Estimate for 10-Year Deficit Raised to $9 Trillion

August 26, 2009

By JACKIE CALMES

WASHINGTON— The nation’s fiscal outlook is even bleaker than the government forecast earlier this year because the recession turned out to be deeper than widely expected, the budget offices of the White House and Congress agreed in separate updates on Tuesday.

The Obama administration’s Office of Management and Budget raised its 10-year tally of deficits expected through 2019 to $9.05 trillion, nearly $2 trillion more than it projected in February. That would represent 5.1 percent of the economy’s estimated gross domestic product for the decade, a higher level than is generally considered healthy.

The Congressional Budget Office, which unlike the administration did not account for the president’s policy proposals in its latest report, increased its projection of deficits over the next decade. Absent any changes in law, it said the deficit would rise to $7.1 trillion, from $4.4 trillion in March.

The C.B.O. did analyze the president’s budget in June and concluded his proposed tax cuts and spending would push deficits through 2019 above $9 trillion. While the administration now agrees with that figure, technical data in the new C.B.O. report suggests that if it were to review the Obama budget now, it would project deficits through 2019 above $10 trillion, analysts speculated.

Anticipating that the deficit figures will stoke the debate over the costs of Mr. Obama’s effort to overhaul health care, the administration was quick to say that much of the projected deficit was a legacy of the Bush administration and that the Obama administration was committed to restoring budget discipline when the economy recovers.

“Over all, it underscores the dire fiscal situation that we inherited and the need for serious steps to put our nation back on a sustainable fiscal path,” Peter R. Orszag, the president’s budget director, wrote on his agency’s Web site.

As the president has argued before, Mr. Orszag said that rising deficits make an overhaul of the health care system essential, because the government’s ballooning costs for Medicare and Medicaid are “the key driver of our long-term deficits.”

Congressional Democrats echoed that argument in statements reacting to the budget reports. But Republicans concluded otherwise.

“While the U.S. health care system does need to be reformed, we cannot ignore the fiscal realities of our situation,” Senator Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee, said in a statement. “We must proceed with extreme caution before putting in place a huge and costly new program that will threaten our economy and the future of our children,” he added.

The budget updates from the White House and Congress, required each summer by law, incorporate economic data from last winter that turned out to be worse than either public or private forecasters expected as the year began, and also reflect the costs since then of spending and tax cuts to stimulate the economy and bail out the financial, auto and housing sectors.

Amid signs that the downturn has hit bottom and a slow recovery was under way, one lagging indicator troubles Democrats. The administration now projects that while the economy will return to growth later this year, though more slowly than it forecast in February, the unemployment rate will top 10 percent before employers start rehiring. That would be up from 9.4 percent in July, and a sharp jump from the 8 percent that the administration forecast earlier.

The relative good news was that the administration and Congress’s budget office reduced their projected deficits for the current fiscal year that ends Sept. 30.

Each agency now says that the fiscal 2009 deficit will reach $1.6 trillion, or 11.2 percent of G.D.P., the highest level since World War II. Previously the administration projected $1.8 trillion, or nearly 13 percent of G.D.P.; the Congressional office had projected $1.7 trillion.

The reduction for just this year is largely because of lower-than-expected costs for rescuing financial institutions and because some banks repaid money from the $700 billion bailout program that began in the last months of the Bush administration.

When Mr. Obama took office, his budget office projected it had inherited a deficit for 2009 of $1.3 trillion; the C.B.O. estimated $1.2 trillion.

Since then, the administration and Democratic-controlled Congress have enacted a $787 billion stimulus package, though less than half of that will be disbursed this fiscal year, as well as supplemental spending for the wars in Iraq and Afghanistan and bailouts for two automakers.

Also, the recession has reduced anticipated revenue from taxpayers, and increased spending for safety-net programs like jobless benefits and food stamps.

The budget reports underscored another factor that increasingly is driving up deficits: the cost of interest on the expanding federal debt, which is the accumulation of all annual deficits. The debt, which was 33 percent of the G.D.P. when the decade began, would reach 68 percent by 2019.

The House Republican leader, Representative John A. Boehner of Ohio, said in a statement, “the Democrats’ out-of-control spending binge is burying our children and grandchildren under a mountain of unsustainable debt.”

Administration officials countered that they were restoring pay-as-you-go budget rules that Republicans had shelved when they were in power, though Democrats would exempt major items. Democrats also said that while they are trying to offset the costs of health care changes, Republicans in the Bush years cut taxes, waged wars and created a Medicare drug benefit, all by deficit financing.

“It’s fairly clear that responsibility for these numbers doesn’t lie with Barack Obama but with the policies that were in place before him,” said Stan Collender, a longtime budget analyst at the consulting firm Qorvis Communications. He said either Mr. Bush or Senator John McCain, Mr. Obama’s Republican rival in 2008, would have increased the deficit comparably this year with more war and stimulus spending.

But, he added, “regardless of who’s to blame, it’s undeniably Barack Obama’s problem now.”

The administration, with backing from many economists, has said it would not try to cut the short-term deficits until the economy recovers enough that businesses and consumers resume their spending and investment. But Mr. Orszag said the administration, in next year’s budget, would propose savings other than in health care to arrest long-term deficits.

His office’s budget report also said that “the president is committed to addressing the shortfall in the Social Security system.”

BB&T buys Colonial bank; 4 other banks fail

Southern regional bank Colonial BancGroup sees rival grab its branches and deposits.

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By Chris Isidore and Julianne Pepitone, CNNMoney.com writers

Last Updated: August 15, 2009: 12:11 AM ET

DID YOUR BANK FAIL?

• For more information visit www.fdic.gov
• Don’t panic – your savings are insured
• Keep paying your loans – the terms remain the same.
• The FDIC will notify you by mail about your accounts/loans.
• Contact the FDIC with any questions until further notice
• If your bank is purchased, you will be contacted by your new bank.

NEW YORK (CNNMoney.com) -- Troubled Colonial BancGroup will be bought by rival BB&T Friday, the government said after state regulators closed the bank whose assets had been frozen by a federal judge.

The Montgomery, Ala., bank, which has 346 branches spread across Florida, Alabama, Georgia, Nevada, and Texas, is the sixth largest bank failure in U.S. history and by far the largest failure of 2009.

With $25 billion in assets and $20 billion in deposits, Colonial is 100 times larger than the typical bank to have failed this year.

BB&T (BBT, Fortune 500) will buy $22 billion of Colonial's assets, as well as its deposits and branches, leaving the remaining assets in the hands of the Federal Deposit Insurance Corp.

BB&T, based in Winston-Salem, N.C., is also a regional banking power, with 1,500 branches across the Southeast. It is also a major mortgage lender.

Most customers of Colonial should not be affected by the closing. The FDIC, the federal agency that has protected bank deposits since the Great Depression, will guarantee account balances up to $250,000.

But home buyers and those who want to refinance their mortgages could end up paying somewhat higher rates, even if they have never heard of Colonial, said Guy Cecala, publisher of trade publication Inside Mortgage Finance.

Cecala said Colonial was a significant player in the sector of the business known as "mortgage warehouse" lending, which provides financing needed by mortgage brokers and non-bank lenders to make home loans.

"The more firms like this that get out, the more dependent we get on large banks, and less competition there is. That's never a good thing," he said. Warehouse lending used to be a huge source of funds for home loans, according to Cecala, but the mortgage defaults and declining home prices of recent years has decimated the business.

"The warehouse lending market is now so fragile and so small, it doesn't help when we lose anybody," he said. "We have only a cup of water where we used to have a bucket of water."

Trust fund hit: The failure of Colonial is another blow to the FDIC trust fund, which has had to cover 77 bank failures so far in 2009 -- including four more late Friday (see below).

The fund took a $35.1 billion hit in 2008, and an additional $4.3 billion decline in the first quarter of this year, leaving it with assets of only $13 billion as of March 31. But most of last year's decline was due to $25 billion the agency set aside to cover future losses.

"The past 18 months have been a very trying period in the financial services arena," said FDIC Chairman Sheila Bair, in the Colonial failure release. "Our industry funded reserves have covered all losses to date. In fact, losses from today's failures are lower than had been projected.

Little more than a year ago, bank failures were relatively rare, with only four occurring in the first six months of last year. The collapse of IndyMac, a major mortgage lender, in July 2008, signaled a rash of failures to follow. IndyMac cost the FDIC about $10.7 billion by itself, and is the most expensive failure in history.

Colonial will likely be one of the most expensive bank failures, according to Chip MacDonald, a banking lawyer at Jones Day, given its active position in mortgage warehouse lending across the Southeast.

The FDIC said Colonial's closing will cost the Deposit Insurance Fund $2.8 billion. "That's a significant share of the FDIC fund," he said.

It is now a rare Friday night that the agency does not seize the assets of a newly failed bank. And the number of banks judged as troubled has soared to 305 as of March 31, up from only 90 a year earlier. Those 305 problem banks on the FDIC's confidential list have combined assets of $220 billion.

The trust fund that covers the deposits is paid by banks, and the weaker banks have seen those premiums rise about 14% in the last year. The agency has also announced a special one-time assessment on bank assets that will raise $5.6 billion for the fund this September. But those funds will come from money that the banks will not lend out to businesses and consumers in hopes of reviving the economy.

Legal problems: MacDonald said that Colonial is also unusual because of the allegations of criminal wrongdoing at the bank.

Colonial disclosed on Aug. 4 that federal agents had executed a search warrant at its mortgage warehouse lending offices in Orlando, Fla. It also had been forced to sign a cease and desist order with the Federal Reserve and regulators at the end of last month related to its accounting practices and recognition of losses, which limited its abilities to make dividends or other payments to investors.

The agents who searched its offices came from the Special Inspector General for the Troubled Asset Relief Program, even though Colonial never received TARP funds.

Colonial applied for TARP assistance but had been told it needed to be able raise an additional $300 million in private capital to be eligible for the federal assistance. On March 31 Colonial announced it had found such an investor in Taylor, Bean & Whitaker Mortgage Co., a major non-bank mortgage lender based in Florida. But that deal collapsed, and TBW halted operations on Aug. 5 as its offices were also searched by federal agents.

The bank had issued a statement to investors in November saying it had applied for TARP and had no reason to believe its application was being processed through the normal channels. After it later disclosed the need to raise the additional $300 million in capital to get TARP, it was hit by a shareholder suit.

Colonial could end up as the second-most expensive bank failure, according to Chip MacDonald, a banking lawyer at Jones Day, given its active position in mortgage warehouse lending across the Southeast.

"It's probably going to be cheaper than IndyMac, but my guess is it could be $5 billion to $7 billion," he said. "That's a significant share of the FDIC fund."

The sale of Colonial to BB&T also comes a day after U.S. District Judge Adalberto Jordan ruled in favor of Bank of America (BAC, Fortune 500), which had requested a temporary restraining order to keep Colonial from liquidating or transferring assets worth $1 billion.

"Viewing Colonial's contractual breach in conjunction with the fact that Colonial is on the brink of collapse and is suspected of criminal accounting irregularities, the potential for immediate substantial injury to Bank of America is clear," the judge said in his order.

The lawsuit that prompted the order was filed by Bank of America. It involved more than 6,000 mortgages issued by its subsidiary and held in trust by Colonial. According to the motion, Bank of America is owed more than $1 billion in assets, but Colonial had failed to pay the amount owed.

Last month, the bank said in a statement that it had "substantial doubt about Colonial's ability to continue" due to uncertainties about its ability to increase its capital levels.

Shares of Colonial (CNB), which fell 80% in 2009, were not trading Friday. But shares of BB&T (BBT, Fortune 500) gained nearly 9% on the report of the acquisition.

Four other banks fail: Late Friday, the FDIC also said that four other banks had failed. Outside of Colonial, the largest collapse of the day was Community Bank of Nevada in Las Vegas, which went under with assets of $1.52 billion and total deposits of about $1.38 billion. Its failure will cost the FDIC's Deposit Insurance Fund an estimated $781.5 million

The Nevada bank did not find a buyer, leaving the FDIC in control of its assets. The agency immediately created a new institution, the Deposit Insurance National Bank of Las Vegas, which will remain open for approximately 30 days to allow depositors access to their insured deposits and give them time to open accounts at other insured institutions. Banking activities, such as direct deposit, writing checks, and using ATM and debit cards, will continue normally through the transition.

Dwelling House Savings and Loan Association in Pittsburgh closed its door for the last time Friday. The FDIC said PNC Bank will assume control of its assets. It was the first Pennsylvania bank to fail this year.

As of March 31, Dwelling House held assets worth $13.4 million and total deposits of $13.8 million. The FDIC estimates that this closure will cost the its insurance fund $6.8 million.

MidFirst Bank of Oklahoma City assumed all deposits of two failed Arizona banks, Union Bank in Gilbert and Community Bank of Arizona in Phoenix. Community Bank of Arizona had assets of $158.5 million and total deposits of approximately $143.8 million. Union Bank had assets of $124 million and total deposits of approximately $112 million.

The two failures, the first in Arizona this year, will together cost the FDIC's insurance fund around $86.5 million.

The 77 bank failures so far in 2009 has more than tripled last year's total of 25.

AP NewsBreak: US bought oil stolen from Mexico

MEXICO CITY (AP) -- U.S. refineries bought millions of dollars worth of oil stolen from Mexican government pipelines and smuggled across the border, the U.S. Justice Department told The Associated Press -- illegal operations now led by Mexican drug cartels expanding their reach.

Criminals -- mostly drug gangs -- tap remote pipelines, sometimes building pipelines of their own, to siphon off hundreds of millions of dollars worth of oil each year, the Mexican oil monopoly said. At least one U.S. oil executive has pleaded guilty to conspiracy in such a deal.

On Tuesday, the U.S. Homeland Security department is scheduled to return $2.4 million to Mexico's tax administration, the first batch of money seized during a binational investigation into smuggled oil that authorities expect to lead to more arrests and seizures.

"The United States is working with the Mexican government on the theft of oil," said Nancy Herrera, spokeswoman for the U.S. Attorney's office in Houston. "It's an ongoing investigation, with one indictment so far."

In that case, Donald Schroeder, president of Houston-based Trammo Petroleum, is scheduled to be sentenced in December after pleading guilty in May.

In a $2 million scheme, Herrera said, Schroeder purchased stolen Mexican oil that had been brought across the border in trucks and barges and sold it to various U.S. refineries, which she did not identify. Trammo's tiny firm profited about $150,000 in the scheme, she said.

Schroeder's attorneys said in an e-mail that neither they nor their client would respond to AP's requests for comment.

Bill Holbrook, spokesman for the National Petrochemical & Refiners Association, said a single indictment against a small company should not be used to smear the reputation of the entire U.S. oil industry, "and is not indicative of how domestic refiners operate."

But in Mexico, federal police commissioner Rodrigo Esparza said the Zetas, a fierce drug gang aligned with the Gulf cartel, used false import documents to smuggle at least $46 million worth of oil in tankers to unnamed U.S. refineries.

Mexico froze 149 bank accounts this year in connection with that crime, which continues at a record rate, according to Mexico's state oil monopoly Petroleos Mexicanos, or Pemex.

In a surprising public acknowledgment, Mexican President Felipe Calderon said last week that drug cartels have extended their operations into the theft of oil, Mexico's leading source of foreign income which finances about 40 percent of the national budget.

"These are Mexican resources, and we do not have to sit back or turn a blind eye," Calderon said. "This is our national heritage and we must defend it."

Highly sophisticated thieves using Pemex equipment "are basically working day and night, seeing how they can penetrate our infrastructure," said Pemex spokesman Carlos Ramirez. The thieves, operating in remote parts of the country, have even built tunnels and their own pipelines to siphon off the product, he said.

How much of the stolen oil is crossing into the U.S., and how much of the theft is at the hands of cartels? So far, nobody knows.

"These questions are really the center point of all of this," Ramirez said.

He said cartels in northern Mexico are responsible for most of the theft, though he said there may well be internal operatives at Pemex stealing as well. Last week, police raided Pemex offices looking for insider misconduct.

Trammo, the sole company named in court records so far, is dwarfed by any refiner most people have heard of. It sells some 2.1 million barrels a year.

Major refiners such as San Antonio-based Valero Energy can produce more than that in a single day, buying crude from tankers or pipelines, and none has been implicated in buying stolen oil.

"It is Exxon Mobil's policy to always obey relevant laws, rules and regulations everywhere we operate," said spokesman Kevin Allexon. Shell Oil Co. said it abides by all laws.

Various kinds of petroleum products, including gasoline, are being stolen and sold to gas stations and factories in Mexico, said Ramirez, adding that service stations in at least two states have been shut down recently for selling stolen gas.

The thefts are a devastating blow to Pemex, which saw production fall 7.5 percent in the first half of the year.

So far this year, Pemex is aware of 190 different thefts, almost half in the Gulf state of Veracruz. Ramirez said Pemex is using hidden cameras, extra guards and additional investigators to catch the thieves, but the problem is still spreading: So far this year, oil theft is up 10 percent, and have been confirmed in 19 states, up from 13 in 2008.

And oil theft experts say that just like drugs, the crimes will be tough to stop as long as there's money to be made.

"U.S. refineries willing to buy stolen crude don't care where it comes from. Once the product is at their doorstep, the deal is done, and they can pay pennies on the dollar without taking the risk of getting it across the border," said Kent Chrisman, director for global security with Oklahoma City-based Devon Energy.

Chrisman, a former Secret Service agent, recently teamed up with Texas law enforcement agents to bust a ring of thieves in that state.

Oil theft in general is a relatively new problem, Chrisman said, "but we've seen a big spike in recent years because oil prices went up. Every year it seems to get worse and worse. It's a profitable business."

Bank Bonuses $33 Billion

Nine banks that received government aid money paid out bonuses of nearly $33 billion last year -- including more than $1 million apiece to nearly 5,000 employees -- despite huge losses that plunged the U.S. into economic turmoil.

The Millionaire's Club

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Top employees at nine big U.S. banks that received government aid shared a bonus pool of $32.6 billion. A breakdown of those receiving more than $1 million each.

The data, released Thursday by New York Attorney General Andrew Cuomo, provide a rare window into the pay culture of Wall Street, where top employees typically make 90% or more of their compensation in year-end bonuses.

The $32.6 billion in bonuses is one-third larger than California's budget deficit. Six of the nine banks paid out more in bonuses than they received in profit. One in every 270 employees at the banks received more than $1 million.

Overall compensation and benefits at the nine banks fell 11%, to $133.5 billion in 2008 from $149.3 billion in 2007, the Cuomo report said. But with net revenues falling, the percentage of the firms' revenues dedicated to compensation rose to 45% last year from 41% in 2007.

The report reignites long-simmering anger, on Capitol Hill and beyond, over big Wall Street payouts. The nine firms in the report had combined 2008 losses of nearly $100 billion. That helped push the financial system to the brink, leading the government to inject $175 billion into the firms through its Troubled Asset Relief Program.

The chairman of the U.S. House investigative panel, New York Democrat Edolphus Towns, called the pay figures "shocking and appalling" and announced a hearing into compensation practices at banks.

The White House was more muted. "The president continues to believe that the American people don't begrudge people making money for what they do as long as...we're not basically incentivizing wild risk-taking that somebody else picks up the tab for," said White House Spokesman Robert Gibbs.

More

• Read the full report from the New York Attorney General's office.
• Real Time Econ: Back to the Good Times
• Financial News: Bloggers' reactions

Deal Journal

• What Are Your Chances of Being a Millionaire?
• Bonus Breakdown From Cuomo's Report

Those on Wall Street argue they have to pay to keep talent. Often, bankers say, only a small group is responsible for losses and it is not fair to punish employees in other areas of the business. They say the compensation system will be difficult to change.

"These pay packages are pretty outrageous," said Michael Baldock, a partner at Stamford, Conn.-based boutique bank Ondra LLP, who has worked at a number of big investment banks. "But if you generate $10 million in revenue a year, another firm will always want that revenue and be willing to pay for it."

In releasing the report now, New York Attorney General Cuomo is vaulting ahead of federal efforts to assess and curb excessive pay. The office has been among the first to investigate and bring charges on several Wall Street abuses this decade.

The House of Representatives is preparing to vote as early as this week on a bill that would give shareholders nonbinding say on pay packages and give regulators more tools to prohibit risky pay practices at banks and other regulated financial firms. The Senate isn't expected to vote on the legislation until the fall.

The Obama administration, meanwhile, is preparing to vet pay at firms receiving "exceptional assistance" from the government. Institutions have until Aug. 13 to submit proposed compensation details for the 100 highest-paid employees at each. The Treasury Department's pay czar, Kenneth Feinberg, could push banks to renegotiate deals he sees as rewarding risky behavior or that are out of line with compensation at similar institutions.

Andrew Williams, a Treasury spokesman, said Mr. Cuomo's report "focuses on strengthening the link between pay and performance -- a goal that we share."

Andrew Cuomo

Mr. Cuomo said Thursday he hopes his report will prompt the financial firms themselves to significantly overhaul their pay system to reward long-term performance rather than short-term gains. His report didn't release names of individual bonus recipients because of privacy concerns.

"The banks say they pay for performance," Mr. Cuomo said of the data. "Yet in 2008 there was no performance and they still continued to pay out huge sums of money."

Wall Street has shown little sign of slowing down the pay train this year. Goldman Sachs Group Inc. and Morgan Stanley recently disclosed that they have set aside $11 billion and $6 billion in compensation and benefits, respectively, for their employees so far this year. Goldman's second quarter was among its best ever. Morgan Stanley lost money for its third straight quarter.

Goldman and Morgan Stanley declined to comment on the report.

Meanwhile, some big banks that received government bailouts, including Citigroup Inc. and Bank of America Corp., are offering handsome pay packages to lure stars. Citigroup -- which received about 25% of the aid going to the nine banks -- has the No. 1 pay recipient. Andrew Hall, who heads Citigroup's energy-trading unit Phibro LLC, received $98.9 million in 2008, according to a government official. Citigroup CEO Vikram Pandit, by comparison, received more than $38 million last year.

An early test for Mr. Feinberg will be the pay of Mr. Hall, whose profit-sharing contract with the bank could again entitle him to as much as $100 million, say people familiar with the matter.

James Forese, Citigroup co-head of global markets, cited Phibro's "consistent track record of profitability" and said its contracts directly align compensation with performance. "That said, we are sensitive to the need for a full review of compensation practices in our industry," he said. "We are evaluating the best way forward for stakeholders."

The group of nine's No. 2 bonus for last year, according to a government official, was the $39.4 million that went to Bank of America's Thomas Montag. In 2008, Mr. Montag was sales and trading chief at Merrill Lynch, which got crushed by billions of dollars in mortgage-related losses and was sold to Bank of America. Mr. Montag's pay package included stock grants, which since have fallen in value.

Bank of America said bonuses for Merrill Lynch were shared among 30,000 employees and Bank of America's figures cover more than 200,000 employees.

The study found that pay at the banks remained near previous levels despite revenue declines. Merrill's net revenue fell by $23 billion in 2008, leading to a huge net loss. The firm's pay and benefits dropped by $1.1 billion, or 7%, according to the study. At Citigroup, revenue fell by $28 billion, or 34%. Pay and benefits dropped $2 billion, or 6%.

Similarly, at Goldman and J.P. Morgan Chase & Co., pay fell less sharply than revenue in 2008. Both firms have paid back the government loans they received under TARP. J.P. Morgan declined to comment on the report.

Goldman, Morgan Stanley and Merrill, Wall Street's three largest securities firms in 2008, paid nearly $13 billion in bonuses last year, the report says. That was roughly one-third of their total pay and benefits of $38 billion, according to securities filings.

J.P. Morgan topped other banks in the number of employees receiving $1 million or more -- 1,626 out of its 224,961 employees. This figure includes bonus, salary and options; the numbers of other banks in the study includes bonuses only.

J.P. Morgan's top earner collected $29 million, more than James Dimon, the firm's chief executive, who got $19.7 million in total compensation last year.

Goldman paid the most per employee, about $160,000 each for more than 30,067 staffers. Some 212 Goldman bankers made $3 million or more. Goldman, which weathered the credit crisis better than most rivals and made $2.3 billion in 2008, produced the most revenue per employee, $77,228.

Goldman has said that no partner got a bonus of more than $222,500 in cash. The rest was paid in deferred stock, with an extra year of service required for any of it to vest.

Morgan Stanley had 428 employees who received bonuses of $1 million or more. In addition, 10 people received bonuses of $10 million or more, for a combined $146.8 million.

Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp. round out the nine banks. Each declined to comment.

—Aaron Lucchetti, Daniel Fitzpatrick and Robin Sidel contributed to this article.

Write to Susanne Craig at susanne.craig@wsj.com and Deborah Solomon at deborah.solomon@wsj.com

Soaking the poor

Ever use your debit card and overdraw your checking account, only to later discover that the bank lent you the money -- at a fee -- to cover the overdraft?

Do the math. You may find that you paid an effective 3,000 percent annual interest rate on a courtesy loan you never asked for.

Electronic Loan Sharking

Consumer advocates have been calling on financial institutions to address abusive overdraft practices for several years, and now Congress is poised to act.

"I don't know what loan sharks are charging these days, but these rates are probably a bit higher," says Eric Halperin, director of the Washington office of the Center for Responsible Lending (CRL). "They're more expensive than any other financial product out there."

In the old days, banks would deny a check payment if you didn't have adequate funds in your account, and charge a bounced-check fee. The only way to avoid this (both then and now) was to have a backup -- a link to a savings account or line of credit. If overdrafts became too frequent, the bank would close your account.

Fee Overload

Today, debit and other electronic transactions are the dominant form of payment. Rather than deny payment, most banks automatically cover your small-dollar overdraft and slap you with a fee averaging $34 on every subsequent transaction until your account is back in the black.

A CRL study released this month found consumers pay $17.5 billion in fees on abusive overdraft loans. The average overdraft is just $27, and is typically repaid within five days.

"In 2004, 80 percent of banks routinely declined overdrafts," says Halperin. "Today, 14 of the 15 largest banks routinely cover overdrafts. It indicates a dramatic shift in the marketplace." The Federal Reserve allows banks to enroll consumers in overdraft protection programs without their written consent.

Shady Practices

Moreover, banks can legally manipulate the order in which they pay checks and debits to maximize fees. Consider this example: Bob thinks he has $1,300 in his checking account, but he only has $1,150. He conducts six debit transactions totaling $180, and then pays his rent, for $1,100. He's overdrawn the account by $130.

Bob's transactions arrive in one batch at the bank. Instead of paying the six transactions and charging a single overdraft fee on the rent check, the bank pays the rent check first, followed by one transaction for $50. It then provides overdraft loans for the other five payments, so Bob incurs five separate fees of $34 each -- or $170. (Banks reserve the right to pay checks in any order; see, for example, the policy of U.S. Bank.)

Two weeks later, Bob deposits his paycheck, and the bank gets its money back. Bottom line: When Bob pays $170 for a two-week loan of $130, the annual percentage rate comes out to 3,400 percent. (See my blog for details on this calculation.) But the Federal Reserve has ruled that overdraft fees are not considered finance charges that have to be disclosed, a spokesperson said.

Preying on the Most Vulnerable

Overdraft loan abuses fall mostly on the backs of middle- and lower-income consumers with little financial education, like Paddy Page, an Idaho mother of four. She receives no child support from the abusive husband she left six years ago, who's now in prison.

Page, who dropped out of high school but eventually earned her GED, works full time as a bill collector for Citibank, making $12 an hour. With no family nearby, she was on her own after her divorce.

"Once you get caught in the cycle, it's hard to get out of it," Page says, adding that most of her overdrafts were for groceries and medical bills for her kids. She racked up nearly $500 in overdraft fees last year at Washington Mutual Bank -- $243 of it over a two-day period in August, for nine overdrawn transactions.

Sleepless Nights, Tipped Scales

Like many consumers, Page didn't maintain her checkbook register, relying on her online account balance -- which didn't factor in outstanding paper checks. And because Page chose Washington Mutual's "free" checking account, she wasn't eligible to open a cheaper line of credit.

"I couldn't make it. There were times when I had no money and no groceries," she recalls. "I'd go to the grocery store and think, 'What else can I do?' I'd write a check, the bank would cover it, and on my next paycheck I'd be fighting to get back up to zero in my account. I couldn't sleep at night; I was about to lose my home."

Clearly, the consumer who spends more than he or she has is at fault. But the scales may be tipped against them: The Check Clearing for the 21st Century Act, approved in 2004, allows banks to clear checks they receive more quickly than in the past. But the act doesn't require financial institutions to credit deposits any faster.

Page, for instance, says she would sometimes make a deposit and get hit with an overdraft fee because the credit didn't clear as quickly as she expected.

Without Warning

Consumer advocates would like to see banks provide a warning to consumers if a transaction would overdraw their account. Similar technology already exists: When you use another bank's ATM, you sometimes receive a warning that you'll pay a $1 or $2 fee. You can choose whether to pay the fee or cancel the transaction.

A survey conducted by CRL earlier this year found that three-quarters of consumers wanted to be warned if they were on the verge of withdrawing more than they had in their account.

But the American Bankers Association (ABA) says it would be unfeasible to apply the technology this way; it would lengthen transaction times and raise the costs to merchants and consumers. "Consumers are in control of their finances and can avoid overdraft fees," said Nessa Feddis, ABA senior federal counsel, in a Congressional hearing earlier this month.

A Happy Ending

Happily, Page got back in control of her finances with the help of a fellow church member who's a financial executive.

They worked together to create a budget; get on time with her bills; learn to steer clear of high-fee payday loans and check-cashing stores; and pay off her credit cards.

Page's oldest two children are now in college. "I tell my kids all the time that education will set you free," she says. "You don't want to be bouncing checks and always scrounging money just to have groceries. It's ridiculous."

Help on the Horizon

Representatives Carolyn Maloney (D-N.Y.), Barney Frank (D-Mass.), and Julia Carson (D-Ind.) are sponsoring legislation (HR 946, or the Consumer Overdraft Protection Fair Practices Act) to protect consumers from abusive overdraft policies. The act contains four common-sense provisions to address some of the industry's sneakier tactics. It would:

• Require written consent from the consumer before enrollment in an overdraft loan program.

• Require financial institutions to warn the customer when an ATM withdrawal will trigger a fee -- and allow the customer to cancel the transaction at that time.

• Prohibit financial institutions from manipulating the order of check clearing or delaying the posting of deposits to increase customers' overdraft loan fees.

• Amend the Truth in Lending Act to clarify that overdraft fees are finance charges, so that annual interest rates are reported. This would allow consumers to compare overdraft loans with other credit options -- such as lines of credit, which typically offer annual interest rates of less than 20 percent.

Act Now

In her prepared remarks, the ABA's Feddis told the Congressional hearing that forcing financial institutions to report an annual percentage rate would confuse customers: "In these cases, the fee is fixed, the overdraft often small, and the term of repayment short. It is easy to see how triple digit APRs would result ... In the overdraft-fee context, consumers understand a dollar amount far better than an inflated and meaningless APR."

I think consumers are brighter than that: Given a chance to consider the APR on overdraft loans, they'd understand that their bank has been taking them to the cleaners.

Click here to email your support for the Consumer Overdraft Protection Fair Practices Act bill.

Bank Bonuses

Bank Pay Outrageous, But Is That Recovery?

by Rick Ackerman on August 3, 2009 12:01 am GMT · 12 comments

Assuming Americans still have the capacity for outrage, they should be rioting in the streets following last week’s reports that nine big banks paid out $33 billion in bonuses in 2008. The Wall Street Journal put this travesty in perspective, noting that the bonuses were a third larger than California’s budget deficit. “Six of the nine banks paid out more in bonuses than they received in profit,” the Journal reported, and “one in every 270 employees at the banks - [a total of 5,000 employees] –received more than $1 million.”

Compare these princely sums to the relatively paltry numbers associated with the government’s “cash for clunkers” program, which provides a U.S. voucher of up to $4,500 for motorists trading old gas guzzlers for new vehicles. Cash-for-clunkers ate through $1 billion of funding last week in its first four days, prompting Capitol Hill to approve yet another $2 billion, presumably before things turned ugly on the dealers’ lots. Talk about bread and circuses! If the cash-for-clunkers giveaway enjoyed the kind of backing the banks received via TARP, thousands of Americans who don’t have two nickels to rub together would be driving Bentleys, Ferraris and Lamborghinis.

No Shame

Lest you think the banks are embarrassed by it all, it has been reported that Goldman Sachs, for one, is on course to pay $20 billion in bonuses in 2009 — an average of $700,000 for each and every employee. Over at Morgan Stanley, bonuses are up 30%, to an average $340,000; and at J.P. Morgan, the incentive pool for the first quarter alone has swelled by 175% to $3.3 billion.

These numbers came to light in a report issued by New York Attorney General Andrew Cuomo. Shortly thereafter, New York Rep. Edolphus Towers, chairman of the U.S. House investigative panel, pronounced the news “shocking and appalling.” He promised hearings into the matter, but we’re not holding our breath. At other times in history there would be scaffolds going up in the town centers, and kangaroo courts convened at midnight to condemn the offenders. Instead, we are being asked to believe the brazen falsehood that the banks are leading us out of recession. In fact, as a report issued recently by Matterhorn Management makes clear, “none of the problems in the banking system have been resolved. The system still has a leverage of 25-50 times, it is still full of toxic debt and derivatives, loan books are deteriorating daily, it still has worthless paper assets valued at fantasy prices and most banks are run by the same bankers who created the problems in the first place. For a typical bank, a 4% drop in asset value wipes out the equity. This is what we call a recipe for disaster.”

Fed Buys It's Own Debt and tries to cover it up

BLATANT Monetization Uncovered

Remember the Dallas Fed's Fisher saying that "The Fed will not become the handmaiden of Treasury"?

He was lying (The Fed already has), and now there is proof.

Mad props to both Zerohedge and Chris Martenson for noticing this; I missed the facts buried in the CUSIP list.

The upshot: The Fed bought nearly half of LAST WEEK'S 7 year Treasury Issuance TODAY.

Huh? Remember, after the 5 year auction that went badly (and which I wrote about) the 7yr auction went "well." Rick Santelli (and a lot of other people) agreed - demand was strong. That made no sense to me at the time, coming one day after a near-failure in the 5 year.

Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!

Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!

If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.

Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.

There is no other explanation for what just happened.

None.

This is likely what the market figured out:

When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe.

Hunger hits Detroit's middle class

Food has long been an issue in this city without a major supermarket. Now demand for assistance is rising, affecting a whole new set of people.

By Steve Hargreaves, CNNMoney.com staff writer

Last Updated: August 7, 2009: 12:38 PM ET

DETROIT (CNNMoney.com) -- On a side street in an old industrial neighborhood, a delivery man stacks a dolly of goods outside a store. Ten feet away stands another man clad in military fatigues, combat boots and what appears to be a flak jacket. He looks straight out of Baghdad. But this isn't Iraq. It's southeast Detroit, and he's there to guard the groceries.

"No pictures, put the camera down," he yells. My companion and I, on a tour of how people in this city are using urban farms to grow their own food, speed off.

In this recession-racked town, the lack of food is a serious problem. It's a theme that comes up again and again in conversations in Detroit. There isn't a single major chain supermarket in the city, forcing residents to buy food from corner stores. Often less healthy and more expensive food.

As the area's economy worsens --unemployment was over 16% in July -- food stamp applications and pantry visits have surged.

Detroiters have responded to this crisis. Huge amounts of vacant land has led to a resurgence in urban farming. Volunteers at local food pantries have also increased.

But the food crunch is intensifying, and spreading to people not used to dealing with hunger. As middle class workers lose their jobs, the same folks that used to donate to soup kitchens and pantries have become their fastest growing set of recipients.

"We've seen about a third more people than before," said Jean Hagopian, a volunteer at the New Life food pantry, part of the New Life Assembly of God church in Roseville, a suburb some 20 miles northeast of Detroit. Hagopian said many of the new people seeking assistance are men, former breadwinners now in desperate need of a food basket.

Hagopian is an 83-year old retired school teacher. She works at the pantry four days a week, spending two of those days driving her own minivan around town collecting food from local distributors.

The pantry, housed in the church basement, gives away boxes of food that might feed a family of four for a week. It includes dry and packaged goods like cereals and pasta, peanut butter, canned fruits and vegetables, 7 or 8 pounds of frozen meat (usually chicken or hot dogs), and eight pan pizzas donated from a local Pizza Hut. Most of the other food is purchased from a distributor or donated by the county food program. Last month they gave out 519 boxes.

Hagopian hopes the demand for food doesn't get much worse.

"I hope we're at the top of it because we'll run out of food, and then we'll have to go out and find some more," she said.

She should brace for the worst. Across metro Detroit, social service agencies are reporting a huge spike in demand for food assistance.

Gleaners, an agency that distributes excess food donated from food processors, says their distribution is up 18% from last year. Michigan Department of Human Services, which handles federal food assistance like food stamps, WIC checks and such, has seen a 14% spike in applications since October. Calls to the United Way's help line have tripled in the last year.

"Given the resources, we could double our numbers," said Frank Kubik, food program manager for Focus:Hope, a Detroit aid organization that fed 41,000 mostly elderly people last year. Kubik said his program is restricted by charter and budget from serving more than its current number of clients. But if that were changed, he could certainly serve up more meals.

"There's no doubt about it, there's just so many out there that are really struggling right now," he said.

The changing face of hunger

There have been plenty of people struggling in Detroit for a long time. What makes this recession different is the type of people coming in. It's no longer just the homeless, or the really poor.

Now it's middle class folks who lost their $60,000-a-year auto job, or home owners who got caught on the wrong side of the real estate bubble.

Many of these people have never navigated the public assistance bureaucracy before, and that makes getting aid to them a challenge.

"They have no idea where the DHS office is," said DeWayne Wells, president of Gleaners, the food distributor.

To assist these newly hungry, Wells pointed to the United Way's 211 program, where people can call the hotline and speak to an operator that guides them through a wide range of available social services.

The Michigan Department of Human Services is going digital, rolling out a program where people can apply for food stamps via the Web.

That may help ease another challenge in getting aid to the middle class: pride. Many people feel so bad about having to ask for help that they just don't, or they have issues with it once they do.

"They'll say things like 'I've never had to do this before' and they feel a little uncomfortable," said Hagopian, the retired school teacher. But she says times have changed, the good union jobs are disappearing and it's harder and harder to find work.

"I just tell them society is not what it used to be," she said.

Detroit responds

Actually running out of food doesn't seem to be a problem, so far. In fact, because more people are being affected the response seems to be greater.

"A few years ago it was someone you saw a profile of on TV," said Wells. "Now it's your brother in-law, or the people your kid plays soccer with."

Wells said volunteers are up at Gleaners, as is general community awareness.

The Feds have helped too. Food stamp allowances were increased 14% nationwide under the stimulus plan.

Detroiters are also helping themselves in smaller ways. Thanks to the dearth of big supermarkets in Detroit proper - a phenomenon largely attributed to lack of people - and plenty of vacant land, community gardening has caught on big.

It's not so much that these gardens are going to feed the city, although they certainly help. It's more that they can be used to teach people, especially children, the value of eating right.

"I use vegetables every day," said one child at an after school gardening program run by Earthworks Urban Farm, near the heart of the city. "Last night, an onion I picked from here, I had in my potatoes."

Hearing that is good news to people like Dan Carmody, president of Eastern Market Corp., a century-old public market selling fresh produce and other foodstuffs near downtown Detroit.

Carmody is part of a group of people trying to bring healthy food to town. The efforts include setting up mobile produce stands around the city, working with convenience store owns to stock better produce, and trying to set up a program that allows food stamp recipients to spend twice as much money if they buy from a local farmer.

He says the food situation in Detroit is particularly depressing because the surrounding areas are chock full with some of the best eats around: Michigan grows some of the most varied crops in the nation, everything from apples and cantaloupes to peaches and watermelon. Windsor, just across the bridge, is the hydroponics capital of Canada. Artisan Amish farms are also close by in Ohio and Pennsylvania.

Getting this food to Detroit, and getting Detroiters to buy it is the challenge. That's where the urban farms come in.

"Once kids start seeing where their food comes from," he said, "it changes the whole approach to how they eat."

California putting the screws to small business

SAN FRANCISCO (CN) - Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors' federal class action claims the state is trying to balance its budget on their backs.
Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California "paid" her with an IOU that two banks refused to accept - yet she had to pay California sales tax on the so-called "sale" of the uniforms.
The class consists mostly of small business owners, many of whom rely on income from government contracts to keep afloat. They say California has used them as "suckers" as it looks for a way to bankroll its operations while avoiding its own financial obligations.
"Instead of seeking funds through proper channels, the State has created a nightmare," the class says. "Many of these businesses will not survive if they are required to wait until October 2009 to have these forced IOUs redeemed by the State."
The class claims the state is violating the Fifth and Fourteenth Amendments. It demands that California be ordered to honor its own IOUs, plus interest. They are represented by William Audet.

Traders Profit With Computers Set at High Speed

July 24, 2009, 4:10 am

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices. It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets, writes Charles Duhigg in The New York Times.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund, told The Times. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.

tax revenues plummet

AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans

By STEPHEN OHLEMACHER
Associated Press Writer

AP Photo/D. Morris

WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

While much of Washington is focused on how to pay for new programs such as overhauling health care - at a cost of $1 trillion over the next decade - existing programs are feeling the pinch, too.

Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.

Is there a way out of the financial mess?

A key factor is the economy's health. The future of current programs - not to mention the new ones Obama is proposing - will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.

"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."

A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.

Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.

"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.

Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.

Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."

Deutsche Bank foreclosure dismissed

NEW JERSEY COURT DISMISSES FORECLOSURE FILED BY DEUTSCHE BANK FOR FAILURE TO PROVIDE DISCOVERY AS TO OWNER AND HOLDER OF NOTE, SECURUTIZED TRUST DOCUMENTS, AND OTHER DOCUMENTS DEMANDED BY BORROWERS

July 14, 2009

In a stunning victory for borrowers, a New Jersey court has dismissed a foreclosure action filed against the borrowers by Deutsche Bank Trust Company America as alleged trustee for a securitized mortgage loan trust after Deutsche Bank willfully, and despite the entry of three (3) separate court orders, refused to produce documents demanded by the borrowers which included documents setting forth the identity of the true owner and holder of the Note and mortgage, the complete chain of title to ownership of the note and mortgage, payment application histories, and documents as to the securitized mortgage loan trust. The Court had given Deutsche Bank multiple opportunities and extensions of time to produce the documents, but Deutsche Bank continually refused to produce any of the documents requested, resulting in the dismissal of Deutsche Bank’s foreclosure action. The Court also ruled that Deutsche Bank is not permitted to re-file any foreclosure action until it is prepared to produce ALL of the subject discovery.

FDN attorney Jeff Barnes, Esq. represented the borrowers, assisted by local New Jersey counsel.

W. J. Barnes, P.A. has numerous other cases pending where similar discovery requests have been sent to Deutsche Bank, none of which have been complied with to date. As such, additional requests for sanctions, including dismissal, are expected to be filed in these cases.

Deutsche Bank was also the subject of a recent ruling in a case in New York where the Court denied Deutsche Bank’s Motion for Summary Judgment, finding that a purported assignment from MERS to Deutsche Bank was defective and that Deutsche Bank, with an invalid assignment of the mortgage and note from MERS, lacked standing to foreclose. Significant in the ruling was the court’s observation and question as to why, 142 days after the borrower was claimed to be in default, that MERS would assign a “toxic” loan to Deutsche Bank. The court also required a satisfactory explanation, by sworn Affidavit, from an officer of the securitized trust as to why, in the middle of “our national subprime mortgage financial crisis”, Deutsche Bank would purchase from MERS, as alleged “nominee”, a nonperforming loan. The court further inquired as to whether Deutsche Bank violated a corporate fiduciary duty to the note holders of the securitized mortgage loan trust with the purchase of a loan that had defaulted 142 days prior to its assignment from MERS to the trust.

It appears that may have done so to take advantage of one or more “credit enhancements” inside of the securitized mortgage loan trust which pay benefits upon declaration of default. These credit enhancements are extremely complicated and multi-layered, and are required by law in connection with the issuance and sale of the mortgage-backed securities “backed” by the trust.

The assignment of the mortgage and note to the securitized trust, which were already in default well in advance of the assignment, would permit Deutsche Bank to both realize a profit through payment of credit enhancement benefits (which effect a pay down of the claimed “default”) while simultaneously permitting Deutsche Bank to institute a foreclosure, resulting in a “double dip” for Deutsche Bank. This is, of course, illegal, but unless competent counsel raises the issue, it goes unnoticed and Deutsche Bank, like so many other foreclosing parties, winds up stealing the borrowers’ property and getting paid for doing it.

Jeff Barnes, Esq.