The Financial Crisis Inquiry Commission
That 1930s show
A Depression-era crusade against Wall Street has a 2010 revival
Pecora in his pompTHE battle against the financial crisis may be ending, but the war over why it happened has barely begun. The most ambitious effort yet to settle the story begins next week with the first hearing of the Financial Crisis Inquiry Commission.
Congress gave the ten-member bipartisan commission a sprawling mandate: to investigate at least 22 potential causes, from excess global savings to short-selling, and to explain why specific firms collapsed or needed bail-outs. The report, due by December 15th, is not supposed to contain recommendations but probably will.
Though modelled on the body that investigated the attacks of September 11th 2001, the spiritual father of this venture is the Pecora Commission. This was named after Ferdinand Pecora, the chief lawyer on the Senate Banking Committee from 1933 to 1934. His cross-examinations brought forth revelations of widespread abuses on Wall Street: bankers selling stocks at preferred prices to powerful friends, or giving executives bonuses for dumping dud securities on the public. Within days of testifying, the head of National City Bank, the predecessor of Citibank, was forced to resign. The commission’s findings led to the creation of the Securities and Exchange Commission and the passage of the Glass-Steagall Act, which separated commercial and investment banking.
Bankers could be in for another public stoning. The heads of JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of America will appear at the commission’s first public hearings on January 13th and 14th. Regulators and independent experts will also testify. Tim Geithner, the treasury secretary, and Ben Bernanke, the Federal Reserve chairman, have already appeared before the commission privately and should do so publicly later.
The commission, chaired by Phil Angelides, the Democratic former treasurer of California, is unlikely to make as big a stir as Pecora’s. Journalists, prosecutors and Congress have already produced a stream of exposés of the crisis. Most of the star witnesses have been grilled elsewhere already. The Obama administration hopes its own regulatory overhaul will be done before the commission even reports.
Yet the commission seems bound to uncover some salacious wrongdoings that will shape future reforms. Mr Angelides was a perennial thorn in the side of business, using California’s state pension plan to browbeat bosses of firms he disapproved of, and he retains a dim view of Wall Street. “In 1929, people were throwing themselves out of windows; in 2009, they were lining up for bonuses,” he says.
A staff of up to 50 will interview hundreds of witnesses. Reluctant ones will be subpoenaed. While national security required the 9/11 commission to keep private much of what it learned, Mr Angelides and his Republican vice-chairman, Bill Thomas, want to post their findings on the web immediately. If their final report is half as readable as the 9/11 one, it, too, should be a bestseller.
Argentina's bank grab
The reserves, or your job
The president’s ultimatum to her Central Bank chief
TO SUSTAIN its expansionary fiscal policies, Cristina Fernández’s government has developed an insatiable hunger for other people’s cash. First she ramped up taxes on farmers, then last year she nationalised private pension funds. Now she is trying to lay her hands on the Central Bank’s foreign-currency reserves.
Redrado’s pointed defianceLast month she issued a decree transferring $6.6 billion of the reserves to a fund to service the public debt. Although the government has run a (now diminishing) fiscal surplus for years, it cannot borrow freely in international capital markets. This is both because investors mistrust its policies and because it has yet to settle with bondholders who boycotted a previous debt restructuring in 2005 under Néstor Kirchner, Ms Fernández’s predecessor and husband.
The Central Bank is formally independent. By law any transfer of reserves requires authorisation by Congress. Martín Redrado, the bank’s governor, stalled, awaiting legal advice and the outcome of a legal challenge to the reserve grab by the opposition-controlled province of San Luis. On January 6th the government ordered Mr Redrado to resign. He refused, saying he would serve until his term ends in September.
“It wasn’t Redrado who accumulated the reserves,” said Aníbal Fernandez, the cabinet chief (who is not related to the president). “It was [the Kirchners’] government. In this country, it’s not the governor of the Central Bank that makes the decisions.” In fact it was Argentine exporters—not the government—whose labours accumulated the reserves. And Ms Fernández, who is deeply unpopular, is finding her decisions contested. In June the government lost its legislative majority in a mid-term election.
Mr Redrado has hitherto gone along with the Kirchners’ dash for growth, while trying quietly to moderate some of their policies. If he remains defiant on the reserves, Ms Fernández can oust him only by appealing to a special committee of Congress, which would probably be led by opposition legislators. Ironically, had she sought the approval of Congress for the reserve transfer she might well have got it. Few Argentine politicians are prepared to pay the political cost of spending cuts or tax rises to pay off bondholders. As it is she may have turned the Central Bank chief into a martyr for the cause of integrity in public policy.
Same-sex marriage in America
Courting couples
An important trial begins in America's fight over gay marriage
THE venue, gay-friendly San Francisco, may at first glance seem predictable for a legal challenge that may lead to the legalisation of gay marriage in America. But nothing else about the trial of Perry v Schwarzenegger, which began on Monday January 11th, fits stereotypes. Pitting both a male and female gay couple (including Kristin Perry) against the state of California (nominally represented by its governor, Arnold Schwarzenegger), it is a federal review of whether Proposition 8, a Californian voter initiative of 2008 that outlawed gay marriage in the state, is constitutional.
Whatever the outcome, the case is likely to go to appeal and come before the Supreme Court. But first the trial will do two things: it will establish, for the first time, a body of evidence, through expert testimony, that appelate courts can use to evaluate the claims by supporters and opponents of gay marriage. And it will blur the existing partisan divide on the issue between conservatives and liberals.
This is thanks to the unusual pairing of lawyers who are arguing in favour of gay marriage for the plaintiffs. David Boies, a well-known liberal who litigated for Al Gore in his 2000 court fight against George Bush over the presidency, is an unsurprising choice. But his partner, Theodore Olson, is a prominent conservative and was Mr Boies's courtroom adversary in 2000. Now he has teamed up with Mr Boies to argue for legalising gay marriage based on what he considers an arch-conservative interpretation of the constitution.
Their opponents, largely from the Proposition 8 campaign, also consider themselves conservatives, although they hail from the right's religious and "traditionalist" wings. Fearing that they might appear bigoted, the defence pleaded with the federal Supreme Court to ban plans by the judge, Vaughn Walker, (himself appointed by George Bush senior), to stream the proceedings on YouTube. Doing so might expose witnesses to ridicule or harassment, defence lawyers argued. The Supreme Court banned the video feed, at least temporarily, 20 minutes before the trial opened,.
The defence is hoping to establish the right of voters to amend the constitution of their state. California's Supreme Court, six of whose seven justices were appointed by Republican governors, ruled in May 2008 that a ban on same-sex marriage violated California's constitution. This ruling galvanised opponents of gay marriage to put Proposition 8 on the ballot. It passed with 52% of the votes, and the state Supreme Court upheld the vote.
America's constitution, however, does not allow rights to be stripped from its citizens by majority vote. Specifically, the federal Supreme Court ruled in 1996 that any laws motivated by homophobia (or other bigotry) are unconstitutional. The motivation behind the Proposition 8 campaign thus becomes an issue. Its sponsors are among the witnesses, and their television advertisements and press releases may become evidence. Scholars will testify about homophobic discrimination.
They will also be cross-examined about other claims against gay marriage. One concerns the sanctity of tradition. But, as Mr Olson has argued, the fact that something has been custom in the past does not require it to remain that way--otherwise, America would still ban interracial marriage while maintaining segregated schools and debtors' prisons.
Another question is whether or not marriage specifically serves procreation. America does not bar, say, infertile couples or old women from marrying. What, then, about the issue of whether gays can raise children? The two women plaintiffs happen to be bringing up four children in what appears to be an exemplary environment. What about the alleged harm to heterosexual marriages by homosexual ones? Psychologists or other experts would have to prove that straight couples are threatened by gay ones, which appears tough.
Ultimately, Mr Olson is trying to establish that conservatives should welcome, not fear, gay marriage. They revere marriage as a social institution, so the respect of gays for it should be a cause for celebration, not disgust. And there is the 14th amendment of the constitution, which guarantees Americans equal protection under the law. Mr Olson is reminding conservatives that denying homosexuals access to a basic institution of society would appear to violate equality, and thus the constitution.
U.S. Economy Is Up in the Air
Commentary by Amity Shlaes
Jan. 12 (Bloomberg) -- Airport security lines trigger the same mental process in most Americans. Irritation is the first stage. You arrive at the front of the line hostile to the whole enterprise -- the conveyer belt, the company that manufactured the recalcitrant zipper on your bag, the not-especially-polite airport workers.
This month, after the Christmas Day bomb attempt over Detroit, you feel resignation: “I can put up with this as long as the Transportation Security Administration prevents another bomber.” Next, as you pull off your shoes and look up into the faces of the security guards, you find an important bit of consolation for the delay: “At least somebody got a job out of this.” After you’ve cleared security, comes this final thought: “But it isn’t a very good job, is it?”
The entire experience recedes during the rush to the gate. Still, like the suitcase at the other end, the security line experience is worth unpacking. That’s because it recalls what’s wrong with our economy in general this winter.
In airports, talk runs to upgrades. The unsaid part of the security line is that it is a downgrade in the quality of our day. Every one of us budgets time. Airport security steals at least half an hour. That means we have lost minutes where we could have been doing something at the office or at home.
Sure, we may be stroking the
Government Intrusions
The major new government programs of 2008, 2009 and now 2010 are like those security lines -- irritating intrusions. The new health-care legislation, for example, seeks to do something impossible: limit federal outlays even as it sustains service.
That kind of impossible promise tends to result in shortages -- waits of airport-size duration. What the legislation promises to do is make a hospital more like a bad airport. The Senate’s proposed surtax on insurers who offer high-end plans is the equivalent of shutting down the Admiral Lounge.
Then we come to the second stage, the consolation of job creation. Given the rockiness of the job market, it is somehow comforting to see those airport security workers in their uniforms. At least they’re taken care of; that’s the typical analysis of the responsible person. Since so many of them are from minority groups or immigrants, we’re glad to see them establishing themselves in the U.S. Somehow that makes the waste less bad.
Getting Things Done
Most of us react similarly at the news of federal stimulus projects. At least something is being done when Alachua County, Florida, which has a poverty rate of 23 percent, gets $105 million in recovery money. The $3 million that went to the Texas Department of Protective and Regulatory Services for foster care on April 1, 2009, was likewise reasonable. Who can turn down kids? Then there are the billions that were poured into banks. Perhaps that was necessary. In the too-big-to-fail doctrine, banks are like air-traffic controllers.
What about that final stage, the skeptical look back? At the airport, one thing that bugs us is the arbitrariness of it all. Who, in August 2001, would have thought that slippers, Crocs and any other kind of shoe that is easy to take off would benefit from a geopolitical event? Similarly, few could have predicted that products we love -- cigarette lighters, pocket knives, large tubes of toothpaste -- would be damaged by an economically unrelated phenomenon, the aggression of al-Qaeda.
Not Optimal
Big new government programs, whether the coming health-care law or stimulus plans, also create untold number of business winners and losers. The winners include green consultants who charge companies for retrofitting their building so they might win the favor of a moody Environmental Protection Agency. Losers include those companies whose business plans for a city street were knocked out when the state or federal government decided to use stimulus cash to build its own project.
In other words, whether it is TSA jobs or stimulus outlay, what the government does may not be bad. But it is rarely optimal. Neither a TSA worker nor a stimulus worker is as likely as a private-sector entrepreneur to come up with and implement an idea yielding big productivity gains. That is why our growth these cold months feels unsolid: between the security work and the stimulus work, we are generating junk gross domestic product, and promising to generate more.
What could make more of our growth more genuine? Recognizing that defense outlays should be made for defense alone, and not for the economy’s sake. What the economy needs is less airport, and less stimulus. Citizens tend to know that the airportization of America can’t bode well, just as the new George Clooney film in its own way suggests. The country won’t really be able to get off the ground as long as it is still up in the air.
Venezuelans Rush for TVs on Devaluation
By Daniel Cancel and Jose Orozco
Jan. 12 (Bloomberg) -- Venezuelan consumers are rushing to buy flat screen televisions before prices jump, while U.S. companies including Colgate-Palmolive Co. brace for profit declines after President Hugo Chavez devalued the currency.
Shoppers picked through half-empty shelves at the Game-Zone electronics store in Caracas yesterday after a surge in demand drove up sales 70 percent over the weekend, said salesman Xavier Manrique. Colgate, the world’s largest toothpaste-maker, forecast a charge of up to 6 cents a share each quarter this year and Clorox Co., the biggest bleach maker, said it expects as much as $30 million in Venezuelan currency-related losses.
Chavez’s threats to seize businesses that raise prices following the first devaluation in five years may deepen shortages by making companies hesitate to restock, said Juan Pablo Fuentes, an economist at Moody’s Economy.com. He forecasts inflation could reach 60 percent, the highest since 1996 and more than double the government’s forecast.
“It’s going to be a tough year,” Fuentes said in a telephone interview from West Chester, Pennsylvania. “The devaluation has an immediate impact on consumers. You’re going to see a sharp contraction in consumption, which is the main driver for GDP.”
The government will “boost spending but it won’t be enough to compensate,” Fuentes said. “At first you’re going to see a lot of empty shelves. There’s a lot of uncertainty and some businesses will be afraid of putting the new merchandise on display since they don’t know what prices to use.’”
Bonds Fall
Chavez on Jan. 8 devalued the 2.15-per dollar exchange rate, setting a level of 2.6 for imports of items including food and medicine and a rate of 4.3 for “non-essential” products. He said the central bank would also start to defend the bolivar in the unregulated parallel market, where it sank yesterday to a four-month low of 6.48.
Venezuela’s benchmark bonds fell in trading today after soaring to the highest since September 2008 yesterday as investors speculate the government’s budget deficit will narrow.
JPMorgan Chase & Co. raised Venezuelan bonds to “overweight” from “market weight,” today citing the devaluation as “unambiguously positive” for fiscal accounts.
Venezuela’s 9.25 percent dollar bonds due in 2027 fell 1.5 cents to 81.5 on the dollar at 9:15 a.m. in New York, according to JPMorgan. The yield on the securities rose 23 basis points, or 0.23 percentage point, to 11.75 percentage points.
Shopping Like ‘Crazy’
At Game-Zone, in the Sambil shopping mall in eastern Caracas, almost all of the stock that was supposed to last through this month was gone before the end of the weekend, said Manrique, 22. The outlet sold out all but three of 15 stereo systems and all but 10 of 30 DVD players, he said.
“People were shopping like crazy, out of control,” said Manrique.
Manrique expects prices to double at his store. Game-Zone bought its current stock of electronics with dollars acquired from the government at 2.15, he said. Now, the store expects to import goods at the 4.3 rate.
Lawyer Mariela Davila, 45, said the 32-inch flat screen television she planned to buy last weekend at the Imgeve electronics chain that cost 2,900 bolivars had been sold out at stores she visited. A larger one costing 4,900 rose in price over the weekend to 6,000 bolivars, she said.
Paying More
“In the end, we are going to pay more,” said Davila. “This affects everything.”
The devaluation, while narrowing the budget deficit by boosting government oil export revenue, is another setback in a country already grappling with curbs on electricity usage.
Chavez, 55, restricted operating hours for shopping malls, casinos, and public administration offices this month in an attempt to reduce electricity use amid a drought that’s threatening to paralyze the country’s main hydroelectric plant. The government even asked Venezuelans not to string up Christmas lights in December.
Venezuelans voted down a Chavez-proposed referendum in 2007 to overhaul the constitution amid widespread shortages of beef, eggs, milk and sugar. The government responded by boosting food imports and threatening to jail business owners that were found hoarding food goods.
Retail sales, which have averaged 27 percent annual gains since 2001, plunged last year as the slump in international oil prices prompted the government to pare spending while 27 percent annual inflation eroded the purchasing power of consumers.
Parallel Rate
Bonds rallied yesterday, sending benchmark yields to a 16- month low, on speculation the devaluation will ease the government’s financing needs. Standard & Poor’s raised the outlook on the country’s BB- credit rating, which is three levels below investment grade, to stable from negative.
The government may seek to contain inflation by shifting more companies away from the parallel exchange rate, said Maikel Bello, an economist at Caracas-based Ecoanalitica.
“A lot of businesses migrated to the parallel exchange rate, so if you can offer them a dollar at 4.3 bolivars now, there doesn’t need to be a massive hike in prices,” Bello said.
Colgate yesterday said it expects its products to fall into the “non-essential category” and forecast the charge of 4 cents to 6 cents a share for each quarter this year.
Profit Cuts
BMO Capital Markets yesterday cut its profit targets for Avon Products Inc., Revlon Inc., Newell Rubbermaid Inc., Procter & Gamble Co. and Energizer Holdings Inc. Household products makers fell in New York trading.
“The market is likely to punish all multinationals until the importance of their position in Venezuela and the earnings impact of the devaluation are known,” BMO analyst Connie Maneaty said.
Companies that have reported Venezuelan earnings at the previous official rate of 2.15, even after failing to get government approval to import at that rate and repatriate dividends, may be exposed now for “inflated” profits, Ali Dibadj, a New York-based analyst with Sanford C. Bernstein & Co., said in an interview.
Venezuelan authorities shut a Caracas store operated by Colombian retailer Almacenes Exito SA for 24 hours after finding that employees were raising prices, the state-run Bolivarian News Agency reported. In all, Indepabis, as the consumer protection agency is known, temporarily closed 70 stores of the 96 that were inspected yesterday for “incurring in price markups and speculation,” according to the state newswire.
For Emily Delgado, shopping at Imgeve in the Chacao neighborhood of Caracas was disappointing.
“I came to buy a DVD player because I assume that everything will be more expensive after the devaluation,” said Delgado, a 45-year-old who works in public relations. “There were none left when I showed up. I guess there will be more soon, but at another price.”
Stocks, Oil Drop as Bonds Rally
By Michael P. Regan and Rita Nazareth
Jan. 12 (Bloomberg) -- The Standard & Poor’s 500 Index dropped for the first time this year while European stocks fell the most in three weeks and Treasuries rose on concern the economic recovery will slow as governments withdraw stimulus.
The S&P 500 slipped 0.6 percent to 1,140.1 at 11:07 a.m. in New York. Europe’s Dow Jones Stoxx 600 Index declined 1 percent. The 10-year Treasury note yield declined eight basis points to 3.73 percent, while the yield on the German bund slipped to the lowest level this year. Platinum increased to a 17-month high on demand from carmakers. The yen strengthened against all 16 major counterparts, while crude oil slumped as much as 2.1 percent.
China ordered banks to set aside more reserves to cool the expansion of the world’s fastest-growing major economy, stoking concern that recovery from the global recession will falter. Alcoa Inc.’s earnings trailed analyst estimates and Chevron Corp. said last quarter’s profit was lower than the previous period, spurring speculation fourth-quarter results will disappoint investors.
“Alcoa’s numbers raised some doubts about the earnings season,” said Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which manages $8.5 billion. “On top of that, there’s also China weighing on the market. As the global economy shows signs of strength, central banks will have to start tightening at some point.”
Earnings Season
The S&P 500 ended a six-day rally. Alcoa tumbled 8.4 percent as profit excluding certain items was 1 cent a share in the fourth quarter, trailing the 6-cent average estimate of analysts as the company had to buy aluminum on the open market to meet orders. Revenue fell 4.5 percent to $5.43 billion, topping estimates. Chevron, the second-largest U.S. oil company, slipped 1.2 percent after saying profitability from refining was “significantly weaker.”
Intel Corp. and JPMorgan Chase & Co. are among companies scheduled to report results this week. Combined profit for S&P 500 companies surged 62 percent during the fourth quarter in the first increase since 2007, according to the average analyst estimate in a Bloomberg survey.
The MSCI World Index of 23 developed nations’ stocks lost 0.4 percent. Norsk Hydro ASA, Europe’s third-largest aluminum producer fell 5 percent in Oslo. Beiersdorf AG, the German maker of Nivea skin creams, dropped 3 percent in Frankfurt after reporting profit that missed analyst estimates.
Air France-KLM Group led European airlines lower, falling 2 percent in Paris, as Japan Airlines Corp. plunged 45 percent in Tokyo on speculation it will file for bankruptcy. Most Asian stocks gained after the biggest jump in Chinese auto sales in at least 10 years.
Yield Spread
The yield advantage on two-year U.S. notes versus comparable Japanese bonds slipped for a third day, narrowing to less than 73 basis points, the lowest since Dec. 23. The German bund yield declined four basis points to 3.30 percent, while the 10-year Australian note yield fell 5 basis points to 5.62 percent.
Governments around the world are selling unprecedented amounts of debt to help keep the economic recovery on track. The U.S. will sell a record-tying $40 billion of three-year notes today in the second of four auctions this week totaling $84 billion. The Netherlands sold 4.3 billion euros ($6.2 billion) of three-year notes.
Greek bonds fell, with the yield on the two-year note rising as much as 27 basis points to 3.03 percent after the European Commission said there were “irregularities” in the government’s deficit reports last April and October.
Bubble Concern
China’s central bank also sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year.
“China has been vocal about the risks of hot-money inflows, inflation and speculative bubbles for months,” Andrea Cicione, a credit strategist at BNP Paribas SA in London wrote in a note to investors. “Surprisingly strong credit growth last week may have prompted the central bank to take action.”
The MSCI Emerging Markets Index fell for the first time in three days, sliding 0.6 percent, as indexes in Dubai, Hungary and Russia declined more than 1 percent. Yields on developing nation bonds rose five basis points relative to U.S. Treasuries after Indonesia scaled back a sale of dollar-denominated bonds to $2 billion and canceled plans to sell 30-year notes.
Platinum, Palladium
Platinum for immediate delivery advanced as much as 2.3 percent to $1,627.38 an ounce, the highest since August 2008. Palladium added as much as 2.1 percent to $443.38 an ounce, the highest since July 2008. The metals, used in car catalysts, advanced as China’s vehicle sales jumped 46 percent last year and investors anticipated demand for new U.S. exchange-traded funds backed by platinum and palladium.
Wheat tumbled 6.4 percent to $5.36 a bushel in Chicago, the most in seven months, after a government report showed U.S. stockpiles of the grain on Dec. 1 were 24 percent higher than a year earlier.
Oil fell for a second day, dropping as much as 2.1 percent to $80.80 in New York.
The cost of insuring against losses on European corporate bonds rose, with contracts on the Markit iTraxx Crossover Index of credit-default swaps on 50 companies climbing 11.5 basis points to 393.5, according to JPMorgan Chase & Co. The index yesterday fell to the lowest level since December 2007.
Obama Plans to Raise $120 Billion
By Hans Nichols and Ryan Donmoyer
Jan. 12 (Bloomberg) -- President Barack Obama plans to raise as much as $120 billion through a fee on financial institutions to help recoup losses from the Troubled Asset Relief Program and reduce the deficit, according to an administration official.
The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who requested anonymity.
The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
The government’s $700 billion rescue plan contributed to a record $1.4 trillion deficit last year.
Tax experts, who discussed the possibilities before the president’s plan was disclosed, say all of the administration’s structural options, which include an income surtax, an excise tax, or a fee pegged on the value of assets or some other measure, are likely to be so porous that financial institutions would be able to sidestep most of them.
“Any new tax is always more complicated than the designers anticipated,” said Ed Kleinbard, the former staff director of Congress’ non-partisan Joint Committee on Taxation who is now a law professor at the University of Southern California. “When the numbers involved are this large, it’s very difficult to design on the fly.”
‘Unintended Consequences’
Kleinbard said the U.K. is already struggling to make its 50 percent tax on bank employee bonuses of more than 25,000 pounds ($40,400) stick. Some U.K. banks are moving to absorb the tax while London Mayor Boris Johnson frets that higher taxes may drive 9,000 bankers out of the country.
“There’s always a substantial risk of unintended consequences and the risk of simple ineffectiveness,” Kleinbard said.
The administration’s proposal won’t include a tax on Wall Street bonuses or financial-services transactions, Politico reported yesterday, citing unidentified officials.
The proposed fee revenue is almost three times what analysts expect the 10 biggest U.S. banks earned in 2009. Those banks, led by Goldman Sachs Group Inc. and Wells Fargo & Co., have reported net income of $41.6 billion through the first nine months of the year. They will likely post combined net income of $3.84 billion in the fourth quarter, according to analysts’ estimates.
Several Options
Profits at financial institutions, which begin reporting earnings later this week, have rebounded and may triple by 2011, according to analyst surveys compiled by Bloomberg News. Charlotte, North Carolina-based Bank of America Corp., the biggest U.S. lender, said last week it expects to pay record bonuses to some investment bankers.
“Clearly this is designed as a political measure,” said Roberton Williams, an economist for the Tax Policy Center, a Washington-based research group run jointly by the Urban Institute and the Brookings Institution. “How much you want to punish and how you go about it is so wide open.”
Tax Options
Several options could be on the table. Piggybacking on the existing corporate income tax is one, Williams and Kleinbard said, although companies without net profits don’t pay any income taxes.
An excise tax would likely be paid regardless of whether an institution is profitable.
Finding something to levy also is challenging, tax experts said. Options range from assets, to payroll size, to average wages paid to top executives. No matter what basis is chosen, Williams said, companies will try to reduce their use of that particular method.
Wayne Abernathy, executive vice president of the American Bankers Association, said in a telephone interview that an industry-specific fee would create a “real fairness issue,” forcing banks to pay for parts of the bailout that “didn’t work.” In addition, Abernathy said, banks are paying an “excellent” return to the Treasury.
Banks repaid the U.S. $165 billion last year, letting the government recoup about two-thirds of its total investment in the banking system, according to a U.S. Treasury Department report released yesterday.
TARP also collected $12.9 billion in fees, dividends and interest, the Treasury said. So far, the U.S. has made an 8 percent return on its bank investments, a Treasury official told reporters.
Administration Pressure
Representatives for Bank of America, San Francisco-based Wells Fargo, and New York-based Citigroup Inc. and JPMorgan Chase & Co. declined to comment.
“While we have not seen any specific language from the administration, Congress will certainly examine any serious proposals to lower the deficit and recoup even more” of the TARP funds used in the bailout, said Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi, a California Democrat.
John Thain, the former chief executive officer of Merrill Lynch & Co., said in a Bloomberg Television interview yesterday that new taxes are “not necessarily the right way” to resolve the issue of banks becoming “too big to fail.”
The administration also is continuing to prod financial firms to tie bonuses to the long-term health of a company by giving the bulk of such compensation in stock as a way to limit risks, White House spokesman Robert Gibbs said.
“There are folks that just continue not to get it” on Wall Street, Gibbs said. Firms that pay large bonuses to executives risk raising public anger, he said.
Still, he said, “there’s a limit to what the president can do” in limiting compensation at firms that aren’t getting government assistance.
When Greed Is Not Good
When Greed Is Not Good
Wall Street has quickly rediscovered the virtues of mammoth paychecks. Why hasn't there been more financial reform?
ALAN S. BLINDER
I hear Gordon Gekko is making a comeback. So is greed.
They say markets are alternately ruled by greed and fear. Well, our panic-stricken financial markets have been ruled by fear for so long that a little greed might serve as an elixir. But everybody knows you can overdose on an elixir.
When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.
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Plainly, they all failed in the financial crisis. Compensation and other types of incentives for risk taking were badly skewed. Corporate boards were asleep at the switch. Opacity reduced effective competition. Financial regulation was shamefully lax. Predators roamed the financial landscape, looting both legally and illegally. And when the Treasury and Federal Reserve rushed in to contain the damage, taxpayers were forced to pay dearly for the mistakes and avarice of others. If you want to know why the public is enraged, that, in a nutshell, is why.
American democracy is alleged to respond to public opinion, and incumbents are quaking in their boots. Yet we stand here in January 2010 with virtually the same legal and regulatory system we had when the crisis struck in the summer of 2007, with only minor changes in Wall Street business practices, and with greed returning big time. That's both amazing and scary. Without major financial reform, "it" can happen again.
It is true that regulators are much more watchful now, that Bernie Madoff is in jail (where he should have more company), and that much of "fancy finance" died a violent death in the marketplace. All good. But history shows that financial markets have a remarkable ability to forget the past and revert to their bad old ways. And we've made essentially no progress on lasting financial reform.
Perhaps reformers just need more patience. The Treasury made a fine set of proposals that the president's far-flung agenda left him little time to pursue—so far. The House of Representatives passed a pretty good financial reform bill late last year. And while there's been no action in the Senate as yet, at least they are talking about it. As Yogi Berra famously said, "it ain't over 'til it's over."
But I'm worried. The financial services industry, once so frightened that it scurried under the government's protective skirts, is now rediscovering the virtues of laissez faire and the joys of mammoth pay checks. Wall Street has mounted ferocious lobbying campaigns against virtually every meaningful aspect of reform, and their efforts seem to be paying off. Yes, the House passed a good bill. Yet it would have been even better but for several changes Financial Services Committee Chairman Barney Frank (D., Mass.) had to make to get it through the House. Though the populist political pot was boiling, lobbyists earned their keep.
I expect they'll earn more. Even before Senate Banking Committee Chairman Christopher Dodd (D., Conn.) announced his retirement, it appeared likely that any bill that could survive the Senate would be weaker than the House bill. Then came Mr. Dodd's announcement, which reshuffled the deck.
There are two diametrically opposed hypotheses about how his retirement will affect the legislation. Conventional wisdom holds that it is good news for reformers: Freed from crass political concerns, Mr. Dodd can now steer his committee more firmly toward a better bill. Let's hope so. But an opposing view reminds us that lame ducks lose power rapidly in power-mad Washington. To lead, someone must be willing to follow.
My fear is that a once-in-a-lifetime opportunity to build a sturdier and safer financial system is slipping away. Let's remember what happened to health-care reform (a success story!) as it meandered toward 60 votes in the Senate. The world's greatest deliberative body turned into a bizarre bazaar in which senators took turns holding the bill hostage to their pet cause (or favorite state). With zero Republican support, every one of the 60 members of the Democratic caucus held an effective veto—and several used it.
If financial reform receives the same treatment, we are in deep trouble, both politically and substantively.
To begin with the politics, recent patterns make it all too easy to imagine a Senate bill being bent toward the will of Republicans—who want weaker regulation—but then garnering no Republican votes in the end. We've seen that movie before. If the sequel plays in Washington, passing a bill will again require the votes of every single Democrat plus the two independents. With veto power thus handed to each of 60 senators, the bidding war will not be pretty.
On substance, while both health-care and financial reform are complex, health care at least benefited from broad agreement within the Democratic caucus on the core elements: expanded but not universal coverage, subsidies for low-income families, enough new revenue to pay the bills, insurance exchanges, insurance reform (e.g., no denial of coverage for pre-existing conditions), and experiments in cost containment to "bend the curve." The fiercest political fights were over peripheral issues like the public option, abortion rights (how did that ever get in there?), and whether Nebraskans should pay like other Americans (don't try to explain that one to foreigners).
But financial regulatory reform is not like that. Every major element is contentious: a new resolution authority for ailing institutions, a systemic risk regulator, a separate consumer protection agency, whether to clip the Fed's wings or broaden them, restrictions on executive compensation, regulation of derivatives, limits on proprietary trading, etc.
The elements are interrelated; you can't just pick one from column A and two from column B. What's worse, several components would benefit from international cooperation—for example, consistent regulation of derivatives across countries. This last point raises the degree of difficulty substantially. No one worried about international agreement while Congress was writing a health-care bill.
All and all, enacting sensible, comprehensive financial reform would be a tall order even if our politics were more civil and bipartisan than they are. To do so, at least a few senators—Republicans or Democrats—will have to temper their partisanship, moderate their parochial instincts, slam the door on the lobbyists, and do what is right for America. Figure the odds. Gordon Gekko already has.
Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board.
The Trouble with Harry
Reid's racial comments aren't his worst rhetorical offense.
We can think of several reasons for Harry Reid to resign as Senate Majority Leader, though the flap over his obtuse racial comments isn't one of them. The uproar is nonetheless instructive about the perils of identity politics.
Mr. Reid is apologizing to all and sundry for saying in private in 2008 that Barack Obama should run for President because he was "light-skinned" and spoke with "no Negro dialect, unless he wanted to have one." Republicans are calling for Mr. Reid to resign, on grounds of the Trent Lott precedent.
When the Republican leader in 2002 joked at a birthday party for Strom Thurmond that America might have been better off had the one-time Dixiecrat won his 1948 Presidential campaign, Democrats demanded Mr. Lott's resignation. An Illinois state senator with a big political future went so far as to suggest at the time that Republicans needed to "drive out" Mr. Lott in order to "stand for something." Mr. Lott resigned, notwithstanding his profuse apologies.
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European Pressphoto Agency
Senate Majority Leader Harry Reid
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In contrast, Mr. Obama and various black Democrats have rushed to Mr. Reid's defense. The President said he accepted Mr. Reid's apology because "I've known him for years, I've seen the passionate leadership he's shown on issues of social justice and I know what's in his heart."
We've never peered into Mr. Reid's heart, but here's hoping the President will be equally quick to absolve the next Republican who says something stupid about race. Not every racial malaprop merits political banishment, and it would be edifying to the American public to hear this President say so on behalf of someone who isn't a partisan ally.
Some Americans, white and black, might be more insulted by Mr. Reid's implication that most Americans—45 years after the Civil Rights Act of 1964—are still so residually racist that they would only vote for a black candidate who isn't really . . . black. In reality, we saw in November 2008 that Americans were more than ready to elect a black politician who campaigned to be President of all Americans, in contrast to previous candidates who ran expressly and principally as candidates of black America. Democrats like Mr. Reid still see the American electorate through the prism of identity politics, which leads them to such condescending conclusions.
The irony is that Democrats are increasingly the victims of this kind of racial politicking. Bill Clinton's dismissal of Mr. Obama as a Jesse Jackson-style "black candidate" hurt his wife's candidacy in 2008. Democratic Congressman Artur Davis, vying to become the first black governor of Alabama, has been declared a traitor to his race for having voted against Nancy Pelosi's health bill.
Mr. Reid's allies are even now responding to critics by playing the race card. Democrats are pointing to the NAACP's voting assessments of Republicans who have called on him to resign. "Senator Reid's record provides a stark contrast to actions of Republicans to block legislation that would benefit poor and minority communities—most recently reflected in Republican opposition to the health bill," says Congressional Black Caucus leader Barbara Lee (D., Calif.). Thus do Mr. Reid's ill-chosen words morph into the accusation that Republicans are racist for opposing government health care.
In any event, this is hardly Mr. Reid's worst rhetorical offense. That prize goes to his all too public comments in April 2007 that "the war is lost" in Iraq, even as the surge was finally making victory possible. That was a betrayal of American soldiers risking their lives in Iraq, and to the extent it emboldened the enemy, it may have cost American lives.
If Mr. Reid has apologized for that defeatism, we don't recall it. That's reason enough to resign.
Stocks Down as Earnings Disappoint
Stocks Down as Earnings Disappoint
KRISTINA PETERSON
Stocks suffered a modest but broad-based decline as retail and energy companies lagged and early earnings reports fell short of investors' high expectations.
The Dow Jones Industrial Average fell 32 points, or 0.3%, to 10631. Alcoa led the measure's declines, tumbling 9.6% after the aluminum maker posted a $277 million loss with lower sales in its construction, aerospace, commercial-building and gas-turbine markets.
The Nasdaq Composite Index fell 0.8%. The Standard & Poor's 500 index declined 0.6%. Its energy and materials sectors dragged as the price of crude oil, which had topped $83 a barrel on Monday, reversed course and fell to less than $82 per barrel. Investors noted the slightly warmer weather likely contributed to the pull-back in oil prices.
The only sector in the S&P 500 posting a gain was consumer staples, a traditional safe haven that edged up 0.4%. The consumer-discretionary sector was among the index's weakest groups, off 0.9%.
Data showed national chain-store sales were down 1% in the first week of the month compared with December, according to Redbook Research's latest indicator of national retail sales. Analysts had expected a 1.2% decline. Separately, the International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index fell 3% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis.
Investor sentiment wobbled after the Commerce Department reported that the U.S. deficit in international trade of goods and services had expanded more than expected in November, as surging oil prices helped imports grow faster than exports.
The report added to the market's disappointment after Alcoa unofficially kicked the fourth-quarter reporting season off on a sour note. Investors had been expecting this reporting season to look particularly strong thanks in part to easier comparisons to the bleak fourth quarter of 2008, along with the massive cost cutting of 2009.
Additionally, video games publisher Electronic Arts warned on fiscal 2010 earnings, blaming weakness in Europe as well as a shift toward lower-margin products in Europe. Its shares fell 7.4%.
Frank Ingarra, co-portfolio manager at Hennessy Funds, said the reports only added to investors' concerns, noting the average retail investor is still skeptical of the economy's recovery and hesitant to wade into stocks.
"They're still scared and you see that in the mutual fund flows," Mr. Ingarra said. "Every retail investor is focusing on unemployment and all this other data is unfortunately just reinforcing that they shouldn't be in the market, but for long-term investors it's a great buying opportunity."
In other markets, Treasurys were higher, with the 10-year note up 23/32 to yield 3.730%.
The dollar fell against both the euro and the yen. Earlier, the greenback rose against most rival currencies Tuesday morning after China's central bank raised its yuan reserve requirement by 0.50 percentage point in a bid to stave off inflation.
"That's going to be a shorter-term market concern," said Randy Hare, portfolio manager at Huntington Funds. "It'll put some pressure on some of the commodity names, but they're doing that because their economy is strengthening."
Hartford Financial Services Group shares rose 1.8% after the company doubled its fourth-quarter earnings guidance as rising financial markets and a mild storm season helped its businesses.
KB Home declined 4.5% after the home builder swung to a fiscal fourth-quarter profit. A tax benefit helped it beat expectations, but its revenue tumbled as home prices continue to fall.
Great Atlantic & Pacific Tea tumbled 19%. The supermarket operator's fiscal third-quarter loss widened sharply on $412.6 million in asset write-downs, mostly related to its Pathmark division.
Some Jobs Won't Return
Even in a Recovery, Some Jobs Won't Return
JUSTIN LAHART
![[Veterans and family members wait on line to attend job fair. ]](http://s.wsj.net/public/resources/images/OB-FF999_jobs01_F_20100111213958.jpg)
Getty Images Veterans and family members wait on line to attend a job fair Nov. 23, 2009, in New York City.
Even when the U.S. labor market finally starts adding more workers than it loses, many of the unemployed will find that the types of jobs they once had simply don't exist anymore.
Employment in Selected Industries
See how many jobs were gained or lost in selected industries from November 2007 to November 2009.
The downturn that started in December 2007 delivered a body blow to U.S. workers. In two years, the economy shed 7.2 million jobs, pushing the jobless rate from 5% to 10%, according to the Labor Department. The severity of the recession is reshaping the labor market. Some lost jobs will come back. But some are gone forever, going the way of typewriter repairmen and streetcar operators.
Many of the jobs created by the booms in the housing and credit markets, for example, have likely been permanently erased by the subsequent bust.
"The tremendous amount of economic activity associated with housing, I can't see that coming back," says Harvard University economist Lawrence Katz. "That was a very unhealthy part of the economy."
Reshaping the Job Market
![[Reshaping the job market]](http://s.wsj.net/public/resources/images/OB-FG000_Jobspr_D_20100111214219.jpg)
Read more profiles of workers in different industries.
![[Tim Winters ]](http://s.wsj.net/public/resources/images/NA-BD382_Jobs7_A_20100111152153.jpg)
Tim Winter Tim Winters, Aspen, Colo. Age 39
Hotel Director Forced to Give Up Own Home
After getting laid off in March from his job as operations director at a small hotel, Tim Winters could no longer afford his $1,200 a month apartment. He has been living at family members' homes, an ironic twist for someone who often used to stay for free at hotels when he traveled. "It takes a lot of understanding and time to get used to living with other people again," says Mr. Winters, who started his career in hospitality in 1996. Mr. Winters says he has applied for approximately 170 hotel-management positions and has had 14 interviews, but no job offers yet.
![[Daryl Jones ]](http://s.wsj.net/public/resources/images/NA-BD403_jobs8_A_20100111212431.jpg)
Daryl Jones Daryl Jones, Tulsa, Okla. Age 45
Economy Chips Away at Cabinet Maker's Business
Daryl Jones misses the smiles that would appear on clients' faces after receiving the one-of-a-kind cabinets, bedroom sets and other wood furniture he built by hand while running his home-based business. But sales plummeted in recent years, prompting the third-generation craftsman to take a job building cabinets for corporate jets to make ends meet. Still, Mr. Jones is optimistic that one day he will return to his custom woodworking full time. "Once the economy bounces back and people feel comfortable again spending money, then things will start picking back up."
![[Jeff Walker]](http://s.wsj.net/public/resources/images/NA-BD381_Jobs6_A_20100111152136.jpg)
Jeff Walker Jeff Walker Brighton, Mich. Age 53
Auto Industry Executive Goes Back to School
Jeff Walker, a former auto industry executive, doesn't mind being among the oldest students at Eastern Michigan University. "I'm happier than just being unemployed and looking for a job," he says. In April, Mr. Walker lost his job as a vice president of operations at a small auto equipment supplier in Brighton, Mich., where he had worked for 22 years. Mr. Walker is studying technology management in pursuit of the college degree he started but never finished after high school. Now, he says, he just wants to "get out of manufacturing."
![[Duane Dittbrenner ]](http://s.wsj.net/public/resources/images/NA-BD377_Jobs2_A_20100111152036.jpg)
Duane Dittbrenner Duane Dittbrenner, Cleburne, Texas Age 50
Veteran Trucker Worries About Paying the Bills
Duane Dittbrenner was laid off last month from his job at Arrow Trucking Co. He has been struggling to find another trucking job in the Dallas-Fort Worth area. "Where I live, most of it is hazmat and tankers," says Mr. Dittbrenner, who has hauled big rigs for the past 20 years throughout the U.S. Mr. Dittbrenner says he is worried he won't be able to pay next month's bills if a new job doesn't come along. "It's just getting out there and pounding the pavement," he says. "I'll have one soon. All you can do is be optimistic."
![[Debra Allicock ]](http://s.wsj.net/public/resources/images/NA-BD376_Jobs_A_20100111152016.jpg)
Michael Benabib Debra Allicock, Brooklyn, N.Y. Age 42
Growing Demand, but Low Pay, for Home Health
Debra Allicock migrated to New York from Guyana in 2000 and took a job as a home-health aide, helping the elderly with errands, meals and light housekeeping. She says the relationships she gains are what motivates her to work 12-hour days despite low pay and no medical insurance. "You get to get very close and attached with them," she says of her clients. Ms. Allicock says her services are in high demand. "Why go to a nursing home when you can stay in your home surrounded by everything you love?" she says. "Maybe one day someone is going to return that favor for me."
![[Richard Hawthorne ]](http://s.wsj.net/public/resources/images/NA-BD378_Jobs3_A_20100111152051.jpg)
Richard Hawthorne Richard Hawthorne, Laguna Beach, Calif. Age 58
Real Estate Executive Tries a New Path
Richard Hawthorne has been out of work since June 2007, when he was laid off from a small commercial real estate investment firm where he was director of development. "In past downturns I've done well, but this downturn has me stumped," he says. Mr. Hawthorne enjoyed his more than 30 years in commercial real estate. "There was something new and totally unpredictable each and every day to solve," he says. But now, tired of being told he is overqualified for jobs in his field, he is launching a business advising financial institutions on how to eliminate investment property debt.
-- Interviews by Sarah E. Needleman
Unhealthy but a boon for men without a college education. One in three jobs, or six million total, have been lost in the manufacturing sector since 1997, the last year the sector posted job gains. The upsurge in construction jobs accompanying the housing boom provided these workers in manufacturing with an opportunity to earn decent wages.
Now that door, too, has shut. With 1.6 million jobs lost over the last two years, the construction sector has accounted for more than a fifth of the jobs lost since the recession began.
For more highly educated workers, finance may no longer offer as many high-paying jobs as it has in the past. Thomas Philippon, an economist at New York University's Stern School of Business, estimates that the financial sector's share of the economy was nearly 20% larger than it should have been. Since the start of the recession, the financial sector has lost 548,000 jobs, or 6.6% of its work force. Mr. Philippon's estimate suggests there will be further pressure on financial jobs.
In other areas of the labor market, the recession accelerated job losses that were probably coming anyway. In November, there were 36% fewer people working in record shops than two years earlier, according to the Labor Department. There were 23% fewer people working at directory and mailing list publishers, and 46% fewer at photofinishing establishments. Those are jobs that, with the advent of mp3 recordings, Google and digital photography, were likely disappearing anyway.
But as the recession hurt already ailing businesses, workers were forced into a sudden adjustment rather than the gradual one they would have otherwise faced. The recession also provided companies with an opportunity to cut jobs no longer as critical as they once were. That may be particularly true of the secretaries and mailroom clerks that advances in information technology have made less necessary. The ranks of people doing office and administrative work have fallen 10.1% since the recession began.
"Those are the production jobs of the information age, and they're being to a substantial extent automated," says Massachusetts Institute of Technology economist David Autor.
The permanent loss of many jobs may keep the labor market from fully recovering for a long time to come.
Prior to the 1990s, jobs rebounded quickly once recessions ended. Payrolls fell by nearly three million in the deep downturn that extended from July 1981 to November 1982. But by the start of 1983, the economy was creating jobs again, and by the end of 1983, the U.S. job count had exceeded its old peak.
That was because more of the job losses were essentially temporary, with manufacturers and the like letting workers go with the implicit expectation that they would be hiring them back once the worst was over.
But since the early 1990s, jobs have been slower to recover from recession. After the 2001 downturn ended, job losses continued for nearly two years. It wasn't until 2005 that the job count returned to its prerecession high.
Productivity-enhancing technology and competition from low-wage countries like China made more job losses permanent. And it took time for new jobs to be created and for workers to acquire the skills needed to do them. In the wake of a far deeper recession, creating new jobs and retraining workers to do them could take even longer.
It is anyone's guess what those jobs will be. The Labor Department has done little more than extrapolate from recent trends. It expects growth in areas like health care, which has been one of the few bright spots. Given the exigencies of an aging population, that seems a fair bet.
One could also make the case that the U.S. is shifting from a consumer nation to a nation of producers, and that will lead to a resurgence in technology and high-tech manufacturing jobs.
But Harvard's Mr. Katz warns that past experience suggests such conjecture is likely fruitless. "One thing we've learned is that when we attempt to forecast jobs 10 or 15 years out, we don't even get the categories right," he says.
Monday, January 11, 2010
Organised crime in Mexico
Outsmarted by Sinaloa
Why the biggest drug gang has been least hit
IT MIGHT seem incongruous to see Felipe Calderón, who has bet his presidency on fighting organised crime, accused of sheltering Mexico’s top drug lord. Yet across the country banners hanging from highway overpasses suggest he is in cahoots with Joaquín El Chapo (“Shorty”) Guzmán—the leader of the Sinaloa “cartel” and, according to Forbes magazine, the world’s 701st richest man. “Mr Narco-President,” began one seen in Veracruz state in 2008. “If you want to end crime, stop protecting drug traffickers like El Chapo.”
The banners are placed by rival drug mobs. But they hint at a paradox. The Sinaloa organisation (named after a north-western state) is responsible for around 45% of the drug trade in Mexico, reckons Edgardo Buscaglia, a lawyer and economist at ITAM, a Mexico City university. But using statistics from the security forces, he calculates that only 941 of the 53,174 people arrested for organised crime in the past six years were associated with Sinaloa. An official disputes those numbers, and notes that several close relatives of Ismael Zambada, the co-head of the Sinaloa mob, were arrested on drug charges last year.
Nevertheless the government crackdown seems to have fallen mainly on other mafias. The Arellano Félix gang, featured in “Traffic”, a Hollywood film, has splintered into warring factions after six of its seven founding brothers were captured or killed. Police often arrest senior leaders of La Familia, a newer mob specialising in methamphetamines. In December marines surrounded and killed Arturo Beltrán Leyva, who split from the Sinaloa mob in 2008, and six of his henchmen. This month one of his brothers was arrested in Culiacán, the capital of Sinaloa.
In the zero-sum game of the drug trade, one gang’s loss is another’s gain (which is why “drug cartel” is such a misnomer). The weakening of local traffickers in Tijuana and Ciudad Juárez has enabled Sinaloa to strengthen its presence along Mexico’s northern border. Mr Beltrán’s death may cheer Mr Guzmán: their falling out left sons of both men dead.
Mr Calderón insists that he is attacking all the gangs “forcefully, and, I emphasise, without distinctions.” Some analysts doubt this. “The government’s strategy is to focus on the weakest groups, so that the organised crime market will consolidate itself around Sinaloa,” says Mr Buscaglia. “They’re hoping to negotiate a decrease in violence with that one group.”
Officials insist there is no going back to the old practice in which Mexican governments turned a blind eye to drug gangs provided they acted discreetly. If Sinaloa has been hit less hard, it is because it operates differently. It has stuck to a “transactional” rather than “territorial” method, says one official. Other gangs, such as La Familia and the Zetas, a particularly violent outfit of former soldiers, began to control cities and diversify into extortion and kidnapping. When the government deploys troops to reclaim the streets, it is these gangs whom they run into.
Sinaloa, by contrast, has stuck to drugs and money laundering and is smarter and more sophisticated. It prefers anonymity to the ostentation of others (Mr Beltrán was undone by inviting a famous accordionist to play at a Christmas party). It eschews jobless teenagers, its rivals’ rank and file, in favour of graduates, infiltration and intelligence. Although all the gangs have penetrated local governments, only Sinaloa and the Beltráns have been discovered to have bribed senior officials. Officials complain that Sinaloa operatives receive warning of pending raids. Sceptics wonder whether success against other gangs comes from tip-offs from Sinaloa.
Mr Guzmán bribed his way out of a federal prison in 2001. His territory now is 60,000 square km (23,000 square miles) of rugged mountains where “you’d need 100,000 soldiers surrounding the area and even then I’m not sure you’d succeed [in capturing him],” the official said.
For now the government has other priorities. Three years after it launched its crackdown, the violent turf-wars among the gangs that this has triggered show no sign of abating. Mr Calderón has notched up some victories, but also suffered defeats. A protected witness who had testified against Sinaloa, Édgar Bayardo, was killed in a Starbucks café in Mexico City last month. Just hours after the funeral of a marine, who died in the operation against Mr Beltrán Leyva, four of his grieving relatives were murdered. Some residents of Ciudad Juárez are growing restive over the government’s failure to stem the violence.
Some analysts draw a parallel with Colombia. In the late 1980s and early 1990s its government pursued Pablo Escobar and his cronies in Medellín, whose terrorist violence brazenly challenged the state, while only later acting against the Cali mob, which like Sinaloa preferred bribery and legal business fronts. Others worry that Mexico lacks the capacity to take on Mr Guzmán’s outfit. But sooner or later it will have to try.
Latinos and American politics
Latinos and American politics
Power in numbers
Hispanics, long under-represented as voters, are becoming political kingmakers
THE choice of John Pérez to take over as the new speaker of California’s state assembly later this month has been hailed as something of a breakthrough—but only because Mr Pérez is openly gay. That he is also Latino is not considered newsworthy. Kevin de León, who competed with Mr Pérez for the post, is also Latino, as are several of Mr Pérez’s predecessors, including his cousin, Antonio Villaraigosa, who is now the mayor of Los Angeles. The weight of Latinos in the politics of states like California and Texas (where the Mexican-American Legislative Caucus claims 44 of the 150 members of the state House of Representatives) is already understood to be not only large but normal.
This year, after the decennial census that will confirm the huge growth of America’s Hispanic population, this influence will become both evident and normal in even more parts of the country. Arturo Vargas, the executive director of the National Association of Latino Elected and Appointed Officials (NALEO), reckons that during the last census about 1m Latinos were left out of the statistics because “if you live in a garage or on somebody’s couch”, as many Latinos do, it is easy not to be counted. This time there is a concerted effort to change that. And if the Census Bureau’s estimates are corroborated, almost 16% of America’s population will be shown to be Hispanic (since the label refers to ethnicity rather than race, anybody who considers himself Hispanic is deemed to be so). That will compare with 13.4% for blacks, according to the estimate.
Along with the ageing of the baby-boomers, this Latinisation is the most important demographic change in America, at least according to William Frey at the Brookings Institution, a think-tank in Washington, dc. Hispanics have accounted for half of America’s total population growth since 2000, he notes. To see the America of the future, he says, look to its youth and its cities. White children are already a minority in 31 of America’s 100 largest metropolitan areas. For America as a whole, whites will become a minority in preschools by 2021 and in the general population by 2042.
One result is more Latino officials and politicians. Mr Vargas counts more than 6,000 in the country, mostly, it is true, on the boards of school and utility districts and other branches of local government that are “the first rung on the political ladder”. But there are also two Latino cabinet members, 26 Latino representatives and a Latino senator. The governor of New Mexico is a Hispanic. Since Sonia Sotomayor became a justice on the Supreme Court, says Mr Vargas with a wink, “there is only one office that has eluded us”, and it is oval. In the fictional world of “
And yet, Latinos have so far punched below their weight in American politics, in contrast to blacks, who have punched above theirs, says Paul Taylor, the director of the Pew Hispanic Centre. Many are undocumented immigrants, many more are too young to vote, and others yet have simply not bothered. Moreover, Latinos are “notorious for not getting organised,” says Mr Frey, since many consider themselves to be Mexican, Guatemalan, Salvadorean or Puerto Rican, say, rather than Hispanic. As a result Latinos have been less strong as a block than the Irish were after the immigration wave of the 19th century, or than blacks have been recently, he says. That may partly explain why Texas has never had a Latino governor, and California has had only one, back in the 1830s.
But this is changing. “Latinos respond to anger and fear,” says Mr Vargas. In California during the 1990s, Latinos read the anti-immigrant rhetoric of Pete Wilson, a Republican governor, as racist and were outraged when voters passed a ballot measure (later ruled unconstitutional) to bar undocumented immigrants from non-emergency public health care, welfare and education. Californian Latinos decided to fight at the ballot box and registered in huge numbers, recalls Monica Lozano, a third-generation Mexican and the publisher of La Opinión, the largest Spanish-language newspaper in America. A similar, and national, surge has been ongoing since the anti-immigrant media frenzy of 2006.
The presidential election of 2008 was the first one in which Latinos played a large, and perhaps decisive, role. They voted for Barack Obama over John McCain by a margin of more than two-to-one—not as large as Mr Obama’s margin among blacks, but of greater importance in states with lots of Latinos, which happen to include swing states. Latinos helped Mr Obama to carry Florida (where they had favoured George Bush in 2004), New Jersey, Nevada and New Mexico, in particular.
In future elections, Latinos will be “the centrepiece of the election, the kingmakers,” says Samuel Rodriguez, a pastor and the president of the National Hispanic Christian Leadership Conference, an evangelical association. They will be able to tilt the electoral balance and turn many red—or, conceivably, blue—states purple. That is because Latinos are the quintessential independents, he says.
Latinos tend to place faith and family at the centre of their lives, and are thus naturally conservative on many social issues, from gay marriage to abortion, says Mr Rodriguez. But the same values also incline them, in contrast to, say, white evangelicals, to communitarian economic policies usually considered liberal (by the American definition of that word). In California, say, they tend, as renters rather than homeowners, to be against Proposition 13, a law that caps property taxes, and instead to favour taxes that pay for better education. They consider themselves the future, says Ms Lozano, and want to invest in it.
Croatia's presidential election
In safe hands
Croatia's new president, Ivo Josipovic, must join the fight against corruption
IN ELECTING Ivo Josipovic by a crushing majority on Sunday January 10th Croats have chosen a man whose ethos can be summed up as “steady as she goes”. In the second round of the presidential poll Mr Josipovic defeated his rival Milan Bandic, the flamboyant and populist mayor of Zagreb, by a huge 60.3% to 39.7%. The Social Democrat defeated his rival in every region of the country except one.
The fight against corruption was an important theme of the campaign, as it is increasingly, in Croatian political life. Mr Josipovic has never held high office before and could credibly present himself as a man with clean hands. The Croatian president plays a role in shaping foreign affairs so Mr Bandic also failed to impress when he said on television recently that Condoleezza Rice, was the American secretary of state. She left office a year ago.
It is hardly surprising that Croats have opted for the man who appears to promise stability in a time of severe economic crisis. But his election is also a symbol of change in this Balkan state. Although he is a Social Democrat he will probably work well together with Jadranka Kosor, the prime minister and leader of the country’s main party, the right-of-centre Croatian Democratic Union.
Mrs Kosor elevation to become prime minister marked a big change in Croatian politics. Last July Ivo Sanader, then prime minister, out of the blue and without giving any credible explanation, announced that he was resigning and leaving politics. He had already transformed the party from a hardline nationalist one to the mainstream of European Christian democrats. However Croats were still left with the impression that it had a high tolerance for corruption.
When Mr Sanader quit it was widely assumed that he would try to run the country from the back through the previously loyal Mrs Kosor. If that was the plan, it was a mistake. Mrs Kosor has grown into her role and has begun to take serious measures to tackle corruption. However, when her party’s candidate was beaten into third place in the first round of the election on December 27th, Mr Sanader, unexpectedly held a press conference the next week to announce that his resignation had been a mistake and that he was back. His coup failed dismally and Mrs Kosor had her predecessor unceremoniously ejected from the party.
Mr Josipovic assumes the presidency at a time of turbulence at home and also abroad. He steps into the big shoes of the outgoing president, Stipe Mesic, who was the last holder of the office of president of the old six-republic Yugoslavia and one of the last of the generation of wartime leaders.
On Friday he chose to make his final trip abroad as president to Kosovo, which declared independence from Serbia in February 2008. “Long Live the Republic of Kosovo,” he declared. Serbia’s president, Boris Tadic, is incandescent with rage about this act. However for Mr Mesic there was an element of tying up loose ends in Kosovo. The destruction of the old Yugoslavia could be said to have begun here in the 1980s, so there was a logic that Mr Mesic should say farewell to power here. Few Croats care about the place today though.
The Kosovo issue is not the only irritant in the all important Croatian-Serbian relationship. On January 4th Serbia launched a countersuit against Croatia at the International Court of Justice. In 1999 the Croats charged Serbia with genocide at the court relating to the war of 1991-95. Now Serbia has charged that, in fact, it was Croatia which was guilty of genocide against Serbs. The reality is neither side really believes the claims and the leaders of both have talked about dropping the whole issue.
One of Mr Josipovic’s main jobs will be to help shepherd Croatia into the European Union. Barring unforeseen events it is likely to become the EU’s 28th member, probably in two years. But, once negotiations are completed, Croatia will hold a referendum on the issue and in the latest polls, conducted by Gallup and the European Fund for the Balkans, 43% said they would vote against membership compared with 39% in favour. Indeed, in general terms, Croats are a highly disgruntled lot at the moment. Some 57% are dissatisfied with their standard of living and a whopping 84% think their country is going in the wrong direction. Between them Mrs Kosor and Mr Josipovic have their work cut out.
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