• MSN
  • Hotmail
  • More
    • Autos
    • My MSN
    • Video
    • Careers & Jobs
    • Personals
    • Weather
    • Delish
    • Quotes
    • White Pages
    • Games
    • Real Estate
    • Wonderwall
    • Horoscopes
    • Shopping
    • Yellow Pages
    • Local Edition
    • Traffic
    • Feedback
    • Maps & Directions
    • Travel
    • Full MSN Index
  • Bing
  • NBCNews.com
  • TODAY
  • Nightly News
  • Rock Center
  • Meet the Press
  • Dateline
  • msnbc
  • Breaking News
  • Newsvine
  • Home
  • US
  • World
  • Politics
  • Business
  • Sports
  • Entertainment
  • Health
  • Tech
  • Science
  • Travel
  • Local
  • Weather
Advertise | AdChoices
  • Recommended: Bomb plot briefing may undercut DOJ's case for AP records seizure
  • Recommended: AP, DOJ clash over seriousness of leak that prompted phone records seizure
  • Recommended: IRS mishandling of Tea Party reviews still unresolved, audit charges
  • Recommended: The case of the missing mustangs; what happened to 1,700 wild horses?

Investigative reporting from NBC News, with your story ideas and documents. Share your ideas. Read about this blog. Follow us on Facebook and Twitter.

  • ↓ About this blog
  • ↓ Archives
    • Icons Email E-mail updates
    • Icons Twitter Follow on Twitter
    • Icons Feed Subscribe to RSS
  • 7
    Apr
    2013
    6:51pm, EDT

    Disputes over environmental impact of 'fracking' obscure its future

    Noah Addis / for NBC News

    Dairy farmer Carol French holds a jar of water taken in July 2012 from the tap in her home in Sheshequin Township, Pa. French says her water first turned cloudy in March 2011, not long after natural gas companies began conducting hydraulic fracturing, or fracking, nearby.

    By Bill Dedman, NBC News, and Karen Weintraub

    BRADFORD COUNTY, Pa. — Carol French still has the canning jar full of cloudy and gelatinous water that came out of her well right before her daughter got sick and some of her 40 milk cows developed a rash. She agrees that this jar, by itself, proves nothing about the environmental impact of "fracking," the drilling technology largely responsible for America's boom in oil and gas production. You can't determine the environmental effects of drilling and fracking from one person's Mason jar full of water.

    Last in a four-part series

    "I can't say it's definitely from the drilling, but there's strong circumstantial evidence," French said, referring to nearby natural gas drilling using fracking.

    Making that direct connection often isn't possible even with 1,100 jars. That's how many examples are on a "list of the harmed," people who have offered personal stories of harm from fracking, as tallied by the advocacy group Pennsylvania Alliance for Clean Water and Air. 

    Beyond such anecdotes, many facts about fracking's impact on the environment remain hotly contested. Consequences like water contamination have been established, but often it is not clear if they were directly caused by fracking or the result of sloppy drilling practices.

    Meanwhile, the scientific studies that do exist suggest there are inconvenient truths for both sides of the fracking debate to confront.


    The biggest hurdle for the pro-industry side: The rapid expansion of fracking over the last five years has resulted in confirmed cases of drinking water contamination, a house explosion, and air pollution.

    But for those who oppose fracking, there is this: Burning the natural gas produced by fracking may be much better for the environment and public health, over the long run, than burning coal.

    America's drive for energy independence

    As detailed in the first three installments of Power Shift, an NBC News/CNBC special report, the United States is experiencing an energy boom created by new drilling technologies that have unlocked vast domestic oil and natural gas reserves. Proponents of fracking praise its economic benefits, while many foreign policy experts say this developing energy independence may give the U.S. new leverage in world affairs.

    Many experts say that concern about the environmental consequences of fracking and other new drilling technologies may be the biggest obstacle to the continued growth of this newfound domestic energy supply. 

    The  future of the industry may depend on whether more cases of environmental damage are documented, and whether they are regarded as unlikely accidents or the inevitable consequence of this expanding search for energy resources. That could, in turn, lead to stricter regulation that could slow or halt new drilling.

    Interactive map: Where the U.S. produces its energy. Click to enlarge

    For now, your view of the energy boom may depend on whether drilling and fracking are happening in your back yard, as they have been in Carol French's back yard in northeast Pennsylvania since 2008. Bradford County is the busiest fracking county in the state. Just across the border, in New York, Gov. Andrew Cuomo is considering whether or not to allow fracking, which he says would take place only under "toughest-in-the-nation" environmental regulations. Much of the countryside in both states sits above the Marcellus Shale, the gas-rich band of rock that stretches to Ohio and West Virginia.

    Water issues are in dispute 
    To get the natural gas out of crevices deep underground, companies must pump in vast quantities of water and sand, under enough pressure to fracture rock and release the gas trapped inside. Also in the slurry that comes back up as waste water: toxic chemicals, including some that cause cancer, damage the nervous system, disrupt hormones and mutate genes. And those are just the ones we know about. Oil and gas companies in some states haven’t been compelled to say what’s in their brew, so some don’t.

    The companies say the health risks are minimal. As of August 2011, oil and gas companies still said there had never been a documented case of drinking water contaminated by fracking. (The industry claim may still technically be true, using the industry definition of "fracking" to refer only to the process that happens after the drill hole is dug, not the drilling activities necessary before the fracking can occur.)

    Reuters

    How fracking works. Click to enlarge.

    The first blemish on the industry's clean record came in a New York Times article documenting such a case from the 1980s. (Demonstration projects for hydraulic fracking began decades earlier in the U.S., though it didn't become common until the early 2000s.) Then came the most-publicized case of well-water contamination near fracking operations, in Dimock Township, Pa., just east of Bradford County; the federal Environmental Protection Agency said in 2012 that preliminary results found the water was safe to drink, though it did contain chemicals as well as explosive methane. Those results have been debated. The nonprofit investigative news organization Pro Publica has reported numerous confirmed health and safety problems related to drilling and fracking, including a house explosion near Cleveland, Ohio, after gas leaked into the home's water well.

    Fracking is now regulated almost entirely by the states, though the EPA is slowly moving toward federal regulation. In the meantime, government has only lightly tapped the brakes to tighten regulation of the industry.

    Drinking water contamination has been the biggest public relations problem for the industry. But the contaminants can come from several sources: from the hydraulic fracturing process itself, from the waste water, from the pits where drilling chemicals are stored, or from transporting chemicals and wastewater. The industry says that examples of contamination are very rare. Lisa Jackson, who was then then the EPA administrator, echoed the industry position that problems aren't systemic to fracking. "If you get a bad operator in there, somebody who’s not responsible, who’s not seeing how important it is to get this right, they can contaminate an aquifer," she said in a June 2011 talk. Environmentalists argue that pollution is an unavoidable part of the drilling process, not the result of shoddy practices.

    It’s theoretically possible, though unproven, that some of the tainted water and dangerous gases might travel through deep underground crevices to unexpected places, such as the aquifers used for private wells and community water supplies. A July 2012 study by researchers at Duke University and California State Polytechnic University at Pomona found that salty water from deep underground could make its way into drinking water near the surface.

    New technology is creating a boom in energy extraction in the Permian Basin. For most residents, it's a welcome boost to the economy.

    At the surface, there have also been outright accidents, leaking oil and toxins. Well casings have cracked, and sometimes pumping in more concrete for a "squeeze job" to stop the escaping water and chemicals won't stop the damage.

    In Bradford County, the pleasant pond at the vacation home of Truman and Bonnie Burnett is a murky swamp, ringed by dead trees, after tens of thousands of gallons of drilling fluid spilled in 2009 from the property of their neighbor, who had signed a gas lease. His wife won't come back to their vacation home anymore, Truman Burnett says, so he has nailed a framed photo of her on a tree.

    An industry lobbying group in North Dakota, where fracking is common, said the industry is doing what it can, but some mistakes are inevitable.

    "You're going to have spills when you have more activity," Ron Ness, president of the North Dakota Petroleum Council, told a reporter with the investigative journalism organization Pro Publica, which documented more than 1,000 accidental oil spills in North Dakota in 2011.

    Related story

    Sorting through the claims, counterclaims about environmental impact of 'fracking,' 

    Advice for a neighbor
    "Our water changed on March 15, 2011," said Carol French, the dairy farmer, a few months after the drilling began in December 2010. What remains unclear is whether health issues experienced by her daughter and some of her cows afterward were caused by the turbid tapwater.

    "My daughter was 24 at the time," French said. "She had a high fever for three days. I thought she had the flu. She had stabbing pains in her abdomen, and diarrhea. ... When I took her to the emergency room they checked her urine and blood to only find that the white blood cell count was high in her urine not in her blood. They then did a MRI to find that she had 'free floating fluid' in her abdomen, and her spleen, liver, and right ovary were enlarged. They didn't know what was wrong with her."

    Then her daughter went to stay with a friend while looking for work. "Nine days later, all symptoms were gone and she was acting like herself," her mother said.

    When she came back to visit, the symptoms returned. "When I would visit my daughter, my rashes would disappear, but return within five days after returning to my home. Our cattle seem to have breeding problems, but I can't say it's strictly due to my water changing without tests being done."

    Now she has bad water a few times a month. When the tap water gets cloudy, she drives around to the nine gas well pads within a mile of her farm, writing down which ones have trucks and men working. She agrees that alone is a fruitless way of identifying a cause.

    Slideshow: Drilling down and out in Texas

    Jim Seida / NBC News

    Watch a drilling crew at work near the small town of Garden City as they drill an oil well that eventually will extend more than a mile deep and a mile sideways in the Permian Basin.

    Launch slideshow

    She hasn't tested her water yet; nor has the state Department of Environmental Protection. They've been squabbling over the rules of how to test and whether the state will act if the results implicate the fracking operations. It's going to cost her $3,200 to get a lab to test for all the acids, detergents and poisons that companies say they use for fracking – or hydraulic fracturing – to break up underground shale and remove oil and natural gas.

    Meanwhile, she tests her water for coliform and E. coli bacteria, meeting USDA and FDA standards for a dairy operation, and she ships the milk off to America's food supply.

    No studies have found fracking chemicals have entered the food chain. Two Cornell University researchers have reported health impacts on cattle near drilling operations, but industry backers called the study "deeply  flawed."   

    French started out as a supporter of fracking. She signed her own gas lease to allow fracking on the farm near Ulster, pocketing $13,600 starting back in 2006, but no company drilled on her land. Now she questions the economic benefits of fracking and worries about the environmental consequences.

    "The standards of yesteryear," she said, "do not meet the industrial activities surrounding us. Like my milk inspector told me, 'You cannot find something you are not looking for.'"

    A lot of her neighbors in the county, however, have put serious money in their pockets.

    Among them is Robert "Bob" Wilmot, a former pipefitter who was able to rebuild a bed and breakfast he runs with his wife ("the best cook in the county," he says) in the small Bradford County town of Rome. He got $5 an acre for a gas lease on his 250-plus acres, then $75,000 more to let the gas company turn his hay field into a pond, and another $25,000 to allow a pipeline. Everyone in the county has heard stories of people making hundreds of thousands, even millions for one of the big compressor stations that send the gas down the pipeline. When the gas rush began here, churches put up signs such as "Thank God the gas companies are here."

    Wilmot says he has confidence in the gas companies, and if anything he believes the state regulators are too tough.

    But Wilmot does have a few reservations. Asked what advice would he offer to the people ten miles up the road in New York, which is considering fracking, he replied. 

    "I'd go ahead. I wouldn't be in favor of putting fracking over by the Finger Lakes. That's a beautiful area. You can't replace them lakes."

    Bill Dedman is an investigative reporter for NBC News; he reported from Pennsylvania. Karen Weintraub is a freelance health and science reporter in Boston.

    More from Power Shift, an NBC News/CNBC special report:

    Part 1: Energy boom dawning in America

    Part 2: Oil, gas sector fuels US economy

    Part 3: How the energy boom could shake up the global order

    1210 comments

    Forcefully injecting toxic chemicals into the ground... How could that possibly be bad?

    Show more
    Explore related topics: energy, oil, economy, world, natural-gas, featured, geopolitics, richard-engel, robert-windrem, fracking
  • 1
    Apr
    2013
    4:28am, EDT

    How the US oil, gas boom could shake up global order

    As energy production in North America climbs, NBC News' Chief Foreign Correspondent Richard Engel explores what it will mean to oil-producing countries in the Middle East.

    By Richard Engel and Robert Windrem, NBC News

    Without fanfare, China passed the United States in December to become the world's leading importer of oil – the first time in nearly 40 years that the U.S. didn’t own that dubious distinction. That same month, North Dakota, Ohio and Pennsylvania together produced 1.5 million barrels of oil a day -- more than Iran exported.

    America’s drive for energy independence

    As those data points demonstrate, a dramatic shift is occurring in how energy is being produced and consumed around the world – one that could lead to far-reaching changes in the geopolitical order.

    U.S. policy makers, intelligence analysts and other experts are beginning to grapple with the ramifications of such a change, which could bring with it both great benefits for the U.S. and potentially dangerous consequences, including the risk of upheaval in countries and regions heavily dependent on oil exports. 


    But many experts say the U.S. would be the big winner, in position to reshape its foreign policy and boost its global influence. 

    "People already are looking at the U.S. differently, seeing the U.S. as much more competitive in the world,” said energy analyst and author Dan Yergin, saying that he first noticed the change in the world view of the U.S. at the World Economic Forum in January in Davos, Switzerland.

    Slideshow: Drilling down and out in Texas

    Jim Seida / NBC News

    Watch a drilling crew at work near the small town of Garden City, Texas, as they drill an oil well that eventually will extend more than a mile deep and a mile sideways in the Permian Basin.

    Launch slideshow

    As detailed in the first two installments of Power Shift, an NBC News/CNBC special report, the United States is reaping the benefits of an energy boom created by new drilling technologies that have unlocked vast domestic oil and natural gas reserves. Coupled with decreasing demand due to energy efficiency and continued cultivation of alternative energy sources, an increasing number of experts believe the U.S. could achieve energy independence by the end of the decade – realizing a dream born during the gas crisis of 1973.

    But who would be the global winners and losers in such a scenario?

    Most U.S. policy makers and experts agree that the U.S. and its allies – particularly its North American neighbors -- would be the biggest beneficiaries.

    Boom helps Iran sanctions stick
    In fact, they say, the West already has realized one major benefit: the success of international sanctions against Iran over its nuclear program.

    Carlos Pascual, the State Department’s coordinator for international energy affairs, noted last month at the CERAWEEK energy conference in Houston that increased U.S. oil production, coupled with a boost in exports from Iraq and Libya, has kept oil prices stable despite the loss, because of sanctions, of up to 1.5 million barrels a day in Iranian exports.

    “What this has taught us, and helped underscore, is that within the world we live in today, hard security issues and energy policy issues have become fundamentally intertwined,” he said.

    Interactive map: Where the US produces its energy. Click to enlarge.

    Yergin, who also is a CNBC energy consultant and author of the energy-focused nonfiction best-sellers "The Quest" and "The Prize," put it this way: "People talk of the future impact. The increase in U.S oil production has already had an impact: Sanctions wouldn't have been effective without U.S. oil production. …  We've added (within the last year) almost as much as Iran was exporting before sanctions.”

    Hossein Moussavian, a former Iranian ambassador to Germany and nuclear negotiator who's now a fellow at the Woodrow Wilson School at Princeton University, said "the radicals" in Tehran failed to foresee the changing energy picture, believing that sanctions wouldn't be imposed and that, if they were, they wouldn't work because oil prices would surge.

    "The Iranian mistake was to believe …  the threats of referring Iran to the United Nations Security Council, imposing sanctions, was just a bluff," he said.

    In the longer term, observers say that the Organization of Petroleum Exporting Countries (OPEC) and many of its member nations are likely to be the biggest losers if the U.S. continues to cut oil imports, likely decreasing oil prices in the process.

    "A dramatic expansion of U.S. production could … push global spare capacity to exceed 8 million barrels per day, at which point OPEC could lose price control and crude oil prices would drop, possibly sharply," the U.S. intelligence community's internal think tank, the National Intelligence Council, said in its “Global Trends 2030” report in December. "Such a drop would take a heavy toll on many energy producers who are increasingly dependent on relatively high energy prices to balance their budgets."

    With some analysts predicting that oil prices could drop as low as $70 to $90 a barrel – down from the current price of nearly $110 per barrel of Brent crude oil – a “scramble” among OPEC members for market share could ensue, said Edward Morse, an energy analyst with Citigroup and co-author of a recent report on titled “Energy 2020: Independence Day.”

    An International Monetary Fund analysis indicates that many major oil-producing states need more than that lowest price level to meet their budgets and would be forced to increase output or reduce spending, which could trigger unrest. Among them, according to the report: Iran, Libya and Russia, at $117 a barrel; Iraq, $112; Yemen, $237; and the UAE, $84.

    Iraq, which has had production from its rich oil fields curtailed by war or sanctions for half of the 53 years of OPEC’s existence, poses another challenge to the organization.

    Now that it’s finally free of such interference, its production is increasing by between 500,000 and 900,000 barrels a year, making it the second fastest growing oil-producing country in the world after the U.S. 

    “And, by God, no one’s going to impose any quota limitations on them,” said Morse, referring to Iraq’s OPEC partners. “So part of the challenge to OPEC is internal as well as external.”

    Can Saudis maintain market-maker role?
    Analysts say OPEC heavyweight Saudi Arabia, which controls vast reserves of oil and needs $71 a barrel to meet its budget, according to the IMF, will do everything it can to remain the market-maker. But in that role, it will face new challenges, they say.

    “Over time, it should become increasingly challenging for Saudi Arabia to ‘overproduce’ and bring down prices to punish wayward OPEC members; without this disciplinary mechanism, it is unclear whether OPEC can remain cohesive,” according to the Citigroup report.

    For its part, OPEC professes to be not unduly alarmed by the U.S. oil and natural gas boom. It highlights the "considerable uncertainties" surrounding wells drilled using hydraulic fracturing, or “fracking,” and associated technologies.

    Yergin said he believes that the Saudis will be able to withstand the turbulence, and that they will provide a buffer for the organization’s lesser producers.

    “It's too quick to write the obit for OPEC,” he said. “… The Saudis will figure it out. They are re-orientated to Asian markets, turning left instead of right.”

    New technology is creating a boom in energy extraction in the Permian Basin. For most residents, it's a welcome boost to the economy.

    But some members of the oil cartel -- particularly Nigeria and Angola -- already are feeling the impact of the U.S. production surge, according to the Citigroup report. U.S. imports from the two countries dropped to 700,000 barrels a day at the end of 2012, down from 1.6 million barrels in 2007. That’s because U.S. production of light, sweet crude -- the kind of oil the West African nations produce -- has burgeoned in recent years. Citigroup forecasts that by the end of 2013, the market for Nigerian oil at Gulf Coast refineries could entirely dry up.

    Longer term, say by 2020, cheaper heavy oil from Canada, freed from the so-called oil sands by new recovery technologies, could push similar oil from Venezuela out of the U.S. Gulf Coast market,  (assuming the Obama administration approves construction of the Keystone XL pipeline to carry it), according to forecasts.

    Mexico also is expected to increase production, offering the U.S. access to another convenient and friendly provider.

    "The Eagle Ford formation in Texas extends into Mexico and if you look at the Gulf, you'll see thousands of black dots marking oil platforms on the U.S. side but nothing on the Mexican side,” said Yergin. “That's changing. There is a political consensus among the three major parties on energy. You will see less immigration from Mexico. Mexico could become more of a BRIC (the term used for fast-developing economies like Brazil, Russia, India and China) than Brazil."

    Besides guaranteeing a stable domestic energy supply, those energy resources add tools to the U.S. diplomatic toolbox, said David L. Phillips, director of the Peace-building and Human Rights Program at Columbia University.

    "Why permit ourselves to be held hostage to regimes hostile to our national interests and who give safe harbor to those who would do us harm?" he asked. "… The glaring example is Venezuela. (Hugo) Chavez was so strongly anti-American and he was providing energy to our enemies. They should pay the price for non-cooperation."

    Current and former diplomats note that the U.S. also could use its increased natural gas production to weaken rival Russia’s near monopoly on natural gas exports to Europe, via its state-controlled energy giant Gazprom. Already, declining prices fueled by the U.S. boom have benefited the European market.

    "What has emerged is a competitive market that allowed the utilities of Western Europe to renegotiate their contract with Gazprom, affecting both prices and financing terms," said the State Department’s Pascual.

    Adding to the pressure, the U.S. firm Cheniere Energy last month signed a 20-year deal to export enough liquefied natural gas to the British utility Centrica PLC to heat 1.8 million homes starting in 2018 – the first pact of its kind.

    Growth slowing in China, India
    As for China and India, both of which are expected to import increasing amounts of energy for years to come, analysts see indications that economic growth is slowing in both countries.

    “In a pattern similar to the abrupt slowdown in demand growth seen in the Asian Tigers in the 1990s, Chinese demand growth has slowed to a more tepid 3 (percent) to 5 percent rate as compared to the double-digit growth seen in the early 2000s,” said a Citigroup report by analyst Seth Kleinman released last week.

    That slowdown is in part due to the diminishing competitive edge that China enjoys over the U.S., Yergin said.

    “Chinese wages are going up 20 percent a year. U.S. energy efficiency and increased production helps the U.S. in the mix on the global competitive landscape, he said, noting that Dow Chemical recently announced it will invest $4 billion in U.S. petrochemical production. “…That doesn’t happen without the U.S. advantage in energy.”

    Citigroup's Morse and other analysts said the slowing Chinese economy and energy insecurity could prompt China to more militarization in the Far East -- a dangerous development in a region already beset by nationalist disputes and where the U.S. is expected to focus increasing attention. But none suggests that the Chinese are likely to challenge the United States as a global power, saying Beijing has neither the military assets nor the desire. Its strategy remains regional and attuned to "short-range engagements," Morse wrote.

    The impact of the rebalancing of global energy production could be more severe in other nations.

    Trevor Houser, a former energy analyst in the Obama administration State Department, worries about the prospect of failed states.

    "If you look at the consequences of more U.S. production and reduced sales from OPEC, some would see that as a benefit," said Houser, now a partner with New York-based Rhodium Group, a global market analysis firm. "But starving those economies of oil revenue will surely have disruptive effects. It is not necessarily a good development for U.S. foreign policy and geopolitical stability in general."

    AP file/Hassan Ammar

    A U.S. F-18 fighter jet, left, lands on the aircraft carrier USS Abraham Lincoln as a U.S. destroyer sails alongside during exercises in the Persian Gulf in 2012.

    Houser also said that U.S. energy independence could lead to isolationist policies, but will not insulate Americans from global price disruptions.

    "The price Americans pay at the pump will still be determined by events in the global oil market, yet falling U.S. oil imports (are) going to reduce political support for safeguarding those global markets, and no one is willing or able to step up to the plate to replace us,” he said. “... The U.S. economy will still be vulnerable if someone blows up a Saudi port."

    More from Power Shift, an NBC News/CNBC special report:

    Part 1: Energy boom dawning in America

    Part 2:  Oil, gas sector fuels US economy

    That issue – specifically, “Do we leave the Middle East once our energy needs are secure?” – came up at the World Economic Forum in Davos, Switzerland, in January, said Yergin, recalling that “an oil minister came up to me and said, ‘Please don’t leave us.’”

    Pascual, the State Department official, argues that such fears are overblown.

    "These changes in no way change the U.S. commitment to global security, to peace and stability in the Middle East and to security in the transit lanes,” he said, referring to oil shipping routes. “Some people have asked is the United States going to become disinterested. The answer is no. It is absolutely in our self-interest to stay engaged.”

    Richard Engel is NBC News' chief foreign correspondent; Robert Windrem is a senior investigative producer. 

    Coming next Monday: Digging into the environmental consequences of 'fracking' 

    More from Open Channel:

    • Suspect in death of Colo. prisons director threatened to kill prison staff
    • Seniors 'brainwashed' by controversial scooter ads, doctor says
    • Sandusky: Paterno would not have let me coach if he thought I was a pedophile

    Follow Open Channel from NBCNews.com on Twitter and Facebook 


    1053 comments

    Sounds like a good thing to me. Let China garrison the Middle East to safeguard their oil supplies & deal with 3000 years of conflict instead of us.

    Show more
    Explore related topics: energy, oil, economy, world, natural-gas, featured, geopolitics, richard-engel, robert-windrem, fracking
  • 6
    Aug
    2012
    1:29pm, EDT

    China has its own subprime investments: Meet 'Golden Elephant No. 38'

    By Kelvin Soh and Michael Flaherty
    Reuters

    Taihe, China — Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces.

    "They haven't even built a proper road here," said Li Chun, a car repairman, who said he lives in the project. "The local government is holding onto the flats and only wants to sell them when prices go up."

    Golden Elephant No. 38 is one of thousands of "wealth-management products", instruments aimed at monied investors, which have shown phenomenal growth over the last five years. Sales of them soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.90 trillion), according to a report by CN Benefit, a Chinese wealth-management consultancy.

    They are usually created in China's "shadow banking" system - non-banking institutions that are not subject to the same regulations as banks - which has grown to account for around a fifth of all new financing in China.


    Follow Open Channel from NBC News on Twitter and Facebook.


    Like the subprime-debt lending spree in the United States that helped spark the 2008 financial crisis, the products are often opaque, and usually dependent on high-risk underlying assets, such as the Taihe housing project.

    Warning bells
    Financial instability in the world's second-largest economy could have global ramifications, and warning bells have begun to sound about the way these products are marketed in China.

    It has become a mammoth industry, comprising an array of financial products. Analysts have different ways of measuring the size of the sector. Barclays estimates some 22 trillion yuan worth of wealth management products will be issued this year. Fitch Ratings says China's banks had about 10.4 trillion yuan in wealth management product liability at the end of June this year

    Reuters reviewed more than 50 wealth-management and trust loan products, available online and at bank branches in China, with the aim of tracking, for the first time in certain cases, where investors' money in these products ends up.

    All, except two, failed to explain or even display the underlying asset behind the product.

    The China Banking Regulatory Commission, which oversees banking products, said more than 20,000 wealth management products were now in circulation, from a few hundred just five years ago.

    In an email response to the questions raised in this story, the regulator told Reuters new banking regulations require more transparency about these products.

    "It is uncommon to find wealth management products that fail to clearly specify the underlying securitized assets," it said, adding that a regulation issued last year "clearly states that WMP prospectuses must indicate how the money is being used, and the percentage of money that is being put into each asset class."

    The commission is looking into further strengthening the regulatory framework over these products, and "will continue to encourage the wealth management industry's growth under the principles of transparency and sufficient risk control".

    'Ponzi Scheme'
    After a five-year bonanza in sales of these products, signs of trouble are building. China Credit Trust Co, one of the country's biggest trust companies, has disclosed that one of its wealth funds, Jinkai #1, is at risk of default because of money it lent to coal company Zhenfu energy Group. Zhenfu's boss has been arrested, amid reports he owed a total of 500 million yuan.

    "Zhenfu Group and related companies have already been sued three times in the second quarter, all because of off-the-balance-sheet fundraising from underground channels," China Credit Trust said on its website, adding that government teams were trying to sort out who was owed what.

    If the fund were to fail, it would be one of the first in China's fast-growing trust industry and open up a test case on who is ultimately liable when investment products go bad.

    It called to mind the massive losses and widespread bankruptcies in China's trust industry a decade or so ago, when the Guongdong International Trust and Investment Corporation, then one of China's largest state-owned companies, went bankrupt. Some analysts are warning of potential fraud in the industry.

    "Some banks have been using new (wealth-management product) proceeds to cover losses from previous products in the pool," said David Cui, a strategist at BofA Merrill Lynch. "In our view, this is not fundamentally different from a Ponzi scheme. The music may stop at a certain point if and when WMP asset size stops expanding."

    Managing troubled loans
    Wealth management products are investment tools with a short maturity that banks market as a low risk vehicle for returns higher than savings deposits. The products pool money to invest in a variety of different assets. Some of them, such as the Golden Elephant and Jinkai #1, are linked to high-risk trust loans, with the banks playing a middleman role between the trust company and investor.

    At first, products such as Golden Elephant were viewed as a beneficial way for China's banks to manage troubled loans and for its citizens to grow their money by investing beyond the government-set savings rate.

    But as China's growth engine slows, concerns are rising that the mountain of products, many with a maturity of a mere four weeks, will struggle to keep the money flowing in. That would leave banks and investors on the hook for any bad lending stemming from these products and strain the financial system at a time when the country's economy looks fragile.

    "The concern is if some investors begin to experience losses in these products, this could create a panic among other investors," said Mike Werner, an analyst at Sanford Bernstein. "This could result in investors fleeing these products and result in a liquidity squeeze for this market."

    Especially worrisome is the quality and transparency of the products. Liu Shiyu, a vice-governor at the country's central bank, said in June many banks had failed to sufficiently disclose the risks involved in investing in these products, but he did not announce any measures to curb the sector's growth.

    Engine of wealth
    The 14-page prospectus for "Wealth Management Plan No. 350", sold by China Merchants Bank, says it aims to raise 200 million yuan ($35 million). Not until page 5 is it revealed that the product is linked to the Railway Ministry - whose 2.2 trillion yuan debt ($346 billion) exceeds the combined worth of all major U.S. banks.

    The railway operator is seeking to refinance 2.43 trillion yuan ($392 billion). The state-run Beijing Times said it lost 7 billion yuan in the first quarter of this year alone, hit by debt repayments of more than 28 billion yuan in January-March.

    The prospectus also says up to 70 percent of the product's proceeds can be used for investments in "other assets", without saying what these assets are. Bank officials said the money is usually put into a common pool for investments, but said they were unable to say exactly where the money was invested.

    In the American subprime-mortgage bubble, much of the credit-derivative obligations and other investment instruments underpinned by risky home loans were deemed AAA by ratings agencies. In China, domestic agencies give the railway ministry's bonds their highest ratings -- higher even than U.S. treasuries.

    A product called "Wealth Accumulator," sold by Bank of China, only states that the money is being put into high-quality assets that will yield guaranteed returns "significantly higher than term deposits of similar tenor." No other details are offered.

    "The problem is that not even high net-worth Chinese people may fully understand the risks involved," said Gigi Chan, who runs the China Opportunities Fund at Threadneedle Investments, which manages more than $123 billion in assets globally.

    "They're being told there are guaranteed returns, and people need to consider if these returns are really guaranteed."

    Subprime similarities
    The 5 trillion yuan trust industry, sometimes referred to as "shadow banks", emerged soon after China began opening up in 1979. It was meant to encourage innovation within the financial services sector by lending to higher risk companies that traditional banks would not lend to.

    Initially, the trust companies handed out loans by channeling money from institutional investors to companies that needed them, taking a cut in the process. That has changed in the past few years.

    Banks started working closely with trust companies by packaging trust loans into bite-sized wealth management products to cater to yield-chasing depositors, or by selling trust loan products directly to its depositor base at their retail branches.

    Banks also began transferring non-performing debts to roughly 60 trust companies, which in turn packaged the debt into investment products that were sold back to retail customers or marketed with a bank. These vehicles typically focused on property investments, because Beijing was cracking down on bank loans to developers.

    Around the same time, many Chinese banks began offering higher returns on securities they labeled "wealth management products" to people looking for a better return on their money.

    Cash pressures
    Deposit growth at Chinese banks, meanwhile, slowed to around 13 percent last year, its slowest pace in decades.

    Money flowing out of saving deposits and into wealth-management products poses a potential threat to banking stability, because it reduces the amount of money banks have on hand to lend and could lead to cash pressures, analysts warn.

    "Fitch has long emphasized that the greatest risk associated with Chinese banks' wealth management activity is the strain it places on funding and liquidity," Fitch analyst Charlene Chu said in a research note. "The risk was easily controllable when the amount of outstanding products remained small. But it is increasingly difficult for Chinese banks to manage."

    Chinese banks say they prefer straight deposits, but that the wealth tools are a response to the demands of a market that has shown explosive growth.

    "Customer expectations on financial services have been rising," China Construction Bank President Zhang Jianguo told Reuters. "To ensure our wholesome development, to keep customers and attract new ones, wealth management products have now become an essential part of any financial offering."

    All other banks mentioned in this report declined to comment.

    Short-term deals
    The banking regulator implemented rules last year to curb sales of some of the riskier products, including those with one-month or less maturity dates, and those linked to Chinese pawn shops.

    But most products still carry tenures of less than one year -- advisory firm KPMG says only 3 percent extend beyond two years. Information is opaque, rules are open to interpretation.

    "One of the key problems is that short-term financing is being used to pay for a long-term project," said May Yan, head of China bank research at Barclays in Hong Kong. "Infrastructure projects should be funded by long-term bonds. Unfortunately, China doesn't have that."

    The banking regulator has tried to protect the small investor with a rule issued last year requiring that only individuals with more than 1 million yuan in cash could invest directly into trust products.

    At bank branches in two Chinese cities visited as part of the Reuters review, that rule was easy to get around.

    Customers at banks in Nanchang and Shenzhen, unable to cough up the initial 1 million yuan investment, were offered the option of pooling their money together with others to meet the minimum sum required.

    'On paper...'
    The trusts, also called "shadow banks", create the wealth management products and then give them to banks to sell to their customers.

    The bank staff Reuters spoke to stressed the low-risk nature of the products, despite the higher-than-normal returns being promised. They often could not say where the proceeds of the product would be invested.

    "On paper, these are not principal guaranteed but you don't have to worry about that," said a wealth manager at a local branch of Bank of Communications, China's No. 5 lender. "All our clients who've previously bought these products got their principal plus interest back."

    It is not entirely clear who bears the risk if the products default.

    China's courts have in the past ordered banks to compensate investors who had lost money buying mutual funds and other financial products, prompting some to suggest a string of such defaults could weigh heavily on China's major lenders.

    But the fine print in most of the documentation for these products puts the onus squarely on the investor.

    "The question really is, at the end of the day, who is on the hook?" said Werner at Sanford Bernstein.

    Hao Xueqi, a homemaker who was at Shenzen branch of China Construction Bank, was unfazed.

    "I've bought these products and have always gotten my money back," she said. "I usually go with the bigger banks because they have a better reputation and won't close down with my money."

    'A model province'
    The proceeds from sales of the "Golden Elephant" product were channeled to Taihe City Construction Co., a local government financing vehicle. Taihe is an agricultural town in impoverished Jiangxi province, where annual incomes reached 4,500 yuan a year in 2010, barely a tenth of Beijing residents.

    Taihe City Construction Co. used the 50 million yuan raised to pay off part of the cost of constructing the subsidized housing units, according to the product's prospectus.

    "The central government wanted more subsidized housing, so they just removed all the farmers here and told them to leave," said Taihe resident Xiao Hongmei. "The farmers who used to live here were promised flats, but many of them haven't got anything so far."

    A spokesman at the publicity department of the Taihe government office declined to comment, referring queries to the Jiangxi provincial government.

    Xu Weiguo, a deputy director at the province's economic planning department, said Jiangxi was a model province in keeping any economic risks to a minimum.

    "We always study the central government's instructions very closely and follow the rules," Xu said in a telephone interview. "There will not be any problems with our books."

    2 comments

    . I am very surprised the REPUBLICAN PARTY haven't set up their own "Shadow Banking" system in America. The REPUBLICAN PARTY hates any sort of banking regulations. .

    Show more
    Explore related topics: china, economy, investments, featured
  • 18
    Jun
    2012
    2:24pm, EDT

    New maps show the loss of US manufacturing jobs state by state


    Follow Open Channel on Twitter and Facebook.


    By Bill Dedman
    Investigative Reporter, NBC News

    A new study of manufacturing employment by the Investigative Reporting Workshop at American University shows that factory jobs declined by nearly half since the peak in 1979, when there were 21 million manufacturing workers.

    But the researchers also found that manufacturing employment grew in some states, all of them west of the Mississippi River. And many communities, such as York, Pa., still see manufacturing as integral to their survival.

    The study is part of a year-long project to revisit the 1991 classic work of investigative reporting, "America: What Went Wrong," by the reporting team of Donald Barlett and James Steele. Over the next year, the project team will examine how public policy has shaped America's economic crisis.

    The study of manufacturing data found that some states have lost much more than others. In New York, manufacturing jobs are down by three-fourths, in Pennsylvania by two-thirds. The story examines attempts to revive manufacturing, as well as a shift to more high-tech, high-skilled jobs.

    An interesting interactive map shows state-by-state, year-by-year shifts in manufacturing employment.

    Here are the links:

    • Home page for the series
    • Interactive map showing changes in manufacturing jobs
    • Additional maps showing manufacturing jobs in each state


    96 comments

    Our countries economy is in way over its head and our corrupt, and now rich, politicians put us there.

    Show more
    Explore related topics: economy, jobs, manufacturing, featured
  • 15
    Jun
    2012
    6:02am, EDT

    City by city, here's your guide to the painfully slow economic recovery

    Scott Olson / Getty Images

    In President Obama's Chicago, one of the metro areas with very weak economic growth in new economic data, job seekers listen in 2009 to a recruiter during a job fair held by the City Colleges of Chicago.

    By Bill Dedman
    msnbc.com

    The limping gait of the U.S. economy remains painful for many Americans and for President Barack Obama's re-election chances, with the vast majority of metro areas making only small, halting steps toward recovery, according to the latest Adversity Index data from Moody’s Analytics and msnbc.com.

    Data released this week and included in the index, which measures changes in jobs, housing starts, industrial production and house prices, reflect changes in the economy through April.

    The good news: The economy improved in April in every region of the country. Not a single state remains in recession. If someone in your family is out of work, that label may require a bit of clarification: While many have not recovered the jobs lost in the recession, no state is still in a sharp decline. In other words, one can be climbing out of a hole and still be in the hole. And looking more closely at the nation's 384 metro areas, nearly 90 percent have moved out of the recession into at least a modest recovery. The share of metro areas in recession in April was the lowest since the previous July.

    The bad news: Only two states have entered a robust economic expansion. Among metro areas, only 6 percent are in expansion. The rest are stuck in a weak recovery, making small advances and not gaining much economic traction.



    Follow Open Channel on Twitter and Facebook.


    Four years earlier, at the same point in President George W. Bush's second term, 19 states had expanding economies. That number fell rapidly to only one by the time of the 2008 election, when Obama defeated Republican Sen. John McCain, and was at zero just a month after his inauguration. In the three-plus years of the Obama administration, only Alaska and North Dakota have accelerated into a full recovery, and no one expects either of those two Republican states to vote for Obama in 2012.

    Check your state or metro area
    The Adversity Index is calculated by Moody's Analytics based on a design developed with msnbc.com. It places each area in one of five economic categories: Expansion is the best, recession the worst, and in the middle are three transition categories.

    You can see the economic status of each state or metro area on an interactive map from Moody's Analytics. Here's the link for free access through a Moody's partnership with msnbc.com.

    A slow recovery
    "Although April regional data appeared favorable for continued recovery, more recent national data have been soft," reported economist Brent Campbell at Moody's Analytics. "May payroll employment came in below expectations, and the forecast has been revised lower. As a result, risk levels could rise for metro area and state economies in coming months."

    Here's a snapshot from the April data:

    States

    • 2 states are in a steady expansion: Alaska, North Dakota.
    • 5 are at risk, meaning they're still in positive territory but slipping toward recession: Illinois, Maine, Mississippi, Rhode Island, Wisconsin.
    • The remaining 44 (including D.C.) are in recovery, meaning they're still weak but rising toward expansion. The states improving into this category in April were Alabama, Connecticut, Missouri, Oregon and South Carolina, according to Moody's.
    • 0 are in a moderating recession, meaning their economies are not contracting as severely as six months earlier.
    • 0 are in an unrelenting recession. It's been that way since January. The last state out was Georgia.


    Metro areas

    • 21 metro areas are in a steady expansion: Amarillo, Texas; Anchorage, Alaska; Austin, Texas; Bismarck, N.D.; Burlington, Vt.; Cheyenne, Wyo.; Clarksville, Tenn.; Columbia, Mo.; Columbus, Ind.; Dubuque, Iowa; Fargo, N.D.; Grand Forks, N.D.; Holland, Mich.; Lafayette, Ind.; Lafayette, La.; Lubbock, Texas; McAllen, Texas; Midland, Texas; Odessa, Texas; Sioux City, Iowa; Waterloo, Iowa.
    • 76 are at risk, meaning they're still in positive territory but slipping toward recession. That's the fewest since September 2010, Moody's reported. They are Abilene, Texas; Akron, Ohio; Alexandria, La.; Auburn, Ala.; Augusta, Ga.; Bangor, Maine; Battle Creek, Mich.; Beaumont, Texas; Bloomington, Ind.; Bloomington, Ill.; Bridgeport, Conn.; Brunswick, Ga.; Chicago, Ill.; Chico, Calif.; Cleveland, Ohio; College Station, Texas; Columbus, Ga.; Columbus, Ohio; Danville, Ill.; Decatur, Ala.; Eau Claire, Wisc.; Elizabethtown, Ky.; Eugene, Ore.; Farmington, N.M.; Flagstaff, Ariz.; Florence, Ala.; Fond du Lac, Wisc.; Gainesville, Fla.; Great Falls, Mont.; Greeley, Colo.; Ithaca, N.Y.; Kennewick, Wash.; La Crosse, Wisc.; Lake Charles, La.; Lake County, Ill.; Lancaster, Pa.; Las Cruces, N.M.; Lebanon, Pa.; Lewiston, Maine; Los Angeles, Calif.; Madison, Wisc.; Mansfield, Ohio; Merced, Calif.; Michigan City, Ind.; Milwaukee, Wisc.; Monroe, Mich.; Morristown, Tenn.; Mount Vernon, Wash.; Muncie, Ind.; Myrtle Beach, S.C.; Naples, Fla.; North Port, Fla.; Olympia, Wash.; Owensboro, Ky.; Panama City, Fla.; Pensacola, Fla.; Pittsfield, Mass.; Port St. Lucie, Fla.; Portland, Maine; Providence, R.I.; Punta Gorda, Fla.; Richmond, Va.; Saginaw, Mich.; Sandusky, Ohio; Santa Rosa, Calif.; Sheboygan,  Wisc.; Springfield, Ill.; Sumter, S.C.; Virginia Beach, Va.; Waco, Texas; Warner Robins, Ga.; Wausau, Wisc.; Wenatchee, Wash.; Wichita Falls, Texas; Wilmington, N.C.; Yakima, Wash.
    • The largest group, the 242 metro areas not named here, are in recovery, meaning they're still weak but rising toward expansion.
    • 31 are in a moderating recession, meaning their economies are not contracting as severely as six months earlier: Albuquerque, N.M.; Anderson, Ind.; Anderson, S.C.; Anniston, Ala.; Bremerton, Wash.; Carson City, Nev.; Cleveland, Tenn.; Dalton, Ga.; El Centro, Calif.; Jackson, Tenn.; Lake Havasu, Ariz.; Lakeland, Fla.; Lewiston, Idaho; Longview, Wash.; Madera, Calif.; Missoula, Mont.; Modesto, Calif.; Ocala, Fla.; Palm Bay, Fla.; Palm Coast, Fla.; Pine Bluff, Ark.; Prescott, Ariz.; Racine, Wisc.; Rocky Mount, N.C.; Rome, Ga.; Salem, Ore.; Tallahassee, Fla.; Visalia, Calif.; Youngstown, Ohio; Yuba City, Calif.; Yuma, Ariz.
    • 14 are in an unrelenting recession: Albany, Ga.; Champaign, Ill.; Dothan, Ala.; Elmira, N.Y.; Fort Smith, Ark.; Gulfport, Miss.; Huntsville, Ala.; Lawton, Okla.; Montgomery, Ala.; Norwich, Conn.; Pascagoula, Miss.; Pueblo, Colo.; Reno, N.V.; Spokane, Wash.

    About the Adversity Index

    The index is based on changes in employment, housing starts, industrial production and house prices. Each geographic area is judged to be in recession, at risk of recession, recovering from recession, or expanding. More about the index is at http://www.msnbc.msn.com/id/29866676/ns/us_news-the_elkhart_project/t/how-adversity-index-detects-trends-local-economies/.

    For an area to be deemed in recession, the six-month moving average of the index is lower than it was six months earlier. To be deemed in expansion, the opposite is true. The categories "at risk" and "recovery" are transition stages: At risk indicates that the economy is slipping from expansion toward recession, while recovery indicates movement from recession toward expansion.

    357 comments

    There is no recovery, the world is digging a deeper & deeper hole. All the GFC was caused by unregulated banking & business sector then criminal action by governments all over the planet has stolen the legal taxes paid to governments to run nations & used that to bail out irresponsible/c …

    Show more
    Explore related topics: economy, recession, featured, moodys, election-2012, adversity-index
  • 6
    Jun
    2012
    12:37pm, EDT

    Banking industry gradually finding a new 'normal'

    By Wendell Cochran
    Investigative Reporting Workshop at American University

    Bank profits are rising and lending is growing as the battered industry struggles to regain a semblance of normality, new government figures show.

    Some of the signs:

    • Profits are up. Banks made $35.6 billion in the first quarter, according the Federal Deposit Insurance Corp. That’s the best quarter since mid-2007, before the industry was plunged into its worst crisis in a generation.
    • Lending is growing, despite a small downturn in the first three months of the year. Business lending is up by 14 percent in the past year.
    • Troubled assets are down. The amount of troubled assets — a combination of nonperforming loans and the value of foreclosed property — continues to tumble, according to an analysis of FDIC quarterly financial reports by the Investigative Reporting Workshop. At the end of March, the nation’s banks were carrying over $240 billion in troubled assets, but that’s the lowest level since December 2008, when the scope of the financial crisis was beginning to be understood.

    To some extent, whether banking is back depends on which banker you talk to.

    Herbert Marth Jr., president of the $390-million asset Central Virginia Bank in Powhatan, Va., laughs at the question. “Oh, man. No.”

    “Business people are still very cautious. Loan demand is still very, very weak. That’s probably the toughest issue right now,” he says.

    At Northwest Financial Corp., which owns three banks in Iowa, President Jeff Plagge says, “I’m not sure what ‘normal’ is.”

    Still he senses that people think it is time to get back to business, although they remain wary because of events like last week’s stock price tumble caused by worry over European financial issues. Unlike Marth, Plagge sees some rekindling of loan demand.

    “In our three banks we are seeing people kind of back to what I call ‘normal,’” he says. Strong grain and livestock prices over the past few years have helped many banks in the agricultural heartland get through the crisis in better shape than banks elsewhere. Only two Iowa banks have failed since the beginning of 2007.

    He also is vice chair of the American Bankers Association and says that “even in the most troubled places” his colleagues around the country “at least think it’s found the bottom.”

    Look up your bank or credit union with BankTracker

    You couldn’t blame bankers for being a bit cautious about saying the industry is out of the woods. It has been traumatized by its experiences over the past five years. For many banks there still is a mountain of troubled debt and a long line of foreclosures to work through.

    Since the end of 2007, 438 banks have failed, and another 788 have merged into other institutions, meaning that on average banks have gotten larger. The rate of failures has slowed, peaking at 157 in 2010, down to 92 last year and 24 so far this year.

    Between September 2008 and December 2008, the federal government handed out $204.9 billion in capital assistance to more than 800 banks through the Troubled Asset Relief Program (TARP). All but about $11.6 billion of that has been repaid, according to the Treasury Department. Workshop records show that 393 banks still have not repaid their TARP investments. (Note: The Workshop links TARP investments to individual banks, not just to the holding companies that own them. The Treasury Department says it invested in 707 institutions.)

    By its accounting, Treasury has lost about $2.7 billion of TARP funds in banks and related financial institutions that failed, including $2.3 billion to CIT Group Inc., which declared bankruptcy in 2009, less than a year after getting the TARP money. The company’s bank subsidiary, CIT Bank, did not fail and continues to operate. Treasury also has accepted less than its full investments in some cases where banks merged into other institutions.

    Since TARP began in 2008 Treasury has collected nearly $21.5 billion in interest and dividends on its investments. Of the active banks that still owe money, 197 are behind on their dividend payments, owing a total of more than $305 million at the end of April, according to the Treasury Department. The Treasury Department has installed government observers in 51 TARP banks to better oversee their activities.

    It may be awhile before the government sees much of the money it is still owed. While the nation’s largest banks lobbied for and got quick permission to pay back their government funds (in part because they wanted to escape restraints on executive pay), smaller regional and community banks have had a harder time getting out of the program.

    The Inspector General for the TARP program reported to Congress in late April that the banks still in TARP are generally smaller community banks and that they are institutions that “have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds.”

    The Central Virginia Bank, where Marth is president, is an example of the issues smaller banks face trying to exit TARP. Marth says having TARP money, “definitely helped us out and continues to help us out.” The $390 million-asset bank got an $11.4 million infusion from TARP in January 2009.

    Marth says the bank mostly needed the money because it lost $18 million overnight in September 2008 when the government took over mortgage companies Fannie Mae and Freddie Mac, wiping out the bank’s investment in their preferred stock. “If we had that money today, we wouldn’t have needed TARP,” he says.

    Central Virginia has had a difficult time keeping up its payments because of heavy loan losses in 2009 and 2010. At the end of April it owed the Treasury about $1.3 million in dividends on TARP. The bank worked its way back to profitability in 2011.

    Marth says that when the economy and capital markets improve, “We ought to be able to raise additional capital.” But, he adds, given the uncertainty around the financial situation in Europe, “Right now is not the time.”

    The largest outstanding TARP advance went to Synovus Financial Corp. of Columbus, Ga., which received $967.9 million in December 2008. Synovus is current on its dividends and has never missed a payment, according to Treasury Department reports. The smallest remaining TARP investment is $301,000 owed by tiny The Freeport State Bank, Harper, Kan. , which also is current on its dividend payments. In its statements on TARP, Treasury is generally upbeat. It highlights that between repayments and dividends, the bank investment program is in the black.

    Paul Miller, FBR Capital Markets, discusses whether there's still room to run for the regional banks.

    But the Inspector General’s report in April takes a much tougher tack.

    The IG says, “TARP’s costs and legacies involve far more than just dollars and cents. Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals. It also glosses over whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry, i.e., TARP 2.0.”

    For example, the IG says, “A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed ‘too big to fail.’”

    In other words, the government came to the rescue to prevent imperiled big banks from failing, even though there was widespread agreement that it was the banks’ own actions that put them and the whole financial system in jeopardy. The lesson to the banks: “It doesn’t matter what we do, the government will save us if we are big enough.” Since the advent of TARP in September 2008, the biggest banks have gotten bigger and claimed a larger share of banking assets and deposits.

    The inspector general’s report also notes, as the Workshop has reported previously, that TARP did not stimulate bank lending, even though that was a stated goal of the program. “This may be in part due to Treasury’s failure to require…increased lending in exchange for TARP funds,” the report says.

    "Treasury did not even require TARP recipients to report on how they used TARP funds, providing an opaque cover for those institutions that continued to cut lending,” the IG says.

    27 comments

    Otherwise bankrupt, the zombie banking system is being kept alive by constant government bailouts like 0% loans from the Federal Reserve. The Federal Reserve is also buying up a lot of the banks bad mortgages and loans. The banksters don't have to serve time for crimes like mortgage fraud and tax ev …

    Show more
    Explore related topics: economy, banks, featured
  • 9
    Apr
    2012
    7:22am, EDT

    IRS strikes tough balance as 'nice bad guy'

    By Allison Linn, NBC News

    You’ve filed your tax return. Now comes the happy anticipation of wondering how quickly your refund will show up – and grousing when it isn’t in your bank account quickly.

    The IRS has for years faced intense pressure to make the painful process of paying taxes more palatable by at least providing a zippy tax refund. But such service may be coming at a price as the Internal Revenue Service faces a surge of identity theft tax fraud, as well as the usual tax cheats.

    Some victims complain that much of the fraud could have been avoided if the Internal Revenue Service had more carefully screened the fake return in the first place.

    “From a publicity point of view you’re trying to be the nice bad guy,” said Roberton Williams, senior fellow with the Tax Policy Center.

    That is a tough balance, he pointed out.

    "(They are) supposed to process returns very quickly and worry about the fraud aspect, and at the same time Congress is saying, 'Do it with less money,'" Williams said.

    The IRS has struggled with its image for decades, wrangling with a dual role of helping taxpayers file their returns and enforcing against tax cheats.

    The agency, once known as the Bureau of Internal Revenue, changed its name to the Internal Revenue Service in 1953 in an early effort to appear more customer-centric, said Joseph Thorndike, director of the Tax History Project for Tax Analysts.

    But hatred is not too strong a word to express how some people feel about the agency. In 2010 a tax protester crashed his plane into an IRS office in Austin, Texas, killing himself and an agency employee. At the time a Treasury official said there were more than 1,000 threats a year against IRS employees, a figure that had been climbing.

    The IRS also struggles with funding. Last year President Barack Obama sought to boost the agency's $12.1 billion budget by more than $1 billion, so it could hire more workers. Instead Republicans led a successful effort to trim the budget to $11.8 billion. 

    Pressure to speed the refunds can be be intense in a soft economy, when individuals – and the economy in general – could use that money.

    The IRS processed about 145 million returns last year, and three-fourths of those taxpayers got refunds. The average refund was about $3,000.

     

    Send idea Send me your story ideas

    Facebook Follow us on Facebook

    Twitter Follow me on Twitter

    But the IRS has stepped up screening efforts to try to stop fraud. Spokesman Terry Lemons said IRS officials have identified about 2 million individual returns for review so far this tax season, out of about 84 million that have been received. That’s about the same number of returns that it reviewed in all of last year.

    When the IRS does flag a return for such a fraud screen, Lemons said the delay in sending out a refund will vary widely depending on what agents find.

    The IRS also has gradually increased the number of returns that get audited over the past decade or so, following a drop-off in 1998, when the IRS went through a major overhaul to focus more on customer service. It currently audits about 1 percent of all returns, Lemons said.

    He concedes it’s tricky.

    “On the one hand you have millions and millions of taxpayers who have worked hard and are entitled to refunds, and they should be able to get that as quickly as possible,” Lemons said. On the other hand, he said, the IRS has an obligation to taxpayers to make sure returns are checked thoroughly for potential fraud.

    In testimony to a Congressional subcommittee last month, Nina Olson, the taxpayer advocate, said that although taxpayers who are victims of fraud need to be protected, so do the majority of legitimate taxpayers who rely on their refund checks.

    “With the introduction of e-filing, combined with the increasing number of refundable credits run through the tax code, our tax system has shifted, for better or worse, to one of instant gratification,” Olson said in the written testimony.

    Still, she noted, “The benefit of enjoying such a tax system is somewhat offset by the increased ability of perpetrators to defraud the government.”

    Over the years, he said, the IRS has seemed to sway back and forth depending on the political mood and other factors, said Thorndike, the tax historian. Now is one of those times when Thorndike thinks sympathies are more with helping the taxpayer.

    “This is the age of the Tea Party, at least sort of, still, and that makes people even more unsympathetic to the federal tax collector,” Thorndike said. “So it’s not a great time for the IRS to be doing anything other than emphasizing customer service.”

    Is the IRS striking the right balance? Tell us on our Facebook page.

    Show more
    Explore related topics: economy, taxes, identity-theft, featured
  • 28
    Nov
    2011
    10:32am, EST

    Fed lent banks nearly $8 trillion during crisis, report shows

    While the nation's largest banks were publicly reassuring nervous investors of their stability during the height of the financial crisis, they were also quietly approaching the Federal Reserve, hat in hand. The total price tag: $7.77 trillion, many times the amount of the better-known TARP bailout.

    The magnitude of the government's assistance to struggling banks allowed them to grow even bigger and continue paying executives billions in compensation, a report in Bloomberg Markets January issue said Monday.

    A win in court against a group representing the banks and a FOIA request filed by Bloomberg LP revealed the extent of the central bank's largesse — as well as the $13 billion in profits banks earned from those bailouts. The so called "big six" — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — accounted for $4.8 billion of that total — nearly a quarter of their net income during that time. 

    Those borrowed trillions were a deeply-buried secret. It appears that even high-ranking Fed officials didn't know about the scale of the handouts. According to Bloomberg, then-president of the Federal Reserve Bank of Minneapolis Gary H. Stern “wasn’t aware of the magnitude,” and unnamed sources say that even top aides to Treasury Department head Henry Paulson were kept in the dark. 

    The six biggest banks in the country received a total $160 billion in TARP funds, but as much as $460 billion from the Fed, raising the question as to how and why this nearly $8 trillion in loans, guarantees and limits remained under wraps for so long. According to the Fed, the massive scale of banks' borrowing — and the red ink that prompted it — had to be kept secret to avoid spooking investors and prompting a panic or bank runs that would have had even more devastating consequences on the shaken economy. 

    The Fed defended its actions back then by contending that the biggest financial institutions in the country were too big to fail — a phrase that has become a bone of contention among lawmakers, some of whom argue that a "too big to fail" bank is one that's too big to exist.

    Ohio Senator Sherrod Brown sponsored a bill last year that would cap a bank's non-deposit liabilities at 2 percent of gross domestic product, and crack down on workarounds banks currently use to bypass a 1994 law that prohibits any one bank from holding more than 10 percent of all deposits in the country.

    732 comments

    If this story of $7.7 trillion is true. Then could one surmise that the American Financial-Banking Cartels are complete failures and unable to maintain any semblance of business order? Perhaps it is time to take another look at this. Obviously, these folk deserve NOT their wages of millions a year.  …

    Show more
    Explore related topics: economy, banks, featured

Browse

  • featured,
  • documents,
  • terrorism,
  • al-qaida,
  • election-2012,
  • investigative-reporting,
  • iran,
  • crime,
  • reading,
  • military,
  • health,
  • investigation,
  • environment,
  • obama,
  • fbi,
  • campaign-finance,
  • pakistan,
  • u-s,
  • huguette-clark,
  • campaign,
  • updated,
  • cia,
  • guns,
  • news21,
  • voting-fraud,
  • voter-id,
  • who-can-vote,
  • nbc,
  • isikoff,
  • nuclear,
  • penn-state,
  • windrem,
  • security,
  • center-for-public-integrity,
  • osama-bin-laden,
  • politics,
  • romney,
  • wikileaks,
  • shooting,
  • safety,
  • yemen,
  • pentagon
Also
Advertise | AdChoices

Bill Dedman

Investigative reporter Bill Dedman of NBC News is always looking for good investigative story ideas and documents. Bill received the 1989 Pulitzer Prize for investigative reporting, and has written full time for NBCNews.com since 2006.

Bill Dedman Blogroll

  • Bill's investigative reporting feed on Twitter
  • ABC News The Blotter
  • Center for Investigative Reporting
  • Center for Public Integrity
  • Center for Public Integrity's Paper Trail blog
  • Huffington Post Investigative Fund
  • Investigative Reporters and Editors' Extra! Extra!
  • McClatchey blog Nukes & Spooks
  • New York Times' City Room Records blog
  • New York Times' Open data blog
  • ProPublica
  • ProPublica blog
  • Yahoo! News The Upshot
  • TPM Muckraker
  • Washington Post Investigations
  • WhoWhatWhy forensic journalism
  • New England Center for Investigative Center at Bos
  • Wisconsin Center for Investigative Journalism
  • Pulitzer Center on Crisis Reporting
  • Schuster Institute for Investigative Journalism, B
  • MinnPost.com
  • The Washington Independent
  • AU Investivative Reporting Workshop
  • Become a fan on Facebook
  • Follow on Twitter
Have an idea?
Send your ideas and documents for investigative stories.

Michael Isikoff

Michael Isikoff joined NBC News in July 2010 as national investigative correspondent. He had been at Newsweek since 1994 as an investigative correspondent. He has written extensively on the U.S. government's war on terrorism, the Abu Ghraib scandal, campaign-finance and congressional ethics abuses, presidential politics and other national issues.

Amna Nawaz

Amna Nawaz is Bureau Chief/Correspondent for NBC News' Pakistan bureau. She reports for all NBC News platforms from across the country and the region. Previously, she reported for the network's investigative unit.

Mike Brunker, Investigations Editor, NBC News

Mike Brunker is the investigations editor at NBCNews.com. He's worked for the site (formerly msnbc.com) as a reporter and editor since August 1996. Before that, he was an editor at the San Francisco Examiner and Hayward Daily Review in California.

Mike Brunker, Investigations Editor, NBC News Blogroll

  • White Collar Crime Prof blog
  • The Volokh Conspiracy: Legal news now
  • Frederick Lane Blog -- legal news
  • Social Networking Law Blog
  • Sports Law Blog
  • Business of Horse Racing Blog
  • The Long War Journal
  • The Red Tape Chronicles -- consumer/tech news

Azriel James Relph

Azriel James Relph is a researcher for NBC News Investigations. He is a graduate of the CUNY Graduate School of Journalism, and was a reporter for several years at the Hunts Point Express -- a South Bronx newspaper serving the poorest Congressional District in the United Sates. He has written for Newsweek, The Daily Beast, and MSNBC.com.

Robert Windrem

Robert Windrem is investigative producer for special projects at NBC Nightly News. He is also a Fellow at the Center on National Security at Fordham Law School. He has worked at NBC News for more than three decades, focusing on issues of international security, strategic policy, intelligence and terrorism.

M. Alex Johnson

M. Alex Johnson is a reporter for NBC News specializing in national affairs, technology and data analysis. He joined NBC News in 1999 from The Washington Post.

M. Alex Johnson Blogroll

  • Alex Johnson — Journalist at Large
  • Ars Technica
  • Krebs on Security
  • GetStats
  • Technolog
  • Sophos Security Trends
  • Muckety
  • Pew Internet Research
  • Investigative Reporters and Editors
  • Fund for Investigative Journalism
  • Data Journalism Blog
  • Follow on Twitter
  • Follow on Facebook
Follow Alex
Twitter
Facebook
LinkedIn

Archives

  • 2013
    • May (31)
    • April (34)
    • March (42)
    • February (21)
    • January (27)
  • 2012
    • December (33)
    • November (30)
    • October (39)
    • September (34)
    • August (46)
    • July (36)
    • June (42)
    • May (52)
    • April (28)
    • March (24)
    • February (38)
    • January (42)
  • 2011
    • December (27)
    • November (23)
    • October (15)
    • September (9)
    • August (6)
    • July (11)
    • June (12)
    • May (12)
    • April (5)
    • March (11)
    • February (11)
    • January (21)
  • 2010
    • December (11)
    • November (13)

Most Commented

  • Cruel or necessary? The true cost of wild horse roundups (775)
  • Dzhokhar Tsarnaev scribbled note inside boat where he was hiding, sources say (721)
  • AP calls government's record seizure a 'massive and unprecedented intrusion' (727)
  • IRS mishandling of Tea Party reviews still unresolved, audit charges (910)
  • As applications swell, IRS nonprofit division overloaded, understaffed (379)
  • Bomb plot briefing may undercut DOJ's case for AP records seizure (234)
  • The case of the missing mustangs; what happened to 1,700 wild horses? (129)

Other blogs

  • The Body Odd
  • Cosmic Log
  • Red Tape Chronicles
  • PhotoBlog
  • US News

NBCNews.com top stories

3147,10
© 2013 NBCNews.com
  • US news on NBCNews.com
  • About us
  • Contact
  • Help
  • Site map
  • Careers
  • Closed captioning
  • Terms & Conditions
  • Privacy policy
  • Advertise