TIME Banks

U.S. Regulators: Wall Street’s Largest Banks Still Too Big To Fail

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

The biggest banks still don't have adequate bankruptcy plans to avoid precipitating another economic crisis, said U.S. regulators

Eleven of the nation’s largest banks still do not have viable bankruptcy plans that would avoid causing widespread economic damage, U.S. regulators said Tuesday in a sweeping admonition of Wall Street’s giants.

The Federal Reserve and the Federal Deposit Insurance Corp said that the bankruptcy plans submitted by the 11 biggest banks in the United States fail to prepare for an orderly failure, have “unrealistic or inadequately supported” assumptions and do not properly outline changes in firm structure that would prevent broader economic repercussions.

“…[T]he plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the second-in-command official at the FDIC, in a statement.

Banks are required to submit an annual “living will” under the 2010 Dodd-Frank law, a legacy of the financial crisis of 2007-2008, in which the bankruptcy of Lehman Brothers was a precipitating factor in the economic crash that led to the Great Recession.

Regulators called for banks to create “living wills” to plan for a bankruptcy process that would not require the billions of dollars in taxpayer money doled out during the financial crisis, when many of Wall Street’s biggest financial institutions had to borrow billions from the Treasury to avoid disastrous collapse.

With Tuesday’s announcement, the large banks face the threat of tougher capital rules and restrictions on growth if they do not address the issues by July 2015.

“Too big to fail is alive and well. The FDIC’s statement that these living wills are not credible means that megabanks will live on taxpayer life support in the event of a crash,” said Sen. Sherrod Brown (D., Ohio), a proponent of legislation to increase capital requirements for the biggest banks, the Wall Street Journal reports.

Tuesday’s findings apply to banks with assets greater than $250 billion in assets, including Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays and others.

TIME Economy

S&P: Income Inequality Is Damaging the Economy

Improved education will have clear benefits for GDP growth, S&P says

Rating agency Standard & Poor’s has become one more emphatic voice blaming the halting post-recession recovery on high income inequality in the United States, as an S&P report out Tuesday claims that unequal wealth distribution is dampening the country’s economic growth.

Rising levels of income inequality in the U.S. is a drag on economic growth, and was a factor that contributed to S&P lowering its growth rating over the next decade from 2.5% to 2.8%, the report said. Income inequality leads to extreme economic swings, an uncompetitive workforce, and discourages investment and hiring, per S&P.

The U.S. Gini coefficient, a widely-used measure of income inequality, rose by 20% from 1979 to 2010. The non-partisan Congressional Budget Office showed that after-tax average income ballooned 15.1% fro the top 1% of earners, but grew by less than 1% for the bottom 90% of earners.

The S&P said in its report that government policies on taxation and government wealth transfers, including Social Security and Medicare, have not significantly reduced income inequality. Many government programs aren’t limited to assisting lower-incoming households and extend to wealthier groups more than they did at their inception, according to the report. The bottom 20% of households received only 36% of transfer payments in 2010, but received 54% in 1979, according to S&P.

The S&P recommended greater education levels as a key means to improve productivity, saying that if the American workforce completed just one more year of school over the next five years, productivity gains could add over $500 billion, or 2.4% to the level of GDP relative to the baseline.

S&P is an American financial research and ratings firm known for its stock market indices, including the S&P 500 and credit ratings on the debt of public and private corporations, as well as nations’ debts.

TIME Economy

This Map Shows the Wealthiest Person In Each State

Movoto

Bill Gates is worth a whole lot more than the richest person in Alaska

Ever wonder what it would be like to be the richest person in the state? A new map compiled by real estate firm Movoto shows that it means radically different things depending on where you live.

The richest person in Alaska, investor Robert Gillam, is worth nearly $700 million. While that’s an impressive sum compared to the average American, it’s a less than 1 percent of the net worth of the wealthiest person in the state of Washington—Microsoft founder Bill Gates. Alaska joins Delaware, Maine, and North Dakota as the only billionaire-less states.

There are a couple of families that occupy spots in multiple states. Members of the Walton family, whose late patriarch Sam Walton founded Walmart, take the top spots in Arkansas, Texas and Wyoming. The billionaire industrialists, political donors, and philanthropists David and Charles Koch are worth around an estimated $40 billion each, making them the richest people in New York and Kansas, respectively. Their company, Koch Industries, is the second largest privately-owned corporation in the United States.

The map also highlights a big gender gap. A woman in the wealthiest person in nine states, with Wyoming’s Chrissy Walton topping the list at more than $35 billion.

Oracle founder Larry Ellison (California) and eBay Pierre Omidyar (Hawaii) are among the relative few tech billionaires. The map includes those who earned their billions through bricks and mortar, such as John Menard of Wisconsin, worth $7.5 billion, who founded the Menard’s home improvement chain, and Kentucky’s Bradley Hughes, better known as B. Wayne, who turned a self-storage business into a $2.2 billion fortune.

MONEY Economy

WATCH: Job Growth Continues, But Unemployment Rises Too

The economy has added at least 200,000 jobs per month for six straight months, the longest such streak since 1997.

TIME cities

The Rise of Suburban Poverty in America

Rooftops in suburban development in Colorado Springs, Colorado.
Rooftops in suburban development in Colorado Springs, Colorado. Blend Images/Spaces Images/Getty Images

The suburbs aren't the middle-class haven many imagine them to be as new numbers show 16.5 million suburban Americans are living beneath the poverty line

Colorado Springs is often included on lists of the best places to live in America thanks to its 250 days of sun a year, world-class ski resorts and relatively high home values. But over the last decade, its suburbs have attained a less honorable distinction: they’ve experienced some of the largest increases in suburban poverty rates.

The suburbs surrounding Colorado Springs now have seven Census tracts with 20% or more residents in poverty, according to a report released Thursday by the Brookings Institution. In 2000, it had none. In those neighborhoods, 35% of residents are now considered to be below the poverty line, defined as a family of four making $23,492 or less in 2012.

“We’ve seen this all over the state,” says Kathy Underhill of Hunger Free Colorado, a statewide anti-hunger organization, referring to the growth of suburban poverty. “But I think the American public has been slow to realize this transition from urban poverty to suburban poverty.”

Poverty in the U.S. has worsened in neighborhoods already considered to be poor, but it’s now becoming more prevalent in the nation’s suburbs, according to the Brookings report.

“Poverty has become more regional in scope,” says Elizabeth Kneebone of the Brookings Institution and a co-author of the report. “But at the same time, it’s more concentrated and it’s erased a lot of the progress that we made in the 1990s.”

In the last decade, the number of Census tracts considered “distressed” — in which at least 40% of residents live in poverty — has risen by almost 72%. The number of poor people living in those neighborhoods has grown by an even faster rate—78%—from 3 million to 5.3 million. In 2000, the percentage of poor people who live in economically distressed neighborhoods was 9.1%. Today, it’s 12.2%.

Those areas are leading to what Kneebone calls a “double burden” for impoverished residents—being poor while living in a low-income area that often has failing schools, inadequate healthcare systems and higher crime rates. And as those areas are increasingly located in suburban areas, low-income Americans don’t have the kind of social safety nets often found in urban centers.

The numbers of suburban poor are growing at a more rapid rate than those in urban areas. In 2012, there were 16.5 million Americans living below the poverty line in the suburbs compared with 13.5 million in cities. The number of suburban poor living in distressed neighborhoods grew by 139% since 2000, compared with a 50% jump in cities. Overall, the number of poor living in the suburbs has grown by 65% in the past 14 years—twice as much growth as in urban areas.

It’s easy to pin the growth of concentrated and suburban poverty on the recession, but the spread of poverty throughout the U.S. has broader and more varied explanations. The numbers of suburban poor have been swelled by low-income residents who might once have lived in urban cores, but have been priced out of gentrifying cities, and have moved into affordable housing more prevalent in the suburbs.

Suburban areas also tend to be centered around industries most affected by the economic downturn, like manufacturing and construction, and the jobs that have taken their place are often low-paying, like retail and service positions.

There are also few social programs to help the suburban poor ascend the economic ladder. In the counties surrounding the Denver and Colorado Springs area, for example, many charitable organizations and anti-poverty programs have historically been focused on urban cores and haven’t caught up to changing demographics.

“The charitable infrastructure over the decades have focused on the inner city,” says Underhill of Hunger Free Colorado. “They’ve traditionally not had big case loads and aren’t accustomed to the level of service that’s needed.”

The Brookings report highlights a few suburbs that have seen decreases in poverty, including those around El Paso, Texas; Baton Rouge, La.; and Jackson, Miss. But they were outliers. In North Carolina, three suburban areas—Winston-Salem, Greensboro-High Point, and Charlotte—saw significant increases in both the number of economically distressed neighborhoods and the percentage of poor in those areas. Atlanta now has 197 areas with poverty rates above 20%, up from 32 in 2000.

“Suburban areas are no longer just homes to middle- and upper-income households,” says University of New Hampshire demographer Ken Johnson. “There were always poor suburbs, but much of the outflow of population from urban cores to suburbs has historically been middle- and upper-income. That is less true now.”

Kneebone agrees, saying the perception that suburban areas were some sort of middle-class haven “was always a bit too simplistic.”

“Poverty is touching all kinds of communities,” Kneebone says. “It’s not just over there anymore.”

TIME Economy

U.S. Economy Bounces Back With 4% Growth

A welder works on a project at Prospect Steel, a unit of Lexicon Inc., in Little Rock, Ark., July 25.
A welder works on a project at Prospect Steel, a unit of Lexicon Inc., in Little Rock, Ark., July 25. Danny Johnston—AP

The figures beat market expectations and reversed the declines of a frosty first quarter

U.S. GDP surged by 4% in the second quarter of 2014, beating analysts’ forecasts and more than compensating for the previous quarter’s severe contraction, according to new figures released by the Bureau of Economic Analysis on Wednesday.

Analysts had forecast growth rates ranging between 2 to 3%, but the economy bounced back with stronger-than-expected rebounds in consumer spending, exports, and business inventories. The growth wiped out the declines of the first quarter, when the economy contracted by 2.1%, one of the sharpest declines in 5 years. Now, with the second quarter’s rebound, the economy has grown by 0.9% in the first half of the year.

The growth was led by a rebound in consumer spending, which took a hit in the previous quarter due to severe winter weather. This quarter consumer spending grew by 2.5%, compared with 1.2% in the previous quarter. Durable goods, in particular, surged by 14%.

Exports flipped from a decline of 9.2% in the first quarter to a 9.5% increase in the second quarter.

TIME Foreign Policy

White House: EU, US to Impose New Russia Sanctions

(WASHINGTON) — The United States and European Union plan to impose new sanctions against Russia this week, including penalties targeting key sectors of the Russian economy, the White House said Monday.

The show of Western solidarity comes as the U.S. accuses Russia of ramping up its troop presence on its border with Ukraine and shipping more heavy weaponry to pro-Moscow separatists in eastern Ukrainian cities.

President Barack Obama and the leaders of Britain, Germany, France and Italy discussed the crisis during a rare joint video teleconference on Monday. The discussion follows days of bilateral talks on how to implement tougher sanctions after the downing of a passenger jet in eastern Ukraine, an attack the U.S. says was carried out by the separatists.

The U.S. and European sanctions are likely to target Russia’s energy, arms and financial sectors. The EU is also weighing the prospect of levying penalties on individuals close to Russian President Vladimir Putin, who appears to only be deepening Russia’s role in destabilizing Ukraine.

“It’s precisely because we’ve not yet seen a strategic turn from Putin that we believe it’s absolutely essential to take additional measures, and that’s what the Europeans and the United States intend to do this week,” said Tony Blinken, Obama’s deputy national security adviser.

Europe, which has a stronger trade relationship with Russia than the U.S., has lagged behind Washington with its earlier sanctions package, in part out of concern from leaders that the penalties could have a negative impact on their own economies. But a spokesman for British Prime Minister David Cameron said following Monday’s call that the West agreed that the EU should move a “strong package of sectoral sanctions as swiftly as possible.”

French President Francois Hollande said in a statement that the Western leaders “regretted Russia has not effectively pressured separatists to bring them to negotiate nor taken expected concrete measures to assure control of the Russian-Ukrainian border.”

The U.S. penalties are expected to be imposed after Europe finalizes its next moves. Neither set of penalties is expected to fully cut off Russian economic sectors from the West, an options U.S. officials have said they’re holding in reserve in case Russia launches a full-on military incursion in Ukraine or takes a similarly provocative step.

As the West presses ahead with new sanctions, U.S. officials say Russia is getting more directly involved in the clash between separatists and the Ukrainian government. Blinken said Russia appeared to be using the international attention focused on the downed Malaysia Airlines plane as “cover and distraction” while it moves more heavy weaponry over its border and into Ukraine.

“We’ve seen a significant re-buildup of Russian forces along the border, potentially positioning Russia for a so-called humanitarian or peace-keeping intervention in Ukraine,” Blinken said. “So there’s urgency to arresting this.”

Nearly 300 people were killed when the Malaysian plane was shot down by a missile on July 17. The West blames the separatists for the missile attack and Russia for supplying the rebels with equipment that can take down a plane.

Other leaders participating in Monday’s call were German Chancellor Angela Merkel and Italian Prime Minister Matteo Renzi. The White House said the leaders also discussed the stalled efforts to achieve a cease-fire between Israel and Hamas, the need for Iraq to form a more inclusive government and the uptick in security threats in Libya.

TIME Economy

The Average American Family Is Poorer Than It Was 10 Years Ago

The typical American household is worth a third less than it was in 2003, according to a new study

The typical American household was significantly poorer in 2013 than it was ten years earlier as a result of the Great Recession, a new study shows, an effect that is compounded by growing wealth inequality in the United States.

The net worth of the typical American household in 2003 was $87,992, adjusting for inflation. Ten years later, it was just $56,335, a decline of 36 percent, according to a study by the Russell Sage Foundation.

But even as the average American household’s wealth declined, the net worth of wealthy households increased substantially. The average wealth of the American household in the 95th percentile was $1,192,639 in 2003, and $1,364,834 ten years later, an increase of 14 percent.

The authors of the study said the reason for the disparity was that affluent households were able to ride the success of the surging stock market after the 2008 crash, while middle class families were severely impacted by the decreasing value of their homes.

Wealth declined for everyone in the aftermath of the Great Recession, but better-off families were able to rebound. Households at the bottom of the wealth distribution, on the other hand, lost the largest share of their wealth.

‘The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near term,” wrote the authors of the study.

TIME Companies

Walmart’s Head of U.S. Operations Will Step Down After Slump in Sales

A sign lists the current Walmart stock price at a Walmart Supercenter in Bentonville
A sign lists the current Walmart stock price at the Walmart Supercenter in Bentonville, Ark., on June 5, 2014 Rick Wilking — Reuters

His replacement has quickly ascended the ranks of the company's operations in Asia in recent years

Walmart announced on Thursday that Bill Simon, the president of its operations in the U.S., will leave the company next month after four years of leadership marked most recently by a decline in sales. Greg Foran, the New Zealand–born executive who just last month assumed his role as head of Walmart Asia, will take over from Simon from Aug. 9.

“Being asked to lead the Walmart U.S. business is a privilege that I don’t take lightly,” Foran said in a company statement. “I am excited to get started. The needs of our customers are changing dramatically, and we have an enormous opportunity to serve them in new and different ways.”

Foran will assume office at a time of uncertainty for the corporation, with five quarters of falling sales in the rearview mirror despite a recent surge in U.S. consumer confidence. A market analyst told Reuters that Walmart CEO Doug McMillon “wanted new blood” in the company to facilitate its efforts in online retail and general rebranding. Foran has been a rising star in Walmart: he left his position as Woolworths’ head of supermarkets in 2011 to take the reins of Walmart’s fledgling China project and was promoted to oversee the company’s expansion in Asia.

MONEY

Higher Gas Prices Keep Inflation Just Above 2%

Gas nozzle and hose line graph
TS Photography—Getty Images

Inflation steady as pain at pump is offset by slower growth in food costs.

The Consumer Price Index increased 2.1% for the twelve months that ended in June, reports the Bureau of Labor Statistics. This is the second month in a row that the CPI broke 2%.

The index, which estimates overall inflation by measuring price changes in a “basket” of consumer goods, also showed .3% month-over-month growth from May to June of this year. That number is slightly down from May, which saw a .4% month-over-month increase.

Because food and energy prices tend to be volatile, many analysts and economists also look at the “core” consumer price index, which excludes those items, to get a sense of underlying inflation trends. The core CPI rose 1.9% since last June, says the BLS. This increase is roughly on par with last month’s year-over-year core CPI increase, suggesting inflation remains relatively steady.

According to the BLS, the CPI’s increase this month was primary driven by higher gasoline prices. The cost of gasoline rose 3.3% during the month of June and accounted for two-thirds of the entire index’s increase. The price of food, which had jumped in May, rose more slowly in June, increasing by only 0.1%

Investors watch inflation numbers closely because they may offer a clue about when the Federal Reserve may begin to raise key short-term interest rates, which the Fed has held near zero since the 2008 financial crisis. Chair Janet Yellen has said the central bank intends to hold rates down at least until inflation runs at 2%.

But though the closely watched CPI has notched above 2% for the second month in a row, it’s not the inflation number the Fed uses for its 2% target. Instead, it uses a number from the Bureau of Economic Analysis called the personal consumption expenditure, or PCE, deflator. This index covers a broader selection of goods and is also calculated somewhat differently. It also has been running lower than CPI recently—the latest reading was 1.8% for the twelve months ending in May, or 1.5% for the core number excluding food and energy. The BEA will release updated PCE numbers on August 1st.

The CPI typically runs 0.30 to 0.40 percentage points higher than the PCE index, says Mark Zandi, chief economist at Moody’s Analytics, speaking to Money.com on Monday evening before the release.

“The target CPI is 2.3% or 2.4%, somewhere in that range,” said Zandi. If so, today’s numbers suggest the Fed is getting closer to it’s target, but isn’t there yet.

Update: Due to an editing error, the story originally misstated the amount CPI typically runs above the PCE index. It has been corrected.

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