Inflation? No problem ... if you avoid food

By Paul R. La Monica, assistant managing editorJanuary 25, 2011: 2:48 PM ET

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NEW YORK (CNNMoney) -- Great news! There is no inflation to speak of -- unless you fancy a burger, cup of Joe or candy bar every now and then.

Yes, inflation may not technically be a problem just yet if you look at the latest consumer price index figures. But agricultural commodities like wheat, corn, coffee and cocoa have all surged in recent months.

Assuming you are a carbon-based life form that actually needs to eat --no offense to IBM (IBM, Fortune 500) "Jeopardy" savant Watson in case it? he? is reading this -- this is not good news.

Some food and beverage companies have already reacted to higher commodity costs with price hikes while others are discussing the possibility of raising prices.

Starbucks (SBUX, Fortune 500), for example, has boosted the price of some drinks. And the chief financial officer of McDonald's (MCD, Fortune 500) hinted in an earnings conference call with analysts Monday that the company may "raise prices where it makes sense" in reaction to higher prices of beef and other commodities.

So the spike in commodity prices bears watching even if inflation doves can point to the fact that the cost of food is up just 1.5% in the past 12 months according to the December CPI report.

Food prices may be a bigger issue in emerging markets like China and India, where fears of runaway inflation have actually led central banks there to start raising interest rates.

But some worry that those problems will soon find their way to the U.S. as well.

"Higher inflation in food prices is not going to be contained to Asia. At some point, it's going to have a major impact on the American consumer," said John Norris, managing director with Oakworth Private Bank in Birmingham, Ala.

3 challenges to McDonald's growth

Norris said that before economists, or for that matter the Federal Reserve, dismiss higher food prices a still non-existent or phantom threat, people should dig into the government's CPI data a little further.

According to the December report, the prices of meat, poultry, fish and eggs were up 5.5% in the past 12 months. Milk and other dairy product prices rose 3.7%.

"The price of stuff that we need every day, week in and week out are going up at a much higher pace than many other goods," Norris said. "The consumer notices when they go to the grocery store and the bill for meat and dairy is significantly higher."

0:00 /2:40India's food prices skyrocket

Will the Fed address this when it releases its next policy statement on Wednesday? After its last meeting, the Fed reiterated that it believes "measures of underlying inflation are somewhat low."

Diane Swonk. chief economist with Mesirow Financial in Chicago, said the issue isn't really inflation per se in the classic sense. Fears of 1970s style inflation are a bit overwrought.

"You can't have major inflation without wage growth and that's just not happening," she said.

But Thomas Cooley, professor of economics at NYU Stern, said the Fed can't ignore inflation altogether. He noted that there is possibly some good news for consumers on that front.

Cooley said the addition of Philadelphia Fed president Charles Plosser and Dallas Fed president Richard Fisher -- two unabashed inflation hawks -- to the Fed's monetary policy committee this year could mean that worries about rising prices won't completely fall on deaf ears.

"It's natural for people to be concerned about rising commodity prices, especially since food and energy costs are creeping up," Cooley said. "But with people like Plosser and Fisher, the Fed will be very wary of any inflationary pressures. I don't think the Fed will take its eye off the ball."

Keep track of surging commodity prices

That's slightly reassuring. In addition, Cooley argues that one reason food prices are rising is because of strong demand from emerging markets. Translation: A rebounding global economy is leading to higher prices. As it should.

Trouble is that the Fed can't do much to combat the effect of rising food prices in other markets while it continues to buy long-term bonds, a policy that may hurt the dollar and inflate commodity prices further. So the U.S. consumer pays the price.

It's already happening with oil and gas prices and now food seems to be next.

And Swonk said as long as prices for important items like food are increasing at a time when consumers are still licking their financial wounds from the Great Recession, that's bad news.

"When food prices are going up because of what's happening globally, there's a trade off elsewhere," she said. "Consumers' budgets are already constrained. Many can't afford higher prices."

Georgia's Crooks

Former Integrity Bank executives plead guilty to federal charges

By Péralte C. Paul and Bill Rankin

The Atlanta Journal-Constitution

6:53 p.m. Tuesday, July 6, 2010

Two former bank officers of the failed Integrity Bank pleaded guilty to various charges in federal court Tuesday in a fraud scheme authorities say led to the Alpharetta institution's collapse.

Douglas Ballard, 4o, and an executive vice president at Integrity, pleaded guilty to one count of conspiracy to commit bank fraud and bribery and one count of tax evasion.

Joseph Todd Foster, 42, and executive vice president of risk management, pleaded guilty to securities fraud for dumping 30,000 shares of his Integrity shares when he learned the bank didn't have enough liquid security to cover a $20 million loan to its largest borrower.

The guilty pleas come two months after the two Atlanta men were indicted on those charges, stemming from a series of loans made to that borrower, a Florida hotel developer.

That developer, Guy Mitchell, 50, of Coral Gables, Fla., previously pleaded not guilty and is awaiting trial.

Founded in 200o with a faith-based focus, Integrity had more than $1 billion in assets when it failed in August 2008.

Allison Dawson, Foster's federal defender, said he was not involved in any bank fraud and received no bribes.

She said he raised concerns about potential problems with loans the bank already made to Mitchell and suggested Integrity not extend additional credit to him. "But they didn't listen to him and approved a $20 million loan to Mitchell in August 2006," Dawson said. "In an effort to protect himself, he sold his own shares."

Ballard's attorney, Aaron M. Danzig, declined comment Tuesday.

Sentencing dates have not been set, and according to the plea agreements, both Ballard and Foster are cooperating with federal officials in theirinvestigations.

“Any time you have a criminal indictment arising out of the banking environment, that’s a significant event,” said Scott Sorrels, a partner in the banking practice with Sutherland Asbill & Brennan. “I don’t think this will be the end of it.”

Though illegal acts were likely the exception and not the rule for many of Georgia's 39 failed banks, the U.S. Attorney's Office is known to be looking into alleged impropriety at other failed banks.

Sorrels said the pleas suggest that “perhaps some of the backlog [in examining criminal cases] is clearing. They’ve been working on Integrity for a while. Now they can redeploy resources maybe to other institutions that haven’t gotten the same level of attention.”

Georgia's Crooks

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Feds' suit targets state senator, other officials of failed bank

By J. Scott Trubey and Christopher Quinn

The Atlanta Journal-Constitution

7:45 p.m. Tuesday, January 18, 2011

Federal banking regulators on Tuesday accused eight former insiders of a failed Alpharetta bank -- including the new chairman of the state Senate Banking Committee -- of gross negligence and various breaches of their financial responsibilities.

In a lawsuit filed by the FDIC, state Sen. Jack S. Murphy, R-Cumming, is among former Integrity Bank executives or directors accused in relation to a series of loans made from 2005 to 2007. The FDIC seeks damages of “over $70 million.”

The civil suit is the third filed nationally, and the first in Georgia, by the FDIC against officers and directors of failed institutions as the agency begins seeking to recoup losses to its insurance fund caused by the failures.

The 56-page lawsuit, filed in an Atlanta federal court, describes an uninhibited lending warehouse with slipshod controls and a loan committee of directors and executives who badly botched their duties. Integrity failed in August 2008.

Murphy, who was on the bank’s board from 2000 to 2008, was named last week as chairman of the Senate Banking and Financial Institutions Committee.

Murphy said Tuesday he knew nothing of the suit until The Atlanta Journal-Constitution called him about it. He said he had no plans to step down as the banking committee chairman.

“I have served on the banking committee for eight years in the House and the Senate,” he said. The committee deals with legislation aimed at banking law in Georgia, he added, and “has absolutely nothing to do with the FDIC and their decisions.”

During Integrity’s steroidal growth in the early 2000s,the defendants “increased the Bank’s already high risk exposure by implementing policies and procedures void of the most basic prudent lending controls and neglecting to adequately supervise lending personnel,” the FDIC suit says.

Integrity had numerous loans in violation of state lending limits, and its own internal loan policy permitted loans larger than allowed by state law, the suit asserts.

Other defendants are: Steven M. Skow, former Integrity president and CEO; Clinton M. Day, a former bank chairman; former senior lender Douglas G. Ballard; and former directors Alan K. Arnold, Joseph J. Ernest, Donald C. Hartsfield and Gerald O. Reynolds.

Day, a real estate developer, former state senator and one-time Republican candidate for lieutenant governor, was on the Senate banking committee during his stint in the chamber in the 1990s.

The defendants, all at times members of the bank’s loan committee, “caused the bank to pursue an unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in the residential and commercial real estate market,” the FDIC suit says.

The other defendants could not be reached for comment Tuesday.

Georgia leads the nation in bank failures since mid-2008, with 52. Integrity was among the first and largest. Its collapse cost the FDIC an estimated $211 million. Two former bank officers have pleaded guilty to federal criminal charges.

The suit is the first of an expected wave of litigation and civil penalties against insiders of some failed Georgia banks where the FDIC believes malfeasance, not simple mismanagement, was involved.

Murphy said he and other bank board members met with FDIC officials before he resigned in late 2008 as the bank crisis hit, and that the FDIC indicated to them that the board had acted responsibly.

Murphy said he had a personal stake in the bank and wanted it to prosper. He owned 340,000 share of Integrity stock, which at one time was worth about $6.5 million dollars, he said.

“All of that went away, and lot of my retirement,” Murphy said.

The FDIC brought the suit in relation to 21 individual loans that caused more than $70 million in losses to the bank. Among them were several soured loans to Atlanta real estate developer Lee Najjar, reportedly the “Big Poppa” of “Real Housewives of Atlanta” fame for his association with Kim Zolciak.

Integrity, which touted itself as a faith-based company and featured copies of the Ten Commandments in its branches, was founded in 2000. Over the next seven years its loan book mushroomed from $5.6 million to $900 million.

Like many banks that ran into trouble, Integrity profited on the northern metro’s once white-hot housing market. But it also made bets in real estate markets like Florida, South Carolina and California. Out-of-territory lending can be troublesome for small banks that don’t have a presence on the ground to make sure developers are meeting their goals.

The bank made profits of $23.2 million from 2004 to 2006.

The lawsuit describes inherent conflicts of interest at Integrity, with no senior officers minding the store. Lower level loan officers were responsible for both producing loans as well as quality control, and the senior lender and other loan officers were compensated by volume of loans made, not quality and performance.

As senior lender, Ballard was paid 10 percent of the fee income generated by the bank’s loan officers on top of his annual salary, the lawsuit notes. He made nearly $850,000 in total compensation 2007, according to SEC filings.

Ballard has already pleaded guilty to criminal charges of conspiracy to commit bank fraud, bribery and tax evasion, in connection to a borrower who funneled money, allegedly with Ballard’s help in return for kickbacks, into his private account to purchase such things as a private island in the Bahamas. Another bank officer pleaded guilty to insider trading for dumping shares when he learned of the allegations. Both Integrity executives await sentencing; the case against the borrower is pending.

Those cases are separate from the FDIC’s civil suit, which seeks to collect damages from the eight defendants.

Loans to Najjar and Paul D’Agnese, two of the bank’s biggest borrowers, were tens of millions above statutory lending limits, the FDIC suit asserts. Neither borrower is a defendant in the case. Najjar, for instance, had loans totaling $60.7 million with Integrity, more than two and a half times Integrity’s statutory cap.

The loans resulted in more than $12 millions in losses to the bank.

The bank also masked losses on development loans by using “interest reserves,” the suit claims. The reserves are pools of cash provided by the bank to pay itself the interest developers owed. The practice ultimately made loans that weren’t being paid look as though they were.

The suit says directors acknowledged rising loan delinquencies as early as 2005, but instead of heeding warning signs of a housing market slump and “repeated regulator warnings, instead continued to increase the volume of speculative lending.”

The suit said by the time the defendants received the bank’s 2007 regulatory review, “the die was cast for the ultimate collapse of Integrity. Only then did the Defendants begin to implement the corrective measures urged for years by regulators and auditors.”

Murphy was named to the Senate banking panel by the newly formed Senate Committee on Assignments. One member, Sen. Chip Rogers, R-Woostock, said Tuesday he will reserve judgment.

“These are allegations and anybody can allege anything in a lawsuit.. . . I don’t take allegations as worth anything more than the paper they are printed on.”

Senate President Pro Tem Tommie Williams, R-Lyons, also a member of the Committee on Assignments, said Murphy asked to be appointed as chairman of either the banking panel or the Insurance and Labor Committee. Williams said he knew Murphy had worked with the failed bank but had no idea further trouble was brewing.

Williams said the fact that Murphy had been a board member at a failed bank was not enough to disqualify him from heading the committee.

“How many banks have failed in Georgia?” Williams asked.

Contributing: Arielle Kass and Rachel Tobin

Find this article at:

http://www.ajc.com/business/feds-suit-targets-state-808228.html

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Banks repossess 1 million homes in 2010

NEW YORK (AP) -- The bleakest year in foreclosure crisis has only just begun.

Lenders are poised to take back more homes this year than any other since the U.S. housing meltdown began in 2006. About 5 million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts forecast.

"2011 is going to be the peak," said Rick Sharga, a senior vice president at foreclosure tracker RealtyTrac Inc.

The outlook comes after banks repossessed more than 1 million homes in 2010, RealtyTrac said Thursday. That marked the highest annual tally of properties lost to foreclosure on records dating back to 2005.

One in 45 U.S. households received a foreclosure filing last year, or a record high of 2.9 million homes. That's up 1.67 percent from 2009.

For December, 257,747 U.S. homes received at least one foreclosure-related notice. That was the lowest monthly total in 30 months. The number of notices fell 1.8 percent from November and 26.3 percent from December 2009, RealtyTrac said.

The pace slowed in the final two months of 2010 as banks reviewed their foreclosure processes after allegations surfaced in September that evictions were handled improperly. Under increased scrutiny by the government, lenders temporarily halted taking actions against borrowers severely behind on their payments.

However, most banks have since resumed their eviction processes, and the first quarter will likely show a rebound in foreclosure activity, Sharga said.

Foreclosures are expected to remain elevated through the year as homeowners contend with stubbornly high unemployment, tougher credit standards for refinancing and falling home values. Sharga said he expects prices to dip another 5 percent nationally before finally bottoming out. The decline will push more borrowers underwater on their mortgages. Already, about one in five homeowners with a mortgage owe more than their home is worth.

The pain likely will be the most acute in states that have already been hit hard. That includes former housing boom states Nevada, Arizona, Florida and California, along with states that are suffering most from the economic downturn, including Michigan and Illinois.

Nevada posted the highest foreclosure rate in 2010 for the fourth straight year, despite a 5 percent decline in activity from the year before. One in every 11 households received a foreclosure filing last year in the state. In December, foreclosure activity increased 18 percent from November with a 71 percent spike in bank repossessions.

Arizona and California also showed sharp December increases in the number of homes banks took back, at 52 percent and 47 percent, respectively. Arizona, along with Florida, finished the year at No. 2 and No. 3 for the highest foreclosure rates.

One in every 17 Arizona households got a foreclosure filing last year, while one in 18 received a notice in Florida.

California, Utah, Georgia, Michigan, Idaho, Illinois and Colorado rounded out the top ten states with the highest foreclosure rates.

More than half of the country's foreclosure activity came out of five states in 2010: California, Florida, Arizona, Illinois and Michigan. Together, these states recorded almost 1.5 million households receiving a filing, despite year-over-year decreases in California, Florida and Arizona.

RealtyTrac tracks notices for defaults, scheduled home auctions and home repossessions -- warnings that can lead up to a home eventually being lost to foreclosure.

Oil Rig Conclusions

FILE - This April 21, 2010 file photo shows the Deepwater Horizon oil rig burning after an explosion in the Gulf of Mexico, off the southeast tip of Louisiana. Decisions intended to save time and money created an unreasonable amount of risk that triggered the largest offshore oil spill in U.S. history, a disaster that could happen again without significant reforms by industry and government, the presidential panel investigating the BP blowout concluded Wednesday, Jan. 5, 2011. (AP Photo/Gerald Herbert, File)

Related Quotes

Symbol	Price	Change
BP	46.50	0.00
HAL	39.42	0.00
RIG	73.25	0.00

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Harry R. Weber and Dina Cappiello, Associated Press, On Thursday January 6, 2011, 6:08 am

NEW ORLEANS (AP) -- A presidential commission's conclusion on the largest offshore oil spill in history that decisions meant to save time and money created an unreasonable amount of risk won't be the final word on the disaster.

But it already has the companies involved with the blown-out well and Deepwater Horizon rig pointing fingers at each other again.

In a 48-page excerpt of its final report obtained Wednesday by The Associated Press, the commission described systemic problems within the offshore oil and gas industry and government regulators who oversee it. It also said such a disaster could happen again without significant reforms.

The full report is due to the president Jan. 11. But key questions will remain, namely: Why didn't a hulking piece of equipment that sat at the wellhead and was supposed to choke off the flow of oil in the event of a blowout do its job? Federal investigators analyzing the blowout preventer at a NASA facility in New Orleans aren't expected to finish until February.

The Justice Department continues its own investigation, as does a joint U.S. Coast Guard-Bureau of Ocean Energy Management, Regulation and Enforcement panel.

The oil spill commission said poor decisions led to technical problems that contributed to the April 20 accident that killed 11 people and led to more than 200 million gallons of oil spewing from BP's well a mile beneath the Gulf of Mexico. Inquiries by BP and Congress have found the same.

BP, Halliburton and Transocean, the three key companies involved with the well and the rig that exploded, each made individual decisions that increased risks of a blowout but saved significant time or money.

But ultimately, the Deepwater Horizon disaster came down to a single failure, the panel says: management. When decisions were made, no one was considering the risk they were taking.

In one example cited by the commission, a BP request to set an "unusually deep cement plug" was approved by the then-Minerals Management Service in 90 minutes. That decision is one of the nine technical and engineering calls the commission says increased the risk of a blowout.

"The blowout was not the product of a series of abberational decisions made by a rogue industry or government officials that could not have been anticipated or expected to occur again. Rather, the root causes are systemic, and absent significant reform in both industry practices and government policies, might well recur," the commission concluded.

Interior Department spokeswoman Kendra Barkoff said the report focused on areas in which the agency in charge of offshore drilling has already made improvements.

"The agency has taken unprecedented steps and will continue to make the changes necessary to restore the American people's confidence in the safety and environmental soundness of oil and gas drilling and production on the Outer Continental Shelf, while balancing our nation's important energy needs," Barkoff said in a statement.

BP PLC in a statement issued Wednesday said the report, like its own investigation, found the accident was the result of multiple causes, involving multiple companies, but the company was working with regulators "to ensure the lessons learned from Macondo lead to improvements in operations and contractor services in deepwater drilling."

Transocean Ltd., which owned the rig being leased by BP to perform the drilling, said in response to the commission's findings that "the procedures being conducted in the final hours were crafted and directed by BP engineers and approved in advance by federal regulators."

Halliburton Co., the cement contractor on the well, also said it acted at the direction of BP and was "fully indemnified by BP."

The commission underscores its central conclusion with a quote from an e-mail written by BP engineer Brett Cocales on April 16, just days before the disaster. The e-mail was first unearthed in an investigation conducted by Rep. Henry Waxman, D-Calif., who at the time led the House Energy and Commerce Committee.

"But, who cares, it's done, end of story, will probably be fine and we'll get a good cement job," Cocales wrote, after he disagreed with BP's decision to use fewer centralizers than recommended. Centralizers are used to center the pipe to ensure a good cement job. The cement failed at the bottom of the Macondo well, allowing oil and gas to enter it, according to investigations.

The suggestion that the BP disaster may not be an isolated incident runs counter to assurances by the oil industry, which has worked hard to portray the accident as a rare occurrence.

"This clearly was a rare incident," the president of the American Petroleum Institute, Jack Gerard, said Tuesday when his organization published a new report urging Congress and the Obama administration to open more areas to oil and gas drilling.

Outside experts in technological disasters were split by the report's excerpt. They lauded the commission's focus on organizational and managerial failures instead of blaming the rig workers. But they were divided whether the panel went far enough in criticizing the companies for taking time- and money-saving shortcuts.

University of California at Berkeley engineering professor Bob Bea, who has studied and worked on offshore oil rigs for decades and is an international expert on technological disasters, lauded the panel for "articulating the hows and whys."

"This was a preventable disaster," said Bea, who ran a Berkeley investigation into the accident. "We failed to manage and we were managed."

Cappiello reported from Washington. AP Science Writer Seth Borenstein contributed to this report.

Georgia Power Raises Rates

ATLANTA (AP) — Georgia Power's new president said Tuesday that the electric utility had to raise prices to meet stricter emissions rules and maintain its system, but he's considering new ways to help customers cut costs.

W. Paul Bowers, 54, became president and CEO of the largest firm in the Atlanta-based Southern Co.'s network on Dec. 31, just as its customers were hit with a rate increase that will add more than $14 to the monthly power bill for an average home.

Raising prices was necessary to comply with stricter environmental rules on coal-fired power plants, build a new gas-fired plant and maintain the company's transmission network, Bowers told The Associated Press in an interview. Critics assailed Bowers' company for raising rates during an economic downturn that pushed unemployment to 10.1 percent, although Bowers said his firm invested billions of dollars in its business even in a sour economy.

"We didn't stop it because our customers expect the lights to stay on, they expect us to be compliant with environmental law and they want us to have power for the growth of the future," Bowers said.

Last month, Georgia's utility regulators at the Public Service Commission approved a settlement that not only hiked bills, but also gave Bowers' company the ability to more quickly raise prices should its earnings fall below set targets. Normally, Georgia Power must file a new case with the commission to raise rates, a process that takes months, involves testimony, analysts and a greater say for critics.

When asked, Bowers said he could not rule out another price increase before the current settlement expires in 2014, particularly if Georgia suffers another deep recession.

"I hope not," Bowers said. "You know, you never know."

Georgia Power sought permission in July to more rapidly change its prices after weathering a drop in electricity usage and revenue during the Great Recession. Bowers, formerly Southern Co.'s chief financial officer, said he watched as the Southern Co.'s power system went from adding up to 70,000 new customers annually to a net growth of less than 100 new customers in 2009.

"That made us step back and say, 'Is the three-year rate plan process the right process, and is there a way that we can adjust during these ups and downs in the economy?'" Bowers said.

Bowers said his goals include giving customers more control over their electricity bills. For example, Bowers said Georgia Power is researching whether customers are willing to install systems that automatically turn off major appliances such as air conditioners when electricity costs peak, typically in the early evening.

Sensors installed on the compressor of an air conditioner can detect signals from the power grid and shut down the cooling system. Georgia Power experimented with a similar plan in the 1990s, although Bowers said customers never embraced it. If there's enough demand, a new pricing plan could be created in six months to two years, Bowers said.

Industry executives are still debating how much money residents must save before they will voluntarily change their electricity usage. Bowers estimated that a system capable of shutting off air conditioners during peak times might shave a few dollars off a monthly household bill. That's not much compared to the $22 monthly increases that average Georgia Power households will see by 2013.

"Is that going to be of value to the customer?" he said. "When they walk in and it's a little bit warmer in their home, are they going to accept that? Or do they want to be a little bit more comfortable? And that's a choice that consumers got to make."

Bowers said his biggest long-term challenges include overseeing the construction of two nuclear reactors at Plant Vogtle near Waynesboro. It's a project with big stakes for the entire nuclear industry. If completed, Georgia Power and its partners could be among the first in a generation to win permission to build a new reactor.

The federal government last gave permission to build a nuclear plant in 1978, just as shrinking electricity demand, a poor economy and an accident at a reactor at Three Mile Island in Pennsylvania brought the industry to a near standstill. Cost overruns and delays were endemic.

In a departure from the past, Georgia Power has picked a standard, off-the-shelf reactor for the Vogtle expansion rather than a custom model, Bowers said. He also expects the utility will benefit from a streamlined review process from the Nuclear Regulatory Commission.

He argued that the Southern Co. subsidiary was uniquely positioned to build the capital-intensive project since the firm is large, has access to cash and experience with big construction projects. He said going forward now, rather than waiting, gave the utility more bargaining leverage.

"There is a benefit of being first associated with the first mover," Bowers said, adding that Westinghouse Electric Co., the reactor supplier, and The Shaw Group, the construction contractor, are using Plant Vogtle as a demonstration project.

"This will be the first one in the United States," he said. "They want it to be successful."