The Obama administration says it is increasing border security and cracking down more on drug trafficking and smuggling from Mexico into Southwestern states such as Arizona.
On Friday, U.S. Attorney for Arizona Dennis Burke said the federal government has upped illegal drug case filings by 99 percent since 2008, filed 25,200 illegal immigration cases and boosted wiretaps by 50 percent for cases related to money shipped from Arizona to Mexico and other foreign locations.
On Monday, the White House released additional figures as administration officials met with Arizona Gov. Jan Brewer, Attorney General Terry Goddard, Burke and other state officials.
The White House offered the following stats:
K9 patrol units along the border have been increased to 13 from five.
384 agents were added at Southwestern ports of entry along with five high-tech detection units to the six already deployed at Mexican border crossings.
$85 million in illicit cash was seized along the border over the last 12 months — a 22 percent jump from the preceding 12 months.
Federal agencies seized 1,404 firearms and 1.62 million kilograms of drugs along the border the past 12 months — increases of 22 and 14 percent, respectively.
Former U.S. Attorney Paul Charlton said more resources are being focused on border and immigration cases as well as crimes on Indian lands and white-collar and mortgage fraud crimes since Burke took over as federal prosecutor in 2009 and the Obama took office.
Charlton — now a private attorney for the law offices of Gallagher & Kennedy PA — served as U lowest fee payday loans.S. Attorney for Arizona from 2001 until the end of 2006. Charlton exited from that post as part of Bush administration purge.
After 9/11 there was a heavy focus of federal investigation into national security and potential terrorism cases, he said, adding the Bush administration also focused on child pornography.
He expects federal pursuit of child and illegal sex rings to continue under Obama. “It’s still a very serious problem,” he said. But he said the Obama administration appears to be moving more aggressively and with more resources on white collar and mortgage fraud cases as well as on the immigration front.
The statistics were released as Brewer and U.S. Sens. Jon Kyl and John McCain press for more federal resources along the border. Brewer, in particular, has argued the state is under siege from drug cartels and smuggling rings and says more border walls, air patrols are needed.
“Administration officials continue to say that the border is as safe as it has ever been, yet the feds are posting signs 80 miles from the Arizona border warning Americans to stay away from our public lands,” Brewer said in a e-mail promoting her reelection bid. “We need action from the federal government not signs ceding sovereign U.S. territory to international drug cartels and human smugglers.”
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The St. Louis public relations community has been buzzing about BP’s response to the deadly Gulf oil spill and how it’s a lesson in what not to do.
“Unfortunately for BP, they have let the crisis manage them; they have not managed the crisis,” said Tim Beecher, a senior vice president and senior partner at Fleishman-Hillard.
Beecher knows a thing or two about crisis communications. After the 1989 Exxon Valdez disaster in Alaska, many companies built crisis response centers and started doing drills for refinery fires and shipping accidents. Beecher helped Amoco with such a plan in Chicago so officials could rehearse and prepare for the worst. “They (BP) need to start asking the federal government and state governments for help and maybe even put out an international appeal, ‘We can’t find our way out of this by ourselves.’ They need to ask for the best and brightest engineers and scientists. They need that kind of brilliance right now to stop the leak and start the cleanup.”
Fueling the fire of BP criticism are the many gaffes BP CEO Tony Hayward has made, PR professionals say.
BP should have immediately recognized the seriousness of the problem instead of downplaying the incident, said Mary Sawyer, director of public relations at the Brighton Agency. “As late as May 18, Hayward insisted the environmental impact of the oil spill in the Gulf of Mexico would be ‘very, very modest.’”
Sawyer called the remarks “terribly self-centered and completely inappropriate.”
“This disaster killed 11 people, and we can’t even begin to estimate the environmental and economic impact of tragedy,” she said. “He was right to apologize for his remarks, saying they were hurtful and thoughtless.”
But the apology was too little, too late, said Jill Haynes, a spokeswoman for Isle of Capri Casinos and president of the St. Louis Chapter of the Public Relations Society of America.
“At this point, over 40 days after the tragic explosion on an oil rig off the Louisiana coast, (Hayward) has finally taken the step he should have taken weeks ago. He apologized. Unfortunately, that apology fell on deaf ears … To top it off, immediately after he apologized, he added, ‘I want my life back,’ resulting in an outpouring of additional criticism.”
Lauren Kolbe, president and founder of Kolbe Co., described BP’s communications as “relatively cold and lacking compassion.”
“They don’t appear to be communicating confidently or expressing confidence in their plans and actions, which is leaving people uneasy,” she said. “That, coupled with the seemingly slow and ineffective actions being taken to deal with the spill, is making BP appear incompetent, resulting in the loss of the public’s confidence.”
BP recently hired former vice president Dick Cheney’s press secretary to handle media relations but still has a way to go to restore its reputation. New photos of oil-covered animals also aren’t helping the BP’s carefully cultivated “green” image.
PR experts said if they were BP’s spokespeople they would have used social media to more quickly communicate to the public about the disaster.
“BP underestimated the impact of the Internet on spreading news, photo and video,” said Craig Kaminer, president of Twist. “They were quick at dealing with TV and print reporters, but not at dealing with websites, YouTube, live webcam feeds, blogs and social media sites. When Toyota had their problems, they stopped production and focused all attention on the problem.”
Ron O’Connor, principal of O’Connor & Partners, said BP’s first mistake was to commit to a quick and positive outcome. Instead, the company should have stressed the difficulty of the situation and do so in a way that paints a picture that everyone can understand, he said. “What engineers were attempting was similar to blindfolding a four-year-old youngster, then facing that youngster into a 120-mile-an-hour wind and telling him/her to swing a golf club at a whiffle ball in an attempt to make a hole-in-one at a distance of four football fields,” O’Connor said. “Difficult to achieve, especially when the world is watching and the mere presence of a TV camera gives us the incorrect impression that what we're seeing may be just a foot or two underwater.”
The disaster is now much bigger than BP, Kaminer said. “It will impact millions of lives and livelihoods, and potentially wipe out coastal communities for generations. This is not only possibly fatal for BP but it will impact every oil company and their operations.”
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The Small Business Administration is making low-interest "economic injury loans" to small firms on the Louisiana coast that have been hurt by last month’s BP oil spill.
Under its Economic Injury Disaster Loans program, SBA is offering 30-year loans of up to $2 million, at a 4% interest rate, to affected businesses. The April 20 spill, which is still leaking oil, led to a ban on fishing along Louisiana’s southeast coast.
Gov. Bobby Jindal officially requested the loans Tuesday, saying in a letter to the SBA that thousands of commercial fishermen in six parishes could suffer economic injury as a result of the spill.
"The closure of these vital fisheries will have a devastating impact to the economy of southern Louisiana," said Jindal.
Small businesses can begin applying for the loans today, Mills said, and they can also request deferrals on existing SBA disaster loans. The money can be used to to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the spill’s impact.
"Many small businesses in the Gulf region earn their living by fishing in the waters on the coast," said SBA Administrator Karen Mills, in a conference call Thursday instant payday loan no telecheck.
Jonathan Swain, the SBA’s assistant administrator, said the agency has a loan reserve of $7.2 billion for its disaster assistance program. Of that, so far only $190 million has been allocated to 38 different disaster areas around the country, including the flooded areas of Tennessee.
"We have the resources necessary to meet the needs [of businesses hurt by the oil spill,]" he said. "We don’t expect that all of the funds will be needed."
SBA also encouraged local small businesses to file claims with BP (BP), and said that borrowers may be required to use any claim payments to help repay the SBA loans.
"We have the tools, and we want to be there to help people with what they need," Mills said. "There are expenses they would have been able to pay if this disaster had not occurred."
SAN FRANCISCO — Eleven days after losing his home to foreclosure, Jorge, a Napa construction worker, received an ominous letter in the mail. It said he still owed $78,000 on his home’s second loan.
“I was afraid and felt pressured,” said Jorge, who asked that his name be withheld because he is embarrassed about his situation. “I called them to say I had already lost the house in a foreclosure,” he said, speaking in Spanish through a translator. “They told me it doesn’t matter, you have to pay the money anyway.”
Jorge’s experience is being mirrored elsewhere. Debt collectors are starting to hound people who lost their homes to foreclosures or short sales over their second mortgages.
In California, a foreclosure generally wipes out the borrowers’ obligation on the main mortgage but not necessarily on other home loans.
“We’ve seen a lot of folks coming to us, saying, ‘I was foreclosed on, now these people say I owe $150,000 for my second loan; I thought everything was going to go away, what do I do now?’” said Noah Zinner, an attorney with Housing & Economic Rights Advocates in Oakland.
Some experts think the trend will accelerate, causing foreclosure pain to linger.
“I think the other shoe is going to drop soon,” said Shannon Jones, a real estate attorney in Danville who gets several calls a day from people concerned about their liabilities post-foreclosure. “In the next two years we will see a huge volume of (debt collection on) second loans. We’re seeing a number of lenders start filing suit or turn them over to collection companies.”
California is a nonrecourse state, meaning lenders cannot pursue borrowers for unpaid balances on home-purchase loans. However, home loans not used for the purchase — home equity lines of credit and second loans taken out after purchase — are recourse loans, which means lenders are legally entitled to collect the unpaid balance. Depending on the type of loan, they have four to six years to pursue borrowers, Jones said.
Refinanced mortgages do become recourse loans, but in California a nonjudicial foreclosure — the most common kind — eliminates the borrower’s liability to the lender that carried out the foreclosure, which is generally the main lender. A second lender for a non-purchase loan, however, still has “recourse,” or the right to pursue the borrower.
In Jorge’s case, he took out the second loan to buy his house, so it is nonrecourse debt, and he cannot be sued for the unpaid balance. A debt collector can, however, ask him to pay “voluntarily.”
For several months, Jorge continued to receive letters and phone calls from both his bank and a debt collector asking him to pay.
“The servicer says there is nothing that prohibits the borrower from voluntarily paying us,” Zinner said. “There is no question it’s sneaky, but it’s not illegal for them to do that. If they were to threaten to sue, that would clearly be illegal.”
“I suspect they’re just dealing with volume,” said Maeve Elise Brown, executive director of the Oakland group. “(Debt collectors) buy the debt for 10 cents on the dollar and figure they’ll browbeat a certain percentage of homeowners into paying them, whether the money is lawfully due or not.”
Housing & Economic Rights Advocates has partnered with attorney Will Kennedy of Santa Clara to represent Jorge and plans to pursue a class-action case on behalf of other borrowers with nonrecourse loans whose lenders dunned them for that debt.
“Many people are in Jorge’s situation and don’t realize they’re under no obligation to make any more payments after a foreclosure,” Kennedy said.
But millions of borrowers do have recourse loans that they took out after purchase, which means lenders have a legal right to pursue them for unpaid balances.
In California during the boom real estate years — 2005 to 2007 — homeowners took out 2.88 million home equity lines of credit and 1.18 million non-purchase second loans, according to First American CoreLogic, which tracks loan data. The total was 4 million such recourse loans totaling $485.3 billion.
Some experts think lenders may pick whom to pursue by probing defaulted borrowers’ net worth.
Rick Harper, director of housing at Consumer Credit Counseling Services of San Francisco, which staffs the federal HOPE for Homeowners hot line, said his workers tell borrowers who are considering default that their second loans could make them liable to debt collection.
“Depending on what the holder of that note wants to do, it can make their (the borrowers’) life miserable,” he said. “Most of the (lenders) do an asset test to see if there’s anything there. They can run credit reports, use investigative services, get their hands on the applications they used when they applied for a loan.” Applications for loan modifications and short sales also require disclosure of assets.
At Wells Fargo, Mary Berg, a spokeswoman for the Home Equity Group, said in an e-mail: “On a case-by-case basis, after a review of the borrower’s situation, we do sometimes pursue deficiency balances in states that allow this type of activity. We only pursue deficiency judgments if we determine that the borrower has the ability to repay the entire or a portion of the balance.”
Wells, Bank of America and JPMorgan Chase hold the lion’s share of U.S. second liens, according to Inside Mortgage Finance. BofA has $147 billion, Wells $124 billion and Chase $118 billion, it says.
Chase wrote off about $4.6 billion in home equity loans in 2009, and has said it expects to write off up to $5.6 billion of the loans this year.
Chase declined to comment. BofA did not return requests for comment.
Jones, the Danville real estate attorney, said she’s turned down some second-loan clients.
For instance, one Bay Area man had borrowed $52,000 on a home equity line of credit for a home that ended up in foreclosure.
“The lender filed suit against him and he asked me to defend him,” she said. “I said, ‘You don’t have a defense. You borrowed the money, you spent the money. You signed a promissory note and said you would pay it back.’”
Often, such borrowers end up settling with the lender for pennies on the dollar, Jones said. “You can’t get blood from a turnip,” she said.
Margot Saunders, an attorney with the National Consumer Law Center, said bankruptcy may be the best option for some people to wipe out liability for their second loans.
“People with a second mortgage who are facing foreclosure should go to bankruptcy to get rid of the unsecured second-mortgage note,” she said. “They should do it as soon as they’re foreclosed upon, because that’s when they’re at rock-bottom, not when they’ve started to rebuild (their finances).”
Other attorneys said borrowers should try to discharge their second liens before a foreclosure or short sale by offering the lender a percentage of the amount due.
Home Affordable Modification Program, the government’s foreclosure-prevention plan, recently added provisions encouraging lenders to settle or modify second loans. If adopted by lenders, that could help people who lose their homes in the future avoid pursuit by debt collectors, but it won’t do anything for the millions who already lost their homes in recent years.
“It will be hard for people in our state to start over again, if they sometimes lawfully and sometimes unlawfully end up getting pursued for pretty significant-sized debt,” Brown said.
Fast food joints are scrambling to find alternate sources for one of America’s favorite sandwich toppings after a winter freeze took a huge bite out of Florida’s tomato harvest.
Due to unusually cold winter weather, 60% to 70% of Florida’s tomato crop was destroyed, said Terence McElroy, a spokesman at the Florida Department of Agriculture. And because the sunshine state produces about 75% of U.S. tomatoes, prices across the country have spiked.
A 25-pound box of tomatoes from south Florida is selling for $30, up more than 300% from a year ago, when a box of tomatoes cost about $6.50 to $7, said Reggie Brown, executive vice president of the Florida Tomato Growers Exchange.
Because ingredients make up about 30% of the price of a typical fast food meal and tomatoes go into nearly every sandwich or burger, a price spike could chew up profits in no time.
"We’re seeing the effects in restaurants and produce aisles at grocery stores, but fast food chains in particular are being impacted, because those restaurants buy tomatoes in bulk and put at least a thin slice on almost everything," said McElroy.
‘Sorry, out of tomatoes’
Restaurants are trying to offer their customers uninterrupted tomato supply without raising prices. For some large chains that means getting tomatoes from other sources. But others are only offering the fruit "upon request," or slicing tomatoes from menus altogether.
Burger King was so low on tomatoes in the last couple weeks that some of its restaurants were forced to stop offering them.
"We just didn’t have them for a few days, so we put up a sign from corporate saying we’re sorry, we’re out of tomatoes," said an employee at a Burger King in Missouri Valley, Iowa.
A Burger King spokeswoman confirmed there have been "spot outages of tomatoes," and the chain "will continue to resupply Burger King restaurants with tomatoes that meet our standards as they become available."
While fast food chains like Hardee’s and Carl’s Jr. avoided price hikes by sourcing their tomatoes from Mexico prior to the freeze, restaurants that typically rely on the Florida crop are looking elsewhere.
Subway usually purchases its tomatoes from Florida at this time of year, which has an earlier tomato season than other parts of the country because of its warmer climate. In the spring, as tomato seasons begin elsewhere, the chain starts looking to places like California and Mexico for tomatoes.
To maintain a steady supply of tomatoes, Subway has switched its sourcing earlier than usual this year, said Les Winograd, a company spokesman.
The effect on your burger
Fast food chains are doing everything they can to keep the shortage from affecting their customers’ dining experience. Denny’s is hoping prices stabilize soon, and has not made any menu changes so far.
But some changes may be unavoidable. Subway, for example, typically purchases a specific type of tomato from Florida, but surging prices have forced the sandwich chain to experiment with different varieties.
"Because of the freeze in Florida and because certain tomatoes are becoming harder to come by, we’re going to be purchasing some other varieties that are not in as short of supply," Winograd said.
Switching to a new product or source poses a risk for these chains, because customers could perceive it as lower quality, said Darren Tristano, executive vice president of food industry research firm Technomic Inc.
"It’s a question of if you are going to be those that opt for a lower price and sometimes lower quality products or if you are going to maintain the level of quality your customers expect," he said.
But substitutions might be better than no tomatoes at all. The lack of tomatoes at some Burger Kings really hit a nerve with certain customers.
"Burger King, I am through with you," a customer who received five tomato-less Whopper Jr.’s from Burger King said in an online consumer forum, My3cents.com.
But some chains believe their customers will be more understanding.
Since last week, Wendy’s has been including tomatoes in its sandwiches and burgers only upon request, said Denny Lynch, a company spokesman.
"We’re doing this in all U.S. stores for two reasons," Lynch said. "One is availability — we can’t get as many tomatoes as we need — and secondly, the color, size and quality has been affected by the deep freeze in Florida, so the quality might not meet customers’ expectations."
Lynch said Wendy’s has placed signs explaining the situation outside the restaurant near the drive-through window and next to the cash registers inside, and that so far, customers have been very understanding.
"We’ve actually had a number of people compliment us that we told them about it beforehand," he said. "Everybody knows that we’ve had a harsh winter, so they’re very understanding about it."
CNNMoney.com’s Andrew Keshner contributed to this report
Owners of a Marion, Ill., golf club late last week finally got their long-awaited sit-down with U.S. Treasury officials to ask the agency to drop its objections to the club’s sale.
But Treasury did not indicate what action it might take or give a timetable, said Fritz Archerd, head of the golf owner’s group, who attended the meeting.
"There’s reason for hope. But there’s also reason for pessimism," Archerd said.
For the past 15 months, the Treasury has blocked the sale of the Kokopelli Golf Course because of the involvement of Zimbabwean national John A. Bredenkamp. He led a group that owned the golf course from 2001 to 2006. He retained a right to future profits when the course was sold again.
The problem is that Bredenkamp was named in late 2008 by Treasury’s Office of Foreign Asset Control to a list of people targeted for economic sanctions. These specially designated nationals, which include al-Qaida terrorists and drug kingpins, are prohibited from conducting any business in the U.S.
Treasury, which has declined to comment on the proceedings, accuses Bredenkamp of "gray-market arms trading and trafficking" and other endeavors to prop up Zimbabwe’s ruling regime.
Archerd said the Kokopelli investment lost about $750,000. A purchase price expected to be about $1 million would be enough to recoup that investment and pay off debt. So no profit would head to Bredenkamp if the golf club were sold to Marion-area owners quick payday loans.
Archerd said his group could no longer afford to invest in the golf club, featuring an 18-hole championship course once voted No. 3 in Illinois by Golf Week magazine. And yet, they cannot sell the course. It’s not even clear if the bank could foreclose on the property with the Treasury’s blocking order.
The plight of this golf course was the subject of a Post-Dispatch article last Sunday.
An economic sanctions attorney not involved in the case said he was surprised Treasury did not offer a solution at the sit-down meeting.
"I don’t understand why this hasn’t moved forward," said Clif Burns with Bryan Cave in Washington.
After Archerd’s meeting, the potential buyers indicated they had lost patience. Marion-area restaurateur David Hays said in a release, "We no longer are optimistic that we will see a timely solution to this dilemma."
Time — and money — does appear to be running out for Kokopelli. Staff already has been cut from 75 to one. The lawnmowers were repossessed last week, so there is no way to maintain fairways and greens. And next week the power company plans to turn out the lights.
It is hard to tell whether the federal judge in the North Face vs. South Butt trademark infringement lawsuit is laughing.
And discerning whether that’s a smile on his face could be a clue to how the judge eventually rules.
Already, the case has been rife with humorous jabs from tiny Ladue-based South Butt LLC, which claims its clothing line is a protected parody of the popular North Face brand. In South Butt’s written response to the allegations in early January, attorney Al Watkins struck a jokey tone by including a photo of South Butt’s 18-year-old founder, Jimmy Winkelmann, and describing him — apparently for the judge’s benefit — as "a handsome cross between Mad Magazine’s Alfred E. Newman [sic] of ‘What Me Worry’ fame, and Skippy the Punk from the Midwest."
Watkins also noted how North Face’s decision to sue has resulted in a financial boon for his client. "But for the actions of North Face," he wrote, "the South Butt saga might have been relegated to local Friday fish-fry banter."
The question is whether Missouri Eastern District Judge Rodney W. Sippel finds any of this funny. An answer, of sorts, arrived Tuesday.
Sippel, 53, an appointee of President Bill Clinton, issued an order that opens with a quote from humorist Franklin P. Jones: "It’s a strange world of language in which skating on thin ice can get you into hot water." The judge then ruled against South Butt’s request that the lawsuit be dismissed. The judge also noted he did not find it "implausible" that South Butt’s logo could cause confusion or dilution of North Face’s trademark. So the case will go forward.
But at the end of his order, Sippel warned South Butt’s attorney against making requests with little merit — which also could be read as a warning to be more serious. "Although this filing may not reach the level of frivolity, it approaches the line," Sippel wrote.
That might sound like a rebuke.
But Watkins, South Butt’s attorney, did not see it that way.
"I’m very pleased that the judge has adopted a tenor and demeanor that is not inconsistent with that which we have employed in this case," Watkins told the Post-Dispatch on Wednesday no fax payday loans.
The South Butt was started in 2007 by Winkelmann as a way to spoof a status symbol that crowded the hallways of his former school, Chaminade College Prep. He began selling T-shirts, fleeces and shorts at Ladue Pharmacy, which handles the South Butt products’ marketing and manufacturing details. North Face sued Winkelmann and the pharmacy over the South Butt name in December.
South Butt has responded with humor over the dispute, both in its press releases and its legal filings.
Sandy Davidson, lawyer and professor of communications law at University of Missouri Columbia, said judges sometimes employ humor — and in a case like this, that could be good for South Butt.
Davidson pointed to the trademark case of Hormel, maker of Spam, suing over the puppet Spa’am, Miss Piggy’s guard in the "Muppet Treasure Island" movie. An appeals court sounded like it was having some fun when it shot down Hormel’s complaint.
"In a recent newspaper column," the court wrote, "it was noted that ‘In one little can, Spam contains the five major food groups: Snouts. Ears. Feet. Tails. Brains.’ … (One) might think Hormel would welcome the association with a genuine source of pork."
Davidson said she could see how Watkins might be "trying to invite the court to use banter that other courts have used."
Now, North Face and South Butt face court-ordered mediation in March, and, if that fails, will be back in Sippel’s courtroom.
But Watkins said the South Butt case was inherently humorous.
"No matter how much you try to suppress the levity of the issues," he said, "it is going to spontaneously emerge and spontaneously emerge often."
JPMorgan Chase delivered its strongest performance since the financial crisis first took hold two years ago, as the company reported earnings on Wednesday that towered above Wall Street’s expectations.
The bank’s quarterly profits were driven largely by a strong performance in its investment banking division.
And while losses continued to climb in the consumer-related parts of its business, executives at the company suggested that they were starting to see signs of stability.
"I give them a big check mark," said Raymond James analyst Anthony Polini. "Credit quality was in line with expectations and their core [earnings] power remains intact."
JPMorgan Chase, the first in a series of big banks due to report this week, said it it earned $3.6 billion during the third quarter, or 82 cents a share.
That was far better than Wall Street was anticipating. Analysts polled by Thomson Reuters expected the company to report a profit of $2.03 billion for the quarter, or 52 cents a share.
Investors cheered the news, sending JPMorgan Chase (JPM, Fortune 500) stock nearly 4% higher in midday trading Wednesday. Shares across the the banking sector followed, as the S&P Banking Index (BIX) gained more than 2% on the news.
Banking vs. credit
Propping up the company’s latest results was JPMorgan’s investment banking business, which has experienced significant growth over the past year given the disappearance of Lehman Brothers last fall and the weakened state of peers like Citigroup (C, Fortune 500).
Profits in the division more than doubled from a year ago in the latest, climbing to $1.9 billion.
Unlike the previous quarter, when equity underwriting fees lifted the division’s results, fixed income provided a big boost this time given the boom in newly issued corporate and government debt.
That rapid shift in business, however, left many analysts wondering just how sustainable the performance of both JPMorgan’s fixed-income and broader investment banking business could be in future quarters.
"I think the easy money has been made there, no question about it," said Bill Fitzpatrick, an analyst at Optique Capital Management, which owns shares of JPMorgan.
Offsetting those numbers, however, were credit concerns, particularly within its consumer-related divisions such as its credit card business.
"While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue," JPMorgan Chase CEO Jamie Dimon said in a statement.
During the quarter, the company said it added approximately another $2 billion to its consumer credit reserves, which dragged down results both within its mortgage lending and credit card businesses.
Both divisions reported widening losses compared to the second quarter of 2009.
Mike Cavanagh, JPMorgan Chase’s chief financial officer, tempered that view however, noting that there were some encouraging signs such as stabilization of early-stage delinquencies within its credit card portfolio.
He added that the company could be close to the end of adding to its loan loss reserves if the economy continues to stabilize.
Cavanaugh also delivered some encouraging news for shareholders, noting that a dividend hike was a possibility, provided that the U.S. economy doesn’t endure further weakness from here.
Earlier this year, JPMorgan Chase slashed its annual dividend nearly 87% to 20 cents a share to preserve capital. Cavanaugh suggested it may not be long before the board could raise it to 75 cents or $1 a share.
"If we are lucky that could be some time early next year," he said.
Other top-tier financial firms are slated to report their quarterly results later this week, with Citigroup (C, Fortune 500) slated to report its results Thursday while Bank of America (BAC, Fortune 500) is due up Friday.
What to do with Wall Street’s gluttonous gatekeepers?
By all accounts, the major credit rating agencies — Standard & Poor’s, Moody’s and their smaller rival Fitch — played a significant role in inflating the credit bubble. The firms raked in huge fees by blessing bonds based on mortgages of poor quality. Then Wall Street dumped the highly rated bonds on suckers around the globe.
When homowners couldn’t make their mortgage payments, the bonds turned toxic — touching off a financial sector meltdown that that torched investors everywhere.
Washington has promised reform. But leading plans under discussion would do little to address two longstanding structural problems.
First, the firms earn most of their money taking fees from bond issuers, creating a thorny conflict of interest.
Second, investors and regulators use the ratings for everything from investing decisions to capital requirements — yet the accuracy of the ratings isn’t even officially tracked, much less subject to meaningful scrutiny.
So as regulatory reform season kicks into high gear, there is little sense that serious change is imminent.
"The role of a rating agency is to provide a fair, unbiased assessment of value in order to improve the efficiency of credit markets," Jerome Fons, a former Moody’s managing director, told the National Association of Insurance Commissioners last month.
"But powerful interests prefer inefficient markets so that they can extract returns from the less informed," said Fons, who now runs a risk consulting business. "It takes heroic discipline to stand up to these interests, and in my view, for-profit rating firms are not up to the task."
To be sure, the rating firms stress that they aren’t standing still. S&P notes that it has hired new executives and adopted new rules for rating housing-related securities and preventing conflicts of interest. Moody’s has pointed out its efforts to improve transparency and boost ratings consistency.
Nice ratings, big profits
The rating agencies have performed poorly many times before. Notably, they were just as tardy in flagging the problems at Enron and WorldCom in the downturn at the start of this decade as they were last year at Lehman Brothers and AIG.
Yet despite this uneven track record, the ratings firms’ profits were growing at a rapid clip until the bottom fell out of the housing market.
Moody’s (MCO) saw its profits grow sevenfold between 1997 and 2006, when U.S. house prices topped out. Financial services accounted for three-quarters of profits at S&P parent McGraw-Hill (MHP, Fortune 500) that year.
But the profit gusher at the major firms have eased off in recent years, as the financial markets teetered. And threats stemming from the loose practices of the go-go days are starting to emerge. Take a suit filed in July by Calpers, the giant pension fund.
The firm sued all three big rating agencies, blaming them for $1 billion in losses on debt issued by so-called structured investment vehicles, or SIVs, a favorite tool of Wall Street during the boom. The ratings agencies said the suit lacked merit.
Calpers claimed the rating agencies were negligent in giving high ratings to some bonds that have since gone sour quick pay day loan. The suit also said the firms were "actively involved" in creating these questionable investments, arguing they "would help the arrangers structure their deals so that they could rate them as highly as possible."
The rating firms, without commenting specifically on the Calpers claims, reject the notion that they would ever cross the line into structuring or selling bonds.
"We don’t structure deals — our policy prohibits that," an S&P spokesman said. "We do not structure, design or market securities of any kind," Moody’s said.
Still, some observers contend that the agencies’ actions in structured finance may have compromised a favorite legal defense. The rating agencies say they are merely publishers, and that their ratings are opinions that are shielded by the First Amendment.
But with the lion’s share of revenue coming from the firms whose bonds they rate, "Really they’re more like vanity publishers," said Daniel Alpert, managing director at investment bank Westwood Capital. "There’s no way the First Amendment defense will survive this wave of litigation."
Regulatory underreach?
If the current situation is less than satisfactory, the fixes being pursued on Capitol Hill and at the Securities and Exchange Commission are nothing to write home about either.
The Obama administration this summer called for new rules that would strengthen SEC oversight of the rating agencies and demand that they manage their conflicts of interest better. It also said rules should be rewritten to reduce investors’ and regulators’ reliance on ratings.
But that may be easier said than done. Americans got an inkling of that last fall after AIG faltered and was propped up with taxpayer funds that eventually ran to more than $180 billion.
AIG’s Achilles heel turned out to be the billions of dollars of credit default swaps it wrote to help European banks reduce their capital requirements. In essence, the European banks paid AIG for triple-A ratings that allowed them to lend out spare funds rather than holding them against possible losses.
While the ratings agencies obviously didn’t cause AIG’s implosion, the insurer’s woes show just how integral the big three firms have become to the financial system.
"The system has been set up to rely heavily on ratings," said Matthew Richardson, a finance professor at New York University. "It’s hard to put that genie back in the bottle."
But if Washington hasn’t come up with a workable fix yet, there’s no reason to despair. There are plenty of proposals to change the so-called issuer-pays model and to improve the procedure for approving and overseeing nationally registered rating firms.
It may simply take a while for policymakers to sort through all of them, Richardson adds. After all, massive bank failures and funding crises have up till now taken priority.
"This was part of the crisis, but it wasn’t the heart of the crisis," he said. "It’s going to take some time to get this piece of the puzzle right."
It’s time for Sheila Bair to stop worrying about bailout politics and hit Uncle Sam up for some dough.
Bair is the chairman of the Federal Deposit Insurance Corp., the federal agency that administers the insurance fund that stands behind the savings of millions of Americans.
The fund is paid for by the banks that benefit from it, but it has been depleted by a wave of bank failures that isn’t expected to abate any time soon.
The FDIC board is scheduled to meet Tuesday to discuss how to raise money to restock the fund. There aren’t a lot of good options.
Bair could easily borrow the cash from Treasury, where the FDIC has a standing credit line. But the agency hasn’t done so in nearly 20 years, since the trough of the last banking crisis. And with bailout rage lingering in the air, Bair has made clear she’s not eager to break that precedent.
She said last week that whether to tap the Treasury credit line is a "philosophical question" for bankers and their regulators. The central issue: Is the Treasury backstop there for foreseeable losses or for "unexpected emergencies?"
That comment reminded listeners that as heavy as the FDIC’s burden has been — 95 banks have failed this year, on top of 25 last year — the agency is still wary about the possible collapse of a giant, multibillion-dollar institution.
But another danger is that if the FDIC fails to take prompt and transparent action, the public could again lose faith in the financial system — at a time when bad news about failing banks is certain to continue.
"I don’t understand why Sheila just does not use her Treasury line to recapitalize the fund in the same way that she encourages banks in similar situations to recapitalize themselves," said Ken Thomas, a Miami-based banking consultant who has testified before Congress on deposit insurance funding.
"By doing this," Thomas added, "she would put an end to all of this growing and troubling uncertainty about the shrinking fund, which does nothing but detract from confidence in the FDIC which is the most important concern."
What Bair would rather do is what the agency typically does — collect funds directly from banks — or turn to what she describes as other tools, such as raising money by issuing debt to banks.
The FDIC has warned banks that they may have to pony up another special fee to support the insurance fund, whose balance fell to a 17-year low of $10 billion this summer.
But the banks, which have been socked with one special fee this year, are warning that a tax on their already weakened profits could push a number of them over the edge and stall the economic recovery that has gingerly taken hold since spring.
And for once, they may not just be blowing smoke. The industry posted a $3.7 billion loss in the second quarter, when one in four institutions were unprofitable. The FDIC classifies more than 400 institutions — nearly 5% of its membership — as troubled.
Whatever the industry’s problems, many commentators have dismissed the prospect of the FDIC using its Treasury credit line as another bailout. The agency has a $100 billion standing credit line with Treasury — and, thanks to a law passed this year, the authority to borrow as much as $500 billion through 2010 in an emergency.
Given that the industry paid essentially no insurance premiums for a decade, it’s easy to see why there might be some resentment over a fresh demand for taxpayer funds.
Between 1997 and 2006, the industry made $1.28 trillion in pretax operating profits, according to FDIC data. During that period, thanks to a 1996 law that prohibited the agency from assessing well capitalized banks, the banks paid just $672 million in insurance premiums.
Yet given the banks’ current problems — and the federal laws that oblige the industry to, over time, fully repay any Treasury borrowings — the option of drawing on the credit line is gaining backers in unexpected places.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services committee, said this week he believes using the credit line is the "cleanest" way to solve the FDIC’s funding questions.
And Thomas — who twice last decade proposed boosting the minimum size of the deposit insurance fund, so that the FDIC fund would never repeat its brush with insolvency in the early 1990s — dismisses the bailout talk as a red herring.
"This idea that she does not want to go to the Treasury because of the perception of a federal ‘bailout’ does not make sense, since everyone knows that FDIC is ultimately backed by the full faith and credit of the U.S.," said Thomas.
Whatever outsiders think, the FDIC board — led by Bair and staffed by two members of the FDIC and two other federal banking regulators — will soon decide. An FDIC spokesman said it’s likely the agency will put some proposals out for public comment Tuesday, rather than making a decision on the spot.
The shifting debate seems to have left even the politically savvy chairman a bit bemused.
"The political dynamic on this is interesting," Bair said this month after her speech at Georgetown University. "People are shifting from not wanting this to go to taxpayers to wanting it to go to taxpayers."
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