Goldman Sachs Pulls Off 2nd Biggest "scam" in Financial History

Of course, it was done completelly legally although the ethics are another question.

Record Bonuses on tap for Goldman Staff
by CalculatedRisk on 6/21/2009 09:56:00 AM

From The Observer: Goldman to make record bonus payout (ht Jonathan)

Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year ...

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever....In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.



NC: I have no problem with people making an honest buck - or even millions of them. And I have no personal problem with Goldman Sachs, in fact, I have several friends that work there and I obviously hope they get a good bonus. But this scam they are on the verge of pulling off is truly infuriating.

I have done some research on Goldman's "record profits" based on their 2008 annual report and some articles that were printed in October - December of last year and this is how I believe it went down (take that with a grain of salt).

[Please note that this is my analysis and, obviously, could be incorrect (especially some of the details). I welcome any comments, feedbacks and corrections whether posted by name or anonymously.]

• The "AIG bailout" was always about funneling tax payer money to the banks. Basically, the Treasury (namely Hank Paulson and now Geithner) and the Fed found away to subsidize their buddies on Wall Street without needing congressional approval. The sent the money via derivative contracts between AIG and the Wall Street banks under the guise of a Fed bailout of AIG.
• You see, and this is from the GS annual report, Goldman was already protected from an AIG default. They had purchased derivative contracts called CDS (credit default swaps) which are investments that go up in value when a reference company - in this case AIG - has a decline in creditworthiness. These contracts are generally bi-lateral agreements between two entities but their value is determined by a very liquid CDS market.
• Ironicallly, the reason that Goldman was hedging (or mitigating) its risk of AIG default is that it had $20 billion of CDS trades with AIG. In other words, Goldman had billions of dollars worth of CDS contracts with AIG that were protecting Goldman from defaults of mortgage bonds. It protected itself from an AIG default by buying CDS protection on AIG with completely independent 3rd parties.
• In October, when it appeared that AIG was about to go bankrupt, the CDS contracts on AIG would haved increased in value several times over again. So let's say on $20 billion worth of contract value that was purchased as $500 million, the value was now $15 billion.
• Goldman closed its CDS trades with the 3rd parties at a huge gain - somewhere around $10 billion (this is deduced from the mosaic theory between the 2008 annual report and several media reports that I read last year). Some people say that Goldman was told by Paulson (the former CEO of Goldman who still owns hundreds of million dollars worth of GS shares) that AIG would be rescued, so they closed the trades knowing that AIG would not default. But there is no evidence of this, so that can be ignored.
• Either way, Goldman already protected itself from the AIG default risk and was greatly compensated for doing so.
• Now, the Fed and the Treasury come in and pay out the counterparties of AIG on CDS trades. Goldman was a the top of that food chain and received somewhere between $12 billion and $20 billion in settlements from the U.S. taxpayers.

So you can now see how Goldman was able to "double-dip" and was paid out twice for the same contracts. And that is a huge part of how you are now seeing "record profits" for fiscal year 2009 as the government money via AIG is recorded as straight profits. Certainly, there are other factors allowing Goldman to report record earnings (such as a change in the FAS 157 accounting rules where companies can value assets at whatever price suits their bonus :) - but the AIG settlement is the largest factor.

To me, this is just completely outrageous. And the arrogance of announcing record bonuses is a poor PR move to say the least.

Risk Management, Bank Politics and the Financial Crisis

NC: To this day, my wife is convinced that I wrote this article anonymously with only a few facts and figures changed (like the fact that I would set my alarm for 5:30). I can peronally assure the readers that this description of life at a large multi-national bank is completely accurate and eerily describes the last 12 months at my previous employer.

When you deal with the guys at the top of the pyramids at these organizations, you realize just exactly how banks could have mismanaged themselves and ultimately the economy onto the brink of abyss. And if you think the regulators were any better...

The emphasis is mine.

The author is a former head of risk at a top investment bank. He wrote on condition of anonymity.


MY ALARM went off at 5.30am and I stumbled to the kitchen to make a coffee, knowing that it could be the last day I went to work for an investment bank. It was September 15 last year and Lehman Brothers had just gone under. As a result, I had lost my bank about $1 billion (£700m).

On the train I wondered what lay before me. Losses do not come much bigger. Would they let me through the door? After 13 years in banking, it looked like my number was up. The worst thing was that none of it had come as a surprise. I had inherited the risky trades a year earlier and warned my bosses about the size of the potential losses all along, but they wouldn’t let me get out of the positions. In an investment bank, nobody wants to hear about risks in their business - not while they are making money.

Until the end of 2008, I worked in a large investment bank, managing risks for the derivatives business. I was the guy who was supposed to mop up everyone else’s problems. I had to look at all the complex trades, work out what the losses could be, then find a way to protect the bank. That’s the theory.

I saw every trade. Knowing what I knew, I could work out every trick employed by these “Masters of the Universe” to line their own pockets, whether the bank made money or not. Those who make their way to the top of the pile in banking are not the best traders, but the best politicians. When it comes to complex trades, the bosses have the wool pulled over their eyes all the time by the people they employ.

Derivatives are what really confuse everyone. It’s a term that covers a whole range of contracts but basically they are bets on the future value of something - whether that’s a share, a shipment of iron ore or even the creditworthiness of another bank.

I once tried to block a large derivative deal because the maths didn’t make sense. It just wasn’t going to make enough profit to justify the 30 years of credit risk it was going to leave on the balance sheet. But the head salesman, who was behind the trade, would be paid his bonus in one year, not 30. Needless to say, he disagreed with my analysis.

My boss and I tried to face him down. He went straight for the jugular and threatened to take the matter to the head of Fixed Income, accusing us of curtailing good client business and short-changing the shareholders. I tried to make my case but my boss’s appreciation of derivatives was weak, to say the least. I could see he had lost my point in the first sentence of my argument.

By sentence two, the head salesman had sensed the weakness and went in for the kill. He calmly said that he would ensure that we would be fired if he missed the deal and it turned out our analysis was wrong. In his opinion, our analysis was deeply flawed.

At this point, my boss’s eyes started to well up with tears. The debate ended. We had lost and my boss had chickened out, consenting to the deal with no further dissent. I left the room in disgust.

High finance had been decided by what amounted to playground politics. The client in question went bust shortly after, brought down by complex derivatives sold to it by the investment banks. Shareholders lost everywhere. Bonuses were paid everywhere.

When you turn up for a job interview at an investment bank there is only one real answer to the question “why do you want to work here?” but it is rarely answered truthfully. While bankers will give many grand reasons as to why they do the job, they are driven by nothing else but money. Money is everything.

I once arrived at an interview to be told the head of derivatives was going to conduct the meeting in his Bugatti on the way home. When I met him, he told me he was driving to the hospital where his wife was having their first child. While speeding through London he talked mostly about himself and how much money he had been making. He was just one of the thousands of bankers who are obsessed with money – their money. Whether the bank makes money is a secondary consideration.

Often the banks themselves have no idea if they are making money or not. The regulation of derivatives has been so weak, and the speed of innovation of new products so fast, that it has left a void on the trading floor. Cowboy traders have been taking advantage of a flawed system, knowing there is almost no chance of anything coming back to hurt them. So long as the traders can make it look like they have made a profit, they get their bonuses. This is the financial equivalent of the Wild West, yet only those on the inside realise this.

When trading in complex credit products exploded into life a few years ago, a whole host of financial products were created, mostly with acronyms for names. These are the same products that went on to blow up investment banks around the world as the sub-prime crisis emerged.

In the early days, two big banks picked up that they had been dealing with each other on a regular basis in very large volumes. After a while they each inquired what the other was up to. Both thought they were making money on the trades – bank A was selling something to bank B, yet both banks reckoned they were making a profit on it.

So both banks booked a profit in their accounts, and both sets of traders got bonuses. You don’t need to be a genius to see the problem here. Ultimately, only one set of shareholders will benefit.

Five to 10 years down the line, a sharp-eyed accountant might be able to spot the problem, but that is unlikely. Every few years there is typically a market blow-up, and issues like this get conveniently washed away as overinflated assets are then deliberately marked down below their true value in preparation for the next boom. That’s the point in the cycle we have reached now.

Many senior managers have been as clueless as the outside world as to how to value these trades. They are simply sitting at the top of the pile, praying they have timed it well to enjoy a couple of good years and allow themselves the opportunity to cream off the mother of all bonuses.

Job protection is a career in itself. All these complex products are designed and controlled by complicated computer programs. It has been known for the analysts who build the valuation systems to add pages and pages of unnecessary computer code so as to conceal what is really happening.

The managers are unable to check their work and the end result is that the guy who built the system is the only one who knows how to work it.

It is wrong to think that all investment banks are the same. Some institutions have been getting to grips with these problems, others have not.

My old bank is far from unique. My exposure to Lehman came through credit insurance my bank had sold to investors. If Lehman defaulted on its bonds, we were one of the institutions that would be asked to pay up. Bizarrely, we held these positions as part of a strategy that was designed to reduce the damage we would suffer if one of our big clients were to go bust.

The problem I had spotted suggested that all of the bank’s derivative trades could be valued incorrectly. This was more than just a minor hitch. Nobody wanted to listen and nobody wanted to make a decision. I sent e-mails; nobody responded. I asked the chief executive to sign off on the strategy himself, but I never heard back from him. Most of the other banks accounted for these trades in the same way.

So I was not the only guy who came unstuck last September, thanks to Lehman’s collapse. That was the event that turned the credit crunch from a crisis into a disaster. When I arrived at work, they let me through the door as usual. I took the decision myself that enough was enough. I suggested to my boss that I be made redundant and that my team be spared.

Market Manipulation?

From Anonymous Futures Trader - Chicago Mercantile Exchange:

Recently, I read more comments on the nature like "The market is rising against all the technical indications" or since a few weeks almost every day of some analysts that a "technical Correction of 10-15% is healthy and inevitable. " But nothing happens. Corrections are about 2-3% not out and despite negative indicators en masse the market is rising constantly. This is indeed quite unusual, at least if you compare it to 'normal' Market behavior compares.

No wonder that there are increasing rumors that Market is manipulated. Normally I give to such conspiracy theories little. They draw most only depends on the real relationships to recognize. However, I have even in recent weeks some phenomena observed close to the Thoughts of a targeted manipulation is not quite so seem implausible lassen.

First one can observe that whenever the U.S. market over night falls (the futures will be 24 h traded) and the next day clearly negative for open threatens, just before stock market opening is a constant Bid (a collector) in the futures market and This opening up a piece raises. Especially in pre-trade is the relatively low volumes possible. This happens so regularly that already many people's attention have become.

Secondly appears whenever the market crucial points umzukippen suddenly threatens a great bid in the market oblivion. Finally, we are on 29 May and on 3 June shortly before Closing stock market view. On 29 For example, in May the market is threatened once again in the 200 -- Day abzuprallen line and down to rotate. For technical analysts this failure would be a clear Sell signal was. Since the market is already very long without any correction was gone, would be a greater downward movement was normal. But then came a few minutes before the close an unlimited orders over 5,000 S & P500 index futures in the market and catapulted them within seconds 1.5% above and on the 200-day line. The value of these orders amounted to nearly 250 million U.S. dollars!

It is hard to imagine that an institutional investor his orders so kursbeeinflussend in the market represents. Normally, one would such an order evenly distributed throughout the day and thus kursschonend in the market. On other days, similar things happened. So I ask myself, who the motivations here, and where the money comes. Only very very few institutional investors have the means, with such large orders to play. "

If there is no tampering, then there are at least unusually crazy times. Maybe I really can see ghosts, and the market is involuntarily from the institutional investors driven by the current upward movement have completely overslept. As far as I know there are very many! The stand on the sidelines and waiting for a correction to buy into the market them. You do not want in these overbought Market. But it comes and will not Correction. Maybe but then loses a or other nerve and goes "all in"? This mix of the short-acting "less negative "news, on the basis of the acting Stimuli until the autumn can pause, combined underinvestment with institutional investors is an explosive. It could lead to the market fundamentals of its decouple. We inflating a new stock and Commodity bubble experience. I already have a name to read: BGB - Bernanke-Geithner bubble. Everything well and good if these bubbles are not the property had suddenly and unexpectedly to burst.


NC: I don't generally believe in conspiracies but I can tell you that the 3 pm effect in the markets has been well known for the last 3 months. Everyday, the market makes a drastic move in the last hour (usually up, but sometimes down) - traders are even now openly talking about front-running the 3 o'clock move. And it all started on that day when the Fed and Citigroup made their big "2009 has been profitable" statements.

Anyway, if the government really wanted to manipulate the markets, they would just announce it and the market would immediately move up like 1500 points. They have openly announced all the other bailouts and manipulation schemes, so why not the stock market.

If it does turn out that the government or Fed is buying S&P futures pre-open and at 3 pm, I can assure you they think they are doing it with good intentions of helping the country and the world. Of course, you know what they say about the road to he!! being paved with good intentions.

Fascinating Proposal to "shrink Detoit and Flint"

Cities Downsize to Survive by CalculatedRisk on 6/13/2009 01:25:00 PM

From The Telegraph: US cities may have to be bulldozed in order to survive (ht Chad, Brian)
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit ... there are already plans to split it into a collection of small urban centres separated from each other by countryside.

"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."


NC: This is a fascinating proposal straight out of the History Channel show "Life After People". So they would actually turn old Detroit residential and commercial zones back into farmland or even its original natural state which I suppose would be forest.

If you get beyond obvious issues such as the logistics and morality of forcing people to leave their homes and businesses, even if in poor condition, its actually a great proposal. Ideally, you could recreate urban living in the remaining "villages" which would include higher density housing like townhouses and high-rise apartments and walkable residential areas, something always lacking in Detroit.

That being said, I still like my idea for turning the area into a clean water technology hub, but in the absense of economic and population growth - perhaps a "Life After People" experiment makes some sense and could even re-energize the area.

Clean Water technology - biggest global investment opportunity over the next 30 years

At risk of turning this into a water blog, I wanted to do a follow up post on last week's thoughts regarding the long-term promise of clean water technologies.

____________________________________________________________________

Clean Water First: Economic Planning in India
By Edward L. Glaeser

Edward L. Glaeser is an economics professor at Harvard. He recently returned from India, where he was researching a book on cities.

It isn’t wise to start teaching children calculus before they have mastered long division, and it is not prudent to begin long division until addition and subtraction are, more or less, under control.
So why do governments that cannot manage the basics of public hygiene think that they can micro-manage an economy?

I have a moderate, and only somewhat facetious, libertarian progressive proposal. Unless a government manages to provide clean water to its poorest citizens, it should refrain from any new barrier to international trade, complex nationalization scheme or draconian zoning laws.
The energy and entrepreneurship of India’s private sector, both in the shiny office parks of Bangalore and in the dusty streets of Dharavi, only makes India’s public sector problems more frustrating. I suspect that India’s information technology has been so much more successful than its manufacturing because I.T. is less dependent on public infrastructure, like roads and electricity.

The just re-elected prime minister, Manmohan Singh, deserves enormous credit for dismantling much of the “license raj” that was the unfortunate legacy of Nehru and his progeny. Let’s hope he takes his latest mandate as an opportunity to improve delivery of the public sector basics, like clean water, while continuing to reduce other, unnecessary interventions.

India will get rich not in its villages, but in its cities and towns, where people can connect with each other and with the global economy. The great problem with urban living, however, is that when many people crowd into small areas, there is an increased need for an effective public sector. Today, the mismanagement of India’s cities not only reduces quality of life but limits urban growth and thereby slows the economic progress of the subcontinent.

The most important task of city government is to provide clean water. A cholera epidemic is a lot more dangerous than a crime wave. Today, approximately half of Mumbai’s residents do not have reliable access to working toilets. A 2003 study classified 70 percent of the water samples from one ward in particular as undrinkable.

The most important achievement of America’s 19th-century cities was their sewers and waterworks that saved thousands of lives. The history of clean urban water reminds us that it is a massive undertaking that requires direct public leadership.

Public-private partnerships, like the Manhattan Water Company (which became the Chase Manhattan Bank), were notably unsuccessful at solving the water problem. The successes, like the Croton Aqueduct that feeds Manhattan, required massive spending and subsidy. In 1900, America’s cities were spending as much on water as the federal government spent on everything except for the military and its pensions.

Today, the average commute time in Mumbai is 47 minutes, which is 20 percent higher than that for New York and 88 percent above the United States average. This high number is all the more remarkable because so many poorer Indians live in their shops. In Mumbai, a 10-mile trip downtown can easily take 90 minutes, as an overwhelming abundance of cars, auto-rickshaws and even bullock-drawn kerosene carts slow one’s commute. The train system is fast, but deadly, as thousands die each year in Mumbai alone, either run over or pushed out of moving trains.

Mumbai’s transport problems require both more infrastructure and congestion charges. Unless people pay for access, roads will continue to be badly clogged. Singapore pioneered congestion charging in the 1970s, when it was a developing city-state, and its roads have remained open ever since. The best part of clearing the roads is that safer, faster buses can provide mobility for poorer Indians.

While Mumbai has failed to provide open streets or clean water, it has engaged in some of the most draconian land use planning on the planet out of a quixotic, and a mistaken, desire to limit growth and imitate the worst features of English urban planning.

Since the 1960s, the city has enforced rules that restrict building space in core downtown areas to less than 1.33 times land area. These regulations keep Mumbai artificially low, and increase congestion.

Instead of traveling vertically in elevators, people must travel horizontally on crowded roads. The taller buildings that are being built have plenty of land around them, to accommodate these land use rules, which limits the development of Mumbai as a pedestrian city. By allowing more building, the city’s property tax rolls would increase, which would make it easier to finance investment in water and transportation infrastructure.

Why did America’s 19th-century cities, corrupt as they were, manage growth better than many developing cities today?

One reason is that power was vested in city machines that were voted out when they screwed up too badly. With the exception of Delhi, India’s cities are generally governed by states that are generally dominated by rural voters. In the words of the great Tammany sage, G.W. Plunkitt: India’s cities are “pie for the hayseeds.”

I suspect that the cities of India won’t get the reforms they need until they are turned into independent city-states with governments that are accountable to their urban populations

Saturday Night Video Post

This is a great song and video. For some reason, it makes me want to go to Italy...

http://www.youtube.com/watch?v=hIq06EXMNn4

Tired of "poor" Detroit stories

For anyone who doesn't already know, I grew up in the Detroit area and went to the University of Michigan. While I have been gone for over 10 years now and am now a bit out of touch on the local scene, Detroit will always be "home" for me.

I am so incredibly tired of all these stories where everyone feels sorry for Detroit. And the one below is one of the dumbest I have read - the idea of turning Detroit into another brain dead "yuppie" town is about as stupid and ridiculous of an idea as I have heard. Why don't we turn the entire United States into a huge version of SoCal where the entire economy revolves around refinancing mortgages, making movies and teaching each other yoga?

We all know what happened to Michigan (and more broadly to the Rust Belt) over the last 40 years and nobody has any delusions over where the area is now. While the economy will eventually get better and even the auto industry should rebound somewhat, clearly there needs to be a new direction. So let's get it over the past (one of the few times you will ever hear me say that) and look to the future.

I am going to go out on a limb and make a radical suggestion on what needs to happen to "save" Michigan. I hope that I don't come off like John Mauldin with some asanine suggestion like having foreigners pay $200,000 to come live in Michigan - sorry tangent.

To create a sustainable new industry that adds value and brings in investment, there needs to be a true competitive advantage which Michigan can offer. What is that advantage: fresh water - something that is in shortage in 35 states and countless countries globally (including India and China).

Here are my thoughts:

Break the Great Lakes protection act that was signed last year by the U.S. and Canada which banned the sale of water from the Great Lakes. I don't say this because I hate the environment, on the contrary I consider myself an amateur environmentalist (just ask me my views on surface parking lots).

There are a lot of blogs and research websites that are dedicated to this very issue (here is a good one: http://www.glelc.org/blog/water-and-economic-development/) so I won't get into this aspect any further.

They should look to begin selling fresh water by pumping or shipping water throughout the U.S. and possibly even globally. Over the next 30 years, water scarcity is going to be one of the biggest issues in the western U.S. and in many parts of emerging Asia (not to mention places like Africa where water shortages have already reached critical levels).

Yes, I realize that this is going to have an impact on the local environment eventually, but I have read studies that the Great Lakes could supply U.S. water needs for like 200 years before materially impacting the ecosystem of the lakes. Even if that number is 70 years instead of 200 years - the cashflow would help solve an economic situation that is at a critical tipping point for not just Michigan, but the entire Great Lakes basin (from Wisconsin to Buffalo, NY) and even Canada where Ontario is suffering from the fallout of the global collapse in industrial production.

Also, when you look at it from a humanitarian standpoint where people all of the world are going to suffer from lack of access to clean, potable water - to me its a no-brainer.

And here is the beauty of it, you take the cashflow from the sale (and don't forget the jobs that would be created in the development of the water distribution infrstructure) and invest it into making Michigan, and the entire region, into a clean water technology hub. You can provide subsidies and incentive for companies that do research and production in water technology (everything from cleaning up poluted water sources to replenishing depleted aquifers and advanced desalination techniques) to set up in the area and hopefully create some critical mass.

Sale of water technology would create a booming export sector for the next 30 years or longer due to the anticipated U.S. and global demand for such technology. And the areas that need the most water (Middle East, China and India) are the countries that are developing the fastest and (in the case of the Middle East and China) have the money to pay for it. To be honest, this is something for the local governments to think about even if they don't want to sell the water to fund the investment.

My idea might suck but its better than self-pity and much better than becoming a center for teaching yoga.



"Poor Detroit Story": GM Bankruptcy May Say 'No Reason to Stay' to Detroit Residents

June 3 (Bloomberg) -- General Motor Corp.’s bankruptcy is the last thing Detroit and the state of Michigan need.
Michigan already has lost 780,000 jobs this decade, the most of any state. Its April unemployment rate of 12.9 percent was the highest in the country.

The fourth-largest U.S. city for four decades starting in the 1930s, Detroit now ranks 11th. Its population of 916,952 is less than half the peak of 1.85 million in 1950.

Now, with 6 of the 12 plants on GM’s bankruptcy hit list located in the state, Michigan and Detroit are bracing for what may be an accelerated exodus of people and jobs.

“People have no job, no home, no credit and no reason to stay,” said Bob Daddow, deputy executive of Oakland County in suburban Detroit, which expects to lose one-third of its property-tax revenue from 2007 to 2011. “We’re very much still on a downward spiral and we haven’t hit bottom yet. I don’t see anything that will be good with the bankruptcy of GM.”

One-third of the population of Detroit, GM’s hometown, lives in poverty. That’s the most of any U.S. city with more than 250,000 people and almost triple the national rate. Public schools graduate 32 percent of their students, according to a study by Michigan State University, compared with the national average of 72 percent.
‘Middle-Class Bind’

With rising white-collar job losses, the pain is seeping into the suburban ring surrounding the city, said Kevin Boyle, a Detroit native who won the National Book Award for an account of race relations in the city in the 1920s. The suburbs have a population of 3.5 million.

“It’s a terrible middle-class bind,” Boyle said. “It’s the entire state, certainly the entire metropolitan area.”
The contrast with the Detroit of five decades ago is stark. In those years, residents flowed into the area from the south and rural Michigan and landed good-paying jobs in Detroit’s factories without having more than a high school diploma.
“You were instantly vaulted into the middle class,” said Mike Smith, director of the Walter Reuther Library of Labor and Urban Affairs at Wayne State University in Detroit.

The bankruptcies of GM and rival Chrysler LLC, in nearby Auburn Hills, may doom the chance of any return to the prominence and prosperity Detroit once enjoyed as the world’s motor capital, said former autoworker Sean McAlinden, now an economist for the Center for Automotive Research in Ann Arbor, Michigan.

Stempel’s Experience

GM’s Michigan employment has plunged to 47,330 today from 482,000 in 1978, according to figures compiled by the center. Even if GM and Chrysler successfully reorganize under Chapter 11, their bankruptcies will result in the loss of 179,400 U.S. jobs by next year, including 35,695 in Michigan, according to a May 26 study by the research group.
“They’ve been permanently hobbled,” McAlinden said. “This is very humbling.”

“There will be a lot of grief and hard times in Michigan,” said former GM Chairman Bob Stempel, who was ousted in a boardroom coup in 1992. His time at GM was marked by large losses and job cuts, but today is much worse, Stempel, 75, said.

“I closed 18 assembly plants,” he said. “You never get over that. You worry for the communities and feel for the people.”

Detroit has tried to broaden its economic base by attracting high-tech firms and movie producers and building three casinos. The efforts have had limited success. Receipts at the casinos are falling, leading the Greektown Casino in downtown Detroit to file for bankruptcy last year.

Overcoming the Image

“There have been a lot of attempts to diversify the economy,” said Daddow of Oakland County, which is going after companies that make batteries for electric cars. “But we’re losing jobs by the thousands and only bringing them in by the hundreds.”

Luring new employers will require overcoming Detroit’s image as a city in decline, scarred by social problems and corruption, said Dennis Archer, Detroit’s mayor from 1994 to 2001. Kwame Kilpatrick, the mayor who followed Archer, went to jail last year after admitting he lied in a civil trial about an affair he had with his chief of staff.

“The city of Detroit faces enormous challenges,” said Archer, who is now chairman of the Dickinson Wright law firm in Detroit. “The economic challenges were compounded by a mayor who resigned in disgrace.”

On May 5, Detroit voters elected Dave Bing, former star of the National Basketball Association’s Pistons, as their new mayor. After leaving the NBA, Bing, 65, founded a steel company that today has about 500 workers. Spokesman Bob Warfield said the mayor wasn’t available to comment.

‘Welfare Queen’

“Immediately, his status as a professional athlete as well as a successful business person who is widely respected begins to help change the image of the city,” Archer said of Bing.

Detroit’s image is linked to its signature industry, which has taken a beating in the national discourse over bailouts and auto chief executive officers flying corporate jets to Washington last year to ask for financial aid to survive.
“We’re being treated like a welfare queen,” said McAlinden. “I don’t know how you get over that.”

Detroit and Michigan should work to transform from a low- education economy dependent on auto-factory jobs to a diversified, knowledge-based economy, according to a study co- authored by University of Michigan senior researcher Don Grimes.

Pittsburgh Example

“You have to recognize that manufacturing is not going to solve your problems,” said Grimes, who worked at a Ford factory in the 1970s. “It’s a mindset that says what we have to be is a yuppie community, attractive to educated people, particularly young people.”

He cites as an example Pittsburgh, which he says successfully transformed itself into a medical center after the steel industry collapsed.

The GM bankruptcy may be the turning point that forces the region to get on with redefining itself, said Diane Swonk, chief economist with Mesirow Financial Inc. in Chicago.

“Detroit is finally having the funeral they’ve been waiting for and they can put it to rest and start rebuilding,” said Swonk, a Detroit native whose father worked for GM for 35 years.

Cocaine Dealers Demanding To Be Paid In Gold?

Quick lunchtime post – Don’t laugh at this. Many of these organizations are highly sophisticated financially and have substantial “grass” root economic information available to them. Pardon the pun.

I saw a study 3 or 4 years ago when international drug cartels starting demanding payment in Euros instead of the old standard U.S. dollars. It preceded a multi-year decline in the value of the USD.


Dealing gold in the Dominican Republic
Forget warnings from the IMF, the OECD and George Soros. You know your currency is well and truly down the swanny when even drug dealers are refusing payment in it.
In a report entitled US Gold, Going, or Completely Gone? Rob Kirby, forensic analyst at Kirby Analytics, says almost 3,000 metric tonnes of gold compounds were exported from the US in 2008."
Paul Mylchreest, of the Thunder Road Report, notes that a "very suspicious" 174 tonnes of gold compounds were exported to the Dominican Republican – "that well known hub of the world gold trade".
"Maybe these gold compounds really are used in gold paint and that artist who normally puts colourful tarpaulins around islands and buildings has painted the whole of the Dominican Republic gold," Mylchreest ponders. "I'll go and check Google Earth."
But, he reckons the transformation of the Dominican Republic into a key staging post in the cocaine trade between South America and the US, is a far more likely.
"Wouldn't it be interesting if drug smugglers have seen the writing on the wall for the paper dollar and will now only accept payment in gold bullion?"