The Nation's Financial Condition

[Farfromgeneva]

5yr - 0.958%
10yr - 1.458%
30yr - 1.987%

Seem low but these are not good numbers to be closing this week on. Especially the ten year above 1.40%.

[Farfromgeneva]

Liberty Street Economics - https://libertystreeteconomics.newyorkf ... mber-2021/
« Have Consumers’ Long-Run Inflation Expectations Become Un-Anchored? | Main

SEPTEMBER 24, 2021
The New York Fed DSGE Model Forecast—September 2021
Marco Del Negro, Keshav Dogra, Shlok Goyal, Alissa Johnson, and Aidan Gleich

This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2021.

As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.

The key driver of the model’s forecast over both the short and the medium run is the response of the economy to the COVID-19 pandemic. To capture the massive and abrupt macroeconomic effects of the virus, as well as their faster retreat compared to standard business cycle dynamics, the model is augmented with several transitory demand and supply shocks starting in 2020:Q1 (the model description on our GitHub page describes these changes in some detail). Starting in 2020:Q2, the COVID-19 shocks are also partly anticipated one quarter ahead. This anticipation captures the fact that the pandemic has been persistent and expected to be so since shortly after its inception, although its duration remains uncertain. The standard deviations of these pandemic shocks are estimated, letting the data settle the relative importance of shortfalls in supply or demand in driving the decline in economic activity. The standard deviations of the standard business cycle shocks during the pandemic are allowed to deviate from their counterparts in normal times and are also estimated. Unlike in June, the model now includes an additional, negatively autocorrelated measurement error in inflation. This allows the model to capture transitory, mean-reverting changes in the price level associated with the pandemic.

Starting in 2020:Q4, we assume that monetary policy follows a new reaction function, average inflation targeting (AIT), reflecting the changes in the FOMC monetary policy strategy announced last August. The parameters of the new rule are such that the policy rate lifts off its effective lower bound (ELB) in the second half of 2023. Upon its introduction, we assume that agents’ awareness of the new policy is partial but increasing over time. More specifically, expectations are based on a convex combination of the old and new reaction functions, with the weight on the latter converging to 1 over six years. This modelling approach captures the fact that expectations are likely to adjust only gradually to the introduction of the new policy strategy, especially with the policy rate stuck at the ELB, since agents cannot observe directly its reaction to macroeconomic developments until liftoff.

The September 2021 model forecast is reported in the table below, alongside the one from June 2021, and depicted in the following charts. The model uses quarterly macroeconomic data released through 2021:Q2, augmented for 2021:Q3 with the median forecasts for real GDP growth and core PCE inflation from the August SPF release, as well as the yields on 10-year Treasury securities and Baa corporate bonds based on 2021:Q3 averages up to August 16.

How Do the Latest Forecasts Compare with the Ones from June?
Changes in the forecast relative to June reflect both new data released over the past three months, and changes in the model parameters and the model specification. While the change in parameters and model specification had relatively minor effects on the forecast, the new data on inflation were a substantial upside surprise, resulting in much stronger short-term inflation projections, and weaker short- and medium-run output projections, relative to June. Specifically, core inflation is projected to reach 3.8 percent in 2021, well above the June forecast of 2.2 percent. The model attributes part of this increase to a persistent cost-push shock, and part of it to transitory measurement error. Consequently, the model expects the increase in inflation to be largely temporary, with core inflation declining to 2.2 percent in 2022, 1.9 percent in 2023, and 1.8 percent in 2024. While projected inflation remains somewhat above the June forecast in 2022 (1.9 percent), it is equal to the June forecast in 2023, and slightly below the June forecast for 2024 (2.0 percent).
The cost-push shocks leading to higher inflation projections have a negative effect on output for two reasons. First, these supply shocks have a direct effect on output, especially in the short and medium run. Second, higher realized inflation in 2021 raises average inflation, leading to a steeper path of policy after liftoff relative to the June forecast, given that the AIT rule reacts to average inflation. This less accommodative policy after liftoff leads to a weaker path of output growth than was projected in June, particularly in 2023 and 2024 (and to lower inflation, as discussed above). The mean forecast for real GDP growth (Q4/Q4) is 5.3, 1.7, 0.8, and 0.7 percent in 2021, 2022, 2023, and 2024, respectively, compared to 5.4, 2.6, 1.7, and 1.0 percent in June.
Estimates of the real natural rate and its future evolution are broadly similar to those in June, with the natural rate predicted to be about -0.2 percent by the end of 2021 and rising to 0.6 percent by the end of 2024.

[Farfromgeneva]

Corporate-Buyout Loans Near Highs of 2007
Boom in debt-fueled mergers and acquisitions—and a payday for Wall Street—are being stoked in part by government policies

A buyout boom fueled by easy money and a looming hike in the capital-gains tax is sweeping Wall Street deal making to highs not seen since before the 2008 financial crisis.

Companies have issued $120 billion of “leveraged loans” this year through Sept. 23 to finance corporate buyouts by private-equity firms—just shy of the $124 billion record for the first nine months of the year set in 2007, according to data from S&P Global Market Intelligence’s LCD.

Most deals have also gotten bigger. The average leveraged buyout cost about $2.5 billion in debt and equity this year, eclipsing the mean of roughly $2 billion in 2007, according to S&P.

The wave has swept up household names like satellite-TV operator DirecTV and a unit of cybersecurity firm McAfee Corp. , and it has reintroduced megadeals to the market. Goldman Sachs Group Inc. recently started marketing $7 billion of loans to investors that will be used by a trio of private-equity firms to finance part of their roughly $34 billion takeover of Medline Industries Inc., the largest leveraged buyout in more than a decade.

A mix of government policies have primed the LBO frenzy. Easy money and low interest rates have pushed investors toward the high yields that leveraged loans pay. Meanwhile, company owners are trying to cut deals ahead of anticipated tax overhauls.

“I’ve signed eight deals since June and in a typical summer I average one per month,” said Elizabeth Cooper, a partner at Simpson Thacher & Bartlett LLP who frequently advises on leveraged buyout deals for private-equity firms like Blackstone Group. “I don’t think I’ve taken a day off—a full day off—since Christmas of last year,” she said.

Purchase prices and debt loads are climbing amid the boom, raising concerns that when economic growth slows, the companies being bought won’t be able to repay the loans private-equity firms use to buy them, bankers and credit investors say.

Still, the rebound from the Covid-19 pandemic continues and S&P Global Ratings forecasts the default rate on leveraged loans will hover around 1% for the next year. That compares with the historical average of 2.68%.

Competition for new buyouts is so hot that when software company Cornerstone OnDemand Inc. went up for sale this summer, private-equity firm Clearlake Capital Group negotiated a roughly $2.2 billion loan from JPMorgan Chase & Co. and submitted an early bid, sealing the deal before the auction could get under way, a person familiar with the matter said.

In some ways, this LBO surge resembles the bonanza of the mid-2000s, when innovations in derivative markets and a flood of easy money from banks and insurers stoked a flurry of ever-larger buyouts. The debt loads private-equity firms are using to buy companies have climbed back to near-record levels. But the risk has shifted from large banks sidelined by postcrisis regulations to investment firms that specialize in credit and private-equity.

Investment banks are currently carrying about $130 billion of buyout loans on their balance sheets, compared with $480 billion in 2007, said Kevin Foley, head of global debt capital markets at JPMorgan.

Wall Street firms still arrange loans for most buyouts and collect a fee, but regulations make holding them on the balance sheet for more than a few weeks prohibitively expensive. Instead, the banks quickly sell the debt to investment firms, insurers, pensions and, increasingly, to complex investment funds called collateralized loan obligations, or CLOs.

Some large loan investors are cutting the banks out entirely, writing billion-dollar checks to finance buyouts on their own. Cloud-based technology company Inovalon Holdings Inc. disclosed in August it would sell itself for $7.3 billion to private-equity firms. About $3 billion of the purchase price would be paid for with loans from debt investors Blackstone Credit, Owl Rock Capital Advisors and Apollo Capital Management.

Still, more deals translated to more pay for many investment bankers on Wall Street. Jefferies Financial Group Inc. did the same amount of leveraged finance business in the first half of 2021 as it did in all of 2020, a year in which volume grew by 40% compared with 2019, a person close to the bank said. Compensation for bankers in the group rose by more than 40% in 2020 and should increase again this year, he said.

LBO specialists have been waiting for this swell of activity. Private-equity firms amassed a roughly $1.5 trillion cash pile in recent years but, until recently, they struggled to find enough targets at an attractive cost. That changed after the Democrats took control of the White House and Congress in November, increasing the likelihood of a rise in the capital-gains tax rate.

“The tax hike is looming on the horizon and sellers want to maximize what they can make,” said Kearney Posner, a portfolio manager specializing in leveraged loans at Lord Abbett & Co. That motivated some to cut prices to consummate deals, she said.

For now, regulators are relatively sanguine about rising debt loads the deals are placing on companies being acquired, perhaps because the banking system is now less exposed.

The Federal Reserve warned banks in 2013 against arranging deals involving debt in excess of six times a company’s earnings before interest, taxes, depreciation and amortization, or Ebitda, but has issued no such guidance this year. The average debt on LBOs in 2021 has been 5.67 times Ebitda, compared with 5.41 times in 2013, according to data from S&P. (this is senior secured not inclusive of other debt and liquidation preference equity investments)

Fed officials this year have focused their attention on concerns over asset valuations rather than on specific corners of debt markets. Staff economists recently characterized vulnerabilities in the U.S. financial system as “notable,” an unusually explicit signal of concern. Economists judged asset valuations as “elevated,” according to minutes of that meeting released last month.

—Nick Timiraos contributed to this article.

[Farfromgeneva]

SBA Lifts COVID EIDL cap from $500,000 to $2 Million
SBA Administrator Isabella Casillas Guzman announced major enhancements to the COVID Economic Injury Disaster Loan (EIDL) program, including increasing the cap to $2 million.
SFNet has been drawing attention to misuses of the EIDL program that unfairly impact secured lenders, create challenges for borrowers and put tax payer dollars unnecessarily at risk. SFNet has submitted letters to the SBA (see most recent letter here) and has met with both SBA officials and legislators concerning this matter. We will continue to advocate for the best outcome for the SFNet community.
Please contact Michele Ocejo [email protected] for more information on SFNet actions on this issue.

https://www.sba.gov/funding-programs/lo ... id-19-eidl

[MDlaxfan76]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

[a fan]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Already did QE multiple times so.....why the F not?

This debt ceiling thing? Only in America would we allow Congress to play this game of: "we already passed all these spending bills that include trillions in borrowed money....we should vote later as to whether or not we should pay our bills'.

Only thing dumber than this, is FoxNation and fake conservatives convincing themselves that refusing to pay the bills is the same thing as not spending the money that leads to all the bills.

It ain't.

[MDlaxfan76]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Already did QE multiple times so.....why the F not?

This debt ceiling thing? Only in America would we allow Congress to play this game of: "we already passed all these spending bills that include trillions in borrowed money....we should vote later as to whether or not we should pay our bills'.

Only thing dumber than this, is FoxNation and fake conservatives convincing themselves that refusing to pay the bills is the same thing as not spending the money that leads to all the bills.

It ain't.

#MTFC

[Farfromgeneva]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

[Farfromgeneva]

https://www.philadelphiafed.org/-/media ... lution.pdf

https://www.cbo.gov/sites/default/files ... mieswp.pdf

JUL 31, 2012 7:00 AM EDT
The Implication of Currency Dilution
Diluting a product has reduced its value and thus we refuse to pay the same price for it. Except when it comes to paper money.
JEFF NIELSON
VANCOUVER (Silver Gold Bull) -- In our daily lives, we learn that there are many immutable principles of cause and effect. Drop an object and it will fall down, not up. Throw a rock at a pane of glass and it will break. Put an ice cube in the sun and it will melt.

So, too, is it with the cause and effect known as dilution. Whether we are an adult buying watered-down booze from a bar or a child buying a watered-down beverage from a lemonade stand, we immediately comprehend that diluting the product has reduced its value and thus we refuse to pay the same price for it.

Similarly, should a jeweler attempt to tell us that (less pure) 10-karat gold is worth as much as (more pure) 24-karat gold, we would simply scoff at such nonsense and walk away. As I have noted before, even the dim bulbs in the mainstream media can grasp the concept that if a company prints up a lot of shares (and thus dilutes shareholder equity), the value of its shares must decline.

Indeed, in the entire known universe we have only one example of an item that (supposedly) does not automatically decline in value as it is diluted: the bankers' fiat paper currencies. In fact, we have no shortage of clueless scribes claiming that it is possible for these currencies to actually

The Link between Default and Depreciation
August 25, 2014
By David G Wiczer




In the aftermath of the Argentine default (or semi-default, depending on how you look at it), the Argentine peso has fallen considerably, with reports of market expectations that the default would cause 11 percent depreciation in the currency.1

One should not take for granted, however, that currency markets and sovereign debt markets would be inexorably tied: The Argentine peso trades on international markets to facilitate mostly private-sector trade between Argentina and the rest of the world, while Argentine sovereign debt is issued for the government to borrow and its default is a reflection of the public-sector finances. Why is this link so intimate? Are there implications of this linkage?

This idea will be fleshed out further, but in this post I will posit that currency depreciation acts as a punishment for default. It makes imports from the rest of the world more expensive and hurts consumers in Argentina. Because this effect is relatively predictable, it acts as a deterrent to default, which in turn makes default less likely and increases countries’ borrowing ability.

The table below shows that the relationship between currency depreciation and default is rather strong and predictable. In this table, we take the record of defaults (as categorized by Standard & Poor’s since 1970) and look at how their exchange rates and trade flows changed. There is obviously variation across countries’ experiences, and so the table shows that the vast majority experience some depreciation. Note the depreciation occurs when looking at both nominal and real terms of trade: This is not just an effect of faster inflation in the defaulting country but rather a change in the terms of trade.

Argentina default
Why would default cause depreciation? Sovereign default on foreign currency debt makes foreign creditors reluctant to deal with borrowers of all sorts from defaulting countries. And because importers and exporters from defaulting countries require some short-term credit to facilitate trade, defaults can increase the risk in the trade and hence turn prices against them.

Locals may also look to hold more foreign currency as a precaution, because government willingness to default on debt, even only in foreign markets, makes assets like government bonds denominated in the local currency less valuable.

Depreciation has two distinct effects on local economies:

Foreign goods become more expensive to import.
Locally produced substitutes become relatively cheaper.
Hence, the depreciation both hurts consumers and can spur some increase in production. The relative importance of imports to the local basket of purchases can, therefore, be a factor in how much default hurts. This cost of default is not trivial, because the costs of sovereign default are generally ill-defined. A personal default has certain legal pathways that are generally well defined, but this is not so when a country stops paying.

When considering how much to lend and at what interest rates, lenders need to consider the countries’ likelihood of repaying, and this involves calculating how much it would hurt countries to default. In short, harsher punishments can increase access to foreign credit because countries are less likely to default if that would be more painful. Depreciation is truly a double-edged sword, serving as the punishment that allays lenders’ fears of default, but also hurting the ordinary bystanders to a government’s actions in the case of default.

Notes and References
1 Porzecanski, Katia. “Argentine Default Sours Outlook for Peso as Talks Ordered.” Bloomberg Businessweek, Aug. 4, 2014. It should be noted that this article also cited a JPMorgan projection that the government might intervene in currency markets to prop up its peso and make the default appear less legitimate.

Additional Resources
On the Economy: Comparing International Bond Yields
On the Economy: Debt Crisis in Europe Easing, but Not Over
On the Economy: Recent ECB Policy and Inflation Expectations

[Farfromgeneva]

Straight up these guys should be in jail

Fed Leaders Eric Rosengren, Robert Kaplan to Resign Following Trading Controversy
Dallas Fed President Kaplan said his stock trading distracted from the work of the central bank

Boston Fed President Eric Rosengren cited health reasons in saying he would retire nine months early.
PHOTO: STEVEN SENNE/ASSOCIATED PRESS
By Michael S. Derby
Updated Sept. 27, 2021 6:30 pm ET

The Federal Reserve banks of Boston and Dallas said their presidents were resigning, following reports of the two leaders’ investment trading that prompted calls for their departures and a central-bank review of its ethics rules.

The two banks gave different reasons for the exits. Dallas Fed President Robert Kaplan, a 64-year-old who is resigning effective Oct. 8., acknowledged in a statement released by the bank that his stock trading distracted from the Federal Reserve’s work.

The Boston Fed said its president, Eric Rosengren, also 64, would retire Thursday, about nine months early, citing health reasons. He said in a statement released by the bank that he was leaving as he had qualified for a kidney transplant to deal with a long-running condition.

In most cases, regional Fed leaders must retire at 65.

Mr. Rosengren’s decision follows the recent disclosure that he traded stocks and other investments related to the real-estate industry last year while also helping to set monetary policy. Disclosure forms for Mr. Kaplan showed many millions of dollars in trading in stocks and investments such as stock-market futures and interest-rate funds taking place since he became Dallas Fed president in 2015. While central-bank disclosure forms require officials to provide dates for trading, Mr. Kaplan’s form referred to “multiple” dates and his bank has declined to provide any transaction dates.

The central bank said recently that it would undertake a review of its ethics rules and make changes as needed, and Fed Chairman Jerome Powell at a press conference last week declined to voice clear support for the two Fed leaders.

‘We need to have the public’s trust, we need to hold ourselves to the highest ethical standards.’

— New York Fed President John Williams
“No one on the [Fed’s rate-setting committee] is happy to be—to be in this situation, to be having these questions raised. It’s something we take very, very seriously,” Mr. Powell said then.

Both men separately arrived at their own decision without being forced to resign by the chairman, according to people familiar with the matter.

Mr. Rosengren’s announcement, shortly before 8:30 a.m. on Monday, that he would accelerate his planned retirement put Mr. Kaplan on the hot seat. Throughout Monday, it became clear that Mr. Rosengren’s exit would only intensify the scrutiny on Mr. Kaplan’s trading activity.

Both men resigned one day before Mr. Powell is slated to appear before the congressional committees that oversee the Fed.

New York Fed President John Williams on Monday expressed support for the ethics review. “We need to have the public’s trust, we need to hold ourselves to the highest ethical standards,” and the current review will help ensure that is the case, he said in a virtual appearance Monday.

“We stand ready to adopt any changes around financial rules of disclosure or anything like that” because “we need to make sure that people understand that we’re working all the time in the interest of the public, and we need to have policies and restrictions to support that,” he said.

The two officials’ trading activities were made public via annual disclosure forms released by each of the 12 regional Fed banks at the start of the month, and earlier reported by The Wall Street Journal. The forms detail the financial holdings and any trading done by the policy makers over the prior calendar year.

Mr. Powell said last week after the reports: “I was not aware of the specifics of what they were doing.”

The 12 regional Fed banks are quasi-private institutions that are overseen by the Federal Reserve Board of Governors in Washington. The regional banks have private boards of directors. They collect economic information, engage in community development work and, in the case of the New York Fed, they are responsible for the implementation of monetary policy.

The regional Fed bank presidents are selected by their boards with the oversight of the Fed in Washington.

All 12 regional Fed banks leaders were reappointed to new terms at the start of this year in a process that was overseen by Fed governor Lael Brainard.

Before Monday, Messrs. Rosengren and Kaplan had said that while their trading was consistent with internal central-bank rules, to avoid any conflicts of interest they would sell their stockholdings and move the money into cash or diversified mutual funds.

The central bank nevertheless faced calls for the two men to step down. Critics said the trading raised questions as to whether the men were setting monetary policy with the nation’s well-being in mind, or whether they were acting for personal profit. While the regional Fed bank ethics rules prohibited ownership of bank stocks and limited senior leaders’ trading around Federal Open Market Committee dates, they also called on central bankers to avoid even the appearance of impropriety with their investing activity. The FOMC is the Fed’s rate-setting committee.

“President Rosengren did the responsible thing by stepping down today and we wish him well,” said Benjamin Dulchin, leader of the Center for Popular Democracy’s Fed Up Campaign, a left-leaning activist group. The Fed “has a problem with the public perception, and often the reality, that they favor the interests of Wall Street. It makes both these problems worse when influential Fed presidents are actively trading stocks.”

Better Markets, a group that pushes for tighter financial regulation, said that more is needed. It said Mr. Powell needs to take stronger action to condemn the trading Messrs. Rosengren and Kaplan engaged in and to order a full disclosure of Mr. Kaplan’s market activity. It also seeks a broader investigation into whether other senior Fed officials were doing similar trading.

Mr. Powell said, in a statement released by the Boston Fed, “Eric has distinguished himself time and again during more than three decades of dedicated public service in the Federal Reserve System.”

Mr. Rosengren, a 35-year veteran of the Boston Fed, would have held a voting role on the FOMC next year.

Over Mr. Rosengren’s tenure at the Boston Fed, he became a leading voice on monetary-policy issues and on financial-stability issues, and he helmed an institution that also oversaw key parts of the central-bank response to the financial crisis over a decade ago and again when it responded to the Covid-19 pandemic. The bank is currently researching the possible launch of a fully digital dollar as top central banks around the world contemplate adopting their own digital currencies.

Mr. Rosengren “has an unbelievably strong legacy in terms of the way he has led the Boston Fed,” Chicago Fed President Charles Evans told reporters Monday. “I will miss him and his great counsel…but I certainly hope to enjoy continued long conversations with him well into the years after we’re both retired.”

The Boston Fed statement said Mr. Rosengren “hopes to improve his health condition and eventually be able to explore areas of professional interest and contribution, in the future.”

A search for Mr. Rosengren’s successor is under way, the statement said. Given Mr. Rosengren’s impending retirement, the bank noted that the process had already begun.

—Nick Timiraos contributed to this article.

Write to Michael S. Derby at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the September 28, 2021, print edition as 'Two Fed Leaders To Exit Following Trading Controversy.'

[MDlaxfan76]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I thought that it might get a rise out of you.

Fundamentally his thesis is the whole debt ceiling is BS to begin with, an accounting pile of poop, so why not simply obviate it altogether?

The "coin" would not be traded or used for any sort of payment, it would simply represent an accounting on the balance sheet of the Fed that obviated the debt limit. It itself would not represent any greater obligation of the US govt, just a recognition that the debt limit was bogus to begin with.

It would not, if understood that way, represent any difference at all in the world's assessment of the viability of US debt repayments or the value of any such payments when ultimately made.

Indeed, so the logic would go, eliminating this nonsense that a Congress must vote later (or not) on whether the US will repay (or not) its debts incurred earlier would be a reduction in lender risk, not an increase.

It's at least an intriguing way to point out how ridiculous our current situation is now.

[MDlaxfan76]

Straight up these guys should be in jail

Fed Leaders Eric Rosengren, Robert Kaplan to Resign Following Trading Controversy
Dallas Fed President Kaplan said his stock trading distracted from the work of the central bank

Boston Fed President Eric Rosengren cited health reasons in saying he would retire nine months early.
PHOTO: STEVEN SENNE/ASSOCIATED PRESS
By Michael S. Derby
Updated Sept. 27, 2021 6:30 pm ET

The Federal Reserve banks of Boston and Dallas said their presidents were resigning, following reports of the two leaders’ investment trading that prompted calls for their departures and a central-bank review of its ethics rules.

The two banks gave different reasons for the exits. Dallas Fed President Robert Kaplan, a 64-year-old who is resigning effective Oct. 8., acknowledged in a statement released by the bank that his stock trading distracted from the Federal Reserve’s work.

The Boston Fed said its president, Eric Rosengren, also 64, would retire Thursday, about nine months early, citing health reasons. He said in a statement released by the bank that he was leaving as he had qualified for a kidney transplant to deal with a long-running condition.

In most cases, regional Fed leaders must retire at 65.

Mr. Rosengren’s decision follows the recent disclosure that he traded stocks and other investments related to the real-estate industry last year while also helping to set monetary policy. Disclosure forms for Mr. Kaplan showed many millions of dollars in trading in stocks and investments such as stock-market futures and interest-rate funds taking place since he became Dallas Fed president in 2015. While central-bank disclosure forms require officials to provide dates for trading, Mr. Kaplan’s form referred to “multiple” dates and his bank has declined to provide any transaction dates.

The central bank said recently that it would undertake a review of its ethics rules and make changes as needed, and Fed Chairman Jerome Powell at a press conference last week declined to voice clear support for the two Fed leaders.

‘We need to have the public’s trust, we need to hold ourselves to the highest ethical standards.’

— New York Fed President John Williams
“No one on the [Fed’s rate-setting committee] is happy to be—to be in this situation, to be having these questions raised. It’s something we take very, very seriously,” Mr. Powell said then.

Both men separately arrived at their own decision without being forced to resign by the chairman, according to people familiar with the matter.

Mr. Rosengren’s announcement, shortly before 8:30 a.m. on Monday, that he would accelerate his planned retirement put Mr. Kaplan on the hot seat. Throughout Monday, it became clear that Mr. Rosengren’s exit would only intensify the scrutiny on Mr. Kaplan’s trading activity.

Both men resigned one day before Mr. Powell is slated to appear before the congressional committees that oversee the Fed.

New York Fed President John Williams on Monday expressed support for the ethics review. “We need to have the public’s trust, we need to hold ourselves to the highest ethical standards,” and the current review will help ensure that is the case, he said in a virtual appearance Monday.

“We stand ready to adopt any changes around financial rules of disclosure or anything like that” because “we need to make sure that people understand that we’re working all the time in the interest of the public, and we need to have policies and restrictions to support that,” he said.

The two officials’ trading activities were made public via annual disclosure forms released by each of the 12 regional Fed banks at the start of the month, and earlier reported by The Wall Street Journal. The forms detail the financial holdings and any trading done by the policy makers over the prior calendar year.

Mr. Powell said last week after the reports: “I was not aware of the specifics of what they were doing.”

The 12 regional Fed banks are quasi-private institutions that are overseen by the Federal Reserve Board of Governors in Washington. The regional banks have private boards of directors. They collect economic information, engage in community development work and, in the case of the New York Fed, they are responsible for the implementation of monetary policy.

The regional Fed bank presidents are selected by their boards with the oversight of the Fed in Washington.

All 12 regional Fed banks leaders were reappointed to new terms at the start of this year in a process that was overseen by Fed governor Lael Brainard.

Before Monday, Messrs. Rosengren and Kaplan had said that while their trading was consistent with internal central-bank rules, to avoid any conflicts of interest they would sell their stockholdings and move the money into cash or diversified mutual funds.

The central bank nevertheless faced calls for the two men to step down. Critics said the trading raised questions as to whether the men were setting monetary policy with the nation’s well-being in mind, or whether they were acting for personal profit. While the regional Fed bank ethics rules prohibited ownership of bank stocks and limited senior leaders’ trading around Federal Open Market Committee dates, they also called on central bankers to avoid even the appearance of impropriety with their investing activity. The FOMC is the Fed’s rate-setting committee.

“President Rosengren did the responsible thing by stepping down today and we wish him well,” said Benjamin Dulchin, leader of the Center for Popular Democracy’s Fed Up Campaign, a left-leaning activist group. The Fed “has a problem with the public perception, and often the reality, that they favor the interests of Wall Street. It makes both these problems worse when influential Fed presidents are actively trading stocks.”

Better Markets, a group that pushes for tighter financial regulation, said that more is needed. It said Mr. Powell needs to take stronger action to condemn the trading Messrs. Rosengren and Kaplan engaged in and to order a full disclosure of Mr. Kaplan’s market activity. It also seeks a broader investigation into whether other senior Fed officials were doing similar trading.

Mr. Powell said, in a statement released by the Boston Fed, “Eric has distinguished himself time and again during more than three decades of dedicated public service in the Federal Reserve System.”

Mr. Rosengren, a 35-year veteran of the Boston Fed, would have held a voting role on the FOMC next year.

Over Mr. Rosengren’s tenure at the Boston Fed, he became a leading voice on monetary-policy issues and on financial-stability issues, and he helmed an institution that also oversaw key parts of the central-bank response to the financial crisis over a decade ago and again when it responded to the Covid-19 pandemic. The bank is currently researching the possible launch of a fully digital dollar as top central banks around the world contemplate adopting their own digital currencies.

Mr. Rosengren “has an unbelievably strong legacy in terms of the way he has led the Boston Fed,” Chicago Fed President Charles Evans told reporters Monday. “I will miss him and his great counsel…but I certainly hope to enjoy continued long conversations with him well into the years after we’re both retired.”

The Boston Fed statement said Mr. Rosengren “hopes to improve his health condition and eventually be able to explore areas of professional interest and contribution, in the future.”

A search for Mr. Rosengren’s successor is under way, the statement said. Given Mr. Rosengren’s impending retirement, the bank noted that the process had already begun.

—Nick Timiraos contributed to this article.

Write to Michael S. Derby at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the September 28, 2021, print edition as 'Two Fed Leaders To Exit Following Trading Controversy.'

Agreed, egregious assuming true; this sort of corruption is why the most popular part of the proposed 'Build Back Better' bill is actually the pay-for's...raising taxes on the rich and Wall Street is even more popular than building roads, fixing bridges...

[Farfromgeneva]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I thought that it might get a rise out of you.

Fundamentally his thesis is the whole debt ceiling is BS to begin with, an accounting pile of poop, so why not simply obviate it altogether?

The "coin" would not be traded or used for any sort of payment, it would simply represent an accounting on the balance sheet of the Fed that obviated the debt limit. It itself would not represent any greater obligation of the US govt, just a recognition that the debt limit was bogus to begin with.

It would not, if understood that way, represent any difference at all in the world's assessment of the viability of US debt repayments or the value of any such payments when ultimately made.

Indeed, so the logic would go, eliminating this nonsense that a Congress must vote later (or not) on whether the US will repay (or not) its debts incurred earlier would be a reduction in lender risk, not an increase.

It's at least an intriguing way to point out how ridiculous our current situation is now.

It's a threat to the trust and faith embedded in our currency. Doesn't have to change anything. The GSEs weren't supposed to be debt obligations of the US government but what happened in 08? We folded it in because agency MBS supported our housing finance infrastructure and China and other sovereigns held a lot of it. Once the door is opened it questions whether we will support the dollar or this competing thing that we created even if as a lark.

Find another way to illustrate the point. However I don't totally agree. Other countries may rely on the debt ceiling in some way even if it's tripped on the reg by us time after time after time after time. The good faith and credit. This tears at the faith and puts the question of "could the US decide to pull a 3rd world move on us with respect to their obligations" on paper and codified into our system. It may seem stupid but if our creditors think this wouldn't happen and we put it down on paper it elevates the risk in the minds of creditors so I'd argue the debt ceiling, even if kabuki theater, does have a value to our creditors. And it's the marginal owner that sets the price (and consequently as they have an inverse relationship, the yield or cost of borrowing to us). Even the idea that we would consider this could lower the price and devalue the off the run treasury bonds, reduce liquidity and have a cost. It's more real as a risk and threat than I think you believe it to be, even if it seems like form over function.

To what I highlighted, it doesn't matter what "we" understand it to be, it matters if other creditors understand it that way or not and that risk is way way to huge to take when there's other ways to make that point and not blow ourselves up in the process. Risk/reward - this is all downside and little upside.

[MDlaxfan76]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I thought that it might get a rise out of you.

Fundamentally his thesis is the whole debt ceiling is BS to begin with, an accounting pile of poop, so why not simply obviate it altogether?

The "coin" would not be traded or used for any sort of payment, it would simply represent an accounting on the balance sheet of the Fed that obviated the debt limit. It itself would not represent any greater obligation of the US govt, just a recognition that the debt limit was bogus to begin with.

It would not, if understood that way, represent any difference at all in the world's assessment of the viability of US debt repayments or the value of any such payments when ultimately made.

Indeed, so the logic would go, eliminating this nonsense that a Congress must vote later (or not) on whether the US will repay (or not) its debts incurred earlier would be a reduction in lender risk, not an increase.

It's at least an intriguing way to point out how ridiculous our current situation is now.

It's a threat to the trust and faith embedded in our currency. Doesn't have to change anything. The GSEs weren't supposed to be debt obligations of the US government but what happened in 08? We folded it in because agency MBS supported our housing finance infrastructure and China and other sovereigns held a lot of it. Once the door is opened it questions whether we will support the dollar or this competing thing that we created even if as a lark.

Find another way to illustrate the point. However I don't totally agree. Other countries may rely on the debt ceiling in some way even if it's tripped on the reg by us time after time after time after time. The good faith and credit. This tears at the faith and puts the question of "could the US decide to pull a 3rd world move on us with respect to their obligations" on paper and codified into our system. It may seem stupid but if our creditors think this wouldn't happen and we put it down on paper it elevates the risk in the minds of creditors so I'd argue the debt ceiling, even if kabuki theater, does have a value to our creditors. And it's the marginal owner that sets the price (and consequently as they have an inverse relationship, the yield or cost of borrowing to us). Even the idea that we would consider this could lower the price and devalue the off the run treasury bonds, reduce liquidity and have a cost. It's more real as a risk and threat than I think you believe it to be, even if it seems like form over function.

To what I highlighted, it doesn't matter what "we" understand it to be, it matters if other creditors understand it that way or not and that risk is way way to huge to take when there's other ways to make that point and not blow ourselves up in the process. Risk/reward - this is all downside and little upside.

Well, this is definitely not my field of play.

I'm very far from expert in any of this and didn't even stay in a Holiday Inn on the topic.

But I think the repetitive kabuki theater we play is terribly disruptive for creditors...especially as any foreign investor's analysis of our political system is that we're paralyzed by partisanship in ways that are unprecedented. Political risk has never been this high, and it has to look like it's getting worse, not better.

The only good news has been that there haven't been better alternatives to the US. No matter how ridiculous we must appear, we continue to appear safer by comparison. And not unlike the buoying force to equity markets of such unattractive returns on debt, money simply has flowed to the best of bad alternatives.

One way or another, we need to get rid of this notion that we could make a political decision at any time to default on obligations already incurred.

[a fan]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I guess I don't understand QE......we can print money, hand it to our creditors. Debt is now gone. What's stopping us from doing that?

[Farfromgeneva]

I hate the status of being the cleanest dirty shirt in the laundry. Just don't think parlor tricks do any good and add risk. The foundation of being the fiat currency in the first place is that we got there post Bretton Woods pullout (don't want to get her pregnant...can't help myself, sorry) is the the full "faith and credit" - don't see how playing games because we aren't functioning properly could ever be the right answer.

Like I said, find another way to fight the funk of the debt ceiling. But I look at that like a modification or amendment to a credit deal, not a restructuring which is what throwing the concept of another competing currency into the mix would be.

Have American Gangster on in background while working here - forgot it was Idris Elba who "gets his 20% on the street" from Denzel. Man that guy gets around. And is good, but not Maharasha Ali good. Common is an underrated actor too, probably because he's too damn good looking. More or less the younger Brad Pitt with more pigmentation.

(btw the ceiling means the SBA isn't endorsing loans at the moment, had dinner with a CFO/COO of a privately owned bank in GA who's owner is a billionaire from a family that has a electrical distribution business in Chicago and he was crying about having too much capital and liquidity but needed those deals to get the fee income from gain on sale of the gov't guaranteed portion of the loans. 75% of total loan amount, on a pari passu risk of loss at first dollar, basis at north of $110/$100 with premiums split 50/50 w the gov't over 10pt premium so say it's $115 on $75/$100, or 12.5% premium on the $75 sold which equates to roughly $9.375/$100 out the door and only $25 at risk. Plus a host of other money in a 1%/annum servicing fee on the whole $100 and loans mostly at Prime + 2.75% max rate chargeable which is about 2.75% higher than most CRE loans they book so nice carry of even conservatively 6.25%-6.5% spread, 4x1% + excess spread over typical loan rate, assuming Prime more or less reflects overhead expense and cost of funding for the bank. And I guess the small business doesn't get funded too but that's a whole other story)

[Farfromgeneva]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I guess I don't understand QE......we can print money, hand it to our creditors. Debt is now gone. What's stopping us from doing that?

We lose control of monetary policy. We only get away with it because the entire world has sterlized their own currencies and we still smell like rosier s**t than everyone else.

Look up Russia 1998 Ruble devaluation. Printing money is the same as changing our exchange rate with the world.

That's when we end up with some foreign masters instead of being able to act like the a**holes we have been getting away with acting like for the last dozen years.

[MDlaxfan76]

What do folks think about this concept?

https://www.crisesnotes.com/yet-another ... ntthecoin/

Horrible idea no doubt in my mind. It's a default, if not technical surely monetary. Promises to be repaid via US Treasury dollar denominated debt would get crushed, the dollar would get crushed and the world would find an alternative they don't even bother looking for right now. Forget whatever that guy wrote (and I did read through it), it's as impractical and silly as anything a 3rd world country would try.

It's this simple - I promise to repay you in a certain form that is broadly accepted as payment around the world. Then I make up a new competing monetary store of value either diluting or cannabilizing my existing form of legally obligated repayment on prior debts. I've destroyed the value of the form and source of repayment through my own actions thus devaluing the debt I owe you.

It's dumb because of the above. On every level imaginable and anyone who can't get that shouldn't be responsble for money or financial decisions for themselves let alone anyone else.

Even discussing it publicly chips away at the promise to repay source of strength of the dollar. It's almost as bad as the direct attack on our institutions by the prior regime and it's gimp minions.

I guess I don't understand QE......we can print money, hand it to our creditors. Debt is now gone. What's stopping us from doing that?

I think Geneva is fundamentally correct that simply printing more money and inflating our way out of debts would indeed panic creditors.

But not so sure the 'coin' concept has that same effect. It's mere accounting, not actually more money in the system, as the 'coin' can't actually be used for debt repayment. Basically it's an accounting acknowledgment that the US has assets that have no corresponding lien, and using that reality, to ignore the phony debt ceiling nonsense.

The author prefers other answers, but his basic point is that this is all accounting nonsense, nothing more. So stop it.

[Farfromgeneva]

What Happens When A City Declares Bankruptcy
July 11, 20121:00 PM ET
Heard on Talk of the Nation
16-Minute Listen
Download
Transcript
San Bernardino, California is seeking bankruptcy protection. Officials said the government can not cover its bills and faces a $46 million deficit. Phil Batchelor, former interim city manager for Vallejo, California, talks about what happens to workers and services when a city goes bankrupt.

NEAL CONAN, HOST:

San Bernardino is expected to become the third California city in the past month to file for bankruptcy. That follows Stockton and Mammoth Lakes. Even after layoffs and cuts to public employees' pay and pensions, officials in San Bernardino said the government could not cover upcoming bills. So what happens now to city services like police and fire protection, garbage collection, road repairs? Who gets paid, and who doesn't? If you have questions about municipal bankruptcy, give us a call, 800-989-8255.

Email us: [email protected]. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION. Joining us now is Phil Batchelor on the phone from Vallejo, California, where he formally served as the interim city manager to help that city get out of bankruptcy. Nice to have you back on the program.

PHIL BATCHELOR: Thank you, Neal.

CONAN: Is bankruptcy protection a get-out-of-jail free card?

BATCHELOR: No, it's not. When you declare bankruptcy, you don't suddenly get a free pass that allows you to abdicate responsibilities for providing municipal services.

CONAN: So what's the priority list? Who gets what?

BATCHELOR: Well, once you've declared bankruptcy, you still have the obligation to get your fiscal house in order. You still have to balance the budget. You still have to settle with the claimants. You still have to pay your legal bills, and you still have to deal with your unfunded liabilities.

CONAN: Unfunded liabilities, those are pensions for the most part?

BATCHELOR: Yes.

CONAN: And bonds, to pay off previously issued bonds, perhaps?

BATCHELOR: Yes. This is part of the claimants.

CONAN: What does the bankruptcy protection then give you? Does it give you the right to negotiate with your creditors to say we'll give you X pennies on the dollar?

BATCHELOR: It provides a couple of things. One, it buys some time. Two, is it brings all parties to the table - the vendors, the claimants, the bankers, the employee organizations, even individual employees and retirees. They all can have a seat at the table. And it brings an independent third party to preside over it.

CONAN: And...

BATCHELOR: This is the judge, the bankruptcy judge.

CONAN: And so if the union and the city council can't come to an agreement, the judge decides?

BATCHELOR: Yes. But the judge wants you to be able to work it out with the claimants. For example, when we filed for bankruptcy, we had, in Vallejo 1,013 claims filed against us; and we had $382 million in outstanding liabilities in these claimants. That's what they claimed that they were due. And so when I was brought in, I was asked to help get the city out of bankruptcy. And what we did is we sat down with the attorneys that represented the other parties, and we began the long process of what can we do.

I think, you know, you ask the question, perhaps, why do organizations get into these kind of situations where they have to declare bankruptcy? I think there's two things. One is they abdicate responsibility for their own destiny. They enter into long-term agreements, contracts, MOUs that...

CONAN: MOUs are memorandums of understanding?

BATCHELOR: Yes. And the second thing is, I think, there is not a positive trusting relationship between the bankers, suppliers, vendors, employee organizations. They don't trust you. And so part of the process is when you're sitting at the table, do they believe you? Well, if they don't believe you, then they're calling for an outside third party to come in, and thus, we get into bankruptcy. But when you're sitting there and a judge is presiding over it, it sort of says, all right, let's get down to business, let's see the numbers, we understand them, and now what are we going to do?

For example, when the city of Vallejo declared bankruptcy, they had to balance the budget. They were spending more each year than they were bringing in.

The result, they closed three out of eight fire stations. And that increased the response time to respond to a medical emergency or a fire. They kept the fire department by 42 percent of the number of employees they had. The police department, they reduced the number of sworn officers from 155 down to 90. They cut the department by 47 percent. Now, they still have to provide police protection and fire protection and medical protection and garbage and everything else that a city is responsible for. But they have less assets to do it with.

CONAN: And I assume one of the first things that goes is maintenance.

BATCHELOR: One of the first things to go is what?

CONAN: Maintenance.

BATCHELOR: Maintenance. Preventive maintenance is absolutely put aside.

CONAN: So roads deteriorate, the city's capital equipment deteriorates, vehicles age and aren't replaced.

BATCHELOR: Absolutely. The roads become - unless you're getting outside funding from the state or federal government, the interior roads within a city will not probably be paved. The potholes will get worse. And if they deteriorate enough, then you'll have to rebuild the road completely, which will cost you many times as much as maintaining it properly in the first place.

CONAN: What happens to the psychology in a city that's in bankruptcy?

BATCHELOR: When there's a label put across a city or a county or a special district that says, you're in bankruptcy, it equates in the minds of the public to dysfunction. You couldn't manage your own business, so you end up in bankruptcy. And it is very difficult for the employees. They don't want to be associated with a dysfunctional organization. It destroys morale.

CONAN: And I assume their pay has been cut as well. There is a question of, are people even going to show up for work?

BATCHELOR: Yes, their pay will be cut. Their benefits will be cut. They will be in a department that has, perhaps, 10 people. And suddenly they have five or six people that have to do the work. And so they're being asked to do more, get paid less and be associated with a dysfunctional organization.

CONAN: And there is then the city's reputation. One of the ways you're always - one of the things you're always trying to do is to attract investment, to attract new businesses.

BATCHELOR: Absolutely. You want to invite business to come in. You want to be business friendly. You want people to come and to establish their business in your entity. It brings in jobs. It brings in tax revenues that help pay the bills. And when you have a label of bankruptcy, it makes it very difficult for people to get serious about relocating to your jurisdiction.

CONAN: We're talking with Phil Batchelor, former interim city manager for Vallejo, California, hired in 2010 to help that city escape bankruptcy, which it filed for back in 2008.

800-989-8255, email us: [email protected] if you have questions about municipal bankruptcy, an option taken or at least sought by three California cities just this month. And we'll start with Alan(ph). Alan on the line with us from Williamsburg in Virginia.

ALAN: Yes. How did Vallejo get into that situation that caused it to go bankrupt?

BATCHELOR: There were several things that happened. It didn't just happened overnight. It didn't just happened a year or two years before they file for bankruptcy in 2008. It was building up over a decade.

The city council had entered into agreements, multi-year agreements with their employee organizations, that they would continue to pay salaries based on a formula. The formula was what other cities did. We'll pay the average of what these cities pay. That abdicates your responsibility.

Second thing is, the city got into a situation where the unemployment rate began to soar above 15 percent, and businesses were having a very difficult time. The main business in the city, which was Mare Island and naval base closed, and many of the jobs disappeared. And so high unemployment reduced value of the housing stock. Between 2006 and 2009, housing stock value dropped by 67 percent.

CONAN: Now, a lot of places that had bases that closed were able to try to, you know, create enterprise zones to leverage that base into an economic opportunity.

BATCHELOR: True, but the state has taken away a lot of the ability to have enterprise zones, to have redevelopments. In fact, the state just took the ability to have redevelopment agencies that help blighted areas to come back. It just took the revenue from all 400 redevelopment districts in the state. It did away with them this last year.

CONAN: Alan, thanks very much for the call.

ALAN: Thank you.

CONAN: And you mentioned cuts. Obviously, that's part of a solution. The other part is to increase revenue. Were taxes raised?

BATCHELOR: Yes. Because we were able to gain the confidence of the citizens and community leaders, we were able to pass a tax measure that raised $10 million a year for 10 years. It just passed, but it said we have the confidence that you can do better in the future. We were able to get the city out of bankruptcy November 1 of 2011. We began the rebuilding process of opening a new fire station, of adding firefighters, of adding some police officers. And this was because the citizens said we trust you enough, and let's rebuild and let's have a better city in the future.

CONAN: Was there a political price to pay, those who are in office when bankruptcy was declared?

BATCHELOR: Yes, there's always a political - many of the people who were in office when the years leading up to it are gone. And we have new council members that have come in and helped to rebuild the city.

CONAN: And council members, this is a city manager form of government?

BATCHELOR: It is. It's a - has a charter and the city manager is responsible for the operations and running of the city. And the city council, in this case, five members, they set policy and direction and leadership.

CONAN: Phil Batchelor, the former interim city manager for Vallejo, California. We're talking about municipal bankruptcy. You're listening to TALK OF THE NATION from NPR News.

And let's go to Royal(ph). Royal with us from here in Washington, D.C.

ROYAL: Well, thank you very much for taking my call. The - you're absolutely correct as far as the - the actual question you're asking. But one of the things I think that you really need to address - and your guest can probably do a far better job exploring this than I can - is this, you have to deal with the fact that everybody who has a claim wants to be primary. Everybody wants a dollar for their dollar. And there's a great deal of competition.

And the first thing that happens in bankruptcy is everybody gets to be introduced to what a federal bankruptcy judge is, which is probably less powerful than God, but certainly the voice of God. And you need - one of the benefits in bankruptcy is the fact that you get a very clear indication that you can't just grandstand. This is going to be resolved. And, you know, everybody has a voice, but nobody gets the loudest voice.

CONAN: Except the judge apparently.

ROYAL: Well, if your guest can comment on that. But I can certainly say - having represented several people for bankruptcy, I say, listen, when, you know, you got to change your whole vocabulary now that we're, you know, in bankruptcy. And you get to say things like, you know, I got to take care of my kids. I mean, you know, the grandstanding, the hyperbole, if you will, that leads up to bankruptcy, that gets thrown out the window because there's just no room for it. There's no - and that's sort of one of the benefits of bankruptcy.

And there's a lot of reasons why you don't want to go into bankruptcy. But when you have a very strong union, particularly the fire department and particularly the police department, sometimes, bankruptcy is a godsend to a local jurisdiction because nobody has the brass body parts to stand up and say, look, the answer is, no, and we mean it. Because as soon as you say, no, and money - we don't have the money for it, strong unions start complaining, lying and suggest you don't believe in fire departments, you don't believe in your own police, you don't believe in good teachers. And it's just - you can't keep control of the situation.

CONAN: Phil Batchelor?

ROYAL: What happens...

CONAN: Well, let me just ask Phil about his experience.

BATCHELOR: The caller's comments are insightful. We had $382 million in claims. We had $6 million to settle those claims, and yet we did it. And we could not have done without a bankruptcy judge saying, get serious and let's get this done. When you're in the negotiation process with the employee organizations, when you say, we can't afford it, we don't have the money, they believe it's part of the negotiation dance. And, thus, are less likely to come to the table. Or they feel it's not their responsibility. The city leaders got the city in this trouble. Let them worry about it.

ROYAL: You know, it's very similar to, if you will, you know, as a parent, you know, if you have children and you say, look, you know, here's what we have for dinner tonight. And they'll say, well I don't want that. What else do you got? This dinner. This is what we made. And they'll say, no, I want - we want something else. You know, particularly with a very - well, part of the problem with unions is, and again, it's a lack of confidence and belief in the leadership and this sort of this - the idea that it's all a game, and lack of real - part of the problem is, from both the politician standpoint as well as from the unions, nobody wants to look at the actual bottom line.

You don't become a successful politician by saying the word no. And you won't be a popular union leader by accepting the word no. So what you have is, on both of the equation, you know, it's like the children watching the cookie jar, and the children who want what's in the cookie jar. Nobody's saying, hey, there's only so many cookies to go around and that's it.

CONAN: Yeah.

ROYAL: I know there's...

CONAN: Phil Batchelor, we just have a few seconds left - and thank you very much for the call, Royal. But I wanted to ask, it's now 2012, what's the experience with bankruptcy been for Vallejo?

BATCHELOR: Well, the experience has been good. We were able to save probably in excess of $30 million, but we had legal bills of over $12 million. But the problem is not just unions or just cities, it's both. They passed legislation that made possible pensions that are unsustainable. As a result, we will see dozens if not hundreds of cities impacted, many who will go into bankruptcy in the next decade.

CONAN: Phil Batchelor, thanks very much for your time. Appreciate it.

BATCHELOR: Thank you.

CONAN: Phil Batchelor, a former interim city manager for Vallejo, California, with us on the phone from that city.

[Farfromgeneva]

Once bankrupt, Vallejo still can't afford its pricey pensions
by Melanie Hicken @melhicken
March 10, 2014: 10:44 AM ET
vallejo police
The Vallejo police force, shown at a crime scene last year, remains "woefully understaffed" several years after bankruptcy, according to City Manager Dan Keen.
The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills.
The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.

Amid threats of legal action from the state's pension giant, CalPERS, Vallejo did little during its nearly three-year stint in bankruptcy to stem the growth in its pension bills.

As a result, Vallejo continues to dole out large sums of money for retirees. Except for new hires, Vallejo's police and firefighters can retire at age 50 with as much as 90% of their salary -- for life. Public safety workers who retired in the last five years have average annual pensions of more than $101,000.

And the pension costs are expected to continue to rise, with a projected increase of up to 42% over the next five years.

Related: Detroit retirees sound off on possible pension cut

Moody's recently warned that Vallejo's pension obligations could force it to file for bankruptcy protection a second time. The credit rating agency said the city offers a cautionary tale for two other California cities teetering on the brink: San Bernardino and Stockton.

Vallejo City Manager Dan Keen counters that the city's financial position isn't as bleak as Moody's says. He said the city is in a much "better place" than when it filed for bankruptcy, in part due to a 1% sales tax hike that is funding new city services, like the installation of new surveillance cameras aimed at improving public safety.

In addition, employee concessions, such as a 5% pay cut for police, will allow the city to fill this year's projected $5.2 million budget shortfall, he said.

Still, Keen said pension costs are a major concern.

"If we don't resolve those costs, then we're going to see services continue to suffer," said Keen, who has led the city since 2012. "We're going to have to cut somewhere."

A lot of cuts have already been made.

Vallejo's roads are littered with potholes. Three of its nine fire stations remain closed. And its police force is down by almost 40% -- though Keen says there are plans to hire more officers this year.

Crime has surged, with more than two dozen homicides last year, compared to only seven in 2006. Burglaries are also on the rise. Residents maintain neighborhood watch groups, but the crime is taking a toll.

"Some people in my neighborhood are voting with their feet and leaving Vallejo," resident Russell Zellers wrote in a 2013 letter to City Hall. "If things continue along the present course, I may not be far behind them."

Related: Retired union workers facing 'unprecedented' pension cuts

In the fatter years, Vallejo enjoyed a housing boom like many California cities. Flush with property tax revenues, city leaders approved increases in salaries and benefits for city workers. Police officers and firefighters were earning six-figure salaries, even before overtime.

As costs grew, city officials began dipping into the city's cash reserves to pay the bills. Then, in May 2008, after a wave of foreclosures caused property tax revenue to plummet, the city could no longer afford the generous salaries and other benefits it was paying and was forced to file for bankruptcy.

To help cut its debt, the city slashed retiree health benefits and the interest payments it paid to banks. It also cut pension benefits for new hires and raised the amount current workers must contribute to their pensions. But it did not attempt to cut pension benefits for current workers and retirees, a move that can only be attempted during bankruptcy.


Why Detroit filed for bankruptcy
In its report, Moody's blamed the state's pension giant CalPERS for Vallejo's lack of action.

CalPERS, which manages $277 billion in retirement assets for more than 1.6 million workers and retirees, has repeatedly argued that pension benefits are protected by California law. It says it is an "arm of the state" and should therefore be exempt from bankruptcy proceedings -- meaning it should get paid in full while other creditors could get pennies on the dollar.

Workers and retirees say their pensions were promised through employment contracts and they shouldn't be penalized for the city's bad planning.

Related: Pensions ask retirees to pay back tens of thousands

So far, no bankrupt California city has ever challenged CalPERS over pension cuts. CalPERS did not respond to a request for comment.

Vallejo's bankruptcy was likely only a short-term fix to its financial problems, said Michael Sweet, a California-based bankruptcy attorney at Fox Rothschild LLP.

"The problem will continue to fester until people face up to the fact that the money available is less than promises made," he said.

CNNMoney (New York)
First published March 10, 2014: 10:37 AM ET
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