Monday, August 29, 2011

Big Banks Bet Crude Oil Prices Would Fall in 2008 Run-Up, Leaked Data Show

By Matthew Leising and Silla Brush - Aug 29, 2011 12:00 PM GMT+0800

Just before crude oil hit its record high in mid-2008, 15 of the world’s largest banks were betting that prices would fall, according to private trading data released by U.S. Senator Bernie Sanders.

The net positions of the banks undermine arguments made by Sanders that speculative trades on Wall Street drove oil prices in 2008, said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston. Retail gasoline reached a record $4.08 a gallon on July 7, 2008, and oil peaked at $147.27 a barrel on July 11 that year.

“If you believe the banks are jerking around the market and the market is going the way they were trading, the price should have been lower,” Pirrong, who reviewed the data, said in an interview.

The records of oil futures and derivatives trades in the first half of 2008 were compiled by the Commodity Futures Trading Commission and made public Aug. 19 by Sanders. Banks including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley and UBS AG collectively held 229,460 net short contracts compared with 101,537 net long contracts, the data show. Short trades make money if prices fall.

Sanders, a Vermont Independent, and other supporters of curbs on speculation have said the CFTC documents demonstrate the need for the agency to complete its rule on so-called position limits. The Dodd-Frank regulatory overhaul enacted last year requires the CFTC to limit traders’ positions in exchange- traded and over-the-counter derivatives for oil, natural gas, wheat and other commodities.
‘Major Reason’

In an Aug. 22 letter to CFTC Chairman Gary Gensler, Sanders said the 2008 data showed that banks and other speculators harmed the economy. “We now know that excessive oil speculation is a major reason why oil prices have risen so sharply,” he wrote.

Asked to comment specifically on the analysis of the banks’ positions, Warren Gunnels, senior policy adviser to Sanders, declined, saying the senator’s office would need more information from the industry and regulators. “The bottom line is that we need the CFTC to obey the law, do its job and eliminate excessive oil speculation,” Gunnels said in an interview.

The position-limits rule, first proposed by the agency in January, spurred more than 13,000 public comments filed with the CFTC from supporters including Delta Air Lines Inc. (DAL) and opponents including Barclays Capital.

The data released by Sanders lists transactions by more than 200 traders, offering a dated but rare glimpse into an opaque market. It was collected by the CFTC for a Sept. 11, 2008, report on the run-up in oil prices. The agency said at the time that the data had limitations and, while it was the best available snapshot of trading, it might not be definitive.
‘Utmost Concern’

When the agency told Congress in 2008 that its review found no evidence that non-commercial trading had driven the spikes in prices, three House Democrats questioned the conclusion and sought the underlying data about companies and their positions.

The CFTC data was kept confidential until Sanders publicized it. John Damgard, president of the Futures Industry Association, said in an Aug. 19 statement that the release was of “utmost concern” to the trade group’s members and could “seriously jeopardize the CFTC’s ability to gather information from market participants and carry out its market surveillance mission.”

The CFTC and its inspector general should investigate if any laws were broken because of the leak, the association said on Aug. 25.

Sanders has suggested he acted in part to counter the CFTC’s assertion when it released its January proposal that it needed more data on the private over-the-counter swaps market to implement position limits on contracts that settle outside of the current month.

Sanders’ office said the data he released included both exchange-traded and over-the-counter transactions. “It is my understanding that the CFTC is still claiming that it cannot impose strict speculation limits because it does not have enough information,” Sanders said in the Aug. 22 letter to Gensler. That, Sanders said, is “laughable.”

Steve Adamske, CFTC spokesman, declined to comment on Sanders’s letter.

The swaps market was largely unregulated until those trades helped fuel the 2008 credit crisis. Dodd-Frank, enacted last year, aims to reduce risk, boost transparency and give regulators access to databases of information about exchange- traded and private trades.
Meeting the Burden

Opponents of the position-limit proposal have argued that the agency doesn’t have enough data and that regulators haven’t demonstrated that excessive speculation is driving prices.

“The commission has not met its burden of showing that the proposed position limit regime is ‘necessary’ and ‘appropriate,’” Craig S. Donohue, chief executive of CME Group Inc. (CME), the world’s largest futures exchange, wrote in a March 28 letter to the CFTC.

The agency has come under the opposite pressure from Senators Maria Cantwell, a Washington Democrat, Carl Levin, a Michigan Democrat, and Sanders, among other lawmakers. “The CFTC is breaking the law” by not meeting the Jan. 17 deadline set by Dodd-Frank, Sanders said in the Aug. 22 letter.

The agency may vote to complete the position-limit rule as early as Sept. 22, Gensler said Aug. 25. The regulation has split the agency’s five commissioners: Jill E. Sommers, a Republican, opposed the January proposal, while Scott O’Malia, a Republican, and Michael V. Dunn, a Democrat, supported seeking further public comment even as they registered concerns about imposing trading limits. Bart Chilton, a Democrat, has urged the agency to implement the trading curbs.
Offset Positions

All banks included in the data released by Sanders held both long and short positions, which when offset against each other provide a net view of expectations of where oil prices were headed. Credit Suisse held the largest net-short position at 109,655 contracts, which was 2.7 times as large as the largest net long position of 41,338 lots held by Deutsche Bank. Each lot represents 1,000 barrels of oil.

“Goldman Sachs, Morgan Stanley (MS) and other speculators on Wall Street dominated the crude oil futures market causing tremendous harm to the entire economy,” Sanders said on Aug. 19. Mark Lake, a spokesman at Morgan Stanley, and Andrea Raphael, a spokeswoman at Goldman Sachs, declined to comment.
Limited Data

Pirrong, who has consulted for exchanges and whose research on derivatives regulation has been published by the industry, said that one of the limitations of the CFTC data is that it doesn’t distinguish between banks’ trading positions for their own accounts and those handled for clients.

The aggregate position of the more than 200 traders was net short by 36,327 contracts, according to the data. T. Boone Pickens, the billionaire Texas hedge-fund manager, had 145,257 lots and was net short 1,983, according to the data.

A separate set of CFTC data provided to Bloomberg News by Sanders’s office on Aug. 24 shows commodity index fund investments holding net long positions on Dec. 31, 2007, March 31, 2008 and June 30, 2008. The data, also collected for the CFTC’s 2008 report, shows index funds, institutional investors, sovereign wealth funds and other clients all holding net long positions expecting crude oil to rise.

A third set of data released by Sanders showed six hedge and pension funds with crude positions exceeding so-called accountability levels -- which are set by exchanges, not the CFTC. Traders that exceed accountability levels may be required to provide information about the positions to exchanges, while not necessarily facing hard limits on the overall size of the transactions.

The data shows non-commercial trades on exchanges and in private over-the-counter markets. D.E. Shaw & Co., the now $21- billion hedge fund, and Caisse de Depot et Placement, now Canada’s biggest pension fund, held net short positions. Meanwhile, Bridgewater Associates LP, the hedge fund founded by Ray Dalio, expected crude prices to increase.

Bank Long Short Difference

Deutsche Bank 273,403 232,065 41,338
Goldman Sachs 451,997 419,324 32,673
UBS AG 100,206 82,383 17,823
Lehman Brothers 154,507 146,165 8,342
Barclays 277,461 276,731 730
Credit Agricole 89,346 88,715 631
Total= 101,537

Credit Suisse 81,638 191,293 -109,655
JPMorgan 200,062 245,261 -45,199
BNP Paribas 106,994 123,944 -16,950
Societe Generale 141,186 155,518 -14,332
Bank of America 50,893 62,412 -11,519
Macquarie Bank 42,611 51,820 -9,209
Citigroup 87,070 94,943 -7,873
Morgan Stanley 312,527 320,223 -7,696
Merrill Lynch 115,396 122,423 -7,027
Total= -229,460

Dollar Undervalued in Purchasing Parity

By Allison Bennett and Catarina Saraiva - Aug 29, 2011 11:46 AM GMT+0800

The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies.

The greenback has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. That compares with a decline of 14 percent in the world’s reserve currency from this time last year through July.

Demand for U.S. assets is rising even though the Federal Reserve has pledged to keep its benchmark interest rate near zero through mid-2013 and Standard & Poor’s cut the nation’s credit rating from AAA. The two other currencies considered havens in times of financial and political strife -- the Swiss franc and yen -- are under siege by their governments and central banks after strengthening to records.

“The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”

The dollar strengthened 0.1 percent to 76.64 yen last week, and rallied 2.7 percent versus the franc to 80.63 centimes. The Bloomberg Correlation-Weighted Currency Index for the dollar closed at 89.4521, up from 88.3486 at the end of July. The U.S. currency bought 76.68 yen today and gained 0.4 percent to 80.96 centimes.
Purchasing Power Parity

Even with the gains, America’s currency is 47 percent too weak against the franc and 31 percent undervalued compared with the yen, based on an index developed by the Organization for Economic Cooperation and Development in Paris that measures currencies using prices for similar goods and services in two countries.

The dollar may continue to appreciate as the Swiss National Bank and Bank of Japan intervene to stem gains and currencies of commodity-producing nations such as Australia, New Zealand and Canada lose some of their luster amid a global economic slowdown.
‘Dollar Is Cheap’

“The dollar is cheap against the G-10 small currencies like Australia, Canada, New Zealand, Sweden, Norway, Swiss and also against the yen,” Greg Anderson, a senior currency strategist at New York-based Citigroup Inc., said in a telephone interview Aug. 14. “If we have continued turbulence with commodities and equities selling off, the dollar is a short-term buy.”

America’s currency is 37 percent below fair value against the Australian dollar and 20 percent versus the Canadian dollar, according to the OECD index.

The dollar has mainly weakened since Fed Chairman Ben S. Bernanke signaled last year at an annual conference sponsored by the Federal Reserve Bank of Kansas City that the central bank may boost the economy by printing money and buying bonds. It purchased $600 billion of Treasuries between November and June, contributing to a 6.25 percent drop in the U.S. currency as measured by Bloomberg Correlation-Weighted Indexes.
Fed’s Toolbox

Bernanke said at an annual forum in Jackson Hole, Wyoming, on Aug. 26 that the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.

Slowing growth in the U.S. and the Fed’s pledge to keep its target rate for overnight loans between banks at a record low of zero to 0.25 percent until mid-2013 may constrain the greenback. Citigroup lowered its 2011 U.S. growth estimate to 1.6 percent from 1.7 percent, and Goldman Sachs Group Inc. said it saw a one-in-three chance of a recession as it cut its gross domestic product forecast to 1.7 percent from 1.8 percent.

“Until we can get to a point where the dollar can demonstrate some independent strength, like the economic data justifies the Fed to provide some interest rate support, we don’t think the dollar can shine,” Robert Sinche, the global head of foreign exchange strategy at Royal Bank of Scotland Group Plc, said Aug. 24 in a telephone interview from Stamford, Connecticut.

RBS predicts the dollar will trade at $1.45 versus the euro by the end of the third quarter, from $1.4499 last week, and at $1.06 against the Australian currency, from $1.0573.
Increased Dollar Demand

Demand for the U.S. currency has increased as S&P’s Aug. 5 downgrade of the nation’s credit rating to AA+ caused stock markets to gyrate and sent investors to the safety of Treasuries. Investors repudiated the ratings company’s assertion that the U.S. was less creditworthy, driving 10-year note yields to record low 1.9735 percent on Aug. 18. The dollar appreciated the last month against all but one of the 16 most-traded currencies as tracked by Bloomberg, falling versus the yen.

“The downgrade obviously caused a big risk-aversion theme that is still en vogue,” Blake Jespersen, the director of foreign-exchange at Bank of Montreal in Toronto said Aug. 24 by telephone.

Strategists don’t expect the dollar to falter in the slowing economy. It will remain unchanged on average by the fourth quarter against currencies of the Group of 10 Nations, according to estimates of strategists compiled by Bloomberg.
Main Reserve Currency

The dollar represents 60.7 percent of the world’s currency reserves, compared with 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington. That leaves investors with few alternatives as the Swiss National Bank and Bank of Japan step up their efforts to curb gains in their currencies, according to Jespersen.

“The SNB and the BOJ have been very aggressive, not only in talk but in action, and therefore safe-haven flows are being allocated more toward the U.S. dollar,” Jespersen said.

Gains of 10 percent in the Swiss franc and 4.5 percent for the yen in the past three months have weighed on the export- reliant economies and prompted the central banks to take action to curb further appreciation.

The SNB lowered its target for three-month franc London interbank offered rate, or the rate banks charge to lend to each other in Swiss francs for three months, to “as close to zero as possible” on Aug. 3. It said it may take further steps.

The yen has erased all its losses since the Bank of Japan intervened Aug. 4 and expanded monetary stimulus by 10 trillion yen ($130.5 billion). Finance Minister Yoshihiko Noda introduced a $100 billion funding program last week for Japanese businesses intended to encourage the exchange of “yen-denominated funds to foreign currencies.”

“There are few currencies left to buy that don’t mind going up,” Kit Juckes, head of foreign-exchange research in London for Societe Generale SA and the second-most accurate currency forecaster as measured by Bloomberg said in an interview last week. “How much weaker can the dollar get?”

Tuesday, August 16, 2011

Industrial Production in U.S. Rose 0.9% in July

By Jillian Berman - Aug 16, 2011 9:52 PM GMT+0800

Industrial production in the U.S. climbed in July by the most this year as carmakers started to shake off the effects of the disaster in Japan and higher temperatures boosted utility use.

The 0.9 percent increase in production at factories, mines and utilities followed a revised 0.4 percent gain that was more the previously estimated, figures from the Federal Reserve showed today. Economists projected a 0.5 percent rise in July, according to the median estimate in a Bloomberg News survey. Factory output rose by the most in four months.

Production of business equipment picked up, showing gains in the industry that led the recovery may be sustained even as manufacturers contend with a slowdown in consumer spending and exports. Factories have also kept a tight rein on inventories, limiting the need for large-scale cutbacks that could trigger an economic slump.

“Given some of the other negatives in the economy, I think you still have to point to manufacturing as a bit of a bright spot,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who correctly predicted the gain. Production was bolstered “by a beginning of the recovery in the auto sector. Manufacturing excluding motor vehicles was still up. Not great, but a decent outcome.”

Forecasts for industrial production in the Bloomberg survey of 85 economists ranged from gains of 0.1 percent to 1 percent.

Stocks declined after the report on growing concern over a global growth slowdown after Germany said its economy almost stalled in the second quarter. The Standard & Poor’s 500 Index fell 1.3 percent to 1,189.24 at 9:51 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.28 percent from 2.31 percent late yesterday.
Housing Starts

The housing market is still struggling, separate figures from the Commerce Department showed today. Housing starts dropped 1.5 percent in July to a 604,000 annual rate.

Manufacturing output increased 0.6 percent last month, led by gains at the nation’s automakers, the Fed’s report showed.

Production of automobiles and parts surged 5.2 percent last month, a rebound from the supply-chain disruptions that resulted from the March earthquake in Japan, the Fed report showed. Manufacturing excluding motor vehicles climbed 0.3 percent after a 0.2 percent gain in the prior month.

Motor-vehicle assemblies rose to 8.73 million units at an annual rate in July from 7.89 million, today’s report showed. Cars and light trucks sold at a 12.2 million annual pace in July, up from 11.4 million annual rate a month earlier, Autodata Corp. said last week. Deliveries at Detroit-based General Motors Corp. climbed 7.6 percent from the same month in 2010 to 214,915.
Second Half

“Although the economy has clearly lost some momentum, we do believe that it will continue to recover, but more gradually than we had originally anticipated as we move through the second half of the year,” Don Johnson, GM’s vice president of U.S. sales said on an Aug. 2 conference call.

Business equipment production rose 0.6 percent in July following a 0.2 percent gain in June. Output of computers and electronic products increased 0.5 percent after a 0.8 percent decline in June. Furniture production rose 0.7 percent after a 2.4 percent decrease.

Capacity utilization, which measures the amount of a plant that is in use, increased to 77.5 percent, the highest since August 2008, from 76.9 percent in June. The gauge compares with the average of 79.5 percent over the past 20 years.

Mining production, which includes oil drilling, rose 1.1 percent after a 1.2 percent gain. Utility output increased 2.8 percent, the most this year, after a 0.8 percent gain.
Heat Wave

Temperatures soared across the U.S., with July records in Texas and Oklahoma, according to the National Climatic Data Center. Last month, temperatures were “above normal” or “much above normal” in 41 of the 48 contiguous U.S. states, it said.

The U.S. economy grew at a 1.3 percent annual rate during the second quarter after almost stalling in the previous three months, according to Commerce Department figures. Fed policy makers pledged to keep the benchmark interest rate near zero to bolster a recovery that’s moving “considerably slower” than expected, policy makers said in a statement last week.

The drop in the value of the dollar could boost confidence among manufacturers. A weaker dollar benefits American companies by making their products more attractive to buyers overseas. The dollar dropped 7.9 percent in the 12 months ended in July against a weighted basket of currencies from the country’s biggest trading partners.
Growth Overseas

Peoria, Illinois-based Caterpillar Inc., the world’s largest construction- and mining-equipment maker, posted increased profits and sales in the second quarter, largely due to growth overseas, the company said July 22.

“China is doing a good job of balancing growth and inflation, and our expectations for China remain positive,” Chief Executive Officer Douglas Oberhelman said in the statement. “While we’ve seen some softening of growth in China, dealer deliveries to end users were up in the second quarter of 2011 compared with the second quarter of last year."

U.S. Sovereign Debt Rating Is Affirmed by Fitch at AAA; Outlook Is Stable

By Will Daley - Aug 16, 2011 9:21 PM GMT+0800

Fitch Ratings affirmed its AAA credit rating on the U.S. and said the outlook on the long-term ratings is stable.

Standard & Poor’s on Aug. 5 cut the U.S. credit rating to AA+ from AAA, saying lawmakers failed to cut spending enough to reduce record deficits. S&P dropped the ranking after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s debt limit was lifted.

Fitch said Aug. 2 that the U.S. is under review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.

Moody’s Investors Service affirmed the U.S.’s top Aaa ranking on Aug. 8 in part because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries. Lawmakers’ agreement on Aug. 2 put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years was a “positive step” toward addressing the nation’s record deficits, Steven Hess, the senior credit officer at Moody’s in New York, said Aug. 8 in a telephone interview.

Monday, August 1, 2011

House Passes $2.1 Trillion U.S. Debt Ceiling Plan

By James Rowley and Catherine Dodge - Aug 1, 2011 4:21 PM PT

The House approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default.

The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow.

“We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.”

Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.

Representative Gabrielle Giffords, the Arizona Democrat wounded in a shooting attack, drew a long standing ovation as she arrived to vote for the measure, making her first appearance on the House floor since the Jan. 8 assault in Tucson.

Final approval in the Senate would send the debt-limit measure to Obama for his signature and conclude a months-long battle over raising the $14.3 trillion debt ceiling and reining in government spending.
‘Not One Red Cent’

“It’s hard to believe we are putting our best foot forward with the legislation that comes before us today,” said House Democratic leader Nancy Pelosi of California. “Not one red cent” will come from the wealthiest Americans to cut the deficit, she said. Still, she said she supports the plan because it ends economic uncertainty and prevents cuts in Social Security and Medicare.

Treasuries rose, pushing the yields on 10-year notes to the lowest level since November, as an index showed U.S. manufacturing expanded in July at the slowest pace in two years.

Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage point, to 2.74 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 gained 14/32, or $4.38 per $1,000 face amount, to 103 8/32.

U.S. stocks slumped. The Standard and Poor’s 500 lost 0.4 percent to 1,286.94 at 4:19 p.m. in New York after climbing as much as 1.2 percent earlier. The Dow Jones Industrial Average retreated 10.75 points, or 0.1 percent, to 12,132.49 today after rising 139 points.
Averting Crisis

Democrats and Republicans praised the agreement for averting an economic crisis, even as both sides said the compromise fell short of their goals.

Republicans called the bill a step in the right direction while saying government spending wasn’t pared enough. Democrats expressed concern about making deep spending cuts in a fragile economy and not spreading the sacrifice to the nation’s wealthiest through higher taxes.

“I am voting for this bill not because I like this bill,” said Representative Steny Hoyer, the second-ranking Democrat in the House. “Default for the United States of America is not an option. This would affect all of the people I represent and all of the people of this country.”

Both parties worked today to sell the deal to their rank and file.

“We’re very optimistic we’re going to do well,” Senate Republican leader Mitch McConnell, of Kentucky said after a meeting where he briefed Senate Republicans on the plan.
No Tax Increase

House Republican leaders cast the deal as a victory because it doesn’t raise taxes and makes most of the spending cuts they sought.

“It gives us the best shot that we’ve had in the 20 years that I’ve been here to build support for a balanced budget amendment to the Constitution,” to put “fiscal handcuffs” on Congress, House Speaker John Boehner of Ohio told reporters.

Ryan said his party got two-thirds of the cuts to discretionary spending that it wanted.

“This legislation is typical for compromise legislation,” said Senate Majority Leader Harry Reid, a Nevada Democrat. “Neither side got what they wanted.”

Senator Mark Warner, a Virginia Democrat, said he will support the legislation though it doesn’t do enough to tackle long-term spending and revenue. Warner, one of a bipartisan group that offered a $3.7 trillion deficit-cutting plan, said, “This doesn’t get us to the core problem of how do we take on tax reform, how do we take on entitlement reform.”
Defense Spending Cuts

Senator Lindsey Graham, a South Carolina Republican, said he won’t support the plan in part because of cuts to defense spending. Initially, the Defense Department could see $325 billion in cuts over 10 years as part of the bill’s first round of deficit-cutting, similar to what the Obama administration has proposed, according to an administration official. It’s the second phase of $1.5 trillion in cuts envisioned, with about half coming from national security, that could jeopardize Defense Department operations.

“If fully implemented, the consequences to our nation’s defense infrastructure would be severe,” Graham said in a statement. “What has happened to the party of Reagan who viewed the primary purpose of the federal government was to provide a strong national defense?”

The overall plan would save $2.1 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office.
Money Out of Pockets

Representative Brad Miller, a North Carolina Democrat, said the immediate spending cuts will contract the economy. The measure “is going to take money out of the economy, it is going to take money out of people’s pockets,” he said.

The Treasury Department has said it will reach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress.

“The threat of default is now for certain off the specter of this economy, no longer a headwind” for the U.S. economy, Gene Sperling, director of the National Economic Council, said today on Bloomberg Television.

The measure would raise the debt ceiling in two installments, sufficient to serve the nation’s needs into early 2013. The framework would cut $917 billion in spending over a decade, raise the debt limit initially by $900 billion and assign a special congressional committee to find another $1.5 trillion in deficit savings by late November, to be enacted by Christmas.
Constitutional Amendment

If Congress met that deadline and deficit target, or voted to send a balanced-budget constitutional amendment to the states, Obama would receive another $1.5 trillion borrowing boost.

In the case of Congress failing to take either step, or not producing debt savings of at least $1.2 trillion, the plan allows the president to obtain a $1.2 trillion debt-ceiling extension. That would trigger automatic spending cuts across the government -- including in defense and Medicare -- to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.

An initial $400 billion increase in borrowing authority couldn’t be blocked under the deal. While Congress would get a chance to avert both debt-limit increases through disapproval resolutions, there’s little chance opponents could muster the two-thirds majorities needed in both chambers to override Obama’s veto.

Both sides made concessions. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by both chambers of Congress.

The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law was enacted by Christmas.

Even so, Obama has an opportunity to increase revenue in the future if he opts to allow the tax cuts enacted under George W. Bush to expire as scheduled in 2013. He could veto legislation to extend those cuts -- producing an estimated $3.5 trillion.

White House officials said the enforcement mechanisms will help them press Obama’s agenda as further deficit reductions are made, including additional tax revenue.

The automatic spending cuts would include deep reductions in the defense budget, which Republicans oppose. That measure preserves leverage for Democrats in committee negotiations, the officials told reporters on condition of anonymity.
Spending Cuts Delayed

Because any spending cuts would be delayed until 2013, timed to coincide with the expiration of the Bush tax cuts, Republicans would have an added incentive to agree to overhaul taxes, which Democrats want to use for raising revenue.

Republicans argue that while the super-committee could propose tax increases, it wouldn’t likely do so because the rules of the deal require that it assume -- as the CBO does -- the Bush tax cuts expire as scheduled at the end of 2012. That would mean that to count any new revenue toward deficit reduction, the committee would need to both erase the Bush tax reductions and then generate additional revenue on top of that.

In addition to guaranteeing a vote on the balanced-budget constitutional amendment between October and the end of the year, the agreement could give Republicans a chance to renew their push for the measure at the height of 2012 campaigns.