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Global Recession Worst Since Depression, IMF SaysWASHINGTON (AP) -- The global economy is expected to lurch into reverse this year for the first time since World War II with appalling consequences for nations large and small -- trillions of dollars in lost business, millions of people thrust into hunger and homelessness and crime on the rise. And the pain won't stop this year, the International Monetary Fund declared Wednesday, for what it said was "by far the deepest global recession since the Great Depression." To cushion the blow and head off further damage next year, the IMF is calling for more stimulus projects from the word's governments, including major spending for public works projects. Even with many countries taking bold steps to turn things around, the global economy will shrink 1.3 percent this year, the IMF predicted in its dour forecast. "We can be fairly confident that in 2010 or even 2011, economies will not be back to normal," said IMF chief economist Olivier Blanchard. "Which means that governments should today basically think at least about contingent plans for infrastructure spending. ... Next year will be too late." In the U.S., President Barack Obama's $787 billion stimulus includes money for fixing roads and bridges and other infrastructure projects. IMF officials said there's room for Germany and other countries to do more in terms of fiscal stimulus, and the United States, too, has prodded the Europeans to ramp up efforts. Without the help of countries' stimulative fiscal policies -- such as tax reductions or increased government spending -- the blow to the global economy would be even worse, Blanchard said: "We would be in the middle of something very close to a depression." Even the projected 1.3 percent drop could leave at least 10 million more people around the world jobless, some private analysts said. Allen Sinai, chief global economist at Decision Economics, thinks the global decline will be worse -- closer to 2 percent, which would mean 15 million to 25 million more people out of work. "The global downturn guarantees that countries all over the world will be hit with extraordinarily high unemployment rates," Sinai said. "And, with the tremendous number of unemployed people comes the possibility of political unrest." Also rising crime as millions more are forced into poverty and out of their homes, he and others said. "By any measure," the downturn is the deepest since the Great Depression of the 1930s, the IMF said in its latest World Economic Outlook. "All corners of the globe are being affected." All told, lost output worldwide could reach as high as $4 trillion this year alone, U.S. Treasury Secretary Timothy Geithner estimated in a speech Wednesday. "The world economy is going through the most severe crisis in generations," he said. "We each face somewhat different challenges and thus are not all in the same boat. But we are all in the same storm." Geithner did not mention any further commitments the U.S. might seek on Friday at meetings with other economic powers or during weekend meetings of the IMF and the World Bank in Washington. Analysts say those discussions are unlikely to produce any further major proposals. Obama this week sent Congress a request for a tenfold increase in U.S. commitments to an emergency IMF loan fund, to $100 billion. That would represent the U.S. share of a $500 billion goal for the program. The European Union, China and Japan also have made pledges, but more donors will be needed to reach the goal. The IMF's outlook for the U.S. is even bleaker than for the world as a whole: It predicts the American economy will shrink 2.8 percent this year, the biggest decline since 1946. That's generally in line with the predictions of many U.S. analysts, who expect a figure in the range of 2.5 percent to 3 percent. Besides trillions in lost business, a sinking world economy means far fewer trade opportunities for individual countries. "This looks like the most synchronized recession in world history: We are all going down together," said David Wyss, chief economist of Standard and Poor's. "In a lot of previous recessions, smaller countries can use exports to pull out of the recession. But you can't do that this time because nobody is buying," he said. To get out of this global downturn, the United States -- the world's largest economy -- will need to lead the way, many analysts said. Global powerhouse China is a big lever for restoring growth in Asia. But Sinai said, "For the world economy to recover, you need the U.S. to recover." The notion of "decoupling" -- that the world economy was becoming less dependent on the United States for growth or better insulated from U.S. economic troubles -- has been dealt a setback by the current recession. The financial crisis erupted in the United States in August 2007 and spread around the globe. It entered a tumultuous new phase last fall, shaking confidence in global financial institutions and markets. Total worldwide losses from the financial crisis from 2007 to 2010 could reach nearly $4.1 trillion, the IMF estimated in a separate report Tuesday. Among the major industrialized nations studied for Wednesday's report, Japan is expected to suffer the sharpest contraction this year: 6.2 percent. Russia's economy would shrink 6 percent, Germany 5.6 percent and Britain 4.1 percent. Mexico's economic activity would contract 3.7 percent and Canada's 2.5 percent. Still growing, China is expected to see its expansion slow to 6.5 percent this year. India's growth is likely to slow to 4.5 percent. The jobless rate in the United States is expected to average 8.9 percent this year and climb to 10.1 percent next year, the IMF said. Next year, the IMF predicts the world economy will grow again -- but just 1.9 percent. It said this would be consistent with its findings that economic recoveries after financial crises "are significantly slower" than ordinary recoveries typically are. In 2010, the IMF predicts the U.S. economy will be flat, neither shrinking nor growing. Germany's and Britain's economies, meanwhile, will shrink by 1 percent and 0.4 percent respectively. Other countries, such as Japan, Russia, Canada and Mexico, are projected to grow again. And China and India should pick up speed. Bring Light to Dark Derivatives!July 24, 1998, was an epic day for the global financial system. Federal Reserve Chairman Alan Greenspan stood before Congress's Banking and Financial Services and testified. This article and the next part will focus on these two excerpts from this testimony. "In conclusion, the [Federal Reserve] Board continues to believe that, aside from safety and soundness regulation of derivatives dealers under the banking or securities laws, regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise." In his testimony, Greenspan recommended to Congress that regulation of Over-The-Counter (OTC) derivatives between private parties was not necessary. These derivatives are referred to as "dark derivatives" as they take place away from exchanges where the terms could be made public and the companies examined by the exchange for counterparty risk - the risk that a company would be insolvent or bankrupted by the time when the derivative comes due. For instance, the metal commodity markets like the NYMEX require a 100% cover of all deliverable contracts (leverage transactions still require a 90% cover per 17 CFR 31.8), and examine the solvency of both parties. The remainder of this article will delve into the consequences of this action. Less than two months after Greenspan's testimony, the failure of the hedge fund Long Term Capital Management nearly deflated the developing stock market bubble as it took $4.6 billion USD in derivative-based losses. The Federal Reserve leapt to the rescue, leading a cabal of investment banks to pony up $3.6 billion USD. Goldman Sach's CEO Jon Corzine was forced out shortly afterwards by the future Secretary of the Treasury, Henry Paulson. Corzine would move on to become a US senator and is the current governor of New Jersey. Bear Stearns refused to cooperate and later became the first major casualty of the Panic of 2008. Greenspan's second comment was that central banks would act to suppress the gold price by releasing central bank gold into the market was quite similar to what the London Gold Pool of the 1960s had attempted - and miserably failed - to do: control the price of gold. This is tantamount to stating that the financial "canary in a mine" would be both hooded and castrated in public view. Even in today's troubled economic times, most members of the public are completely unaware that the 2008 daily trading on the London Bullion Market Association exceeded $80 billion USD per trading day, or $20.3 Trillion USD for the year. Part 12 will delve more into the suppression of the gold price, building off of the excellent work put together by the Gold Anti-Trust Action Committee, or GATA. Bring Light to Dark Derivatives! First, let's see what has happened with the OTC derivative market since 1998. The short answer is that the value of the notional amounts exploded from $72 Trillion to $684 Trillion in June 2008 per the data provided from the Bank of International Settlements, or BIS. Before moving on, let's add one more definition to the list from Part 10, "What the Heck are Derivatives?" Notional Value - the value of a derivative's "underlying assets" at the spot price. In the case of an options or futures contract, this is the number of units of "underlying assets" specified in the contract multiplied by the spot price of the asset. Let's say I wanted to speculate on the price of crude oil. I could buy an October 2009 contract to deliver 1000 barrels at $60 a barrel plus exchange fees. The notional value of this contract when purchased is $60,000 but it will not be exchanged until October. In the meantime, if the spot price of the oil drops to $40 per barrel, the notional value drops to $40,000. Furthermore, although the contract gives me the right to buy the oil, I am not the owner of the oil until October arrives and the contract is delivered. The oil is the "underlying asset" of the contract. The same could be said for a credit default swap on a corporate bond, a swap based on the dollar's interest rate. Or a "mortgage-backed" collection of securities. As you can see, the "underlying asset" can be physical property like the barrel of oil, but it could also be much more nebulous, like a derivative based on the ability of hundreds or thousands of people to collectively pay their mortgage on time. Plus, how much are these written contracts actually worth while they have not been exchanged? Well, the BIS gives this information which I used to make the below chart on "gross market value." This grew from $2.5 Trillion in 2008 to "only" $20.4 Trillion as of June 2008. Interestingly enough, the BIS also placed a "market value" on "gross credit exposure" of $3.9 Trillion in June 2008. This is the leftover amount after taking into account all contracts that offset each other. Theoretically there is a long contract for every short, but per the BIS this is not always the case. (I do not have specifics yet but this may involve leveraged transactions). So this amount signifies the "market value" of those derivatives where there is a possibility of totally unhedged losses. I must state it's not appropriate to do so other than to obtain a rough idea, but if the percentage of the gross credit exposure could be estimated as proportional to the nominal value, this would work out to a whopping $130 Trillion. However, how can you place a "market value" on all the various types of derivatives? Most especially, how can you call this a MARKET value if there is NO market for these contracts - remember that all OTC derivative transactions take place directly and privately between a buyer and seller. The Paper Property System and Derivatives This requires us to look at the derivatives problem in a new light. The crux of the matter is that OTC derivatives have an unknown worth - the BIS "gross market value" calculation is, in my humble opinion, nonsense. Let me explain. First one should understand that our entire property system is founded on paper documents. If one owns a car or a house in the United States, one must also have a deed or title to that property. If one buy goods from a store, there is a paper record - a receipt - that serves to transfer ownership of the good from the store to the individual. Online transactions merely substitute screens for this paper record. Whether a corporation or an individual, one typically has to prove their identity in some way based on paper - a passport or driver's license or business license - before doing business with each other. The vast quantity of transactions we execute are done with unseen other entities. Also recognize that when you purchase or sell a stock share or mutual fund share you are selling it to an unknown person, usually via some exchange that you trust to transfer your property - which is really just a paper document. This system of property identification and organization is founded on our rule of law. However, many fail to realize that this link of property to paper documentation does not exist in many places in the world - many Latin American and Third World countries do not have a very clear, transparent property system setup. However, the size of the OTC derivative market has led the modern-day United States into a similar Third World scenario! We do not understand (and have lost) the link between the paper derivative contract and real assets. Furthermore, we no longer know if these pieces of paper has any worth and are tethered to real assets with actual value. All derivatives are really instruments of quasi-property. These credit instruments pretend to be based on (fiat) money, but they are not really anchored to anything!! They masquarade as real property, but at best are just forms of quasi-property. Remember, we live in a paper property system. Without the knowledge on what these investment bankers and their financial engineer assistants have done, there is no way to know if they are bankrupt. Let me repeat. THERE IS NO WAY TO KNOW FOR SURE IF THESE COMPANIES ARE SOLVENT. There is no way to know if its even POSSIBLE for the government or FED to help a few banks or companies if we do not understand what these troubled companies really possess. Executing on eco-political policies and ideas like one "big, bad toxic bank" is an inane idea since - I cannot stress this enough - we do not have the information to know whether these actions will help or not. Which derivative contracts are the "toxic" assets? Where are they? Exactly what assets are they based on? Who owns them? Which counterparties are solvent? The Pregnant Economy's Credit "Baby" Think of the world economy as a pregnant woman. From the outside, we can examine its monetary structure and all the goods and services it produces, but we cannot view the credit hidden inside the woman's belly. (photo from petercanfail) Without testing with an ultrasound or checking for movement, we do not know anything about the baby. Perhaps the baby is in perfect health. Perhaps the baby's head is too large and Caesarian needs to be performed or perhaps the umbilical cord is wrapped around the baby's neck and will choke it if delivered normally. Perhaps the baby has already died. (I hope not!) The horse I am beating to death is that it's impossible to know if a cure is needed and what the cure should BE if the information of this "shadow economy" is not being shared. When $684+ Trillion dollars (possibly past $1 Quadrillion as this is based on September 2008 numbers) is involved, we simply must have the information if we are to move forward. There is no way for the economic crisis to end without understanding the actual worth of these derivatives. Let me repeat again. THERE IS NO WAY FOR THIS CRISIS TO END WITHOUT UNDERSTANDING THE TRUE WORTH OF THE DERIVATIVES MARKETS. Light must be brought to dark derivatives because there is no confidence in the value of both the derivatives but to some extent even to all assets. Mark my words, the world will remain in a state of unease, in a state of endless price discovery, until light is brought to the OTC derivative mess. Now, if the OTC derivative market did not have high degrees of insolvency, it stands to reason that all information would already haven been available - and the world would not be in crisis, Lehman Brothers and Bear Stearns would not have failed, the major banks like Citigroup and Bank of America would not have been halfway nationalized, and the remaining investment bankers and commercial banks like Merrill Lynch, Goldman Sachs, JPMorgan Chase, and HSBC would have been able to carry on business pretty much as usual, regardless of the subprime mortgage crisis. Therefore, the credit "baby" is not in perfect health. Therefore, the question becomes how bad is this insolvency? Can the credit "baby" survive with an operation or not? Is it "just" several mega-banks that will be insolvent? Or is the credit "baby" dead-on-arrival and the entire financial system will come crashing down, as was feared during LTCM in 1998, and during the Lehman Brothers/Bear Stearns aftermaths of 2008? Of course, we have made a bit of a circle, as there is no way to know the answer to this question without the information. My opinion is that what seems to have occurred is that the banking cartel is attempting to weather the storm by frantically repairing its balance sheets with bailout money from a compliant Congress or bailout money from the FED. However, the problem does appear to be fairly catastrophic as the losses for certain banks are most likely too large to paper over with bailout money, and credit extended from by other banks has dried up as they are (rightly) extremely worried about counterparty risk. No Relief from Past or Future Banker Bailouts Let me repeat. The bailout money issued by Congress to the AIG, Citigroup, etc. is almost certainly too small to have any effect on the derivatives problem. $750 Billion, $787 Billion, $2 Trillion bailouts are like throwing pebbles into the ocean when compared with $500 Trillion to $1 Quadrillion. Look at their asset to nominal value ratios and percentage of OTC "dark" derivatives below and please inform me if you come to a different conclusion and why. (Data from Department of Treasury's December 2008 OCC report, page 24/33) Transferring enough paper dollars from hard-working taxpayers either in the present or in the future to these ill-run banking companies can only result in a dollar currency crash similar to what happened in Iceland or many Latin American countries during the '80's and '90's, and hence the (further) impoverishment of the American people. As others have written, this is truly a privatization of the 1998-2007 gains and socialization of 2008-and-onward losses for the banking and investment banking cartels. The Future Obviously for a future resolution to occur, Greenspan's actions should be reviewed in hindsight, the informational deficiency needs to be made transparent, and companies that survive and have not committed fraudulent acts should be penalized by the marketplace for carrying out too sizeable over-the-counter deals without seeking an exchange to verify and secure the counterparty risk. Turning to the future, all involved should consider instead to focus on the true wealth production of goods and services, not questing in search of "riskless" paper-shuffler profits like the financial engineers of the past decade. Of course, this discovery will eventually happen naturally in the United States - unless we enter a totalitarian society and are led to war by our leaders to either control or confiscate even more of the world's wealth but also to refocus the populace on both interior and exterior scapegoats for our fiscal problems. Again, there is simply no other way for our economy to function again on a non-war footing without this information from the financial companies. Of course, the wars will do nothing except worsen the state of economic suppression everywhere in the world, including for most Americans, except for the few elite who may prosper. Taking the optimistic view, there is no way to know when this discovery will happen, and as much as I believe in the "separation of business and state" the fact of the matter is that the political will of Congress must be brought to bear on the banking cartel led by the FED. There are some encouraging signs. In early April, the FED urged its major cartel members and hedge funds to list their credit derivatives on an exchange in New York City. Congressman Ron Paul's Federal Reserve Transparency Act of 2009, HR 1207, has now reached 58 co-sponsors. This act will enable the American people to audit the FED. Bank of America Chief Says Bernanke, Paulson Barred Disclosure of Merrill Woes Because of Fears for Financial SystemFederal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. -- a deal that later triggered a government bailout of BofA -- according to testimony by Kenneth Lewis, the bank's chief executive. Mr. Lewis, testifying under oath before New York's attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses. Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren't normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill -- which eventually totaled $15.84 billion for the fourth quarter -- could have given BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead. "Isn't that something that any shareholder at Bank of America...would want to know?" Mr. Lewis was asked by a representative of New York's attorney general, Andrew Cuomo, according to the transcript. "It wasn't up to me," Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would "impose a big risk to the financial system" of the U.S. as a whole. Mr. Lewis's testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis's decision to keep problems at Merrill under wraps. "Everybody -- Lewis, Paulson, Bernanke -- eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system," according to an individual close to BofA. A person in government familiar with Mr. Bernanke's conversations with Mr. Lewis said Wednesday that the Fed chairman didn't offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel. Mr. Paulson repeatedly told Mr. Lewis that "the U.S. government was committed to ensuring that no systemically important financial institution would fail," according to his spokeswoman. Mr. Lewis couldn't be reached for comment. A BofA spokesman said, "We had no legal obligation to disclose ongoing negotiations with the government and disclosure of ongoing negotiations likely would have severely disrupted the global financial markets and damaged the bank." In the transcript reviewed by the Journal, Mr. Lewis didn't say he was explicitly instructed to keep silent about the losses piling up at Merrill. But his testimony indicates that he believed the government wanted him to remain silent. 'Good Part of the Hit' Mr. Cuomo's investigator asked: "Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?" Mr. Lewis said, "Over the short term, yes." But he also said he believed Mr. Paulson's motive was preventing widespread disaster in the U.S. financial system. According to a person familiar with the matter, Mr. Paulson in March told Cuomo investigators that Mr. Lewis may have misinterpreted some remarks about the Treasury's disclosure obligations as referring to BofA's obligations. The transcript, which stems from an investigation into bonus payments at BofA conducted by the New York attorney general's office, illuminates the difficult dilemmas that regulators and executives alike have had to wrestle with in recent months. By keeping mum, the CEO of one of the biggest U.S. banks appeared to set aside a basic tenet of American-style finance -- that, above all, companies must disclose material information to shareholders and potential investors. "Regulators are supposed to tell you to obey the law, not to disobey the law," said Jonathan R. Macey, deputy dean of Yale Law School. "If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders." At the same time, regulators were struggling to prevent a systemic panic. In the transcript, Mr. Lewis is quoted saying that the regulators' goal was to put everything in place for the deal to be done, "so that you didn't set off alarms in a tragic economy." Mr. Lewis's statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn't adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc. The testimony -- which the New York attorney general plans to release to federal regulators and overseers of bailout money and banks Thursday -- stemmed from an investigation that started when the New York attorney general began examining the circumstances surrounding $3.6 billion of bonus payments to Merrill employees just before the takeover was completed. New York prosecutors are expected to provide the testimony to several regulatory bodies, says a person familiar with the matter. The new details of Mr. Lewis's interactions with regulators over the Merrill merger coincide with the bank chief's battle to retain control of his company as it continues to struggle. The size of the Merrill losses stunned investors in January, and earlier this week Mr. Lewis gave a dim outlook for the economy, setting aside another $13.4 billion to brace for more credit losses, despite earning a first-quarter profit. Jobs at Stake The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis's testimony with the New York attorney general's office corroborates that account. Mr. Cuomo's office says it has been unable to gather a full picture of the Fed's role in the December discussions because the Fed has invoked a regulatory privilege, allowing it to keep some documents confidential. Mr. Lewis has previously said that he first considered backing out of the Merrill deal on Dec. 13, when he said his chief financial officer told him projected after-tax losses were "about $12 billion." Shareholders of the Charlotte, N.C., bank voted to approve the purchase on Dec. 5, and the deal was completed on Jan. 1. Bank of America agreed to accept $20 billion in new capital from the government and announced the injection, in conjunction with the Merrill losses, with its regularly scheduled earnings release on Jan. 20. Mr. Lewis has since been vilified by lawmakers and shareholders for his handling of the purchase. Several investors, including TIAA-CREF, a major pension-fund manager, have said they intend to vote against his re-election as chairman. Some argued that Mr. Lewis should have informed shareholders of the potential losses at Merrill before the Jan. 1 closing of the deal. During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis's own job was at stake. Mr. Lewis still was considering invoking his legal right to terminate the Merrill deal. Mr. Paulson was out on a bike ride when Mr. Lewis phoned to discuss the matter, according to the transcript. "I can't recall if he said, 'We would remove the board and management if you called it [off]' or if he said 'we would do it if you intended to.' I don't remember which one it was," Mr. Lewis said. "I said, 'Hank, let's de-escalate this for a while. Let me talk to our board.' " Traders Mounting "Speculative Attack" on U.S. BanksAfter six horrific quarters, several major U.S. banks finally reported profits. So is it time to celebrate? No, says Simon Johnson, a senior fellow at the Peterson Institute, professor at MIT’s Sloan School of Management, and co-founder of the popular economics blog, BaselineScenario. In fact, if we're not careful, we'll find ourselves in another Great Depression. What it is time to do, says Johnson, is look at the credit markets, which are telling us that the major U.S. financial institutions are being hit with a "speculative attack": “The view being taken by people who trade credit in the United States is that we’re definitely not out of the woods. And I would say, in fact, there’s something of a run taking place in the credit market. Not a traditional bank run, but a speculative attack on some of the biggest financial players ….” Specifically, traders are shorting credit of major banks, betting that the government won't protect bondholders forever: ”Basically these people are betting the big banks will be forced into some sort of default. Now, if enough people bet that, and if the banks can’t draw on enough external support, which in their case would be from the U.S. government, then these runs can be self-fulfilling. It’s extremely dangerous and a situation that’s really not been addressed by the U.S. authorities.” Professor Johnson doesn't believe another Great Depression is likely, but he thinks denying that possibility increases the risk of it. He says he's not trying to exaggerate but instead to urge policymakers address the facts and take corrective action. Banks Sway Bills to Aid ConsumersWASHINGTON — They may be held in low esteem around the nation, but the country’s largest banks still wield considerable influence in Washington. The banks have made it difficult for Congressional Democrats and the White House to give stretched homeowners a stronger hand in negotiating lower monthly payments on mortgages and to prevent credit card companies from imposing higher fees and interest rates. Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting — both pro-consumer measures. To turn the tide, Democrats are calling in their big gun — President Obama — to pressure the executives at the largest credit card lenders. In coming weeks, officials say, the administration intends to make a major push on consumer finance issues, possibly including tough new lending standards for homeowners seeking mortgages. Mr. Obama is set to meet at the White House on Thursday with executives from American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, JPMorgan Chase and others to discuss what officials say are abusive credit card fees and practices. During the presidential campaign, Mr. Obama made an issue of what he considered excessive credit card fees, but he has been largely silent on the matter since his arrival in Washington. As a candidate, he also favored legislation to make it easier for troubled homeowners to use bankruptcy court to ease the terms of their mortgages, a proposal he again endorsed last month. Despite the president’s support and strong Democratic majorities in Congress, both proposals are in jeopardy because of lobbying by banks and their trade groups, particularly in the Senate. On Wednesday, the House Financial Services Committee is expected to approve credit card legislation proposed by senior Democrats that would reduce many of the fees and limit the ability of the companies to charge penalties. The legislation puts into law most of the credit card restrictions adopted last year by the Federal Reserve, although the industry strongly opposes the bill because it says it believes a law would be harder to overturn than a regulation. But the bill, sponsored by Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, and Representative Carolyn B. Maloney, a New York Democrat, faces an uncertain future in the Senate. A tougher counterpart to the House bill was adopted on a narrow, party-line vote in the Senate banking committee three weeks ago. It has yet to find any Republican support, which would be necessary for it to survive. The banking industry has also succeeded in working closely with Republicans to water down and then block a measure that would give bankruptcy judges greater authority to modify mortgages, including reducing principal payments. Senate Republican leaders say they have the support of all 41 of their members — enough to kill the provision by making it impossible to get the 60 votes necessary to cut off debate. Senate Democrats, hoping to resolve the impasse, have opened negotiations in recent days, but not with their Republican counterparts. Instead, in an effort to divide the industry, the Democrats, led by Richard J. Durbin of Illinois, Charles E. Schumer of New York and Christopher J. Dodd of Connecticut, have been in talks with Bank of America, JPMorgan Chase and Wells Fargo, along with a group of credit unions. The lawmakers’ hope is that those institutions would exert pressure on Republican lawmakers and reluctant Democratic moderates. Even if those negotiations are successful, the Democratic lawmakers are still likely to water down the bankruptcy bill further in the industry’s favor. Before the negotiations, Citigroup had been the only major bank to support the bankruptcy measure, often referred to as “cram-down” legislation because it would give judges the authority to dictate terms to lenders and investors who own mortgages bundled into securities. “The cram-down provision, if it became law, would raise the costs of all mortgages for everyone,” said Edward L. Yingling, president and chief executive of the American Bankers Association. “It’s a fact that if you undermine the value of the collateral by allowing cram-downs, you make the loans riskier and banks will price that risk accordingly by rates going up.” Supporters of the bankruptcy measure had been planning to tie it to another banking bill that the industry favors. That legislation would make permanent the temporary increase in deposits guaranteed by the Federal Deposit Insurance Corporation, to $250,000 from $100,000. It would also increase the F.D.I.C.’s credit line with the federal government to $100 billion, from $30 billion, thus enabling regulators to reduce a proposed special premium the banks will owe the F.D.I.C. later this year by more than 50 percent — a $7.7 billion savings. But as the opposition to the cram-down provision has firmed in recent days, senators say there is a growing recognition that the bankruptcy measure might have to be detached and voted on separately. Democratic lawmakers have already agreed to the industry’s demand that the bankruptcy provision be unavailable to homeowners if a lender offers to modify a mortgage through the Treasury Department’s new foreclosure mitigation program. And over the objections of Ms. Maloney, a House subcommittee handed the industry a significant victory when it delayed the effective date by a year. Ms. Maloney said that she expected the measure to move swiftly though the House, but that it faced an uncertain future in the Senate unless it got some Republican votes. “We need bipartisan support in the Senate,” she said. “We got 84 Republicans in the House on the same bill last year.” Republican supporters of the industry have been helped in part by the decision by some Democratic campaign committees, fearful of voter reaction, to reject contributions from banks that have received bailout money. Some prominent Democrats, including Nancy Pelosi, the House speaker, also are refusing donations from bank political action committees. Mr. Frank will not take money from employees of banks that received bailout funds. |
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