Monday, March 24, 2008

US Economic Crisis Update: NYC Braces For Job Cuts; Student Loans Under Threat

March 24, 2008

With Economy Tied to Wall St., New York Braces for Job Cuts

New York Times

New York is accustomed to job losses on Wall Street. They come with just about every economic slump, and their impact is felt throughout the city.

But now, as the city braces for a big contraction in the financial sector as a result of the credit crisis and the collapse of Bear Stearns, the fallout could be worse than in the past.

The New York economy is more dependent than ever on high Wall Street incomes, which have jumped by more than half since 2001, to an average of $387,000, according to the city comptroller’s office.

Last year, the finance industry was responsible for nearly a third of all wages earned in the city, the highest in modern times. And each Wall Street job supports three workers in other sectors.

A great many of the 14,000 employees of Bear Stearns are expected to lose their jobs because of the firm’s cash shortage and its pending acquisition by JPMorgan Chase. As the credit crisis unfolds and other firms discover the depths of their losses related to bad loans, few expect the layoffs to stop there.

“Up to this point in New York City, the material result of the credit crunch hasn’t been felt as quickly as people were expecting,” said Marcia Van Wagner, deputy comptroller for the budget of New York City. “It took a while for the other shoe to drop.”

Indeed, even though economists say this slowdown started in the financial sector, New York has felt little of its pain. For example, real estate prices have largely held steady in the metropolitan area even as they have plummeted in other regions.

Now there are signs of nervousness, and not just among bankers and traders. Some prospective buyers in the pricey condominium market have put their plans on hold. Companies like SeamlessWeb, which delivers food to financial firms, are reconsidering plans to hire more staff. A newsstand operator across from the New York Stock Exchange greeted his customers last week by saying, “It will be O.K.”

Analysts are predicting wider cuts across the industry, even among workers who had nothing to do with mortgages. A UBS analyst, Glenn Schorr, said the major banks had already cut 5 to 10 percent of their work forces, and he said he expected them to make cuts on a similar scale again in the next few months.

“It’s fair to, unfortunately, expect another wave of cuts as they batten down the hatches,” said Mr. Schorr, who covers several major banks.

Some New York-area residents are becoming more cautious with their spending decisions.

Last month, Shai Shustik, a broker with Manhattan Residential, was helping a 27-year-old client find a $700,000 one-bedroom apartment on the East Side of Manhattan. But then the client suddenly put her search on hold. Her father, a banker, said he had lost too much money in the stock market to buy such an apartment for her.

Until two weeks ago, Mr. Shustik was also working with a Credit Suisse banker who wanted to spend up to $1.6 million for a one-bedroom apartment in the West Village or TriBeCa neighborhoods of Manhattan. The banker abruptly stopped his apartment search because he was too concerned about the stock market and his future bonus potential.

Last Tuesday, a woman picking at her salad in Grand Central Terminal said her husband, who works at a competitor of Bear Stearns, feared the trouble would spread.

“He’s worried,” said the woman, Emilie Bosak, a stay-at-home mother. “Most people in finance are worried.”

That worry has been building since last summer, just after two hedge funds within Bear Stearns collapsed and the mortgage markets were beginning to freeze. Employment at securities firms in New York had rebounded since the 2001 recession and was nearing its all-time peak of 200,000 from before that downturn, according to the Securities Industry and Financial Markets Association, a trade group.

Since August, the financial industry has gradually shed at least 20,000 jobs, mostly among those selling loans, those bundling loans into complex securities and those placing trading bets on the likelihood that borrowers would pay.

Now the pace of job losses is increasing. Significant cuts at Bear Stearns are almost certain. Citigroup is in the process of cutting 10 percent of the work force in its investment bank, or 6,000 people. Lehman Brothers announced 1,400 layoffs two weeks ago.

Goldman Sachs said in January that it would reduce its global work force by 5 percent. On Friday, The New York Post reported that the cuts would rise to 20 percent, which would bring the total cut to 6,400 jobs. A spokeswoman for Goldman had no comment on the report.

“There will be more cutbacks because basically the business is not there,” said Richard X. Bove, a managing director at Punk, Ziegel & Company, an investment firm.

The last time Wall Street had a similar contraction was after the technology bubble burst seven years ago. At that time, financial firms cut 60,000 jobs in the New York City area, or 1 in every 10 finance positions, according to Moody’s

But those cuts were rapid, and this downturn strikes some people as more similar to the slow bleeding that occurred on Wall Street from 1987 to 1993, when 100,000 people in the New York area — 15 percent of finance workers — lost their jobs, according to

So far, is predicting about 25,000 job losses in the New York area, but that number may be revised as the full impact of Wall Street’s credit troubles becomes clear, said Marisa Di Natale, a senior economist at

The firm’s chief economist, Mark Zandi, said of the current round of cuts: “It won’t be the same kind of job loss. Back in ’01 or ’91, it was a much larger share of the back-office jobs. But in terms of compensation, the impact could be just as significant. One hedge fund job lost today is worth 10 back-office jobs in the last downturn.”

In New York and surrounding counties, for example, financial workers accounted for 29 percent of all money earned and only 11 percent of jobs in 2006. That is up significantly from 1990, when the finance industry accounted for 19 percent of wages and 12 percent of jobs, according to an analysis by

That increase is related to an unprecedented rise in bonuses over the last four years and also to the elimination of some lower-paying jobs because of outsourcing and computer improvements.

Some New Yorkers said their neighbors seemed to be in denial.

“I was at a benefit last week, and a major well-known chief executive told me that ‘Everything will be just fine. People will start buying houses again,’ ” said David Patrick Columbia, who runs the New York Social Diary, a Web site that chronicles Manhattan social life. “Another one blamed everything on the media. He went on about how the media is creating a recession.”

To be sure, it is not clear how prolonged the downturn in the economy will be or where its effects will be felt the most. Historically, most recessions have hit the manufacturing sector, for example, much harder than financial institutions. This downturn is different, many economists say, because it was set off by troubles in the financial sector.

That distinction is evident among executive recruiters in the securities industry, some of whom say they received a barrage of résumés last week after the sale of Bear Stearns was announced.

“Bear was a shock to the market. No one could have fathomed a year ago that something like this would happen so fast,” said Michael Karp, chief executive of Options Group, a recruiter in New York. “So employees across the board are nervous.”

Adam Zoia, managing partner at Glocap, another New York recruiter, said employers using his firm listed the same number of job openings in the first two months of this year as in the period a year earlier. But, he said, they filled 20 to 30 percent fewer of those positions because of uncertainty about the economy.

Last week, after the Bear Stearns announcement, business school and college students called their institutions from spring break to ask if their finance jobs would be canceled. It remains unclear what will happen with many internships and job offers.

Anxiety is also being felt among the businesses that cater to Wall Street and its high-income workers.

Jason Finger, president of the food delivery company SeamlessWeb, said he saw a clear drop in business this past week. Each order was just a bit smaller.

“It’s only on the margin,” Mr. Finger said. “The financial markets have been very unsettling for us.”

Harry’s Cafe, a cavernous restaurant in the financial district, saw a 15 to 20 percent drop in business over the last two weeks, mostly at lunchtime. The nearby Delmonico’s steakhouse also was slow during lunch. The restaurants’ managers say people living in the new condominiums downtown have added some stability at dinnertime.

At Bistro Laurent Tourondel, or BLT, a sleek steakhouse on 57th Street and Park Avenue, Yann Le Morzellec, the assistant general manager, said: “A lot of the clients have the black Amex card, which shows to us they are pretty stable. I think a lot of them might be immune to what’s going on.”

Eric Bedoucha, the chef at Financier Patisserie, a downtown bakery, tracks the financial market by the types of cakes his customers buy.

“They buy a ‘Good luck!’ cake for when someone is fired and ‘Welcome to our team!’ when someone is hired,” Mr. Bedoucha said.

He saw lots of job-loss cakes in November but has not seen many since then. Still, the bakery opened in 2002, after the last bubble had burst, so he does not know whether people will buy any type of cake if there are large-scale layoffs.

Reporting was contributed by Annie Correal, Geraldine Fabrikant, Christine Haughney and Sharon Otterman.

Financial crisis hits students

By Julie Fry
Published Mar 20, 2008 9:31 PM

For most students, borrowing money has become a necessary part of going to college. The average student now graduates with at least $21,000 in debt and it is not at all uncommon for students to graduate with $100,000 in debt or more. At the same time, tuition at private universities and colleges has enormously increased—far ahead of inflation.

Parents are losing their jobs or their salaries are declining, so family contributions to education costs are decreasing. These factors mean that students from an increasingly broader economic spectrum are more dependent than ever on student loans.

That is why every student who is attending or is applying to college right now must be horrified by what is taking place in the financial markets. In February, it became clear that what was originally reported by the mainstream press as a crisis in the risky subprime mortgage market, was now affecting what have been traditionally thought of as incredibly stable investments—like bonds for student loans.

Here’s what is happening: many state and local governments secure money for public or quasi-public programs through a venue that most people have never heard of called the market for auction-rate securities. Before the financial crisis, auction-rate securities offered the government borrowers a very low interest rate and it offered lenders (banks and other corporations) ready access to their cash investment through regularly scheduled auctions for the bonds, where they could sell their investment and get their cash back on sometimes a weekly basis. They were earning a higher return than they would with their money in a bank.

All the investments were insured by companies called bond insurers, which specialize in guaranteeing this kind of debt. Here is where things started to unravel. These bond insurers also insure other types of debt—like subprime mortgages. Now that these insurance companies are going to have to secure those loans, the banks don’t think they can guarantee student loan debt as well.

But that is really just one aspect of the crisis. Sallie Mae, the biggest lender to students, reported a $1.6 billion loss in the last financial quarter. This was largely reported as resulting from a huge increase in defaults on these loans.

The amount of debt that the Department of Education alone has accumulated from student loans is now more than $40 billion dollars. In fact, right now the only bright spot in the student loan market for investors is in the private collection agency market, which is reporting record profits.

On top of that, the federal government, which subsidizes many student loans and regulates the interest rates as well, cut its subsidies in 2007, further aggravating the default situation and the credit crisis.

All this means that what was once considered one of the safest investments is now among the most risky, with students failing to pay off their debts and no one available to insure the loss.

Therefore, at the auctions for these loans lately, no one has been showing up to buy them—which means that the source of money for student loans is drying up and, not only that, the interest rates on the loans are spiking sharply.

What does this mean for students? States and universities all over the country are cancelling their student loan programs. Several private lenders are withdrawing from the market altogether. And even loan programs backed by federal government guarantors, like the Pennsylvania Higher Education Assistance Agency, a state institution, has announced it is abandoning its federal student loan program. State agencies all over, including Michigan, Montana, Massachusetts, Pennsylvania, New Hampshire, Iowa, and more have announced cutbacks in their student loan programs in recent weeks.

Most students will not be applying for their loans for next year until this summer. So far, the federal government has been telling them they have nothing to worry about. U.S. Secretary of Education Margaret Spellings told Congress on March 14 that students could just borrow directly from the Department of Education, through what is called the direct-loan program. When asked whether the Treasury Department—the same one that is busy bailing out huge banks like Bear Sterns and funding the multi-billion dollar war in Iraq—is going to be able to come up with enough money to account for the loss of much of the state and private student loan industry, the Secretary merely replied that she would be ready.

But despite the rosy and calm picture presented by the Department of Education, the student loan industry continues to crumble, and students are bound to be affected by either enormous interest rates or no loans at all. Students from the states affected so far have already reported deciding to leave their four-year university for a community college, or having to drop out of school altogether. Many of these students have already completed some of their education and are already in debt. Leaving school early will leave them high debt burdens and few prospects for well paying jobs.

Although there have been many struggles over the rising cost of education over the years, the readily accessible access to funds through loans and the promise of a relatively high-paying job upon graduation have kept some of the broader layers of students out of the movement. Now, neither of those factors is a guarantee. With students over the summer facing the prospect of being locked out of access to higher education altogether, this economic crisis may quickly become a political one amongst youth.
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Pan-African News Wire said...

From the March 24, 2008 edition -

Recession is a given. Can we avoid depression?

Economists wonder if the Bush administration is ideologically inclined to do what's needed to rescue economy.

By David R. Francis | columnist

When economist Robert Parks predicted early last week that there was more than a 60 percent probability the current financial meltdown in the United States would lead to the "Bush depression," his phone began ringing like crazy with calls from the media.

Only last fall, most economists were forecasting a modest slowdown. Now, a good majority of them see a slump big enough to qualify as a recession.

But a depression?

Nah! Most number crunchers are counting on the Federal Reserve to stop any failure on Wall Street from cascading to other financial institutions and leaving them falling down like dominoes.

The Fed, under Chairman Ben Ber­nanke, has taken several orthodox and unorthodox monetary actions to prevent the credit freeze-up from spreading and damaging further the basic economy.

Last Tuesday, for instance, the Fed dropped short-term interest rates another 0.75 percentage points to 2.25 percent, hoping to revive financially squeezed banks and encourage consumers to borrow and spend.

Mr. Parks, however, doubts the cuts will do much to boost the economy. Rather, he sees a further steep fall in housing prices, continued major deficits in the federal budget and in the international trade balance, a tumbling dollar, and a weak stock market leading to a genuine depression with 30 to 35 percent unemployment, greater poverty, more loss of homes, plunging bond and stock prices, even some starvation. Parks, now a Pace University finance professor (for years he was chief economist at three Wall Street firms), says he has never predicted a depression before. His e-mail to press acquaintances sparked a lot of interest, as Parks was daring to express publicly the financial community's worst nightmare.

What prompted Parks's pessimism is his assumption that the "right-wing ideology" prevalent in the White House will keep Washington from acting to ward off a major depression. A fan of famed British economist John Maynard Keynes, who called for major government spending programs to remedy the Great Depression of the 1930s, Parks would like the federal government to step up outlays to fix rickety bridges, repair pot-holed roads, improve schools, and more to provide more jobs, more income, and thus more spending to cure any economic downturn.

As Parks sees it, Washington and Wall Street are mostly counting on Fed additions to the money supply to revive the free market and right the economy.

"Automatic recovery is in no way a reliable concept," he warns, especially if deflation (falling prices) has begun. He recalls warning of the economic damage that the bursting real estate and stock market bubbles would wreak in Japan: That nation suffered stagnation from 1990 to 2001. Today's financial crisis has revived the debate over the role of government in stopping a slump.

If the economy doesn't improve soon, says Ed Yardeni, president of Yardeni Research in Great Neck, N.Y., the United States might want to consider doing what Sweden did in 1991: Inject government capital into a troubled financial market. The Swedish economy bounced back quickly.

"This is the worst credit crisis we have ever had" in the postwar US, Mr. Yardeni reckons. He praises the Fed for breaking historical precedents and being creative in its steps to prevent a credit meltdown. But actions by Treasury Secretary Henry Paulson to stem the troubles are "pretty lame," he holds.

So far, Yardeni expects only a "modest recession" in the US, with the "basic capitalism and materialistic instincts" of Americans coming back soon.

Economist Dean Baker figures that more of Wall Street's "big boys" – financial firms like Bear Stearns – will be pushed to the edge, "victims of excessive greed and really bad judgment." The co-director of the Center for Economic Policy and Research in Washington sees the financial system as biased toward pushing income to the already wealthy. So he wants any necessary federal intervention to keep troubled banks alive in a way that doesn't rescue managers or shareholders but merely keeps the institutions running under new management.

Economist A. Gary Shilling, like Parks, is also pessimistic. He predicts a 25 percent drop in house prices by 2010 from their 2005 peak. The result: All homeowners with mortgages will see, on average, nearly all their personal equity in their houses disappear – a $2 trillion drop in total wealth.

Mr. Shilling, a consulting economist in Springfield, N.J., also sees a major retrenchment in consumer spending. And he worries about a "wild card" – the financial crisis spreading as those in the investment community try to unwind their leveraged investments. Many hedge funds and investment banks have borrowed as much as 40 times their own capital to invest, seeking a high return.

Unlike Parks, Shilling expects a deep slump to urge Congress, regardless of party, to respond with rescue measures – say, Federal Housing Administration guarantees of mortgages and a moratorium on foreclosures. He's not sure if it will happen this year or wait for a new administration.