Peak Oil is You
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Page added on March 18, 2011
When the Lights Go Out
The first three articles in this series, Part I – The Math is Different at the Top, Part II – Financial Threats to Power, Part III – Will Water Set the World on Fire, discussed the impacts of financial deterioration and ecosystem degradation (specifically water-based) on the ability of financial elites to retain economic and political power through centralized, global institutions.
A majority of the populations in the developed world or strategically critical countries (India, Pakistan, China, etc.) will be traumatized by the ongoing destruction of financial wealth, as well as water resources necessary for agriculture and household consumption (and, ironically, industry as well). Many of these locations can be considered “central hubs” of our global network civilization, and they must be coherently maintained for the overall system to have any meaningful structure (order).
It is possible, however, that these crises will be used by the elites as justification for further concentration of wealth and power in their hands, through military interventions, the abrogation of legal protections, the implementation of oppressive legislative/executive policies, etc. So far, the global financial crisis has worked like a charm towards furthering this goal, as evidenced by the immense transfer of wealth that has occurred in the developed world since 2008.
The imminent lack of adequate water resources in India, Pakistan and China, three countries with stockpiles of nuclear weapons, will be much more difficult for the elites to manage, but it is certainly not out of the question. China already has an authoritarian government in place that has been coerced to do the bidding of financial elites, and the same could be said of those in India and Pakistan, which are extremely corrupt and largely inept.
Billions of people throughout these regions may revolt in pure desperation, but we are still talking about a hungry, thirsty and disorganized mob facing off against a coordinated, well-equipped cadre of power elites, with every tool of oppression at their disposal (assuming relevant military commanders cooperate). That dynamic changes, however, when the issue of peak oil (decreasing global net energy availability) is factored into the equation, especially since our “central hubs” are net oil importers.
It is generally accepted that, since the discovery of fossil fuels about 150 years ago, at least half of all the crude oil in global reserves has been depleted. In the U.S. (largest per capita consumer of fossil fuels), this oil provided an energy return on energy invested (EROEI) of about 100:1 in 1930, but it is now less than 20:1 for imported oil and 10:1 for domestic (>85% of our crude oil is imported) [1]. No other alternative energy source (except hydroelectric) even comes close to these EROEIs, and some, such as biodiesel, are probably net energy losers. [2]
The technical aspects of peak oil production have been thoroughly documented by numerous analysts, and most of them conclude that it will become exponentially more difficult and expensive to maintain the current supply of global oil, especially when considering environmental concerns and the impact of the financial crisis. As credit markets deteriorate at an accelerated pace and financial economies renew their deflationary spiral, there will be much less capital investment in developing and maintaining oil production, refinery and transportation facilities.
An equally important fact is that oil exporting countries will continue to reduce their exports at an increasingly faster pace than the rate of production decline, as they require more oil for domestic energy consumption or as a part of other strategic policies. [3]. On top of that, resource conflicts generated between or within states could also take significant production capacity off-line and/or destroy already-extracted stores and related infrastructure (i.e. invasion of Iraq, potential invasion of Iran, Libyan “insurrection”, potential revolution in Saudi Arabia, etc.)
Note the Steeper Negative Slope (rate of decline) in Net Exports vs. Production
Note the Steeper Negative Slope (rate of decline) in Net Exports vs. Production
These analysts also conclude that alternative energy sources will not come close to offsetting the net energy declines created by increasing gaps in oil supply and demand, given the various physical (thermodynamic – EROEI, resource – water scarcity), financial (front-loaded costs of scaling up production) and political (greedy, short-sighted lobbies) constraints . [4]. The scope of systemic shifts that can be analyzed under the umbrella of peak oil is almost limitless, and many of these issues are highly inter-connected, but this article will, of course, only focus on its threat to a small group of financial elites in power. This tiny fraction of the population has benefited the most from gains in net energy and the global oil trade, and they stand to lose the most from its collapse as well.
The U.S. Military (Department of Defense) is the largest single institutional consumer of energy in the world, and more than 80% of its energy budget was spent on oil in 2008. It relies on oil for almost all of its critical functions, from transporting its troops to providing them with food, toothpaste and toilet paper, as well as the manufacture of weapons and armor, among other things. This institution, combined with a network of major financial institutions and a few dozen primary defense contractors (Boeing, Lockheed Martin, Blackwater (aka Xe), etc.), represent the core of global elite power structures and their most valuable mechanism of oppression.
U.S. soldiers are already some of the most over-worked and under-paid employees in the developed world, and human beings can only take so much abuse before their loyalty to an abstract concept gives way to basic needs and expectations. Still, just as discretionary spending freezes do not affect “defense spending”, we can expect that oil rationing will divert large amounts of energy away from industry, transportation and possibly agriculture towards the Pentagon. In addition, the U.S. military has already positioned itself in strategic locations near the world’s largest oil reserves, and will most likely use the rapidly progressing unrest in Middle Eastern nations to further justify expansion of this presence.
But, how far can this over-reaching logic carry the elites in power? Zbigniew Brzezinski, National Security Advisor to President Carter and notorious geopolitical strategist for the U.S., has accurately analogized the expansion of financial hegemony to a game of Chess. The players who take a hard bee-line for the opponents’ major pieces make themselves acutely vulnerable and are bound to eventually suffer defeat. According to Brzezinski, this vulnerability takes the form of a “global political awakening”, in which populist sentiment overwhelms the domination of power [5]
America needs to face squarely a centrally important new global reality: that the world’s population is experiencing a political awakening unprecedented in scope and intensity, with the result that the politics of populism are transforming the politics of power. The need to respond to that massive phenomenon poses to the uniquely sovereign America an historic dilemma: What should be the central definition of America’s global role? [6]
By “uniquely sovereign”, he means a country that is sovereign as a small group of powerful people administering its policies, not as a democratic nation. What Brzezinski failed to recognize, however, was that these people no longer have the luxury of carefully crafting globalist policies in resource-rich regions, as he did with the Mujahideen in Afghanistan and the Shah in Iran [7], due to peak finance and oil.
They have created an environment in which their only option to move forward is brute force, and it is simultaneously the worst option. In the process of deploying military hardware to secure critical resources such as oil, significant portions of these resources will be destroyed and increasing resistance will be met. Brzezinski also ignored the fact that “populism” would not be isolated to the system’s developing periphery, but would rapidly spread to its center.
The recent events in Japan provide a vivid example of how our world’s central hubs are extremely mal-adapted to energy scarcity. Here is a country that has been in a zombie financial state for two decades after a credit implosion in the 1980s, but could still boast that it was gradually weaning itself off of coal and imported oil for energy and substituting natural gas and uranium instead. In 2008, when it was still the second-largest economy in the world (now third-largest), Japan generated almost 40% of its electricity from nuclear power. [6].
A record-breaking, yet entirely predictable earthquake (and resulting tsunami), however, has led to severe complications at three of its nuclear power plants (Stoneleigh provides an excellent analysis of the situation here at her The Automatic Earth), which may reverse years of “progress” in its nuclear industry, and leave tens of millions of people without power for at least months. [8]. All of a sudden, access to increasing amounts of mined coal and imported oil appear to be more important than ever, but such resources no longer exist. The extent of systemic physical and economic damage resulting from this event is yet to be seen, and is most likely being drastically under-estimated by the mainstream at this point.
While experts are already predicting this event to be one of the “costliest natural disasters on record”, it was no more “natural” than the BP Deep Water Horizon oil spill at a practical level. The staggering consequences are entirely a function of humanity’s relentless march towards increasing energy consumption, economic growth and global complexity. As Richard J. Samuels, MIT’s Director of the Center for International Studies, put it in an interview with CNN:
Question: Why did Japan so readily turn to nuclear power when the country experienced the terrible effects of nuclear radiation when it was bombed during World War II?
Samuels: It’s a good question, but it’s a fairly easy one to answer. Despite that history, Japan is resource poor. And its resource poverty trumped its unpleasant history with nuclear radiation. That is, Japan knew that it would need more resources if it were going to transform itself into a global powerhouse. And it had no oil. It was running out of coal and there was no liquefied natural gas in the 1950s.
In fact, the critical nuclear situation in Japan is a microcosm of the critical global situation that will erupt over the next five or ten years, if not sooner. The risk to Japanese citizens is that radioactive isotopes will leak outside of the nuclear containment facilities, into the atmosphere and then into their bodies, where they will endogenously (without external interactions) release large amounts of harmful energy (to living beings) as they decay from unstable chemical arrangements into stable ones (the probabilistic rate of collective decay is predictable, but the decay of individual isotopes is not). [9], [10]. This process of release is a dynamic fact of nature, and one that occurs at some of the smallest and largest scales of the Universe, as well as every scale in between.
The sad truth is that tens of thousands of people could end up dying from an earthquake, tsunami or exposure to nuclear radiation, and the financial elites would simply use those deaths to their material advantage, just as they did after Chernobyl in the Soviet Union, Hurricane Katrina in New Orleans or last year’s earthquake in Haiti. Energetic releases on such scales occur very frequently in human society and nature, and our socioeconomic systems, while increasingly vulnerable to them, have so far absorbed them in stride.
Corporate media pundits are simultaneously talking about how tragic the disaster in Japan has been, and how it could also provide an opportunity for renewed economic growth through the rebuilding of its infrastructure. This latter claim is obviously nonsense to anyone who thinks about it for more than two seconds, but it reflects the fact that power elites are not at all shaken by the consequences of this event so far. They are actually benefitting from the “ratings” it generates in corporate media, and stand to benefit much more from financing the rebuilding of homes, schools, roads, factories, etc.
So what will it take to shake this arrogant sense of invincibility out from the consciousness of elites? It could be systemic financial deterioration, water scarcity, other environmental disasters or a combination of such events, but as mentioned throughout this series, it is quite possible that global structures of power will adapt to all of these things. However, peak oil represents an energetic release generated in the very heart of global human civilization, the industrial economy, which will spread through all of its extremities, up its spine and into its brain.
When tens of millions of people in the developed world are forced to live without access to basic electricity or fuel for transportation, along with any other expected luxuries, no amount of whitewashing or clever propaganda will dull the systemic shock. Television ratings won’t soar, because consumers of entertainment will have neither the ability nor desire to watch themselves suffer in real-time. All bets are off when the energy finally stops flowing and the lights go out, and, right now, the financial elites are running the biggest, most complex bets on the table.
Behind Japan’s escalating nuclear crisis sits a scandal-ridden energy industry in a comfy relationship with government regulators often willing to overlook safety lapses. Leaks of radioactive steam and workers contaminated with radiation are just part of the disturbing catalog of accidents that have occurred over the years and been belatedly reported to the public, if at all. In one case, workers hand-mixed uranium in stainless steel buckets, instead of processing by machine, so the fuel could be reused, exposing hundreds of workers to radiation. Two later died.
“Everything is a secret,” said Kei Sugaoka, a former nuclear power plant engineer in Japan who now lives in California. “There’s not enough transparency in the industry.” Sugaoka worked at the same utility that runs the Fukushima Dai-Ichi nuclear plant where workers are racing against time to prevent a full meltdown following Friday’s 9.0 magnitude quake and tsunami. In 1989 Sugaoka received an order that horrified him: edit out footage showing cracks in plant steam pipes in video being submitted to regulators. Sugaoka alerted his superiors in the Tokyo Electric Power Co., but nothing happened. He decided to go public in 2000. Three Tepco executives lost their jobs.
The legacy of scandals and cover-ups over Japan’s half-century reliance on nuclear power has strained its credibility with the public. That mistrust has been renewed this past week with the crisis at the Fukushima Dai-Ichi plant. No evidence has emerged of officials hiding information in this catastrophe. But the vagueness and scarcity of details offered by the government and Tepco — and news that seems to grow worse each day — are fueling public anger and frustration.
“I can’t believe them,” said Taketo Kuga, a cab driver in Tokyo, where low levels of radiation was observed Tuesday, despite being 140 miles (220 kilometers) away from the faulty plant. Kuga has been busy lately driving to airports and train stations people eager to get out and flee southward. And it unsettles him the information about radiation is all over the Internet, hours before officials make their announcements. “I don’t feel safe,” he said. Tokyo Electric Power Co. official Takeshi Makigami says experts are doing their utmost to get the reactors under control. “We are doing all that is possible,” he told reporters.
Worried that over-dependence on imported oil could undermine Japan’s humming economy, the government threw its support into nuclear power, and the industry boomed in profile and influence. The country has 54 nuclear plants, which provide 30 percent of the nation’s energy needs, is building two more and studying proposals for 12 more plants. Before Friday’s earthquake and tsunami that triggered the Fukushima crisis and sent the economy reeling, Japan’s 11 utility companies, many of them nuclear plant operators, were worth $139 billion on the stock market.
Tepco — the utility that supplies power for Japan’s capital and biggest city — accounted for nearly a third of that market capitalization, though its shares have been battered since the disasters, falling 65 percent over the past week to 759 yen ($9.6) Thursday. Last month, it got a boost from the government, which renewed authorization for Tepco to operate Fukushima’s 40-year-old Unit 1 reactor for another 10 years.
With such strong government support and a culture that ordinarily frowns upon dissent, regulators tend not to push for rigorous safety, said Amory Lovins, an expert on energy policy and founder of the Rocky Mountain Institute. “You add all that up and it’s a recipe for people to cut corners in operation and regulation,” Lovins said.
Competence and transparency issues aside, some say it’s just too dangerous to build nuclear plants in an earthquake-prone nation like Japan, where land can liquefy during a major temblor. “You’re building on a heap of tofu,” said Philip White of Tokyo-based Citizens’ Nuclear Information Center, a group of scientists and activists who have opposed nuclear power since 1975. “There is absolutely no reason to trust them,” he said of those that run Japan’s nuclear power plants.
Japan is haunted by memories of past nuclear accidents.
- In 1999, fuel-reprocessing workers were reported to be using stainless steel buckets to hand-mix uranium in flagrant violation of safety standards at the Tokaimura plant. Two workers later died in what was the deadliest accident in the Japanese industry’s history.
- At least 37 workers were exposed to low doses of radiation at a 1997 fire and explosion at a nuclear reprocessing plant operated in Tokaimura, northeast of Tokyo. The operator, Donen, later acknowledged it had initially suppressed information about the fire.
- Hundreds of people were exposed to radiation and thousands evacuated in the more serious 1999 Tokaimura accident involving JCO Co. The government assigned the accident a level 4 rating on the International Nuclear Event Scale ranging from 1 to 7, with 7 being most serious.
- In 2007, a powerful earthquake ripped into Japan’s northwest coast, killing at least eight people and causing malfunctions at the Kashiwazaki Kariwa nuclear power plant, including radioactive water spills, burst pipes and fires. Radiation did not leak from the facility.
Tepco has safety violations that stretch back decades. In 1978, control rods at one Fukushima reactor dislodged but the accident was not reported because utilities were not required to notify the government of such accidents. In 2006, Tepco reported a negligible amount of radioactive steam seeped from the Fukushima plant — and blew beyond the compound.
Now with the public on edge over safety, Tatsumi Tanaka, head of Risk Hedge and a crisis management expert, believes the government would find it difficult to approve new plants in the immediate future.
Tanaka says that, true to Japan’s dismal nuclear power record, officials bungled the latest crisis, failing to set up a special crisis team and appoint credible outside experts.Tokyo Electric Power Co., regulators and the government spokesman have been holding nationally televised news conferences, sometimes several a day, on the latest developments at the Fukushima plant.
But the reactors have been volatile, changing by the hour, with multiple explosions, fires and leaks of radiation. The utility, regulators and government spokesmen often send conflicting information, adding to the confusion and the perception they aren’t being forthright, Tanaka says. “They are only making people’s fears worse,” he said. “They need to study at the onset what are the possible scenarios that might happen in about five stages and then figure out what the response should be.”
Tokyo Could Face Broad Blackouts
by Takashi Nakamichi – Wall Street Journal
Japan Energy and Trade Minister Banri Kaieda said Thursday there may be broad power blackouts in the Tokyo area Thursday if electricity usage isn’t cut below levels seen earlier in the day. His statement came as Tokyo Electric Power Corp. continues to wrestle with bridging a supply gap of up to 25% following the earthquake and subsequent shutdown of two nuclear power plants in northern Japan on Friday. He also said that unused thermal power plants must be put back into operation to fill the current gap as quickly as possible.
Tokyo Electric has implemented rolling blackouts in the region to help cover the shortfall, but Electricity Conservation Promotion Minister Renho called for further efforts to save power. In response, East Japan Railway Co., the main railway operator in the Tokyo area, said it would further reduce its train services to save on power. Previous cutbacks by the railroad along with other local rail systems have created havoc for rush-hour commuters in Tokyo for much of the week, with service levels as low as 20% of normal.
Nuclear crisis: ‘Chain reaction could restart’
by New Scientist
1820 GMT, 16 March 2011
Michael Marshall, environment reporter
The situation at Japan’s Fukushima Daiichi nuclear power plant has become extremely unnerving. The Tokyo Electric Power Company has now admitted that the spent fuel rods could go critical – that is, a nuclear chain reaction could restart.
We have known since yesterday that the reactors themselves were coming under control, and that the biggest threat came from the spent fuel ponds, where the water level has fallen and temperatures have risen. That could lead to the stored fuel rods breaking open, releasing their radioactive contents. Kyodo News reports:
Tokyo Electric Power Co. said Wednesday it is considering spraying boric acid by helicopter to prevent spent nuclear fuel rods from reaching criticality again, restarting a chain reaction, at the troubled No. 4 reactor of its quake-hit Fukushima No. 1 nuclear power plant. “The possibility of recriticality is not zero,” TEPCO said as it announced the envisaged step against a possible fall in water levels in a pool storing the rods that would leave them exposed.
This is a real surprise. These ponds are a standard feature of nuclear reactors, and are typically designed to ensure that nuclear reactions cannot restart in the fuel rods. Among other things, the rods should be widely spaced in the pond.
The BBC explains that the company is now “caught between a rock and a hard place”:
If the fuel rods are dry and hot, there could be damage to the cladding and the release of light radioactive nuclei. To prevent that, you would want to inject water. But water on its own is a neutron moderator and would enhance the chances, however small, of criticality… [water] reduces the speed of the neutrons, meaning they can be captured by uranium nuclei in the fuel rods, inducing them to split. Without water, the neutrons travel too fast, and are not captured.
Hence the company’s proposal to add boric acid, which would mop up the neutrons and hopefully stave off the reactivation of a nuclear reaction. If this did happen, it does not mean there would be a nuclear explosion, but the rods would heat up, the zirconium cladding would probably split, and the likely release of radioactive material into the atmosphere would be significantly higher.
In the longer term, questions will be asked about how the ponds wound up in this condition, when it should have been completely avoidable.
Read more: “After the quake: Megaquake links and risky nukes”
1335 GMT, 16 March 2011
Michael Marshall, environment reporter
Radiation exposure is a major worry inside the 20-kilometre zone around the Fukushima Daiichi nuclear plant (Image: The Asahi Shimbun/Getty)
A helicopter that would have dropped water onto reactor 3 of the Fukushima Daiichi nuclear power plant in an attempt to prevent overheating has been forced to turn back by radiation. Nikkei reports:
The Ground Self-Defense Force helicopters were on standby to drop water on the reactor as it is feared the reactor may have released radioactive steam due to damage to its containment vessel.
The Japan Broadcasting Corporation (NHK) explains that the reactor’s storage pond, which houses 514 highly radioactive spent fuel rods, has been heating up:
White plumes started rising from the reactor on Wednesday morning. Tokyo Electric Power Company says the vapor was steam caused by water evaporating from the reactor’s storage pool for spent fuel rods, which is heating up. In an effort to avert the fuel rods’ exposure, a Self Defense Force CH47 helicopter took off from the Sendai base hauling a large container of water on Wednesday afternoon. But the plan was aborted after radiation levels above the plant were found to have largely exceeded 50 millisieverts – the maximum permissible for SDF personnel on a mission.
This is yet another problem for the beleaguered plant. Reuters notes that workers at the plant temporarily evacuated it yesterday because of the high radiation levels.
Yesterday the waste pond at reactor 4 was causing much of the concern. At one point it had heated up to 83 C, and experienced two fires. The fear is that water levels in the pond will fall so far that the spent fuel rods will become exposed, releasing a significant amount of radioactive material.
It now seems that attention has shifted back to reactor 3, which yesterday seemed to be coming under control, despite a
hydrogen explosion on Monday that damaged the outer building. The BBC now reports that smoke and steam were seen rising from the reactor yesterday, and that part of the containment system may have been damaged.That would make it the second reactor to suffer containment damage, hot on the heels of reactor 2. The containment systems contain steam that has previously been passed through the reactor core. It is therefore radioactive, so its escape means further radioactive contamination.
It seems reactor 3 now has both a damaged containment system, and an overheating spent fuel pond.
With the helicopter plan scrapped, at least for now, Kyodo News reports that an alternative method for cooling the ponds is being proposed:
The National Police Agency is considering using a special water cannon truck held by the Metropolitan Police Department to cool a pool storing spent fuel rods at the troubled No. 4 reactor at the Fukushima No. 1 nuclear power plant, police sources said Wednesday. The operation could start as early as Wednesday night, they said.
0630 GMT, 16 March 2011
Peter Aldhous, San Francisco bureau chief
With smoke rising and workers being temporarily evacuated, the latest news from the stricken Fukushima Daiichi nuclear plant presents a confusing and alarming picture.
According to Kyodo News, Japan’s chief cabinet secretary, Yukio Edano, told reporters on Wednesday morning local time: “There is a possibility that the no. 3 reactor’s containment vessel is damaged.”
If so, that means that containment vessels for two reactors at the site may now be compromised. Concern also surrounds spent fuel rods at the site’s No. 4 reactor, which has experienced a second fire, Kyodo News reports.
Edano’s comments followed TV pictures showing white smoke rising above the No. 3 reactor, as radiation levels at the plant’s entrance briefly reached 10 millisieverts per hour at 10:40 am local time – considered hazardous to human health.
The remaining workers were temporarily evacuated, according to The Guardian, although readings later fell to around 6 millisieverts per hour.
1745 GMT, 15 March 2011
Michael Marshall, environment reporter
It looks like the damaged nuclear reactors at Japan’s Fukushima Daiichi plant are being brought under control. But another threat is coming to the fore: storage areas – cutely referred to as ponds – full of spent fuel rods.
Temperatures have risen in three of the ponds, with one of them coming close to boiling point. That means the radioactive material trapped in the ponds could escape into the atmosphere, contaminating the region far more than the relatively small amount of radioactive material that has escaped so far.The pools are housed on the top floors of the reactor buildings. Spent fuel rods are transferred to them as soon as they come out of the reactor itself, and are kept under water to cool them down and trap the radioactive material within them. Once they have cooled down enough, the rods are then transferred to outdoor pools for long-term storage.
It is the pools inside the reactor buildings that are causing the problem. Two of the reactor buildings – 1 and 3 – have lost parts of their roofs, thanks to the hydrogen explosions that have taken place over the last few days. While these explosions apparently did not damage the reactors within, they have left the pools exposed to the outside air.
However it is the pool over reactor 4 that currently poses the biggest threat. Kyodo News reported earlier today that water levels in the pool storing the spent fuel rods at the No. 4 reactor may have dropped, exposing the rods:
[TEPCO] said it has not yet confirmed the current water levels or started operations to pour water into the facility. Unless the spent fuel rods are cooled down, they could be damaged and emit radioactive substances. The government’s Nuclear and Industrial Safety Agency urged TEPCO to inject water into the pool soon to prevent heating of the fuel rods… Water temperature in the pool stood at 84 C as of 4 a.m. Monday, higher than the normal level of 40 to 50 degrees. Usually, the upper tip of the fuel rods is at a depth of 10 meters from the surface of the pool, it said.
The pond caught fire around 9:40 this morning (Japanese time), following another hydrogen explosion. It was extinguished, but is likely to have carried some radioactive material into the air.
The New York Times reports that the pools have not been cooled properly since Friday’s quake:
“The company, Tokyo Electric, has not been able to cool the spent fuel pools because power has been knocked out.”
And the BBC’s live coverage reported earlier that the company “may start pouring water from a helicopter over Fukushima Daiichi’s reactor four in the next few days, to cool the spent-fuel pool.”
The ponds above reactors 5 and 6, which were deactivated at the time of the quake and have so far caused no problems, have also warmed up though not as much as number 4.
Earthquake Prediction 2011 Jim Berkland – A Major Earthquake in North America Imminent
by
The chairman of the United States Nuclear Regulatory Commission gave a significantly bleaker appraisal of the threat posed by Japan’s nuclear crisis than the Japanese government, saying on Wednesday that the damage at one crippled reactor was much more serious than Japanese officials had acknowledged and advising to Americans to evacuate a wider area around the plant than the perimeter established by Japan.
The announcement marked a new and ominous chapter in the five-day long effort by Japanese engineers to bring four side-by-side reactors under control after their cooling systems were knocked out by an earthquake and tsunami last Friday. It also suggested a serious split between Washington and Tokyo, after American officials concluded that the Japanese warnings were insufficient, and that, deliberately or not, they had understated the potential threat of what is taking place inside the nuclear facility.
Gregory Jaczko, the chairman of the commission, said in Congressional testimony that the commission believed that all the water in the spent fuel pool at the No. 4 reactor of the Fukushima Daiichi Nuclear Power Station had boiled dry, leaving fuel rods stored there exposed and bleeding radiation. As a result, he said, “We believe that radiation levels are extremely high, which could possibly impact the ability to take corrective measures.”
If his analysis is accurate and Japanese workers have been unable to keep the spent fuel at that inoperative reactor properly cooled — it needs to remain covered with water at all times — radiation levels could make it difficult not only to fix the problem at reactor No. 4, but to keep workers at the Daiichi complex from servicing any of the other problem reactors at the plant.
Mr. Jaczko (the name is pronounced YAZZ-koe) said radiation levels may make it impossible to continue what he called the “backup backup” cooling functions that have so far helped check the fuel melting at the other reactors. Those efforts consist of using fire hoses to dump water on overheated fuel and then letting the radioactive steam vent into the atmosphere. Those emergency measures, implemented by a small squad of workers and firemen, are the main steps Japan is taking at Daiichi to forestall a full blown fuel meltdown that would lead to much higher releases of radioactive material.
Mr. Jaczko’s testimony came as the American Embassy in Tokyo, on advice from the Nuclear Regulatory Commission, told Americans to evacuate a radius of “approximately 50 miles” from the Fukushima plant. The advice represents a graver assessment of the risk in the immediate vicinity of Daiichi than the warnings made by the Japanese themselves, who have told everyone within 20 kilometers, about 12 miles, to evacuate, and those between 20 and 30 kilometers to take shelter.
Mr. Jaczko’s testimony, the most extended comments by a senior American official on Japan’s nuclear disaster, described what amounts to an agonizing choice for Japanese authorities: Send a small number of workers into an increasingly radioactive area in a last-ditch effort to cover the spent fuel, and the fuel in other reactors, — with water, or do more to protect the workers but risk letting the pools of water protecting the fuel boil away — and thus risk a broader meltdown.
The Japanese authorities have never been as specific as Mr. Jascko was in his testimony about the situation at reactor No. 4, where they have been battling fires for more than 24 hours. It is possible the authorities there disagree with Mr. Jascko’s conclusion about the exposure of the spent fuel, or that they have chosen not to discuss the matter for fear of panicking people.
Experts say workers at the plant probably could not approach a fuel pool that was dry, because radiation levels would be so high. In a normally operating pool, the water provides not only cooling but also shields workers from gamma radiation. A plan to dump water into the pool, and others like it, from helicopters was suspended because the crews would be flying right into a radioactive plume.
Mr. Jaczko’s analysis suggests that a potentially dangerous chain of events could unfold, as workers trying to cool the adjacent reactors at the facility could also be exposed to intolerable levels of radiation. If they, too, had to withdraw, the problem could worsen, as reactor cores were go uncooled and spent fuel pools run dry.
Earlier in the day, Japanese authorities announced a different escalation of the crisis at Daiichi when they said that a second reactor unit at the plant may have suffered damage to its primary containment structure and appeared to be releasing radioactive steam. The break, at the No. 3 reactor unit, worsened the already perilous conditions at the plant, a day after officials said the containment vessel in the No. 2 reactor had also cracked.
The possibility of high radiation levels above the plant prompted the Japanese military to put off a highly unusual plan to dump water from helicopters — a tactic normally used to combat forest fires — to lower temperatures in a pool containing spent fuel rods that was dangerously overheating at the No. 4 reactor. The operation would have meant flying a helicopter into the steam rising from the plant.
But in one of a series of rapid and at times confusing pronouncements on the crisis, the authorities insisted that damage to the containment vessel at the No. 3 reactor — the main focus of concern earlier on Wednesday — was unlikely to be severe. Yukio Edano, the chief cabinet secretary, said the possibility that the No. 3 reactor had “suffered severe damage to its containment vessel is low.” Earlier he said only that the vessel might have been damaged; columns of steam were seen rising from it in live television coverage.
The reactor’s operator, Tokyo Electric Power Company, said it had been able to double the number of people battling the crisis at the plant to 100 from 50, but that was before the clouds of radioactive steam began billowing from the plant. On Tuesday, 750 workers were evacuated, leaving a skeleton crew of 50 struggling to reduce temperatures in the damaged facility. An increasing proportion of the people at the plant are soldiers, but the exact number is not known.
The Pentagon said Wednesday that American military forces in Japan were not allowed within 50 miles of the plant and that some flight crews who might take part in relief missions were being given potassium iodide to protect against the effects of radiation. Tokyo Electric said Wednesday that some of those at the plant had taken cover for 45 minutes on site, and left water pumps running at reactors Nos. 1, 2 and 3.
There was no suspension of cooling operations, said Kazuo Yamanaka, an official at Tokyo Electric. The vessel that possibly ruptured on Wednesday had been seen as the last fully intact line of defense against large-scale releases of radioactive material from the stricken reactor, but it was not clear how serious the possible breach might be. The possible rupture, five days after a devastating earthquake and tsunami crippled the plant, followed a series of explosions and other problems there that have resulted in the world’s worst nuclear crisis since the Chernobyl accident in 1986.
The head of the Vienna-based International Atomic Energy Agency, Yukiya Amano, who is Japanese, said he would leave for Japan as soon as possible to assess the situation. The revised official assessment of the severity of the damage at the No. 3 reactor may have been intended to reduce some concerns about the containment vessel, which encloses the core, but the implications of overheating in the fuel rod pool at No. 4 seemed potentially dire.
There are six reactors at the plant, all of which have pools holding spent fuel rods at the top level of the reactor building. Reactors 4, 5 and 6 were out of service when the earthquake and tsunami struck, and there were concerns about the pools at 5 and 6 as well, and possibly those at the other reactors. At a hearing in Washington on Wednesday held by two subcommittee of the House Energy and Commerce Committee, Energy Secretary Steven Chu said, “We think there is a partial meltdown” at the plant.
“We are trying to monitor it very closely,” he said. “We hear conflicting reports about exactly what is happening in the several reactors now at risk. I would not want to speculate about what is happening.” He said that his agency had sent 39 people to the American Embassy and to United States consulates in Japan “with the skills, expertise and equipment to help assess, survey and monitor areas.” The department has also shipped survey equipment that can measure radiation levels from the air, he said.
The developments were the latest in Japan’s swirling tragedy since the quake and tsunami struck the country with unbridled ferocity last Friday. Emperor Akihito made his first ever televised appearance on Wednesday to tell the nation he was “deeply worried” about the nuclear crisis. International alarm about the nuclear crisis appeared to be growing, as several nations urged their citizens in Japan to head to safer areas in the south or leave the country. Prior advisories had largely been limited to simply avoiding nonessential travel. Germany urged its citizens to move to areas farther away from the stricken nuclear plant.
Earlier Wednesday morning, Tokyo Electric reported that a fire was burning at the No. 4 reactor building, just hours after officials said flames that erupted Tuesday had been doused. A government official at Japan’s nuclear regulatory agency soon after said that flames and smoke were no longer visible, but he cautioned that it was unclear if the fire had died out. He also was not clear if it was a new fire or if the fire Tuesday had never gone out.
‘Fukushima nuke crisis – Chernobyl on steroids’
by RT
UPDATE: A cascading nuclear disaster at the the Dai-ichi nuclear power plant in Fukushima still eludes control. By Wednesday morning in Japan, explosions had occurred in three reactors, and a fire had broken out in a fourth. At least one reactor containment has apparently been damaged, releasing a significant dose of radiation. In the Nos. 5 and 6 plants — previously thought to be of no concern — authorities detected a rise in temperature levels, leading them to report that they were keeping an eye on these reactors as well, according to the Wall Street Journal.
For several days, authorities have attempted to reassure the public. Now, they are pleading for help.
To get independent answers about the risks faced by people, GlobalPost turned to Arnold Gundersen, a 39-year veteran of the nuclear industry. Now chief engineer at Fairwinds Associates, he has worked as a nuclear plant operator and he served as an expert witness in the investigation into the Three Mile Island accident.
GlobalPost: Officials have said the possibility of a large-scale radiation release is small. Do you agree?
Arnold Gundersen: I think that the probability of a large scale release is about 50-50, and I don’t call that small.
GlobalPost: Why do you think that?
Gundersen: For several reasons. One, you’ve got three reactors involved. Two, you’re already picking up radiation on aircraft carriers a hundred miles away at sea, on helicopters 60 miles to the north, and in town. So clearly, as these plants become more and more difficult to control, it becomes quite likely that a containment now will have a gross failure. And a gross failure will release enormous amounts of radiation quickly.
GlobalPost: The New York Times is reporting that radioactive releases could go on for weeks or months. How concerned should we be about that? At what point does a reactor like this becomes less menacing?
Gundersen: The chain reaction has stopped. That happened in two seconds. But the radioactive isotopes are still decaying away. They’ll decay for at least a year. So you have to release the pressure from that containment pretty much every day. With releasing the pressure will come releasing radioactive isotopes as well.
So yes, the Times is right that every plant — there are now three or four of them — will be opening up valves every day to make sure the pressure is down. And there will be releases from these plants for at least a year.
GlobalPost: How much of a health threat is that?
Gundersen: Within 90 days, the iodine health risks will disappear, because that will decay away. But the nasty isotopes — the cesium and strontium will remain for 30 years. And they’re volatile.
After Three Mile Island, strontium was detected 150 miles away from the reactor. That ends up in cow’s milk and doesn’t go away for 300 years. The releases from these plants will last for a year, and will contain elements that will remain in the environment for 300 years, even in the best case.
If we have a meltdown, it will be even worse than that.
GlobalPost: The ultimate risk in any nuclear accident is that the heat can grow so intense that the steel containment vessel is ruptured, releasing a large amount of radiation. You say there’s a 50-50 chance of this happening. What kind of health effects can we expect?
Gundersen: First, it’s important to know that this steel containment is about an inch thick. It’s not some massive battleship of steel. The reactor is already open, because the pressure relief valves have to stay open.
On top of that, these containments have already breached. We saw iodine and cesium in the environment before the first unit exploded. When you see that, that’s clearly an indication that the containment has breached.
Now, is it leaking 1 percent a day? Probably. Is it leaking 100 percent a day? No. I think for the neighboring towns out to 2 miles, they won’t have anybody back in them for five years. Out to 15 miles, I doubt you’re going to see anyone back for six months. And that’s in the best case, without a meltdown.
If we have a meltdown, I don’t think anyone will be back within 20 miles for 10 or 15 years.
GlobalPost: What would happen if they did return?
Gundersen: There would be higher incidence of cancer. The groundwater would be contaminated. With a meltdown, you’re worried about surface contamination of everything within miles of the plant, and groundwater contamination as well.
GlobalPost: How far would the ground water contamination spread?
Gundersen: Chernobyl had a meltdown, and that groundwater wedge is gradually working its way toward Kiev, which is a very large city [about 80 miles away]. That groundwater contamination lingers for 300 years. It’s not something that’s easy to mitigate.
GlobalPost: That’s a serious issue in a country like Japan with a large population and a small land area.
Gundersen: That’s right.
GlobalPost: You mentioned that the containment vessels have already been damaged. It appears that officials are reporting the opposite. How do you know you’re right?
Gundersen: We’re seeing iodine and cesium in the environment. That’s an indication that the containments are leaking. Exactly how much they’re leaking it’s hard to say.
I can’t understand how officials can say that the releases are low, when they don’t have any instruments that are working. Their batteries have failed, and when the batteries fail, all of the instruments stop working. So it’s hard to determine what the radiation levels are, and what the pressure levels are.
The Japanese and the nuclear industry are heavily, heavily financially invested in this. My experience is that, after Three Mile Island and after Chernobyl, everybody said there wasn’t a problem, until there was a problem. So I really don’t put much faith in official pronouncements the first week of an accident.
GlobalPost: So the people who have access to information have a self interest in making that information look as benign as possible?
Gundersen: Yes. On top of that, the officials don’t want to provoke a panic. So there’s a financial long term interest to try to minimize the impact. The flip side of that is that in the process you lose transparency. There is no transparency right now. We’re dealing with second hand information.
I understand from one source that the second unit cannot be vented, because the vent is jammed. I don’t know if that’s true or not. I have one source, and I like to have two. But this accident hasn’t played out yet. It could clearly get worse before it gets better.
GlobalPost: When you say the venting system is jammed, does that mean that pressure will keep building up until something catastrophic happens?
Gundersen: Yes.
GlobalPost: That sounds bad. There have been explosions at two of the buildings where the reactors are housed. You used to operate nuclear reactors. Would the control rooms be affected by these explosions? And how do they continue controlling the reactors under these circumstances?
Gundersen: Yes. The control rooms have become almost uninhabitable. The operators would have to be in Scott air packs, because the ventilation failed. Otherwise they would be breathing contaminated air. The control room is very close to these reactors. Probably 200 feet away. I doubt there’s much being done in the control rooms. They’re contaminated, and the air is unfit to breathe. It’s very difficult to get anything done if you’re wearing an air pack and a bubble suit.
GlobalPost: So how do they release the pressure? Are they sending people to the reactor to manually do these things?
Gundersen: They’ll send someone out to manually open a valve. And then that person will go back out to manually close a valve. In a high radiation field, there are only so many trips you can make before you’ve exceeded what they call emergency limits. So these people are picking up very large doses in very short periods of time. For their personal health, you can’t send them out again.
So they’re running through the available number of operators to do these high risk maneuvers.
GlobalPost: Is it highly skilled work?
Gundersen: Yes.
GlobalPost: Do these doses endanger their health, or are they below thresholds that would cause a problem?
Gundersen: The probability of these workers getting cancer is dramatically increasing, because the doses they receive in a day are higher than what they get in a year. For every 250 rem received, there will be a cancer. That’s pretty well defined. So if one person picks up 2.5 rem, for every hundred people, one of them will get a cancer. That’s just a statistical crapshoot.
GlobalPost: How safe is Tokyo at this point?
Gundersen: The radiation is being diluted by the wind and spread out. Tokyo is a long way away. Germany is a long way from Chernobyl, and the ground in Germany is so contaminated that they are still prohibiting the hunting of wild boars, 25 years later.
But we don’t have a lot of accurate measures. There’s a U.S. aircraft carrier 100 miles away, and the workers on that aircraft carrier received in one hour the dose they would normally get in one month.
GlobalPost: Is there any risk that the radiation would reach American shores?
Gundersen: Oh it will. Chernobyl reached the U.S. The question is how much radiation? There’s not a lot of data to make that determination right now.
GlobalPost: Should people be concerned about food contamination?
Gundersen: Certainly in Japan they should.
I’ve gone out and bought potassium iodine pills, and I plan to take potassium iodine starting in about 10 days, just because I’m concerned about food contamination. That’s a personal choice right now. My experience says that it would be prudent to get potassium iodine pills and take them, to avoid any of the iodine that might come over. But there’s not a lot of data to support whether or not potassium iodine really helps.
GlobalPost: Is that something that you can buy in a health food store?
Gundersen: Yes, you can get these pills in health food stores and online, although I hear that they’re selling out.
Nuclear expert: U.S. should review worst case scenarios
by John Dillon – Reuters
The U.S. nuclear industry and regulators need to reexamine disaster planning and worst-case scenarios, especially in reactors such as the Vermont Yankee with the same design as the crippled plant at the center of the Japanese crisis, a top expert says.
Vermont Yankee and similar plants are vulnerable to a similar cascade of events as in Japan, where reactors were crippled after the massive earthquake, said Arnold Gundersen, a nuclear engineer who advises the Vermont legislature, the only U.S. legislature with nuclear plant oversight. The March 11 quake in Japan knocked out electric power needed for pumps used to cool the reactors. Back-up generators failed when they were flooded by the tsunami and emergency batteries ran out of power after eight hours, he said.
With no electricity to drive the pumps, the radioactive fuel at the Fukushima Daiichi Nuclear Power Station has dangerously overheated. “We’re not going to have a tsunami in the Connecticut River,” said Gundersen. But a power failure coupled with a flood could threaten the reactor by disabling pumps that draw cooling water from the river, he said.
“What we called a maximum credible accident last week is no longer maximum credible. We really need to go back and evaluate what really is the worst case,” Gundersen said. “I don’t think we’ve take a hard look at what the worst case is for Vermont Yankee’s flood issues.” The Japanese accident shows back-up emergency power supplies are inadequate as well, he said.
Vermont Yankee — a 39-year-old, 605-megawatt reactor on the Connecticut River in southern Vermont with a similar General Electric design as Fukushima Daiichi — relies on eight-hour batteries as did the Japanese plant, he said. “They always assume they can solve the problem in eight hours or less,” said Gundersen. “Of course, in Japan they can’t solve the problem in eight hours or less.”
Neil Sheehan, a spokesman for the U.S. Nuclear Regulatory Commission, said federal regulators will study the Japanese accident to improve safety at U.S. reactors. “There’s no question we’re going to be looking for lessons learned to come out of this,” he said. “Whether that would mean increasing battery power or some other measure it’s too soon to say,” he added.
The NRC recently decided to allow Entergy Corp’s Vermont Yankee to operate for another 20 years. But under state law, the plant needs approval from the legislature to run past March 21, 2012, making its fate uncertain. The state Senate in 2010 voted to shut the plant in 2012 due to pollution issues, though the full legislature has yet to vote on the issue. Yankee is lobbying for another vote, but legislative leaders say it is unlikely Vermont lawmakers will take up the issue again.
As the world’s attention remains focused on the nuclear calamity unfolding in Japan, American nuclear regulators and industry lobbyists have been offering assurances that plants in the United States are designed to withstand major earthquakes.
But the emergency plan for the Diablo Canyon nuclear plant on the California coast, which sits less than a mile from an offshore fault line, does not include a ready response for an accident triggered by an earthquake. Though experts warned from the beginning that the plant would be vulnerable to an earthquake, asserting 25 years ago that it required an emergency plan as a condition of its license, the Nuclear Regulatory Commission fought against making such a provision mandatory as it allowed the facility to be built.
As Americans absorb the spectacle of a potential nuclear meltdown in Japan — one of the world’s most proficient engineering powers — the regulatory review that ultimately enabled Diablo Canyon to be built without an earthquake response plan amplifies a gnawing question: Could the tragedy in Japan happen at home?
Experts who recall how the California plant came to be erected offer a disconcerting answer: Yes. And some are calling for more urgent government action to review safety at nuclear plants across the country. “What they’re displaying now is exactly what was wrong in the past with the nuclear establishment, which is that they didn’t have their priorities right,” said Victor Gilinsky, who served on the Nuclear Regulatory Commission during the Diablo Canyon debate and agreed with the call for greater attention to earthquakes in emergency plans. “They’re more concerned about the protection of the plants, and installation of further plants, than they are about public safety. The president should be saying, ‘I want every single plant reviewed.'”
Back when the California plant was being finalized in the mid-1980s, local activists and environmental lawyers sued the Nuclear Regulatory Commission in an effort to slow the project, arguing that the clear risks from earthquakes nearby required additional planning. The case made its way to the U.S. Court of Appeals in Washington, D.C., where a 5-4 majority — including current Supreme Court Justice Antonin Scalia and former Clinton independent counsel Kenneth Starr — ruled that earthquakes did not have to be included in the plant’s emergency response plans.
The underlying theory was that the plant’s design, which came after years of planning and geological studies, could withstand any foreseeable earthquake in the area — the same assumption that guided thinking in Japan. Emergency response plans at the Diablo Canyon plant still do not take an earthquake-induced nuclear release into account.
“What they’re saying is that there could be an earthquake, but in no way could it ever cause a radioactive release at the same time,” said Rochelle Becker, who led the San Luis Obispo, Calif., group that first sued the Nuclear Regulatory Commission over earthquake preparedness in the 1980s. “I’m pretty sure we now have evidence that it does.” A spokeswoman for the Nuclear Regulatory Commission confirmed that the emergency response plans at Diablo Canyon do not have an earthquake contingency plan because the commission is satisfied that the plant’s structure will be able to withstand an earthquake in the area — calculated as a maximum magnitude of 7.5.
But officials at Tokyo Electric Co., the operator of Japan’s stricken Fukushima Daiichi plant, said over the weekend that the strongest earthquake they had anticipated was much lower than the magnitude-9.0 quake that struck last Friday. “That’s a lesson that we ignore at our own peril, because we could be wrong, too,” said Joel Reynolds, the attorney who originally brought the case against the Nuclear Regulatory Commission and who is now a senior attorney with the Natural Resources Defense Council in California. “It is a story as old as science that we’re always learning new things. We’re always discovering the unexpected.”
Critics have raised particular questions about how a standard emergency response to a nuclear disaster could be complicated if it had been caused by an earthquake, where roads and other surrounding infrastructure would also be impaired. So far, the commission has not specifically recommended any changes to safety regulations or emergency response procedures at nuclear plants in the United States.
“All our plants are designed to withstand significant natural phenomena like earthquakes, tornadoes and tsunamis,” the commission’s chairman, Gregory B. Jaczko, said earlier this week. “We believe we have a very solid and strong regulatory infrastructure in place now.” He added that the commission would “continue to take new information and see if there are changes that we need to make with our program.”
Michael Mariotte, the executive director of the Nuclear Information and Resource Service, a group critical of the nuclear industry and the regulatory process, said the pushback on response planning reflects an environment where the industry is helped along by regulators. “That’s the logic behind a lot of our nuclear regulation, unfortunately, is that it’s designed to accommodate the operation of a plant, and not necessarily the protection of the public,” Mariotte said. “If they acknowledged that an earthquake occurred that damaged the plant, then they’re also acknowledging that an earthquake has damaged the transportation infrastructure, that you can’t get people out properly, that the plant doesn’t work, and then it can’t be approved.”
At the time the Diablo Canyon case was being litigated in the mid-1980s, the Nuclear Regulatory Commission and the electric utility looking to build the plant had been dealing with more than a decade’s worth of federal and state reviews for the facility. Federal regulators were comfortable with their seismic reviews of the remote coastal area between Los Angeles and San Francisco. Comments made during closed meetings, later released to the public, showed that some NRC commissioners were concerned that additional public hearings surrounding the emergency response plan and earthquakes would slow the process further.
“One of the things that I think makes me shy away often from hearings is because as soon as we hear the word ‘hearing,’ you see so much time elapse that it maybe over-influences one,” then-NRC Chairman Nunzio J. Palladino, who has since passed away, said at the time. “I do feel that at this late stage, requiring a delay while we wait for a hearing is not in the best national interest.”
When the case involving earthquake response was eventually litigated all the way to the federal appeals court in D.C., which ultimately sided with the Nuclear Regulatory Commission, the five-member majority noted that there had already been extensive review of seismic activity around the plant. “We can think of no potential natural or unnatural hazards, regardless of their improbability, that the Commission would not be required to consider,” failed Reagan Supreme Court nominee Robert Bork wrote in an opinion for the appellate court. “That is a prescription for licensing proceedings that never end and plants that never generate electricity.”
The four dissenting judges, including current Supreme Court Justice Ruth Bader Ginsburg, noted: “The very purpose of the exercise is to plan for the unthinkable eventuality that the design safeguards will not prevent an accident.” “It defies common sense to exclude evidence about the complicating effects of earthquakes from a proceeding dealing with how to respond to a nuclear accident at a plant located three miles from an active fault, a plant in which seismic concerns dominated the design and construction proceedings for well over a decade,” the justices wrote.
In recent years, the utility that operates Diablo Canyon, Pacific Gas and Electric Company, has recently found another fault line less than a mile from the plant after conducting research with the U.S. Geological Survey. The plant’s original design had accounted for a fault that was farther offshore — about three miles from the plant. The spokeswoman for the Nuclear Regulatory Commission, Lara Uselding, said the utility has not found evidence that the newly discovered fault line would pose a risk to the plant. The commission is currently reviewing the company’s geological report.
U.S. to send drones over damaged nuke plant
by CBS/AP
They’ve been used in the drug war in Mexico and to help fight the wars in Iraq and Afghanistan. Now, unmanned U.S. spy planes will be used over Japan to take a closer, safer look at the damaged Fukushima nuclear complex.
CBS News’ Harry Smith reports that the drones are equipped with infrared cameras, which will allow officials to look inside the complex and find the hot spots where there might be the most trouble.
Conditions at the plant deteriorated Wednesday, with surging radiation forcing Japan to order workers to temporarily withdraw from the plant. In response, the U.S. recommended citizens within 50 miles of it evacuate.
Other countries, including Australia and Germany, have issued more sweeping recommendations for their citizens, advising them to consider leaving Tokyo and other earthquake-affected areas. Tokyo, which is about 170 miles from the stricken nuclear complex, reported slightly elevated radiation levels Tuesday, though Japanese officials said the increase was too small to threaten the 39 million people in and around the capital.
The Pentagon said U.S. troops working on relief missions can get closer than 50 miles to plant with approval. Spokesman Col. David Lapan said the U.S. would review requests from the Japanese for assistance that would require troops to move within that radius, though no approval for such movement had been given since the more strict guidelines were enacted.
The Pentagon said troops are receiving anti-radiation pills before missions to areas where possible radiation exposure is likely.
With the arrival of three more ships to the massive humanitarian mission, there were 17,000 sailors and Marines afloat on 14 vessels in waters off Japan. Several thousand Army and Air Force service members already stationed at U.S. bases in Japan have also been mobilized for the relief efforts.
Airmen have been flying search and rescue missions and operating Global Hawk drones and U-2 reconnaissance planes to help the Japanese assess damage from the disasters. The operation is fraught with challenges, mainly how to continue to provide help amid some low-level releases of radiation from the facility, which officials fear could be facing a meltdown.
Weather also temporarily hampered some relief plans on Wednesday. Pilots couldn’t fly helicopters off the deck of aircraft carrier USS Ronald Reagan until late afternoon because of poor visibility. The 7th Fleet said 15 flights with relief supplies were launched from the eight-ship carrier group, about half as many as the 29 flights reported the previous day to deliver food, water, blankets and other supplies.
Several water pumps and hoses were being sent from U.S. bases around Japan to help at Fukushima, where technicians were dousing the overheating nuclear reactors with seawater in a frantic effort to cool them. The U.S. had already sent two fire trucks to the area to be operated by Japanese firefighters, said Cmdr. Leslie Hull-Ryde, a Pentagon spokeswoman.
Fukushima heroes: Not afraid to die
by Jim Axelrod – CBS
If the Fukushima nuclear plant’s crisis is not calmed soon, Japan will need more brave volunteers to battle it
Since the disaster struck in Japan, about 800 workers have been evacuated from the damaged nuclear complex in Fukushima. The radiation danger is that great. However, CBS News correspondent Jim Axelrod reports that a handful have stayed on the job, risking their lives, to try to save the lives of countless people they don’t even know. The exact number of workers is unclear and has been reported to be anywhere from 50 to 180.
Although communication with the workers inside the nuclear plant is nearly impossible, a CBS News consultant spoke to a Japanese official who made contact with one of the workers inside the control center. The official said that his friend told him that he was not afraid to die, that that was his job.
Cham Dallas, who led teams responding to the Chernobyl disaster, said that kind of response is not out of the normal for some workers in the nuclear energy sector. “(In) my experience of people in the action area of nuclear power is much like that,” Dallas said.
The workers are doing so amid decreasing but still dangerously high levels of radiation. On Wednesday, Japanese officials raised the legal limit on radiation for the workers from 100 millisieverts to 250. “The longer they stay the more dangerous it becomes for them,” said expert Margaret Harding. “I think it is a testament to their guts for them to say, ‘We’ll stay and if that means we go, we go.'”
If the contamination threat isn’t contained in a few weeks, finding enough workers willing to face the risks could become a crucial challenge. Dallas said he expects that in that scenario, the Japanese energy authorities may have to find volunteers willing to undergo similar dangers, which will be hard to do, but not impossible. Keep in mind they’d be volunteering to head into a place so potentially dangerous, that anyone within 20 miles of it was just asked to evacuate.
World energy crunch as nuclear and oil both go wrong
by Ambrose Evans-Pritchard – Telegraph
The existential crisis for the world’s nuclear industry could hardly have come at a worse moment. The epicentre of the world’s oil supply is disturbingly close to its own systemic crisis as the Gulf erupts in conflict.
Libya’s civil war has cut global crude supply by 1.1m barrels per day (bpd), eroding Opec’s spare capacity to a wafer-thin margin of 2m bpd, if Goldman Sachs is correct. Now events in the Gulf have turned dangerous after Saudi Arabia sent troops into Bahrain to help the Sunni monarchy crush largely Shi’ite dissent, risking a showdown with Iran. Russia’s finance minister Alexei Kudrin warned on Wednesday that the confluence of events in Japan and the Mid-East could push oil to $200 a barrel in a “short-lived” spike, which would snuff out global recovery.
While there has been no loss of oil output in the Gulf so far, the violent crackdown in Manama on Wednesday left four people dead and risks inflaming the volatile geopolitics of the region. The rout of protesters encamped at the Pearl roundabout had echoes of China’s Tiananmen massacre. The risk group Exclusive Analysis said such heavy-handed methods may provoke Iran to launch a proxy war by arming insurgents. This could rapidly cross the border, fuelling Shia irredentism in Saudi Arabia’s Eastern Province. Any threat to Saudi control over the 5m bpd Ghawar oil field nearby would be a global “game-changer”. “Much worse headlines can easily be imagined,” said Raza Agha from RBS.
Oil prices have fallen over recent days but it may not be long before the deepening nuclear crisis in Japan and Germany’s decision to shut down seven of its oldest reactors starts to spill over into oil and gas markets. The shutdown of 11 reactors in Japan has cut 10 gigawatts (GW) of power, forcing the country to import other fuels to keep its economy going. “We think they will need an extra 200,000 bpd of fuel oil and light crude, as well liquefied natural gas,” said Eduardo Lopez from the International Energy Agency.
The Fukushima reactors are write-offs. Japan’s local authorities are unlikely to permit other reactors to reopen for a long time. The closure of seven German pre-1980 reactors will cut energy supply by a further 6.2 GW, according to Daniel Brebner at Deutsche Bank. “Nuclear power has suddenly gone from being part of the solution for future green energy to a dangerous relic of the cold-war era,” he said. Germany will have to cover the shortfall by importing more gas and thermal coal, playing havoc with CO2 greenhouse targets.
Even if the world navigates today’s crisis without an energy shock, a more intractable long-term crisis is brewing. Several countries are already turning their backs on the “nuclear renaissance” and shelving plans for fresh reactors. This implies a need for substitutes that will further strain fossil fuel supplies and bring forward the long-feared energy crunch.
It is too early to tell how much of this week’s anti-nuclear rhetoric is posturing by politicians. Germany has imposed moratorium on renewal of 17 reactors. Switzerland and Taiwan are reviewing policy. China said on Wednesday that it was suspending approval of 25 reactors under construction. “We must fully grasp the urgency and importance of nuclear safety,” said the state council.
US Energy Secretary Steven Chu also asked Congress for $36bn in loan guarantees for a new generation of small modular reactors. He has the backing of Capitol Hill for now but support could evaporate if Japan’s containment vessels rupture. The world has 442 reactors, with 65 under construction. They generate 372 GW, covering 13.8pc of global electricity. The share is higher in the rich world: France 75pc, Belgium 52pc, Ukraine 47pc, Korea 35pc, Japan 29pc, the US 20pc, and the UK 18pc. In China it is just 2pc.
Output is expected to double over the next 20 years as the rising powers play catch up. Nuclear reactors are a core part of the supply mix needed to meet explosive demand for power from the industrial revolutions of China and India. Any slippage tightens the energy screw elsewhere, forcing greater reliance on coal before carbon capture and storage is viable. Much depends on whether shale gas fulfils its promise, or how soon we can achieve a quantum leap in solar technology, or exactly when the world hits “peak oil”, and at what price. The UK industry taskforce on peak oil fears the crunch will hit at 95m bpd within a decade.
Dr Euan Mearns at the Oil Drum said Fukushima has shattered democracies’ faith in the safety of nuclear power. If Japanese engineers had prevailed despite the worst that nature could muster, it would have vindicated the industry. “Alas, this is not the case. The future of the human global energy system has just changed course with potentially far reaching consequences for civilisation,” he said.
Japan’s legions of mom-and-pop currency traders are unwinding a favorite strategy, helping drive the yen higher as they try to limit losses and increase their cash holdings. Many retail investors, particularly in Japan, had put on highly leveraged trades involving selling the yen and buying higher-yielding currencies like the Australian dollar or the Brazilian real. But since the earthquake, the yen has soared, quickly turning the trades sour.
Investors have been buying yen as they bail out, helping add to the currency’s gains, according to market participants. Japanese retail customers account for such a large portion of spot yen trading—about 30% of daily volume, according to the Bank for International Settlements—that their moves can have a meaningful impact on the market. Traders at some firms say the trading helped send the Australian dollar down 3% against the Japanese currency Tuesday; the Brazilian real lost 1.5% against the yen and the Canadian dollar lost 2.3%. The U.S. dollar, meanwhile, lost 1% against the yen.
Some in the currency markets expect this shift to play out for weeks to come as Japanese investors exit holdings in Australia, New Zealand and Brazil and repatriate cash to Japan. These nations, along with Canada, Mexico and South Africa, had been popular destinations for Japanese investors because they offer much higher interest rates than is possible on Japanese bonds and savings accounts. Investors could use a so-called carry trade—borrowing cheaply in yen and pocketing the interest-rate difference.
“This is now unraveling,” said Brian Dolan, chief currency strategist at Forex.com, which caters to individual currency traders in the U.S. and Japan. Mr. Dolan says that there were still plenty of carry trades outstanding, “but we have likely seen a significant reduction in those trades.” Online retail trading volumes of yen-related currency pairs this week has been about 2.5 times greater than an average week, according to a person familiar with the matter.
Some investors may have been forced out of money-losing positions, traders say, while others may be trying to get ahead of what is now generally expected to be a stronger yen in coming weeks. They could also be scaling back on risky positions more broadly given the heightened level of uncertainty in the wake of the earthquake. And some investors may find themselves having to tap overseas savings to rebuild from the earthquake and tsunami. “When you had Japanese investors getting out of their higher yielding currency (investments) and bringing money home…all of these currencies saw significant moves,” said Douglas Borthwick, managing director at currency broker Faros Trading.
John Kicklighter, currency strategist at Forex Capital Markets, which operates an online-trading network FXCM.com, says the firm also saw clients buying yen as they closed out carry trades. The delayed reaction in the yen’s rise this week came as “people were better able to tally the financial implications of the crisis,” said Mr. Kicklighter. As the scope of the disaster became clear on Friday, traders and strategists scrambled to assess the impact. Almost immediately, the focus turned to the question of whether Japanese corporations would repatriate money, which in turn would lift the value of the yen. Others are focusing more on what Japanese individual investors will do.
Analysts at HSBC note that the biggest impact will be felt in currencies where trading is relatively thin, like the Australian dollar and Brazilian real. Japanese investors hold about $60 billion in Australian assets and $34 billion in Brazil, HSBC notes. In addition Japanese investors hold $15 billion worth of Australian “Uridashi” bonds, which are bonds denominated in a foreign currency and sold directly to individual Japanese investors, HSBC notes. “When you look at the data, $34 billion in Brazil and $60 billion in Australia, that’s a lot of money because the markets aren’t as liquid,” said David Bloom, currency strategist at HSBC.
Mr. Bloom says any repatriation of money is likely to build slowly. “There is usually a lag,” he said. “People are bewildered by a shock … and then you get your head together.” Faros’s Mr. Borthwick says the immediate impacts of repatriation will be clearest in the Australian, New Zealand and Canadian dollars, “which are the most liquid positions.” There will be more of a lag for Latin American holdings, he says. “Those tend to be more in structured products and will be taken off more in time.”
Mark Konyn, chief executive officer of money managers RCM Asia Pacific, says many Japanese investors have invested in leverage funds designed to juice the yields on high yielding currencies. “If those get unwound, it could be colossal,” he says.
Not everyone is convinced there’s going to be meaningful repatriation flows beyond short-term traders. Jens Nordvig, a managing director at Nomura Securities International Inc., said in a research note Tuesday that the vast majority of Japanese were unaffected by the disaster. So while some Japanese will have to tap their savings for rebuilding costs, the movement of money will be on the margin.
However, he does expect a temporary freeze in the flows of new money that had been heading out of the country to places like Australia and Brazil. “The outflows that had been persistently there are going to be absent and that’s yen-constructive,” Mr. Nordvig said.
U.S. housing starts slump 22.5%, approach record low
by Greg Robb – MarketWatch
New construction of U.S. housing units plunged in February, erasing a sharp gain in January and coming close to an all-time-low level. Starts fell 22.5% to a seasonally adjusted annual rate of 479,000, the Commerce Department said. This is just 0.4% above the record low of 477,000 units set in April 2009.
The decline in starts in February was the largest since March 1984. January starts were revised higher to a 618,000 pace from the 596,000 previously reported. The 18.4% jump in January was due to an 87.4% surge in apartment starts, which analysts attributed to special factors. As a result, economists were expecting a decline in February — but nothing close to the actual drop. Analysts polled by MarketWatch had forecasted starts to fall to a 570,000 rate.
U.S stock markets opened lower after the report, with shares of builders including Lennar and PulteGroup dropping around 2% each. Paul Dales, senior U.S. economist at Capital Economics, said that there is simply no need for housing starts given the excess supply of existing homes that are more attractive to buyers. With house prices falling again, home builders have little desire to boost construction, he noted.
A new constraint on starts are rising costs for building materials, Dales said in a research note. The National Association of Home Builders reported on Tuesday that its measure of builder confidence edged up in March.
Details in the data
Starts of single-family homes fell 11.8% to a 375,000 rate, while starts of multifamily units dropped 46.1% to 104,000. In the past year, starts are down 20.8%. Starts of single-family homes are off 28.8%, while starts of apartments and condominium units have plunged 54.8%. The number of homes under construction fell 1.2% in February to a record-low 424,000 annual rate, while the number of units completed rose 13.9% to an annual rate of 581,000.Starts fell across all four regions of the country, with single-family housing starts hitting a record low in the Midwest. Building permits fell 8.2% to a record-low seasonally adjusted annual rate of 517,000 in February. Building permits for single-family homes dropped 9.3% to a 382,000 rate. Many economists consider single-family permits to be the most important number in the government’s release.
Current-account gap
In a separate report, the Commerce Department said the U.S. current-account deficit, the widest measure of trade, narrowed to $113.3 billion in the fourth quarter, or 3.1% of gross domestic product, from $125.5 billion in the third quarter. The narrower deficit was accounted for by a decrease in the deficit on goods and services.The deficit is down sharply from the peak of 6.5% of GDP in the fourth quarter of 2005. But the deficit has been widening steadily after hitting a low of 2.4% of GDP in the second quarter of 2009. In a separate report, the Labor Department said the producer price index rose 1.6% in February while core prices, excluding food and energy, rose 0.2%.
A comprehensive settlement between U.S. authorities and banks over alleged abuses of mortgage servicing needs to be reached quickly to help the housing market heal, Treasury Secretary Timothy Geithner said on Tuesday. Geithner said such a settlement would allow the government to focus more directly on repairing the damage to the broader housing market and will help dispel the legal uncertainty plaguing mortgage lenders.
“It is very important that we try to bring this to bed as quickly as we can,” Geithner told the Senate Banking Committee. “I think all parties, not just the servicers, but the state AGs and the federal agencies have a strong stake in doing that.”
A group of 50 attorneys general and 12 federal agencies are probing bank mortgage practices that burst into public view last year, including the use of “robo-signers” to sign hundreds of unread foreclosure documents a day. The negotiators are struggling to reach a single agreement on financial penalties and higher standards for banks handling troubled home loans. A “global” settlement with the authorities would relieve a potentially large legal liability and reputational black eye for the banks, as they could face a myriad of lawsuits and fines without a universal agreement.
Negotiations have focused on the top U.S. mortgage servicers, including Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co and Ally Financial. John Walsh, a top bank regulator, said earlier on Tuesday that U.S. federal and state authorities still hope to reach a single settlement proposal they can present to the banks over alleged abuses. “We each have our own separate responsibilities and areas of jurisdiction, but to the extent possible we are trying to coordinate our actions,” Walsh, acting head of the Office of the Comptroller of the Currency, said at an American Bankers Association conference. “Whether this is possible remains to be seen.”
On March 3, state attorneys general sent banks aspects of a proposed settlement endorsed by some federal agencies but not the OCC or the Federal Reserve, the main banking regulators involved in the discussions. The 27-page document proposed changes to how the mortgage servicing industry operates and advocated reducing loan balances for struggling borrowers as a way to help them avoid foreclosure, a proposal banks have not supported in the past.
State and federal authorities continue to negotiate over the key aspect of any settlement: What fine or penalty banks will have to pay. At least some of the officials who endorsed the proposal sent out earlier this month have been pushing for a fine of about $20 billion, which would be used in part to help struggling homeowners. Critics of the disjointed settlement negotiations, including a group of House of Representatives Republicans, have argued the early proposal is an abuse of power that could harm markets. Speaking for OCC, Walsh said, “I can say that the actions we take — both remedial actions and penalties — will be based on the findings of examinations we conducted at the eight large national bank servicers.”
The early settlement proposal has the support of the U.S. Housing and Urban Development Department, the Justice Department, the Federal Trade Commission, and Treasury Department staff setting up the Consumer Financial Protection Bureau, according to Iowa Attorney General Tom Miller. Miller, who is heading up the states’ probe of mortgage servicing problems, said last week that he hoped to have a settlement with the nation’s biggest banks in the next two months.
Questions have been raised about whether the new Consumer Financial Protection Bureau is playing too large a role in settlement negotiations, because it won’t assume its formal regulatory powers until July. Geithner told the Senate panel that the consumer agency will not be a direct party to any settlement over mortgage foreclosure abuses, but is involved in designing new servicing procedures. “The CFPB — the Consumer Financial Protection Bureau — does not currently have authority to administer penalties, and will therefore not be a party to any formal settlement with mortgage servicers,” Geithner said.
In Proposed Mortgage Fraud Settlement, a Gift to Big Banks
by Jesse Eisinger – Propublica
Lurking in a proposed mortgage fraud settlement with the state attorneys general is a clause that could be worth billions for the big banks. Yes, I mean the settlement that might extract the supposedly large sum of $20 billion from the banks to settle foreclosure fraud. The one denounced as a “shakedown” by Senator Richard Shelby of Alabama.
Despite such rhetoric, the settlement might let the banks avoid tens of billions of write-downs, thanks to a clause with a biblical flavor: the last shall be first. The proposed agreement — which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa — would allow banks to treat second mortgages, like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down “at least proportionately to the first.”
Suddenly, the banks would be given license to subvert the rules of payment hierarchy, as Gretchen Morgenson pointed out in The New York Times on Sunday. Yes, the clause says the other alternative is to wipe out the second’s value entirely, but given a choice, the banks would be extremely unlikely to do that. So how is this a gift? Because when the principal on the first mortgage is reduced, the second lien is typically wiped out. The first lien holder has the first right to any money recovered, and the second lien holder has to wait its turn.
The proposal “seems astonishingly generous to the second-lien holders,” said Arthur Wilmarth, a law professor at George Washington University. “And who are those? Of course, they are the big mortgage servicers.” And who owns the big mortgage servicers? The biggest banks.
Throughout the financial crisis, we have heard plenty of intoning about the sanctity of contracts. But this suggests that the banks, with the authorities’ tacit approval, think contracts are for thee and not for me. The price to get the banks to do the right thing contractually with mortgage modifications and foreclosure is to allow them to not do the right thing elsewhere.
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To understand the significance of this issue, cast your mind back to the height of the housing bubble. People used their homes as A.T.M.’s, withdrawing billions from their equity to finance motorboats and meals at Applebee’s.The top four banks now have about $408 billion worth of second liens on their balance sheets, according to Portales Partners, an independent research firm specializing in financial companies. Wells Fargo, for instance, has more money in second liens than it has tangible common equity, or the most solid form of capital. If banks had to write these loans down substantially, acknowledging the true extent of their losses, they would have to raise capital — and might even teeter on the brink of insolvency.
The performance of second liens is among the biggest puzzles in banking today: why are they doing better than the firsts? When Wells Fargo disclosed its earnings, for instance, it classified 5.3 percent of its first mortgages as nonperforming, but put only 2.4 percent of its second liens in that category. That seems very odd because it’s much easier to lose your home if you don’t pay your mortgage than if you don’t pay your home equity line.
Investors are deeply skeptical about the value in these loans, bidding about 50 cents on the dollar for them these days. Even allowing that banks probably hawk the least attractive loans and that investors bid low to generate a high return for the risk, many of these loans are still probably not worth 100 cents on the dollar.
Yet banks have taken relatively few write-downs on second loans so far. In fact, even when the first clearly is in trouble, sometimes the banks appear to resist writing loans down. Bill Frey, who runs Greenwich Financial Services, has instigated lawsuits to try to recoup the value of mortgage securities by getting the banks to buy back faulty mortgages that were in the pools he examined.
He analyzed mortgage securities made up of loans by Countrywide Financial, which is now owned by Bank of America, looking for instances when the second lien was still extant, even though the first lien attached to the same property had been modified. Such a situation would suggest that a bank was not marking down a second lien even when the underlying, more senior first lien was impaired. He says he found multiple instances in every one of the 200 pools he examined.
Mr. Frey argues that the banks should charge off those seconds. “That’s the concept of subordination,” he said. “It’s been around since the Magna Carta. Maybe we should get on the bandwagon.”
This is not simply a fight between hedge funds, which own the securities that contain the first liens, and banks that house the seconds. Many mortgage securities are held by small banks, life insurance companies and pension funds. “I can see little reason why a pensioner should take the loss instead of Bank of America, when it’s Bank of America’s bad loan,” Mr. Frey said.
A Bank of America spokesman said that it charges off second loans when borrowers haven’t made payments for 180 days. The bank doesn’t, nor is it required to, charge them off just because the first lien has been modified, he says. But if a first mortgage is modified, the bank will increase its reserve because it’s more likely that the second will sour.
Since the fall, the Office of the Comptroller of the Currency has been examining how banks across the industry are treating their second liens, according to two people familiar with the review. The O.C.C. declined to comment. But so far, the agency has evinced a rather blasé attitude about the potential problem on banks’ balance sheet. Don’t expect forceful action any time soon. In this case, making the last first may mean that weak banks continue to inherit the earth.
The Obama administration is seeking to force the nation’s five largest mortgage firms to reduce monthly payments for as many as three million distressed homeowners in as little as six months as part of an agreement to settle accusations of improper foreclosures and violations of consumer protection laws, six people familiar with the matter said.
Described as a “shock and awe” approach, the deal would accomplish the four goals set out by state and federal policy makers and regulators as part of their multi-agency investigations into abusive mortgage practices by the nation’s largest financial firms: punish banks for violations of state law and federal regulations; provide much-needed assistance to distressed borrowers; stabilize a deteriorating housing market; and dissuade firms from abusing homeowners in the future.
The modified mortgages could cost the five financial behemoths — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — as much as $30 billion, according to sources. Combined, the five firms handle three out of every five home loans, according to newsletter and data provider Inside Mortgage Finance. It also could lead to reduced mortgage payments or lowered loan balances for nearly two-thirds of the 4.7 million delinquent homeowners who have yet to fall into foreclosure, according to data provider Lender Processing Services.
The aim is to ensure the number of assisted borrowers is spread throughout the country, and that banks modify both expensive and inexpensive mortgages, people involved in the talks said. Banks also would likely forgive mortgage principal in situations where a pre-determined formula dictated that it was the best way to modify a home loan. Balances on second mortgages and home equity loans — of which nearly half of all outstanding loans are owned by BofA, JPMorgan, Citi and Wells — would also have to be written down.
That would then kick-start the healing process needed to clear the large overhang of repossessed and soon-to-be-foreclosed homes that’s depressing house prices and sapping consumer confidence, people involved in the negotiations said. But the deal is far from complete.
While most of the federal agencies involved in the probe are near agreement on the outlines of a settlement, a few holdouts remain — most notably national bank regulator the Office of the Comptroller of the Currency, sources familiar with the internal deliberations said. The nascent Bureau of Consumer Financial Protection, a unit of the Treasury Department, is involved in the discussions, as is the Federal Deposit Insurance Corporation and the Department of Housing and Urban Development. The Justice Department is leading the talks. The OCC appears likely to not participate in a joint federal action, sources said.
Details like the target number of restructured home loans, the total fines to be levied, which mortgages would be modified and how so, have yet to be worked out among the federal agencies. And the 50 state attorneys general, who are pursuing a separate investigation but are working with federal authorities, have yet to even negotiate with the targeted lenders, let alone agree on a single strategy to penalize banks that broke state laws in pursuing improper foreclosures, officials said. They, too, have held limited discussions on the structure of a homeowner assistance program.
Meanwhile, banks, while eager to put the controversies over wrongful home repossessions and “robo-signing” behind them, do not want to be the only firms that pay for what could be a mass mortgage principal forgiveness scheme. They want government-owned mortgage giants Fannie Mae and Freddie Mac, which own or guarantee more than half of all home loans, to participate in any initiative that calls for lowering homeowners’ loan balances. Fannie and Freddie’s regulator has been reluctant to allow them to participate, citing his responsibility of minimizing the cost of the bailout to taxpayers, people involved in the talks said.
The OCC and Fannie and Freddie’s regulator, the Federal Housing Finance Agency, have long declined to comment on the federal probe beyond what their leaders have said publicly. The number of targeted modifications ranges from one to three million, and the time frame to restructure those loans ranges from six months to as many as 18 months, people familiar with the matter said. Stiff penalties would be assessed if banks failed to meet their quotas. The penalties would make noncompliance costlier than modifying troubled mortgages, these people said.
The Obama administration wants a quick resolution to the probes, and is putting pressure on the small group of state attorneys general leading their investigation to wrap it up, sources said. On Tuesday, Treasury Secretary Timothy Geithner told a Senate committee that “all parties have a stake in bringing this to resolution as quickly as possible.” “It’s very important that we try to bring this to bed as quickly as we can,” Geithner told the Senate Banking Committee.
Investors, homeowner advocates and law enforcement officials hoping for a deep investigation into allegedly widespread mortgage abuses by the nation’s largest financial firms may ultimately be disappointed. The state group has not yet filed a complaint detailing their findings and the violations of various states’ laws. While some states individually have sent banks formal investigative requests for information — and received reams of documents in return — they haven’t yet acted as a group.
People involved in the state discussions said they don’t even know the full extent of the so-called robo-signing scandal or other possible violations of state law because they haven’t conducted an in-depth investigation. At least one attorney general, New York’s Eric Schneiderman, has voiced concerns about signing on to any agreement that forces him to give up his right to pursue mortgage-related violations of his state’s laws in order to participate in what is widely acknowledged to be a multi-billion dollar deal, sources said.
There’s been little discussion among the state officials over what claims they’d release banks from in exchange for agreeing to penalties and a requirement they improve their dealings with homeowners, these people said. Schneiderman wants to probe improper lending practices; failures to follow state laws when banks bundled home loans into securities; and allegations of deception by lenders who sold investors now-toxic mortgages. If others join him, it’s unclear how the 50 state attorneys general can reach a unified agreement.
But the banks won’t sign any agreement that forces them to abide by new rules and pay substantial penalties that doesn’t clear them of liability or at least significantly lessen the chance of a state-brought lawsuit, sources familiar with their position said. This week, the state officials were supposed to be meeting with each of the five largest mortgage firms — one a day — to negotiate a possible resolution. The attorneys general cancelled the talks after it appeared the banks weren’t going to take the discussions seriously, according to people familiar with the matter. The state officials then declined to follow through on their plan to subpoena the banks for information.
The banks are now crafting their own proposal, people familiar with the discussions said. “It feels as if this is the last good opportunity consumers have to get some relief from the foreclosure crisis,” Kevin Stein, associate director of the California Reinvestment Coalition and a member of the Federal Reserve’s Consumer Advisory Council, told the Fed on March 10.
Iowa Attorney General Tom Miller, who’s leading the 50-state probe, made a similar pitch to his fellow attorneys general last week during a closed-door meeting in Washington, according to state officials in the room. He also told the law enforcement officials about the administration’s desire to push for as many as three million loan modifications in as few as six months. Almost three million homes have been seized since the start of 2008, according to data provider RealtyTrac. More than 2.2 million homes were in foreclosure through January, according to Lender Processing Services. The Fed forecasts 4.9 million homes to receive foreclosure filings this year and next, Fed Governor Daniel Tarullo said Dec. 1.
The state and federal investigations began as a response to revelations that large banks employed workers who signed hundreds of foreclosure documents a day without reading them — a violation of many states’ laws. The probes then mushroomed into an acknowledgement among top officials that the mortgage servicing industry is deeply flawed and is likely abusing hundreds of thousands of homeowners a year. Now, officials are hoping those probes can be used to finally heal a troubled housing market — a task numerous Obama administration programs failed to accomplish.
Standing in their way are top Republicans in Congress, who argue that politics is trumping the rule of law. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, blasted government officials, likening their demands to a “shakedown.” Rep. Randy Neugebauer, a Texas Republican who serves on the House Financial Services Committee, said last week that it “verges on extortion.”
Others have said the plan to use the scandal as a vehicle to modify delinquent mortgages is a reprise of the administration’s primary homeowner assistance initiative, the Home Affordable Modification Program, better known as HAMP. HAMP has been widely panned for its poor results. The House will vote this week to repeal HAMP. The Republican-controlled House will likely breeze towards repeal. The legislation will likely die in the Democratic-controlled Senate, however.
The sentiment fueling the GOP’s resistance to helping troubled borrowers also is playing a role in the internal discussions among the state attorneys general. The group is led by a committee of 13 attorneys general — seven Democrats and six Republicans — which in turn is captained by four of them — three Democrats and one Republican.
In interviews last week, numerous Republican attorneys general said they’re giving the committee a “long leash” to get a deal done with the banks. Mark Shurtleff, the Republican attorney general of Utah, said the attorneys general that will not be on the negotiating committee will simply wait for them to come to a resolution with the banks, which the full group of 50 will discuss at the National Association of Attorneys General summer meeting in June. But even that has limits.
A preliminary term sheet that was to be provided to the nation’s five largest mortgage firms was leaked to the news media earlier this month. That document detailed how the banks should treat homeowners in the future. Some Republicans have privately grumbled that the proposal may force lenders to reduce loan balances, or mortgage principal. People involved in the state discussions conceded that any deal that forces lenders to forgive mortgage principal would likely not be agreed to by all 50 states.
More than 11 million homeowners with a mortgage, or more than 23 percent, owe more on that debt than their home is worth, according to data provider CoreLogic. Nationwide, that deficit between what is owed and what the homes are worth equates to $751 billion. “Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties,” Mark Fleming, chief economist with CoreLogic, said in a statement last week. Until that recedes, the housing market will remain “very sluggish,” he added.
Congress twice tried to pass legislation during the first two years of the Obama administration that would have allowed judges to forgive principal on primary mortgages in bankruptcy proceedings. One effort was voted down in the Senate; the second one was defeated in the House. Banks vehemently oppose such measures. Reducing loan balances will likely be the sticking point in internal discussions between states, officials involved in the negotiations said.
The attorneys general from Texas, Nebraska, Oklahoma and Virginia are concerned with such an approach, officials said. All either declined comment or did not respond to requests for comment. To mollify those concerns, officials are considering alternative proposals that would both penalize firms that have broken state laws and provide a boost to the housing market.
For example, short sales may be counted as part of the target of one to three million loan modifications. Also on the table are proposals that would force banks to subsidize home purchases by credit-worthy borrowers. This would be used to satisfy concerns that only delinquent borrowers are being helped by the settlement agreement. Officials stressed that despite disagreements over the scope of assistance provided to homeowners, there’s near-unanimity when it comes to going after financial firms for violations of state laws prohibiting unfair and deceptive practices, and cases in which firms’ sloppy foreclosure practices amounted to fraud on local courts.
“Laws were not being followed by the servicers,” Illinois Attorney General Lisa Madigan, a Democrat, said last week. “That absolutely has to change.” Republican Attorney General John Suthers of Colorado said the state officials “want to remedy losses that have occurred as a result of those problems.”
Meanwhile, federal officials are looking at potential violations of rules governing their loan modification programs, as well as failures to comply with regulations surrounding taxpayer-backed loans through the Federal Housing Administration. The banks declined to comment, citing the confidentiality that generally governs their dealings with regulators and law enforcement authorities.
Thewatchdog panel for the $700 billion bank bailout faulted the U.S. government for the last time on Wednesday, saying the program helped underpin the perception that federal authorities will always prevent troubled financial firms from failing. In its final report on the bank bailout, the panel attacked the government for not being transparent enough and not articulating clear goals for its foreclosure prevention program.
It also said federal intervention transformed the notion of ‘too big to fail’ into a stark reality. “Very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss,” said the report authored by the Congressional Oversight Panel.
Stigmatized for bailing out Wall Street at the expense of ordinary Americans, the Troubled Asset Relief Program, known as TARP, used billions of dollars in taxpayer money to prop up major financial firms, including Citigroup and Bank of America. Timothy Massad, the Treasury official in charge of the bailout program, said it was “simply wrong” for companies to think that the government would provide assistance to bail them out in the future. The Dodd-Frank financial reform bill “makes it clear that we should not use taxpayer funds for that,” Massad told reporters.
In recent months, TARP has enjoyed a renaissance of sorts, with some of its harshest critics admitting that the program helped save the financial system from collapsing.
Auto Bailout
The watchdog panel concluded taxpayers would not likely recoup all of the $85 billion extended to the auto industry. Most of that went to restructure General Motors Co and Chrysler Group, now run by Italy’s Fiat SpA, in bankruptcy. The group found that government intervention in the automaker bankruptcies “raised questions about the long-term effects” of such action on credit markets, as well as sticky scenarios involving companies considered “too big to fail.”The report found that the Treasury failed to set clear goals, making it difficult to determine whether intervention in GM, Chrysler, suppliers and automaker financing arms was successful. It questioned whether the goal was only to save the auto industry from collapse or to extend rescue financing with the aim of recovering all of it when the industry got back on its feet? “It is difficult to say whether government intervention was the best option,” the report found. Congressional panel Chairman Ted Kaufman told reporters that he thought it was a good thing the government “went forward with funds” for the auto companies.
More Transparency Needed
The panel admitted that TARP helped provide critical support to markets at “a moment of profound uncertainty” by showing that the country would take any action necessary to prevent the collapse of the U.S. financial system. The TARP’s final cost to taxpayers is estimated to be about $25 billion — an amount far below previous estimates of around $350 billion. Regardless, the panel chided the government for not using the full $50 billion that has been set aside to help keep distressed Americans in their homes.The Obama administration initially predicted that its Home Affordable Modification Program, or HAMP, would help up to 4 million at-risk homeowners avoid foreclosure by providing permanent loan modifications. So far, HAMP has provided loan modifications for about 600,000 homeowners, angering House Republicans, who are trying to kill the program. Congressional overseers expect the program to help up to 800,000 homeowners.
The panel said the Treasury Department was not able to determine which TARP programs were succeeding because it never collected relevant data in the first place. “Without adequate data collection, Treasury has flown blind,” the report said. The panel reiterated criticisms that the Treasury has never formally announced a new target. “Absent meaningful goals, the public has no meaningful way to hold Treasury accountable, and Treasury has no clear target to strive toward in its own deliberations,” the report said.
Treasury’s claim that the bank bailouts will return a profit ignores the other, more costly programs enabling the banks to repay their TARP funds.
Today the Senate Banking Committee will explore the Troubled Asset Relief Program (TARP). Almost 30 months after its birth, TARP is far from dead. More than 550 banks, AIG, GM, Chrysler and others still have approximately $160 billion of taxpayer money outstanding.
Even so, the administration would have us believe that TARP has been a success because it supposedly alleviated the financial crisis and is (so far) being paid back at an apparent profit for taxpayers. Perhaps because he helped invent TARP before he joined the Obama administration, Treasury Secretary Timothy Geithner has called TARP the “most effective government program in recent memory.”
Treasury’s view is misleading. First, it hides the full story of the government’s financial crisis effort, of which TARP is but a minor part. Moreover, Treasury has not been content using rhetoric alone to try to put TARP in the best light. The Special Inspector General for TARP criticized Treasury in October for inadequately disclosing a change in its valuation methodology that reduced a $45 billion loss in AIG to $5 billion, making TARP losses appear smaller than they really are. This data manipulation is only part of a much larger problem with Treasury’s representations regarding the supposed success of the bank bailout payments that lie at the heart of TARP.
The focus on repayment fails to consider the huge taxpayer costs from non-TARP programs that directly and indirectly enabled many of the large banks to repay their TARP funds. These intertwined programs, operated by the Treasury and the Federal Reserve, dwarf the size of TARP and lack its accountability.
The financial crisis was born in the housing bubble caused by the policies of Fannie Mae and Freddie Mac, the two bankrupt government-sponsored entities (GSEs) charged with buying and packaging mortgages into mortgage-backed securities (MBS). TARP banks own billions of dollars worth of MBS and have remained liquid in part because the Federal Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in the securities markets—all outside TARP.
The Fed purchased the MBS at fair market value, but this value reflects Treasury’s bailout and continued support of the GSEs—also done outside of TARP with taxpayer money. Had the GSEs failed, TARP recipients probably would have been stuck with these MBS, writing them down at significant loss. Their ability to pay back TARP funding would have been hurt, and they might have had to obtain more TARP funds or go bust.
So the taxpayer-backed GSE guarantee enables the Fed to prop up the market with taxpayer funds, in turn allowing the TARP banks to “repay” their TARP funds. The bailout of the GSEs by Treasury thus shifts potential losses from TARP to other programs that have less oversight and public scrutiny. Any evaluation of TARP’s success must take into account the interaction among all government programs designed to prop-up the financial system, and the shifting of costs among these programs.
The Congressional Budget Office estimates that Treasury’s bailout of the GSEs will cost the taxpayers approximately $380 billion through fiscal year 2021. If only one-fourth of CBO’s estimate ultimately benefits TARP recipients and other financial institutions, taxpayers will have provided a subsidy to these institutions of approximately $100 billion, which is not accounted for under TARP.
Also seldom mentioned are future costs resulting from using TARP funds to rescue “systemically important” financial and other firms. TARP exacerbates the “too big to fail” phenomenon by targeting much of its funding toward large banks and automobile firms, solidifying the market’s belief in an implicit guarantee from the government for these firms. As credit-rating agencies have recognized, these large firms can borrow much more cheaply than their small-enough-to-fail competitors, which will lead to less competition, a more concentrated financial sector, and higher prices paid by consumers.
In addition, creating larger, more systemically important financial firms increases the likelihood of future financial crises because these firms have an incentive to invest in riskier projects as a result of the implicit government guarantee. The additional costs borne by consumers in the form of higher prices for financial services and the additional costs that result from future financial crises need to be included in any accounting of the costs of the TARP.
TARP was never where the real action was happening. In fact, other Fed and FDIC programs added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone, on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.
The government’s efforts inside and outside of TARP have sown the seeds for the next crisis and, unfortunately, last year’s 2,319-page Dodd-Frank Act does nothing to fix these problems. Treasury must be more transparent regarding TARP. The real myth that the Treasury secretary should dispel is that TARP is a big win for the taxpayer.
Mr. Atkins was a member of the Congressional Oversight Panel from 2009-2010. Messrs. McWatters and Troske are current members of the panel.
Derivatives, as Accused by Buffett
by Andrew Ross Sorkin – New York Times
Warren E. Buffett’s “elephant gun” and itchy “trigger finger” may be the market chatter, after Berkshire Hathaway announced a $9 billion deal to buy Lubrizol on Monday. But Wall Street denizens have been focused on something else in recent days: Mr. Buffett’s private interview before the Financial Crisis Inquiry Commission, a transcript of which has been whizzing around e-mail inboxes.
Mr. Buffett, in a two-hour interview transcribed by the newsletter Santangel’s Review, touched on everything from ratings agencies to the dangers of leverage. But the most provocative moments centered on derivatives, the complicated investments at the heart of the financial crisis. It is perhaps the first time that Mr. Buffett has opened up so publicly about the topic.
Mr. Buffett once described derivatives as “financial weapons of mass destruction.” Yet some of his most ardent fans have quietly raised eyebrows at his pontifications, given that he plays in the opaque market. In the fourth quarter alone, Berkshire made $222 million on derivatives. TheStreet.com published a column last spring with the headline: “Warren Buffett Is a Hypocrite.”
His comments, which were released last month by the financial crisis commission, come as the government is writing rules for derivatives as part of the Dodd-Frank financial regulatory overhaul. And the statements could influence the debate. Mr. Buffett appeared to backpedal from his oft-quoted line, explaining: “I don’t think they’re evil per se. It’s just, they, I mean there’s nothing wrong with having a futures contract or something of the sort. But they do let people engage in massive mischief.”
The problems arise, Mr. Buffett said, when a bank’s exposure to derivatives balloons to grand proportions and uninformed investors start using them. It “doesn’t make much difference if it’s, you know, one guy rolling dice against another, and they’re doing $5 a throw. But it makes a lot of difference when you get into big numbers.”
What worries him most is the big financial institutions that have millions of contracts. “If I look at JPMorgan, I see two trillion in receivables, two trillion in payables, a trillion and seven netted off on each side and $300 billion remaining, maybe $200 billion collateralized,” he said, walking through his thinking. “That’s all fine. But I don’t know what discontinuities are going to do to those numbers overnight if there’s a major nuclear, chemical or biological terrorist action that really is disruptive to the whole financial system.” “Who the hell knows what happens to those numbers?” he asked. “I think it’s virtually unmanageable.”
Mr. Buffett defended Berkshire Hathaway’s use of derivatives, arguing that the company maintains a limited amount. At the time of the interview, the company had only about 250 derivative contracts. (It’s now down to 203.) “I want to know every contract, and I can do that with the way we’ve done it. But I can’t do it with 23,000 that a bunch of traders are putting on.”
He noted that when Berkshire bought General Re in 1998, the reinsurance company had 23,000 derivative contracts. “I could have hired 15 of the smartest people, you know, math majors, Ph.D.’s. I could have given them carte blanche to devise any reporting system that would enable me to get my mind around what exposure that I had, and it wouldn’t have worked,” he said to the government panel. “Can you imagine 23,000 contracts with 900 institutions all over the world with probably 200 of them names I can’t pronounce?” Berkshire decided to unwind the derivative deals, incurring some $400 million in losses.
Mr. Buffett said he used derivatives to capitalize on discrepancies in the market. (That’s what other investors must think they are doing — just not as successfully.) Perhaps the most insightful nugget in the interview was Mr. Buffett’s explanation of why corporations use derivatives — and why they probably shouldn’t.
Many companies, as diverse as Coca-Cola and Burlington Northern, argue that they employ derivatives to hedge their risk. The United States-based Coca-Cola tries to protect against fluctuations in currencies since it does business around the world. Burlington Northern, the railroad giant, uses the investments to limit the effect of fuel prices.
Mr. Buffett, who has interests in both companies, claimed there was another agenda. “The reason many of them do it is that they want to smooth earnings,” he said, referring to the idea of trying to make quarterly numbers less volatile. “And I’m not saying there’s anything wrong with that, but that is the motivation.” The numbers all even out eventually, he cautioned, so derivatives don’t really make much difference in the long term. “They’re going to lose as much on the diesel fuel contracts over time as they make,” he said of Burlington Northern. “I wouldn’t do it.”
Food Stamps Surge in West
By Jim Carlton – Wall Street Journal
Before the recession hit, Idaho, Nevada and Utah had some of the lowest rates of food stamp use in the nation. It was a boom time in a region that has always prided itself on self-reliance and a disdain for government handouts.
But since the recession began, these three states have the fastest growth rates in the nation of participation in the federal program, recently released figures show. Utah saw a nearly 34% jump in food-stamp participation in December from the same month a year earlier, according to the U.S. Department of Agriculture. Nevada had the second fastest growth rate at 25%, followed by Idaho at 24%.
For the fiscal year ended Sept. 30, those three states plus Wyoming ranked among the top 10 in food-stamp growth, with Idaho leading with a 42% jump from 2009, according to USDA figures. It’s a striking shift for the area, reflecting a post-boom fallout that has been compounded by the many new residents drawn to the region by a hot economy who lacked a support network when jobs disappeared.
“This is a pick-you-up-by-the-bootstraps type of state, which is why the food-stamp participation has [historically] been low,” said Rose Andueza, program manager of Idaho’s Division of Welfare. “But I think now people have just run out of options.”
Mike Buster, 48 years old, said he lost his construction job in the Boise suburb of Caldwell in 2008 and hasn’t been able to find stable work since. His wife, Bonnie, 42, said she tried to work odd jobs, but has been limited by health problems, including a heart condition. After Mr. Buster’s unemployment checks ran out, the couple lost their house to foreclosure. In February 2010, they decided to apply for food stamps for the first time. “We didn’t have enough food to last a week, so I looked at my wife and said, ‘It’s time,’ ” said Mr. Buster.
The number of Idahoans taking food stamps has climbed every month since an October 2007 low, hitting 223,347, or about 14% of Idaho’s population, in December. In October 2007, 5.8% of the population, or 87,232 people, received food stamps. Nationally, the number of residents using food stamps—which today take the form of debit cards—rose to 44.1 million, or 13.1% of the population, in December from 27.2 million, or 9% of the population, in October 2007.
In 2006, by contrast, Idaho and Nevada ranked second-to-last among states in food-stamp participation, with 53% of people eligible for the assistance actually receiving it compared with a national average of 67%. The Western region as defined by the USDA—covering California, Arizona, New Mexico, Colorado, Utah, Idaho, Washington, Oregon, Alaska and Hawaii—also ranked last with a 58% participation rate; the Midwest’s was tops at 74%. Comparisons on state participation rates aren’t available beyond 2008.
Officials attributed the rise in Western food-stamp usage to a general push by states for increased access, such as by expediting the process of determining if an applicant is eligible, as well as the recession’s impact. Idaho’s unemployment rate reached 9.7% in January, nearly triple the 3.4% rate in November 2007, the recent low point. Nationally, the jobless rate stood at 8.9% in February, up from 4.7% in November 2007. (State data are reported with a one-month lag.)
Nevada’s unemployment led the nation at 14.2% in January, compared with 3.9% in November 2006, while Utah—whose economy has begun to rebound faster than the rest of the West—held at 7.6% in January up from 2.4% in November 2006.
Idaho’s economy has fallen more steeply than most states’ as two mainstays, technology and construction, nosedived. As a result, food stamps in the state, which typically bristles at federal programs—it was first to pass a bill to block the federal health-care overhaul—have drawn broad political support. Last June, Republican Gov. C.L. “Butch” Otter suspended for at least one year a federal provision that blocked people with assets such as a boat from eligibility for food stamps.
Officials see no letup in the need for food assistance until Idaho’s economy rebounds. That isn’t expected until 2013 or 2014, said Donald Holley, an economics professor at Boise State University. And the Idaho Foodbank plans to give out 10 million pounds of food in the fiscal year that began July 1, double what it distributed in fiscal 2007.
Michael and Valorie Bruesch said their monthly income of about $2,200 from his unemployment checks and her disability compensation is about $200 over the food-stamp eligibility cutoff. So the couple, who live in Caldwell, lined up with more than 150 others one recent frigid morning for a food handout at the Oasis Worship Center in the city, to help save money so they could keep making mortgage payments. “When my unemployment runs out soon, we will qualify for food stamps,” said the 58-year-old Mr. Bruesch, who lost his job as a medical-supply specialist 15 months ago.
Portugal’s government blamed higher rates paid at a debt auction on Wednesday on the opposition’s refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout. Pressure on Lisbon mounted after Moody’s rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces in riding out its debt crisis.
The yield on 1 billion euros ($1.40 billion) of 12-month treasury bills rose to 4.331 percent at the auction, compared with 4.057 percent two weeks ago. Spain, by contrast, obtained lower yields at a T-bill auction on Tuesday and is viewed as less and less likely to need an EU/IMF bailout following a surprisingly strong package of debt measures agreed by euro zone leaders last weekend.
The worsening financing situation for Portugal — which many economists say is the next likely euro zone country to need a bailout after Greece and Ireland — suggests the deal to boost the euro zone rescue fund may have come too late for it. Portugal’s plight has become yet more complicated by the fact that the main opposition Social Democrats have refused to back the government’s latest austerity plans, which are aimed to ensure the country meets its budget goals.
“Failure to approve the new measures in the budget plan would push the country to external help,” Finance Minister Fernando Teixeira dos Santos told parliament’s budget committee. “Current market conditions are unsustainable in the medium- and long-term.”
A Reuters poll of 45 economists found a 60 percent chance that Portugal will need a bailout like Greece and Ireland, with the expectation that it will happen by June.
Prime Minister Jose Socrates warned on Tuesday that his minority government would be unable to continue if the country’s long-term economic strategy, which includes the latest austerity measures, was not passed in parliament.“Yield levels in Portugal still trade above their snowball level — where the level of interest charged means their level of debt stock is going up — and that means that longer-term the situation, despite their best efforts, is getting worse not better,” said rate strategist Charles Diebel at Lloyds Bank.
So far, the Social Democrats have supported the government’s austerity measures and Teixeira dos Santos urged them to negotiate. But analysts increasingly think the political standoff could lead to a collapse of the Socialist government. “Attention has now turned to the approval or not of the economic strategy and the possibility of a political crisis,” said Filipe Silva, debt manager at Banco Carregosa in Porto.
Last Card?
“Jose Socrates has played his last dramatic card,” said daily Diario de Noticias in an editorial. “But this time it appears the Social Democrats are not ready to dance.” Since the Social Democrats now have a lead in opinion polls they may try to push the government out by making it unable to pass legislation and prompt a snap election. The Portuguese, who are facing higher taxes, lower social benefits and a likely return to recession this year, have stepped up protests against austerity. But it was not clear they want a change of government.“I hope there will not be elections soon. I see that as a negative option and hope that PSD acts responsibly,” said Paulo Bernardes, a hotel maintenance manager aged 45.
Social Democrat leader Pedro Passos Coelho has requested a meeting with President Anibal Cavaco Silva and is due to meet him on Thursday. Cavaco Silva has the constitutional power to fire the government if democratic institutions are at risk. Julio Correia, a 63-year-old self-employed businessman, said he hoped there would be no snap election. “But if the vote is held, and power passes over to the Social Democrats there will not be much change, things will stay the same,” he said.
The government’s latest measures were announced on Friday and included cuts in spending on infrastructure and social welfare equivalent to 0.8 percent of GDP. Moody’s cut Portugal’s sovereign debt rating by two notches to A3 late on Tuesday and said it might have to downgrade again given the impact of high borrowing costs and the difficulty of meeting tough fiscal targets.
Still, the IGCP debt agency sold all 1 billion euros ($1.40 billion) in T-bills on offer, with demand outstripping supply by 2.2 times. The yield at the auction of 4.331 percent was below record levels seen in December at 5.28 percent. The yield on Portugal’s 10-year bonds was at 7.67 percent while the spread to safer German Bunds stood at 456 basis points, up from Tuesday’s 446 basis points. Risk premiums hit euro lifetime highs last week.
First-time buyers offered £70,000 deposits by local councils
by Myra Butterworth – Telegraph
First-time buyers are being offered deposits of up to £70,000 by their local council to help them on the property ladder, with taxpayers footing the bill if house prices fall.
The controversial new mortgage deal is being launched by five local authorities and backed by Lloyds Banking Group, one of the lenders bailed out by the taxpayer during the credit crisis. The scheme is aimed at struggling first-time buyers who are unable to afford the large deposits required by lenders concerned about borrowers defaulting on their home loans.
It has echoes of the housing boom in the run up to the credit crisis when banks not only approved mortgages to those without a deposit, but even lent more than the value of the property. Experts warned lenders’ efforts to offer innovative new deals to help first-time buyers could backfire if house prices fall. Under the scheme, if house prices fall and the property is repossessed, the money invested by the local authority could be lost.
Drew Wotherspoon, of mortgage brokers John Charcol, said: “Any scheme that looks to help the beleaguered first-time buyer is welcome, but the detail of this one looks a little odd. At a time where cuts are coming left, right and centre, and public sector jobs are falling like dominoes, using tax payers’ money to help people on the housing ladder seems wrong. If house prices do fall over the coming years then it seems the taxpayer will be out of pocket. That will be unpopular to say the very least.”
Under the scheme, a buyer could potentially purchase a home for £350,000 with a 20 per cent deposit from their local council of £70,000 and a 5 per cent deposit from their own savings. Together, this would provide the 25 per cent deposit required by lenders to secure a preferential rate on their mortgage. Lloyds said a loan of £350,000 was available but “not reflective” of the scheme, as it expected, in reality, to lend much lower amounts. If a buyer bought a lower priced property of £120,000, they would need to provide a 5 per cent deposit of £6,000 and would be provided with £24,000 from the council.
The mortgage from Lloyds, which is the first lender to join the scheme, would be £114,000. But if the value of the property fell to £110,000 and the borrower had their home repossessed, Lloyds would recoup the £4,000 shortfall in the loan from the council. The scheme designers, Sector Treasury Services, insisted caps would be set by each local authority. The local authorities initially taking part in the scheme are Blackpool City Council, Warrington Borough Council, Northumberland County Council, Newcastle under Lyme Borough Council, and East Lothian Council.
Cecilie Booth, director at Sector Treasury Services, said: “The combination of relatively high house prices and understandable caution over lending from banks and building societies means that many potential first-time buyers, including those on the council’s housing waiting list, or currently occupying affordable or social housing units, are unable to save a sufficient deposit, even though they could afford mortgage repayments on a typical first home.
“This initiative is designed to bridge that gap. More people will be able to take the step of buying their first home, stimulating the local housing market and benefiting the wider local economy. ” Stephen Noakes, commercial director of mortgages at Lloyds TSB, said: “We know that a lot of young people turn to the Bank of Mum and Dad to get their foot on the ladder, but that’s not a solution for everyone. Helping people to buy their first home is crucial in achieving and maintaining a sustainable housing market.”
Europe’s Austerity: a Grimm’s Fairy Tale
by Conn Hallinan – Counterpunch
In the Greek town of Aphidal, people have stopped paying road fees. In Athens, bus and metro riders are refusing to cough up the price of a ticket. On Feb. 23, 250,000 Greek protesters jammed the streets outside the nation’s parliament.
The Portuguese nominated the protest song “A Luta E’ Alegria” (The Struggle is Joy) for the Eurovision song contest and, when judges ignored it, walked out in protest. They also put 300,000 people into the streets of the country’s major cities on Mar. 12.
Liverpool bailed from a Conservative-Liberal scheme to supplement government funding with private funding when it found there wasn’t any of either, and the British Toilet Association protested the closure of 1,000 public bathrooms across the country.
In ways big and small, Europeans from Greece to Portugal, from Britain to Bavaria are registering their growing anger with the relentless assault inflicted by government-imposed austerity programs.
Wages, working conditions and pensions that unions successfully fought for over the past half century are threatened by the collapse of banking systems caught up in a decade-long orgy of speculation that the average European neither took part in, nor profited from. Even the so-called “well off” workers of Bavaria, Germany’s industrial juggernaut, have seen their wages, adjusted for inflation, fall 4.5 percent over the past 10 years.
The narrative emanating from EU headquarters in Brussels is that high wages, early retirement, generous benefits, and a “lack of competition” has led to the current crisis that has several countries on the verge of bankruptcy, including Ireland, Greece, Portugal and Spain. Now, claim the “virtuous countries”—Germany, the Netherlands, and Finland—it is time for these spendthrift wastrels to pay the piper or, as German Chancellor Andrea Merkel says, “do their homework.”
It is an interesting story, a sort of Grimm’s fairly tale for the 21st century, but it bears about as much resemblance to the cause of the crisis as Cinderella’s fairy godmother does to the International Monetary Fund (IMF).
While each country has its own particular conditions, there is a common thread that underlines the current crisis. Starting early in the decade, banks and financial houses flooded real estate markets with money, fueling a speculation explosion that inflated an enormous bubble. In climate and culture, Spain and Ireland may be very different places, but housing prices rocketed 500 percent in both countries.
The money was virtually free, with low interest rates on the bank side, and cozy tax deals cut between speculators and politicians on the other. That kept the cash within a small circle of investors. While Bavarian workers were watching their pay fall, German banks were taking in record profits and shoveling yet more capital into the real estate bubbles in Ireland and Spain. The level of debt eventually approached the grotesque. Ireland’s bank debts, if translated into dollars, would be the equal of $10 trillion.
The Wall Street implosion in 2008 sent shock waves around the world and popped bubbles all over Europe. While nations on the periphery of the European Union (EU) tanked first—Iceland, Ireland, Latvia, Romania, Hungry, and Greece, economies at the heart of the EU—Britain, Spain, Italy, and Portugal—were also shaken. According to the Financial Times (FT), total claims by European banks on the Greek, Irish, Italian, Spanish and Portuguese debts alone are $2.4 trillion.
The European Union’s (EU) cure for the crisis is a formula with a long and troubled history, and one that has sowed several decades of falling living standards and frozen economies when it was applied to Latin America some 30 years ago. In simple terms, it is austerity, austerity and more austerity until the bank debts are paid off.
There are similarities between the current European crisis and the 1981 Latin American debt crisis. “In both cases debts were issued in a currency over which borrowing countries had no control,” says the FT’s John Rathbone. For Latin America it was the dollar, for Europe the Euro. Secondly, there was first a period of easy credit, followed by a worldwide recession.
Bailouts were tied to the so-called “Washington Consensus” that demanded privatization, massive cuts in social services, wage reductions, and government austerity. The results were disastrous. As public health programs were eviscerated, diseases like cholera reappeared. As education budgets were slashed, illiteracy increased. And as public works projects vanished, joblessness went up and wages went down.
“It took several years to realize that deflating wages and shrinking economies were inconsistent with being able to fully pay off debts,” notes Rathbone. And yet the “virtuous” EU countries are applying almost exactly the same formula to the current debt crisis in Europe.
For instance, the EU and the IMF agreed to bail out Ireland’s banks for $114 billion, but only if the Irish cut $4 billion over the next four years, raised payroll taxes 41 percent, cut old age pensions, increased the retirement age, slashed social spending, and privatized many public services. When Ireland recently asked for a reduction in the onerous interest rate for this bailout, the EU agreed to lower it 1 percent and spread out the payments, but only on the condition of yet more austerity measures and an increase in Ireland’s corporate tax rate. The newly elected Fine Gael/Labor government refused.
To pay back its own $152 billion bailout, however, the Greek government took the deal. But the price is more austerity and an agreement to sell off almost $70 billion in government properties, including some islands and many of the Olympic games sites.
But the “deal” will hardly repay the debt. Unemployment in Greece is 15 percent, and as high as 35 percent among the young. Wages have fallen 20 percent, pensions have been cut, and rates for public services hiked. Growth is expected to fall 3.4 percent this year, which means that Greece’s debt burden is projected to increase from 127 percent of GDP to 160 percent of GDP by 2013. “Your debt will continue to increase as long as your growth rate is below the interest rate you are paying,” economist Peter Westaway told the New York Times.
Austerity measures in Portugal and Spain have also cut deeply into the average person’s income and made life measurably harder. In Spain, more than one in five workers are unemployed, and consumer spending is sharply off, dropping by a third this past holiday season. Portugal is actually in worse shape. It has one of the slowest economic growth rates in Europe, a dead-in-the-water export industry, and a youth unemployment rate of over 30 percent.
In Britain, the Conservative-Liberal government has cut almost $130 billion from the budget and lobbied for what it calls the “Big Society.” The latter is similar to George H.W. Bush’s “thousand points of light” and envisions a world in which private industry and volunteerism replaces government-funded programs. The actual result has been the closure of libraries, senior centers, public pools, youth programs, and public toilets. The cutbacks have been most deeply felt in poorer areas of the country—those that traditionally vote Labor, as cynics are wont to point out—but they have also taken a bite out of the Conservative Party’s heartland, the Midlands.
Conservative voters have organized demonstrations to save libraries in staid communities like Charlbury and to protest turning public woodlands over to private developers. According to retired financial officer Barbara Allison, there are 54 local voluntary organizations that run programs like meals on wheels in Charlbury. “We’re already devoting an awful lot of our time to charity and volunteers,” she told the FT. “Am I not doing enough? Is [Conservative Prime Minister] David Cameron going to volunteer?” In any case, as Labor Party leader Ed Milliband points out, how does Cameron expect people “to volunteer at the local library when it is being shut down?”
U.S. Treasury Secretary Timothy Geithner strongly endorsed the Cameron program last month and said that he “did not see much risk” that the cutbacks would impede growth. But even the IMF warns that the formula of treating debt as the central problem in the middle of an economic recession has drawbacks. This past October an IMF study concluded “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”
But a massive program of privatization does mean enormous windfall profits for private investors and the banks and financial institutions that finance the purchase of everything from soccer fields to national parks. Those profits, in turn, fuel political machines that use money and media to dominate the narrative that greedy pensioners, lay-about teachers, and free loaders are the problem. And austerity is the solution.
But increasingly people are not buying the message, and from Athens to Wisconsin they are taking their reservations to the streets. The crowd in Charlbury was a modest 200, and the tone polite. In Athens the demonstration drew 250,000 and people chanted “Kleftes,” or “thieves.” But the message in both places is much the same: we have had enough.
A bus driver in Athens told Australian journalist Kia Mistiles that his wages had been cut from 1800 Euros ($2500) a month to 1200 Euros ($1660). “There are more cuts coming into effect in the next three months, that’s why the protests are heating up. I am worried that my wages will be cut to 800 Euros ($1110) a month, and if that happens I don’t know how I will survive.”
But he has a plan. “The situation is reaching a climax,” he told Mistiles, “because working people know that the austerity measures go too far, and with the final rollout, they can’t survive. So there is nothing to do but protest,” adding, “You wait until next summer. The situation in Greece will explode.”
It is unlikely that Greece will be alone.
Workers can’t demand higher wages amid rising unemployment
by Louisa Peacock – Telegraph
Workers are in no position to demand higher wages if today’s unemployment figures are anything to go by.
True, workers have been hit by the double whammy of falling wages amid rising inflation. But it appears, given the fragile state of the labour market, anyone who is in work is simply lucky to have a job. It’s a simple case of supply and demand. Thenumber of people out of work has surged by 44,000 in the three months to December, to reach 2.49m. Youth unemployment has hit a new record high, and the number of people working part-time because they could not find full-time work has surged yet again.
The more people there are searching and competing for jobs, the less bargaining power workers have to demand they deserve a pay increase. Total pay rose by just 1.1pc in December year-on-year, while it was up 1.8pc in the three months to December – a five-month low.
The main test is yet to come, however, as economists have pointed out, because many of the pay negotiations for this year are still to happen. What employers decide to pay staff will also play a vital role in determining exactly when and how quickly the Bank of England will raise interest rates. Employment experts and economists are saying that today’s muted wage growth only serves to dampen inflationary pressure.
As David Kern, chief economist at the British Chambers of Commerce, says: “A premature rise in interest rates in these circumstances would risk damaging the economy, and the MPC should wait until the recovery is more secure before considering an increase.” With a fall in real wage growth, the major fiscal squeeze which is still to come as a result of public sector spending cuts and unemployment likely to rise further in 2011, consumer spending will be limited.
The Bank has signalled that interest rates may rise three times between now and the end of the year, to 1.25pc (up from its record low of 0.5pc last May). But rising rates now could only serve to put further pressure on workers and businesses alike.
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