indian flag, republic day celebration

India’s slow GDP growth and its political hurdles to economic policy making are two key reasons that India risks losing its investment-grade rating, according to a new report from Standard & Poor’s

S&P revised India’s rating outlook to ‘negative’ from ‘stable’ in April. S&P already had India at BBB-/A-3.

Here’s the full release via S&P:

NEW YORK (Standard & Poor’s) June 11, 2012–Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India (unsolicited BBB-/Negative/A-3) could lose its investment-grade rating. That’s according to a recently released report by Standard & Poor’s Ratings Services, titled “Will India Be The First BRIC Fallen Angel?”

The report states that the Indian government’s reaction to potentially slower growth and greater vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating or become the first “fallen angel” among the BRIC nations (which also comprise Brazil, Russia, and China). The ‘BBB-‘ long-term sovereign credit rating on India is currently one notch above speculative grade.

“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” said Standard & Poor’s credit analyst Joydeep Mukerji.

Standard & Poor’s revised the rating outlook to negative from stable in April 2012 because of India’s lower GDP growth prospects and the risk that its external liquidity and fiscal flexibility may erode. The negative outlook also reflects the risk that Indian authorities may be unable to react to economic shocks quickly and decisively enough to maintain the country’s current creditworthiness.

“The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks. Such potential backward steps could reverse India’s liberalization of the external sector and the financial sector,” said Mr. Mukherji.

The report examines the forecasts for economic growth, and the possible effects on business confidence and the government’s commitment to economic reform.

The report also suggests that despite recent problems, the Indian economy remains in much better shape to withstand this period of heightened global uncertainty than it was in the early 1990s, when it suffered a balance-of-payments crisis.

Don’t Miss: The Indian Economy Is A Wreck – These 8 Charts Show What’s Going Wrong >

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/kucIeqcdMqc/sp-warns-india-could-be-first-bric-nation-to-lose-its-investment-grade-2012-6


wealth and inequality

One of the most distressing aspects of the state of the US economy is the decrease in social mobility.

It is much, much harder now than it used to be for Americans to improve their circumstances.

In other words, if Americans are born poor, they’re overwhelmingly likely to stay poor.

Similarly, if Americans are born rich, they have a much better chance of staying rich than someone born poor or middle class.

No one minds inequality as long as one’s station in life is a function of one’s own decisions and effort.

When inequality becomes the luck of the draw, however, if becomes much more profoundly unfair.

America’s social mobility is now not only one of the lowest in the country’s history–it’s one of the lowest in the first world.

If that doesn’t change, the fundamental promise of America for the past 250 years will disappear. The country will no longer be a place in which you can control your economic destiny. Rather, it will become the sort of society that so many of those who emigrated here sought to escape: A country in which your destiny is determined at birth.

Earlier this week, professor Joseph Stiglitz sat down with my Yahoo colleague Aaron Task to talk about this issue.

Here’s the video and Aaron’s writeup:

Income inequality has become the subject of much debate in this country, in large part because of the Occupy Wall Street movement.

In his latest book, The Price of Inequality, Columbia Professor and Nobel laureate Joseph Stiglitz examines the causes of income inequality and offers some remedies. In between, he reaches some startling conclusions, including that America is “no longer the land of opportunity” and “the ‘American dream’ is a myth.”

While we all know stories of people who’ve moved up the social stratosphere, Stiglitz says the statistics tell a very different story. In the last 30 years the share of national income held by the top 1% of Americans has doubled; for to the top 0.1%, their share has tripled, he reports. Meanwhile, median incomes for American workers have stagnated.

Even more than income inequality, “America has the least equality of opportunity of any of the advanced industrial economies,” Stiglitz says. In short, the status you’re born into — whether rich or poor — is more likely to be the status of your adult life in America vs. any other advanced economy, including ‘Old Europe’.

For example, just 8% of students at America’s elite universities come from households in the bottom 50% of income, Stiglitz says, even as those universities are “needs blind” — meaning admission isn’t predicated on your ability to pay.

“There’s not much mobility up and down,” he says. “The chances of someone from the top [income bracket] who doesn’t do very well in school are better than someone from the bottom who does well in school.”

Because the children of those at the top of society tend to do better than those at the bottom — thanks, in part, to better education, health care and nutrition — the income inequality that’s slowly emerged over the past 30 years will only widen in the next 10 to 20 years.

If the root causes of income inequality go unaddressed, America will truly become a two-class society and look much more like a third world economy, Stiglitz warns. “People will live in gated communities with armed guards. It’s a ugly picture. There will be political, social and economic turmoil.” (Hence the book’s subtitle: ‘How Today’s Divided Society Endangers Our Future’)

The good news is Stiglitz believes this “nightmare we’re slowly marching toward” can be avoided, citing Brazil’s experience since the early 1990s as an example of a country that has reduced income inequality. Among other things, he recommends improving education and nutrition for those at the bottom of society, and eliminating “corporate welfare” and other policies which “create wealth but not economic growth.”

For example, he cites the provision in Medicare Part D which forbids the federal government from negotiating prices with the drug companies. Over 10 years, that rule will generate approximately $500 billion for the industry, he estimates, but no tangible benefit for taxpayers or the economy as a whole.

Importantly, Stiglitz believes inequality of wealth and opportunity are hurting the overall economy, by limiting competition, promoting cronyism and keeping those at the bottom from reaching their potential.

“What I want is a more dynamic economy and a fairer society,” he says, suggesting income inequality is ultimately detrimental to those at the top, too. “My point is we’ve created an economy that is not in accord with the principles of the free market.”

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

SEE ALSO: DEAR AMERICA: You Should Be Mad As Hell About This… [CHARTS]

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/iovEmKWLqKc/the-american-dream-is-now-a-myth-2012-6

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Over the weekend, I met with John Titus, Executive Producer of the new documentary film “Bailout: The Dukes of Moral Hazard,” which tells the story of individual Americans affected by the financial bust.  Myself, Yves Smith and other members of the blogerati are featured in the film.

We talked about why the film seems to connect with people at a viseral level.  Our conclusion is that the clarity and hilarity comes from the choice of our late friend John Fox as narrator. 

http://thecomicscomic.com/2012/05/31/r-i-p-john-fox-1957-2012/

The next screening of “Bailout” will be in Philadelphia later this month:

http://usabailout.com/content/screening-philadelphia-june-20-and-june-23

The subject matter of “Bailout” had to pass through the keen, irreverant perspective that John Fox, a veteran television writer and later stand up commedian, brought to all of his work.  When the man who opened for Rodney Dangerfield for eight years tells you about the subprime crisis, it somehow makes sense.

But even though Bailout Director Sean Patrick Fahey vividly presents the impact of the crisis on home owners, there is another part of the story that remains untold, namely the hundreds of billions of dollars in losses borne by investors.  Incredibly, the vast majority of the losses on residential mortgage backed securities (RMBS) and toxic derivatives like collateralized debt obligations (CDO) have been left on the table. 

Consumer and legal advocates, and politicians, focus most of their attention on the impact of the crisis on home owners and communities.  No surprise since this is where the heat is politically.  Likewise for the media, back to the point about John Fox in the role of interlocutor, the most easily understood and conveyed part of the crisis is found in the world of consumer real estate and foreclosures.  Talking about the role of a trustee in an RMBS trust quickly causes the eyes to glaze, but that same complexity and unattractiveness creates vast opportunities for fraud. 

I had an interesting conversation last week with a several consumer advocates who also understand the world of loan servicing in an intimate fashion.  These advocates have been successfully defeating foreclosure petitions in states such as New Jersey because the servicers lack the ability to prove their right to proceed to foreclosure.  That is, the party attempting to foreclose does not have the mortgage note and often cannot even document precisely who is supposed to own the note.

What many consumer advocates and politicians don’t seem to want to understand is that the chaos in the courts with respect to the robo signing mess is a big hint about a whole other area of criminality: securities fraud.  The same systemic inefficiency that makes it difficult for servicers to foreclose on a mortgage with defects in the chain of possesion of the note also enables fraud.  Wall Street firms such as Countrywide, Lehman Brothers and Bear Stearns reportedly double-pledged tens of billions of dollars worth of real and ficticious mortgages. And there has been zero interest from the Obama Administration or state attorneys general in pursuing these claims.

Back in February I wrote a comment for Housing Wire, Eric Schneiderman delves into housing, outlining some of the areas where the NY AG could act to address systemic fraud on Wall Street. 

http://www.housingwire.com/news/eric-schneiderman-delves-housing

But the trouble is that Scheiderman has done nothing.  It seems that the entire system of government in the US has been compromised by the TBTF banks.  From the Federal Reserve Board in Washington to the office of the US Attorney to the various state AGs to the world of Buy Side managers, nobody has any interest in asking difficult questions about the provenance of the collateral underlying a significant — as in double digit percentages of some RMBS and CDOs.

Based upon my discussions with managers and also Sell Side firms involved in the liquidation of asset classes like CDOs, for example, loss rates are running close to 60% on the total $700 billion plus in securities issued.  And something like 2/3rds or more of the principal amount of loss to investors remains on the table, with no claims filed in the courts.  We are talking about tens of billions of dollars in losses, mostly to Buy Side end investors like pension funds, insurers and funds.  Mad now?

The claims here have effectively been abandoned by the supposed managers and advisors.  These orphan claims could be pursued by either public sector or private parties, yet nothing is done.  Why?  Let’s go through the casual chain of complicity and inaction.

First we start with the Fed, OCC, FDIC and other regulators.  From the acquisition of Countrywide Financial by Bank of America, to the acquisition of Bear Stearns and Washington Mutual by JPMorgan, the objective has always been to preserve primary dealers at all cost.  This means the Fed must keep the lid on disclosure of the true asset quality of these TBTF originator/servicr banks, both on balance sheet and in the trillions of dollars in off-balance sheet RMBS securitizations and CDOs sponsored by these banks.  This also means that my friends at the FDIC are sometimes unknowingly on the wrong side of disputes involving the chain of title on collateral.  

Likewise in the case of Lehman Brothers, the bankruptcy process served to obscure the issue with respect to fraud.  As I noted in earlier posts, the trustee in a bankruptcy does not have the power to pursue fraud by third parties.  Only a receiver appointed by a federal district court a la The Stanford Group fraud has this power.  See the evergreen copy of  The IRA Institutional Risk Analyst comment on ZH: “The IRA | It’s All About the Fraud: Madoff, MF Global & Antonin Scalia.

http://www.zerohedge.com/contributed/2012-19-13/ira-its-all-about-fraud-madoff-mf-global-antonin-scalia

Thus when a financial institution files for bankruptcy, unless the creditors understand their right to ask to the appropriate federal district court for the appointment of a receiver, the chances of recoveries and equity fall dramatically.  In a bankruptcy, the officers and directors will almost always walk away scott free — unless a loss to an insured depository allows the FDIC to sue under US banking laws.  FDIC has power to protect the Deposit Insurance Fund (DIF) from loss and, more important, to be advocate for uninsured depositors and other bank creditors as well. 

Note that the payout waterfall in an FDIC insured bank in liquidation is different because the uninsured depositors are next in line after the insured deposits covered by the DIF.  Note too that in the case of a bank failure the FDIC is not merely trustee of the dead bank, but rather receiver with quasi judicial, Article I powers to protect the interests of third party creditors, including depositors, vendors, etc.  FDIC also has expedited access to the federal, Article III courts to compell obedience with its findings as receiver. 

Think of the appointment of an equitable reciever in a bankrtupcy like MF Global as a more general way to apply the same power weilded by FDIC as receiver to all types of fraud.  The unfortunate situation with MF Global illustrates the dilema facing the trustee in that case.  I will write a more detailed post on ZH regarding MF Global to discuss the actions of the trustee. If anybody out there can get me on the phone withe the counsel for the MF Global Bankruptcy Trustee I will put them in touch with my mentors on this issue.

Ask yourself a question:  Just why did BAC have to buy Countrywide?  Was the driver of that transaction merely that BAC was the warehouse lender to Countrywide?  Or was the issue more complex, namely that the target had billions of dollars in ficiticious assets on its balance sheet, bogus securities that were in some cases used as collateral in repurchase transactions.  It can be argued that BAC’s warehouse for Countrywide was the engine for vast fraud.  

Likewise with Lehman Brothers, nobody could buy the firm in its totality because nobody could or would attest to the assets, on or off balance sheet.  There was literally nobody who could or would sign off on representations and warranties needed to sell the company.  And the proverbial bodies were then burried in bankruptcy without the benefit of a receiver, allowing former CEO Dick Fuld and his cohorts to walk away without any criminal sanctions for what seem like obvious, dliberate acts of accounting and securities fraud.

With Bear Stearns and Washington Mutual, JPM CEO Jamie Dimin likewise provided the cover to keep these two rancid situtations under wraps and away from close scrutiny.  Recall when during the last US presidential campaign, Senator John McCain (R-AZ) famously said that we would go through the subprime mess “loan by loan?”  That was the end of John McCain’s presidential run as far as Wall Street was concerned, says one industry insider.

President Obama, by comparison, has been very accommodating to the TBTF banks and their agenda to hide the ball when it comes to systemic securities fraud on Wall Street.  Remember we are talking about loss rates about 50% for production from Bear Stearns, for example, yet none of the responsible parties in the creation of these toxic securities have been indicted. 

Now you will notice there has been no discussion fo the SEC in this tirade.  The SEC has done nothing, squat, buptkus with respect to systemic fraud on Wall Street.  And as we have noted afore this, the Fed and other regulators are complicit in allowing these hideous zombies to merge to avoid resolution and bankruptcy.  The Merrill transaction with BAC, for example, brings along $30 billion in existing litigation due to CDOs.  But this number is still a fraction of the totality of the losses on this asset class.

So if the politicians and supposed officers of the federal and state courts have been bought off when it comes to pursuing criminal and even civil claims related to various flavors of fraud involved with the origination and sale of mortgages, what about the managers, trustees and custodians of RMBS trusts?  Sadly, there are no advocates real or imagine in this group either, except in those rare exceptions where managers have been willing to go to war with some of the biggest firms on Wall Street. 

The simple fact is that the nominee trust of today’s financial markets is a sham.  The trustee appointed by the sponsor of the deal is essentially ministerial in function, with neither the funding nor the mandate to act as an advocate for investor interests. The custodians of these trusts have likewise not historically acted as advocates for investors, although there are some notable exceptions. 

Bank of New York’s DE chancelery court  litigation against BAC behalf of Countrywide bond holders is one rare example.  And the moves by US Bancorp and Deutsche Bank to sue sponsors of deals where they acted as custodian to ingratiate themselves with NY AG Schneiderman is another example.  But of course the two biggest players in the market, BAC and BK, have yet to sue themselves for the deals in which they were involved together.        

Unlike an FDIC bank resolution where the receivership can pursue officers and directors for acts of fraud, in cases such as Maddoff and MF Global, the trustee is hamstrung in pursuing third party claims.  Likewise the investors in an RMBS trust or CDO must organize themselves to pursue claims. They must pay and indemnify the trustee, who then hires counsel and sues the sponsor.  But only in a small minority of deals has a claim been filed.

Aside from the legal and operational issues facing investors who want to sue deal sponsors for fraud, the fact is that managers don’t want to sue because, during discovery, it will be shown that they made bad investmnt choices.  That is a generous description.  Less generous is to say that the manager does to want admit publicly buying a “bag of shells” in terms of diligence on deals. 

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.  Buy Side asset managers who sue the largest Sell Side sponsors become pariah, excluded from the flow of deals and information.  But you have to wonder if the damage these passive managers are doing to investors and the US markets by not zealously pursuing legal claims against the sponsors of RMBS and CDOs is not a worse outcome at the end of the day.

If we take Schneiderman’s statement that nothing is “off the table” in terms of prosecuting acts of fraud, an ideal outcome here, IMHO, would be the following:

1)  NY AG Schneiderman goes into federal court next week and files a motion removing BK as custodian with respect to all RMBS trusts governed by NY law.  Schneiderman should ask the court to appoint a receiver with respect to all of the trusts where BK was custodian and immediately investigate whether fraud and professional malfeasance occurred.

2)  Schneiderman asks the court to appoint a receiver with respect to BAC because of ongoing acts of fraud and the recalcitrance shown to the court. Several federal courts have already found BAC to be engaging in “deliberate delay,” discovery abuse and other acts of bad faith in the various lawsuits now underway.  These acts of contempt of court alone are sufficient reason to apppoint a receiver with respect to BAC.    

3)  And come to think of it, while Schneiderman is in the court house, he can file an emergency motion to intervene in the MF Global bankruptcy and ask the court to appoint James W. Giddens as receiver in that matter.  Schneiderman has standing to bring this motion and could ask the IL AG and US attorney to join him in making the representations to the court.  Then we wipe that grin off Jon Corzine’s face and start to make some real progress on MF Global.  More tomorrow.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/contributed/2012-06-10/its-all-about-fraud-silence-buy-side

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