The EconoMissed

The Fight of the Century: Keynes vs. Hayek Round 2

2011-04-28T09:56:00.000-04:00

America's Finest Writer Back With Another Infuriating Piece

2011-04-12T13:16:00.004-04:00

The Real Housewives of Wall Street
Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.

Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."

But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.

By Matt Tiabbi at rollingstone.com

This Should Shock None of The Economissed Readers

2011-04-11T11:56:00.006-04:00

Traffic citations statewide jump since beginning of recession

By Bethania Palma Markus, Staff Writer Posted: 04/06/2011 07:25:57 PM PDT

The California Highway Patrol and local police officers issued 110,000 more traffic citations in Los Angeles County last year then they did at the start of the economic recession, and a Sacramento attorney is questioning the timing.

In fiscal year 2006-2007, officers wrote 1,746,852 tickets countywide, according to data from Los Angeles County Superior Court. Last fiscal year, they wrote 1,857,825. Statewide, the CHP issued about 200,000 more tickets in 2009 than in 2007, CHP officials said.

The CHP attributes the increase to more officers on the highways and new cell phone laws. But Matthew Becker, an attorney who specializes in traffic cases, said cash- strapped state and local lawmakers are looking for ways to generate revenue.

"The policymakers are sticking more officers on the street knowing the officers will generate more tickets and more profit," he said. "It's not so much a safety issue, but hey, it's bringing in the bucks."

The state is facing a roughly $30 billion budget shortfall. CHP spokeswoman Jaime Coffee said in fiscal year 2006-2007, Gov. Arnold Schwarzenegger authorized hiring 240 new officers and 173 dispatchers.

The CHP has no quota system and no direction has been given to officers to write more tickets, Coffee said. Verbal warnings and assistance to drivers by CHP officers showed a similar increase since 2007, according to statistics provided by the CHP.

A hands-free cell phone law that went into effect in July 2008 accounted for more than 100,000 tickets statewide, according to the statistics. April is the state's Distracted Driving Awareness Month, with officers taking a "zero tolerance" stance on cell phone use, texting and other distractions while driving. "Our officers issue citations for safety purposes, not for revenue," Coffee said.

"If you're not breaking any laws, you won't get a ticket. It's pretty simple." In 2009, increased numbers of citations corresponded with a 9.5 percent decrease in traffic collision deaths and 15 percent fewer accidents, she said.

L.A. County sheriff's Capt. Jim Thornton said deputies write tickets to reduce traffic accidents and increase safety. "The cities are always concerned with more revenue" he said. "That's simple math. However that's not why we do it. We do it to make the streets safer."

Doug Johnson, fellow at Claremont-McKenna's Rose Institute for State and Local Government, said a statewide effort to rake in more revenue via traffic fines is unlikely. A number of factors, including federal grants for DUI enforcement, weather and the number of drivers on the road can influence citation numbers.

"Increasing tickets to generate more revenue is more likely in a smaller jurisdiction," he said. "I understand the questions people have, but there are so many variables that can impact it." Red-light cameras, he added, are relatively new and most are revenue-driven.

Still, Becker questioned the numbers and said he believes citizens who may not be driving dangerously could be targeted because of governmental fiscal woes.

"Is it really what we need from a safety perspective? I don't think so," he said. "From a revenue side for the policymakers, absolutely. Ka-ching."

Whittier Daily News

2011-03-20T10:09:00.001-04:00

The Lady Doth Protest Too Much, Methinks

2011-03-01T21:06:00.002-05:00

Anger at the banks is justified, Mervyn King says

The Governor of the Bank of England, Mervyn King, has expressed "surprise" that the public is not more angry with the bankers who caused the recession.

By Philip Aldrick, Economics Editor 6:14PM GMT 01 Mar 2011

In some of his strongest language yet, Mervyn King today claimed the fall in households' living standards was the fault of the financial services sector and he expressed sympathy that innocent families paying the price.

"The people whose jobs were destroyed were in no way responsible for the excesses of the financial sector and the crisis that followed," he told MPs on the Treasury Select Committee.

In most aspects, he said, the economy had been on a sound footing before the crisis. Previous downturns were often caused by inefficiencies or weak management and were useful opportunities to improve systems. "None of that applied in this crisis," he said. "We had quite a successfully operating economy."

The people who are now suffering "did not get bonuses of the scale people in the financial sector got". The financial crisis may have occurred two years ago but, as austerity measures kick in, "the cost is now being felt", he said.

It remains "a big political problem", he added: "I'm surprised the real anger hasn't been greater than it has."

The Governor also warned that living standards may be permanently lower than where they would have been under the economy's trend growth rate before the crisis. "The evidence of the past is that the impact of a [financial] crisis like that persists for many years," he said.

"You may not get it back for very many years if ever. It's a very real hit on living standards. That's why it is important to take the issue of financial stability very seriously."

Making a personal commitment, he said he hoped to ensure the banks would never again be allowed to cause a recession of the scale just witnessed. "I joined the Bank of England 20 years ago today," he said. "I don't want to leave until we have a framework in place to ensure we don't have to go through this again."

The Governor also expressed concern about the legislation being enacted to give regulators greater powers on bank supervision. He said the Bank would have preferred a new Act rather than amendments to the existing law, but that he was satisfied with the current plans.

Andrew Tyrie, chairman of the TSC, suggested the current plans are a "pig's ear of a legislative process".

The biggest change to banking supervision, Mr King said, would be to "move to a regime that does countenance failure but does not cause havoc with the financial system". Regulators will pay closer attention to whether a bank can fail safely rather than continue with "excessively detailed scrutiny of the big banks".

His position appeared to contradict that of his future deputy governor Hector Sants, currently chief executive of the Financial Services Authority, who has said the new regime would have a "low tolerance for failure". Mr King said: "I don't think that's where we are now."

telegraph.co.uk

Why Isn't Wall Street in Jail?

2011-02-17T00:34:00.002-05:00

Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them

By Matt Taibbi
February 16, 2011 9:00 AM ET

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.

Just ask the people who tried to do the right thing.

more of america's finest jounalist continued here - rollingstone.com

I Know What Wonka Bar Has The Golden Ticket

2011-02-04T00:23:00.001-05:00

Cracking the Scratch Lottery Code

As a trained statistician with degrees from MIT and Stanford University, Srivastava was intrigued by the technical problem posed by the lottery ticket. In fact, it reminded him a lot of his day job, which involves consulting for mining and oil companies. A typical assignment for Srivastava goes like this: A mining company has multiple samples from a potential gold mine. Each sample gives a different estimate of the amount of mineral underground. “My job is to make sense of those results,” he says. “The numbers might seem random, as if the gold has just been scattered, but they’re actually not random at all. There are fundamental geologic forces that created those numbers. If I know the forces, I can decipher the samples. I can figure out how much gold is underground.”

Srivastava realized that the same logic could be applied to the lottery. The apparent randomness of the scratch ticket was just a facade, a mathematical lie. And this meant that the lottery system might actually be solvable, just like those mining samples. “At the time, I had no intention of cracking the tickets,” he says. He was just curious about the algorithm that produced the numbers. Walking back from the gas station with the chips and coffee he’d bought with his winnings, he turned the problem over in his mind. By the time he reached the office, he was confident that he knew how the software might work, how it could precisely control the number of winners while still appearing random. “It wasn’t that hard,” Srivastava says. “I do the same kind of math all day long.”

That afternoon, he went back to work. The thrill of winning had worn off; he forgot about his lunchtime adventure. But then, as he walked by the gas station later that evening, something strange happened. “I swear I’m not the kind of guy who hears voices,” Srivastava says. “But that night, as I passed the station, I heard a little voice coming from the back of my head. I’ll never forget what it said: ‘If you do it that way, if you use that algorithm, there will be a flaw. The game will be flawed. You will be able to crack the ticket. You will be able to plunder the lottery.’”

Reads

2011-01-25T12:14:00.003-05:00

Shell game: Zero-interest policies as hidden subsidies to bank from Axel Leijonhufvud at Vox, points out how our current zero interest rate policy is just another in a long list of wealth transfers from the people of this country to the banking establishment. Oh and don't look now but the yield curve that makes all that possible has hit its widest level EVER.

Obama Spending Drive Will Suffocate Job Growth by Amity Shlaes as she preaches to an empty choir at the church of Keynesianism.

E-mails Suggest Bear Stearns Cheated Clients Out of Billions from Teri Buhl at the Atlantic. Don't worry no one has or will go to jail.

Wall Street Executive Air

2011-01-24T20:28:00.000-05:00

2011-01-11T14:19:00.001-05:00

You're insane if you don't own gold, investors told
Not owning gold during the current financial turmoil is "a form of insanity", according to an investment analyst at a leading City firm.

By Richard Evans 5:46PM GMT 11 Jan 2011

Robin Griffiths, a technical strategist at Cazenove Capital, told CNBC: "I think not owning gold is a form of insanity. It may even show unhealthy masochistic tendencies, which might need medical attention."

He added that the dollar was heading for "oblivion".

Mr Griffiths predicted that gold's 10-year bull run would continue and even intensify. "Although it's been a top performer for each of the last 10 years, it's still in a linear trend," he said. "Eventually it will go exponential and make more in the last little bit than the whole of the 10-year trend."

He said investors should regard any short-term falls in the gold price as a buying opportunity, adding that gold was still not an "over-owned trade".

His comments come against the background of the US Federal Reserve's huge monetary stimulus from quantitative easing, which many believe will result in inflation and a fall in the value of the dollar.

"The downward trend in the dollar is awesomely powerful," Mr Griffiths said. "It's vital to get yourself out of the dollar long-term on any significant rally. Continuing to own a currency that is going to be printed virtually into oblivion – that's the official policy – is crazy."

He added: "Real assets hedge paper money being printed into oblivion, so you've got to own gold and you've got to own other commodity-related investments still."

Gold hit an all-time high of $1,432 last month and is currently trading around $1,375.

Meanwhile, the gold price would have to exceed $2,000 for the metal to be considered in a bubble, according to an analyst at Deutsche Bank. "We believe gold will continue to compete aggressively for investment capital," said Michael Lewis in a report.

telegraph.co.uk

QOTD

2011-01-06T11:20:00.000-05:00

"Just look at us. Everything is backwards. Everything is upside-down. Doctors destroy health, lawyers destroy justice, universities destroy knowledge, governments destroy freedom, the major media destroy information, and religion destroys spirituality."
-Michael Ellner

Mises & the Austrian School Getting Some Credit in the Economist

2010-12-08T10:29:00.002-05:00

It's about time!

Taking von Mises to pieces
Why is the Austrian explanation for the crisis so little discussed?

JOHN MAYNARD KEYNES is back. The British economist has modern intellectual champions in Paul Krugman and Robert Skidelsky. For all today’s talk of austerity, a policy of Keynesian fiscal stimulus was adopted by most governments in the immediate aftermath of the credit crisis.

In contrast policymakers seem to show a lot less interest in the economic ideas of the “Austrian school” led by Ludwig von Mises and Friedrich Hayek, who once battled Keynes for intellectual supremacy. Yet the more you think about recent events, the odder that neglect seems.

http://www.economist.com/node/17522368?story_id=17522368&CFID=156154127&CFTOKEN=24204864

The Fed Undressed

2010-12-02T07:00:00.003-05:00

“We’re talking about huge sums of money going to bail out large foreign banks,” said Bernie Sanders, the independent senator from Vermont. “Has the Federal Reserve of the United States become the central bank of the world?” at the FT.

Hilsenrath gives the fed sponsored take on things at the WSJ.

History Repeats

2010-11-23T11:51:00.003-05:00

Is rise of China inevitable?
We are making it more so by failing to deal with mounting public debt and
deficits, which have ruined other superpowers.

By Jan C. Ting

Philadelphia Inquirer, Nov. 23, 2010

Does the world economic crisis presage the end of the 500-year rise of Western civilization and its replacement by China and a new Asian order? That seems to be the thesis of Scottish historian and Harvard professor Niall Ferguson, who specializes in the rise and fall of empires.

Ferguson recently received the sixth annual Benjamin Franklin Public Service Award from the Foreign Policy Research Institute of Philadelphia, on which occasion he spoke about his alarming conclusions. He noted that five centuries ago, the world's most advanced civilizations might have existed under China's Ming Dynasty or the Ottoman Empire, not in the primitive feudal states of Europe. But Western civilization ascended through technological and scientific innovation - which Ferguson says is not just the most important factor behind one civilization's dominance over others, but the only factor.

One consequence of the current economic crisis is that it limits technological and scientific innovation in the West. Meanwhile, China's growing economy, productivity, trade surplus, and large pool of scientists and engineers are giving it the upper hand.

Ferguson believes the continued ascendance of the West is also threatened by another consequence of the economic crisis: mounting public debt. In their efforts to reverse the job-killing consequences of the Great Recession, the United States and other Western democracies have converted enormous amounts of private debt into public debt by bailing out banks and other failing institutions. And public debt continues to grow as the U.S. government in particular tries to stimulate a struggling economy by spending more than it takes in and borrowing the difference.

Ferguson observes that world history is replete with examples of empires failing in exactly this way - by spending and borrowing too much, inflating their currency, and eventually defaulting on their debt. He cites recent events in Greece as demonstrating that there is in fact a limit to public borrowing, and that when it is reached, a crisis can unfold quickly. In the case of Greece, borrowing costs doubled in days, and only a European Union bailout fended off total collapse, and perhaps did so just temporarily.

Find this article at:
http://www.philly.com/inquirer/opinion/20101123_Is_rise_of_China_inevitable_.html
Jan C. Ting is a professor at Temple University's Beasley School of Law and a senior fellow of the Foreign Policy Research Institute.

My question is, how the rise & fall will look in a time of such interwoven economics and almost global fiat expansionism?

TJ was ahead of his time

2010-11-23T11:25:00.001-05:00

"I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt." -Thomas Jefferson

Touch me baby, you know how I like it!!!

2010-11-16T13:58:00.001-05:00

Body scanners, pat downs prompt traveler backlash

New airport security measures, particularly full-body scanners, are angering many passengers. One man's refusal of the scan has galvanized others across the US.

Body scanners, pat downs prompt traveler backlash

RP and Helicopter Ben

2010-11-12T12:03:00.003-05:00

Bernanke's worst nightmare: Ron Paul

QOTD (quote of the day)

2010-11-05T10:57:00.002-04:00

Germany's finance minister Wolfgang Schaeuble said on German television that "with all due respect, US policy is clueless."

from the BBC.

Keynes vs. Hayek Round II

2010-11-03T09:20:00.001-04:00

Geithner calls for cap on trade surpluses

2010-10-22T12:20:00.003-04:00

Geithner calls for cap on trade surpluses

Not sure I fully understand this but first thought is: Does Geithner live in an alternate reality?

The treasury printed money out of nothing, the fed kept interest rates artificially low, and the government promoted consumption and continues to do so. Responsible and rational monetary policy would have prevented the current excesses.

All Crime and No Punishment on Wall Street

2010-10-20T22:56:00.001-04:00

The nation tires of Wall Street ‘justice’
Commentary: A special prosecutor is needed
By David Weidner, MarketWatch

NEW YORK (MarketWatch) — If you want to take the pulse of how many Americans feel about justice meted out to Wall Street, take a look at the more than 200 comments posted to MarketWatch’s story on the settlement between prosecutors and Angelo Mozilo, the former chief executive of Countrywide Financial.

“The average Joe Schmoe is paying the price financially while these CEOs get a slap on the wrist and a big check to retire.”

“People are losing their homes and dignity and jobs. We are finding out more and more every day that the money has been stolen from the average Joe and distributed to the high level executives.”

“You steal from people and you walk free by giving part of your loot to the police.”

“How are we supposed to believe that justice has been served? I’m not a lawyer but surely, this appears to be a big let-down for the victims of Countrywide’s bad practices.”

“When is Angelo going to get an orange jumpsuit to match his orange face?”

And those were the nicer, more civil comments. Read story and comments on Mozilo settlement.
The frustration many of us feel toward regulators and prosecutors is a reaction to the pain many of us feel as we look at our depleted brokerage accounts, job prospects and the sinking value of the homes we bought in the bubble.

It seems the chiefs of the banks, ratings agencies, mortgage companies and hedge funds must be culpable. Someone has to go to jail for such gross neglect, incompetence or knowing disregard for the truth.

They haven’t, of course. Mozilo agreed to pay a $67.5 million fine that will be shared with Bank of America Corp. (NYSE:BAC) shareholders. Goldman Sachs Group Inc. (NYSE:GS) as an institution agreed to pay $550 million in a settlement, which seemed steep until many realized it was less than 5% of annual earnings, and, based on the company’s first quarter, 10.2 days of market earnings.

There was a glimmer of hope from the bench this year when judges initially rejected settlement pacts between regulators and Citigroup Inc. (NYSE:C) and Bank of America. But those deals gained acceptance without significant penalties for individuals. See related column on justice for Wall Street in WSJ.

Instead, Mozilo walked away after cashing out $406 million in Countrywide stock, and Stanley O’Neal left Merrill Lynch & Co. in 2007 with $160 million in cash, stock and options. Ken Lewis left Bank of America with a $53 million pension. Lloyd Blankfein still holds the top executive post at Goldman. He made $9 million last year and was rated the best chief executive officer on Wall Street. Read Deal Journal report on Blankfein.

It’s enough to make one wonder what it takes, short of a Bernie Madoff-level Ponzi scheme, to run afoul of the law.

This black-is-white state of affairs is more than justice flipped on its head. It’s creating an environment where there is no deterrent — in fact, there’s incentive to push beyond the limits and reach for higher levels of success.

That’s why the government needs to come down harder on those who were ultimately responsible for their company’s actions. And the best way to do this would be to name a special prosecutor in the Justice Department charged with looking for those responsible for the catastrophe.

A chief executive who was paid hundreds of millions of dollars during the decade should carry a greater level of responsibility than those on the ground who actually pushed the buttons. For as much as it has been maligned, Sarbanes-Oxley required CEOs to sign off on the veracity of their company’s financial statements.

OK, let’s not kid ourselves. No special prosecutor is going to be named. These cases, the legal experts tell us, are difficult to make. Look at former Goldman mortgage bankers Daniel Sparks, Michael Swenson and Josh Birnbaum. They were calling a Goldman investment product a “sh*t deal” in emails, and not even they had to undergo anything rougher than a few hours of Congressional questioning.

These cases may be difficult, but they’re not impossible. And given the creation of a lawless marketplace where one economy-destroying decision can be made on top of another for short-term personal gains, something has to be done.

But nothing’s happening. Maybe its because of the money Wall Street lavishes on Congress. Perhaps it’s the close ties between the industry and the administration. It could be, as Nouriel Roubini said in the new documentary “Inside Job,” investigators are “afraid” of what they will find.

A special prosecutor, in a bid to make a name for himself or herself, might be immune to such pressure. It’s our best hope for outing the scoundrels and creating an industry where greed finally takes a backseat to the law.

If not, regulators can look back on a decade where the biggest crook they outed and put behind bars was Martha Stewart.

marketwatch.com

The 50 largest US charities in 2009 - CSMonitor.com

2010-10-06T11:28:00.000-04:00

Interesting.

The 50 largest US charities in 2009 - CSMonitor.com

A War We All Lose

2010-09-28T09:41:00.003-04:00

"We're in the midst of an international currency war," ... "This threatens us because it takes away our competitiveness. The advanced countries are seeking to devalue their currencies."

- Guido Mantega, Brazilian Finance Minister September 27, 2010

Brazil warns of world currency war
The world is in an "international currency war" as governments manipulate their currencies to improve their export competitiveness, said Guido Mantega, the Brazilian Finance Minister.

telegraph.co.uk

Bank Failures

2010-09-20T09:43:00.005-04:00

The FDIC closed six banks this weekend bringing the total for the year to 125. Since the beginning of 2008, 290 banks have failed.

What is interesting is that three of the banks that were taken over by the FDIC this weekend were from Georgia, a trend that has been pronounced for some time. You may be surprised to learn that of the 290 banks that have failed since 2008, the state with the highest number of failures was not the bubble markets of California, Florida, or Nevada, but Georgia.

The top five states for bank failures since 2008:

Georgia - 44
Florida - 39
Illinois - 36
California - 32
Minnesota - 14

39 states have had bank failures since 2008. There have been no bank failures in Alaska, Connecticut, Delaware, Hawaii, Maine, Montana, North Dakota, New Hampshire, Rhode Island, Tennessee, and Vermont.

FDIC Failed Bank List

Entering a Death Spiral?

2010-08-18T15:27:00.001-04:00

Tensions Rise in Greece as Austerity Measures Backfire
By Corinna Jessen in Athens

The austerity measures that were supposed to fix Greece's problems are dragging down the country's economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back.

The feast of the Assumption of Mary on Aug. 15 is the high point of summer in the Greek Orthodox world. Here in one of the country's many churches, believers pray to the Virgin for mercy, with many of them falling to their knees.

The newspaper Ta Nea has recommended that the Greek government adopt the very same approach -- the country's leaders have to hope that Mary comes up with a miracle to save Greece from a serious crisis, the paper writes. Without divine intervention, the newspaper suggested, it will be a difficult autumn for the Mediterranean state.

This dire prognosis comes even despite Athens' massive efforts to sort out the country's finances. The government's draconian austerity measures have managed to reduce the country's budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.

The problem is that the austerity measures have in the meantime affected every aspect of the country's economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country's gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society.

Unemployment Rates of up to 70 Percent

Nikos Meletis is neatly dressed, and his mid-range car is clean and tidy. Meletis used to earn a good living at a shipbuilding company in Perama, a port opposite the island of Salamis. "At the moment, I'm living off my savings," the 54-year-old welder says, standing in front of a silent harbor full of moored ships.

Meletis is a day laborer who used to work up to 300 days a year; this year he has only managed to scrape together 25 days' work so far. That gives him 25 health insurance stamps, when he needs 100 in order to insure himself and his family -- including his wife, who has cancer. "How am I supposed to pay for the hospital?" Meletis asks. Unemployment benefits of at most €460 ($590) per month are available for a maximum of one year -- and only if he can produce at least 150 stamps from the past 15 months.

There's hardly a worker in the shipbuilding district of Perama who could still manage that. Unemployment in the city hovers between 60 and 70 percent, according to a study conducted by the University of Piraeus. While 77 percent of Greek shipping companies indicate they are satisfied with the quality of work done in Perama, nearly 50 percent still send their ships to be repaired in Turkey, Korea or China. Costs are too high in Greece, they say. The country, they argue, has too much bureaucracy and too many strikes, with labor disputes often delaying delivery times.

Perama is certainly an unusually extreme case. But the shipyards' decline provides a telling example of the Greek economy's increasing inability to compete. Barely any of the country's industries can keep up with international competition in terms of productivity, and experts expect the country's gross domestic product to fall by 4 percent over the course of the entire year. Germany, by way of comparison, is hoping for growth of up to 3 percent.

Sales Figures Dropping Everywhere

Prime Minister George Papandreou's austerity package has seriously shaken the Greek economy. The package included reducing civil servants' salaries by up to 20 percent and slashing retirement benefits, while raising numerous taxes. The result is that Greeks have less and less money to spend and sales figures everywhere are dropping, spelling catastrophe for a country where 70 percent of economic output is based on private consumption.

A short jaunt through Athens' shopping streets reveals the scale of the decline. Fully a quarter of the store windows on Stadiou Street bear red signs reading "Enoikiazetai" -- for rent. The National Confederation of Hellenic Commerce (ESEE) calculates that 17 percent of all shops in Athens have had to file for bankruptcy.

Things aren't any better in the smaller towns. Chalkidona was, until just a few years ago, a hub for trucking traffic in the area around Thessaloniki. Two main streets, lined with fast food restaurants and stores catering to truckers, intersect in the small, dismal town. Maria Lialiambidou's house sits directly on the main trucking route. Rent from a pastry shop on the ground floor of the building used to provide her with €350 per month, an amount that helped considerably in supplementing her widow's pension of €320.

These days, though, Kostas, the man who ran the pastry shop, who people used to call a "penny-pincher," can no longer afford the rent. Here too, a huge "Enoikiazetai" banner stretches across the shopfront. No one wants to rent the store. Neither are there any takers for an empty butcher's shop a few meters further on.

A sign on the other side of the street advertises "Sakis' Restaurant." The owner, Sakis, is still hanging on, with customers filling one or two of the restaurant's tables now and then. "There's really no work for me here anymore," says one Albanian employee, who goes by the name Eleni in Greece. "Many others have already gone back to Albania, where it's not any worse than here. We'll see when I have to go too."

No Way Out

The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

The country's unemployment rate makes this trend particularly clear. In 2009, it was 9.5 percent. This year it may rise to 12.1 percent and economists expect it to reach 14.3 percent in 2011. Those, though, are only the official numbers, which were provided by Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development (OECD). The Greek trade union association GSEE considers those numbers far too optimistic. It considers 20 percent to be a more likely figure for 2011. This would put the unemployment rate as high as it was in 1960, when hundreds of thousands of Greeks were forced to emigrate. Meanwhile, purchasing power has fallen to its 1984 level, according to the GSEE.

'Things Are Starting to Simmer'

Menelaos Givalos, a professor of political science at Athens University, has appeared on television, warning viewers that the worst times are still to come. He predicts a large wave of layoffs starting in September, with "extreme social consequences."

"Everything is getting more expensive, I'm hardly earning any money, and then I'm supposed to pay more taxes to help save the country? How is that supposed to work?" asks Nikos Meletis, the shipbuilder. His friends, gathered in a small cafeteria on the pier in Perama, are gradually growing more vocal. They are all unemployed, desperate and angry at the politicians who got them into this mess. There is no sympathy here for any of the political parties and no longer any for the unions either.

"They only organize strikes to serve their own interests!" shouts one man, whose name is Panayiotis Peretridis. "The only thing that interests me anymore is my daily wage. A loaf of bread is my political party. I want to help my country -- give me work and I'll pay taxes! But our honor as first-class skilled workers, as heads of families, as Greeks, is being dragged through the dirt!"

"If you take away my family's bread, I'll take you down -- the government needs to know that," Meletis says. "And don't call us anarchists if that happens! We're heads of our families and we're desperate."

He predicts the situation will only become more heated. "Things are starting to simmer here," he says. "And at some point they're going to explode."

Spiegel Online

Laurence Has a Point

2010-08-11T10:07:00.001-04:00

U.S. Is Bankrupt and We Don't Even Know: Laurence Kotlikoff
By Laurence Kotlikoff - Aug 10, 2010 9:00 PM ET Email Share

Aug. 11 (Bloomberg) -- Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

bloomberg.com

Let Them Eat Cake

2010-08-06T11:25:00.002-04:00

The disconnect is staggering....

Welcome to the Recovery
By TIMOTHY F. GEITHNER
Washington

THE devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes. The scars of the crisis are fresh, and every new economic report brings another wave of anxiety. That uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth.

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

From the start, President Obama made clear that recovery from a crisis of this magnitude would not come quickly and that the recovery would not follow a straight line. We saw that this past spring, when the European fiscal crisis posed a serious challenge to the markets and to business confidence, dampening investment and the rate of growth here.

While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.

Together, private consumption and fixed investment contributed about 3.25 percent to growth. Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand.

As the economists Ken Rogoff and Carmen Reinhart have written, recoveries that follow financial crises are typically a hard climb. That is reality. The process of repair means economic growth will come slower than we would like. But despite these challenges, there is good news to report:

• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.

• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.

• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.

• American families are saving more, paying down their debt and borrowing more responsibly. This has been a necessary adjustment because the borrow-and-spend path we were on wasn’t sustainable.

• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.

• Major banks, forced by the stress tests to raise capital and open their books, are stronger and more competitive. Now, as businesses expand again, our banks are better positioned to finance growth.

• The government’s investment in banks has already earned more than $20 billion in profits for taxpayers, and the TARP program will be out of business earlier than expected — and costing nearly a quarter of a trillion dollars less than projected last year.

We all understand and appreciate that these signs of strength in parts of the economy are cold comfort to those Americans still looking for work and to those industries, like construction, hit hardest by the crisis. But these economic measures, nonetheless, do represent an encouraging turnaround from the frightening future we faced just 18 months ago.

The new data show that this recession was even deeper than previously estimated. The plunge in economic activity started an entire year before President Obama took office and was accelerating at the end of 2008, when G.D.P. fell at an annual rate of roughly 7 percent.

Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January.

The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy.

According to a report released last week by Alan Blinder and Mark Zandi, advisers to President Bill Clinton and Senator John McCain, respectively, the combined actions since the fall of 2007 of the Federal Reserve, the White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5 percent relative to what would have happened had we done nothing. The study showed that government action delivered a powerful bang for the buck, and that the bank rescue on its own will turn a profit for taxpayers.

We have a long way to go to address the fiscal trauma and damage across the country, and we will need to monitor the ups and downs in the economy month by month. The share of workers who have been unemployed for six months or more is at its highest level since 1948, when the data was first recorded, and we must do more to ensure that they have the skills they need to re-enter the 21st-century economy. Small businesses are still battling a tough climate. State and local governments are still hurting.

There are urgent tasks to be undertaken to reinforce the recovery, and Congress should move now to help small business, to assist states in keeping teachers in the classroom, to increase investments in public infrastructure, to promote clean energy and to increase exports. And while making smart, targeted investments in our future, we must also cut the deficit over the next few years and make sure that America once again lives within its means.

These are considerable challenges, but we are in a much stronger position to face them today than when President Obama took office. By taking aggressive action to fix the financial system, reduce growth in health care costs and improve education, we have put the American economy on a firmer foundation for future growth.

And as the president said last week, no one should bet against the American worker, American business and American ingenuity.

We suffered a terrible blow, but we are coming back.

Timothy F. Geithner is the secretary of the Treasury.

nytimes.com

2010-08-05T16:49:00.001-04:00

Secret Banking Cabal Emerges From AIG Shadows: David Reilly

By David Reilly - Jan 28, 2010 9:00 PM EST

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system -- apart from the matter of AIG’s bailout -- deserves further congressional scrutiny.

The New York Fed is in the hot seat for its decision in November 2008 to buy out, for about $30 billion, insurance contracts AIG sold on toxic debt securities to banks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale and Deutsche Bank AG, among others. That decision, critics say, amounted to a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been allowed to fail.

That move came a few weeks after the Federal Reserve and Treasury Department propped up AIG in the wake of Lehman Brothers Holdings Inc.’s own mid-September bankruptcy filing.

Saving the System

Treasury Secretary Timothy Geithner was head of the New York Fed at the time of the AIG moves. He maintained during Wednesday’s hearing that the New York bank had to buy the insurance contracts, known as credit default swaps, to keep AIG from failing, which would have threatened the financial system.

The hearing before the House Committee on Oversight and Government Reform also focused on what many in Congress believe was the New York Fed’s subsequent attempt to cover up buyout details and who benefited.

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank.

Geithner’s Bosses

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kaptur told Geithner at the hearing: “A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you.”

And yet the New York Fed played an integral role in the government’s bailout of banks, often receiving surprisingly free rein to act as it saw fit.

Consider AIG. Let’s take Geithner at his word that a failure to resolve the insurer’s default swaps would have led to financial Armageddon. Given the stakes, you might think Geithner would have coordinated actions with then-Treasury Secretary Henry Paulson. Yet Paulson testified that he wasn’t in the loop.

“I had no involvement at all, in the payment to the counterparties, no involvement whatsoever,” Paulson said.

Bernanke’s Denials

Fed Chairman Bernanke also wasn’t involved. In a written response to questions from Representative Darrell Issa, Bernanke said he “was not directly involved in the negotiations” with AIG’s counterparty banks.

You have to wonder then who really was in charge of our nation’s financial future if AIG posed as grave a threat as Geithner claimed.

Questions about the New York Fed’s accountability grew after Geithner on Nov. 24, 2008, was named by then-President- elect Barack Obama to be Treasury Secretary. Geither said he recused himself from the bank’s day-to-day activities, even though he never actually signed a formal letter of recusal.

That left issues related to disclosures about the deal in the hands of the bank’s lawyers and staff, rather than a top executive. Those staffers didn’t want details of the swaps purchase to become public.

New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.

That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals -- too many counterparties, too many lawyers and advisors, too many people from AIG -- to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark.

This belies the culture of secrecy obviously pervasive within the New York Fed. Committee Chairman Edolphus Towns noted during the hearing that the bank initially refused to disclose even the names of other banks that benefited from its actions, arguing this information would somehow harm AIG.

‘Penchant for Secrecy’

“In fact, when the information was finally released, under pressure from Congress, nothing happened,” Towns said. “It had absolutely no effect on AIG’s business or financial condition. But it did have an effect on the credibility of the Federal Reserve, and it called into question the Fed’s penchant for secrecy.”

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

bloomberg.com

2010-08-02T17:27:00.000-04:00

Four Deformations of the Apocalypse
By DAVID STOCKMAN

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure. When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine.

Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

nytimes.com

Forced to Chase

2010-07-27T17:06:00.001-04:00

Inflation's hidden cost: forcing families to make riskier investments

Back when the dollar was sound, American families invested in simple – and safe – instruments like savings bonds. Now, thanks to Washington’s inflationary policies, they have to chase higher – and riskier – returns.

By Lawrence S. Pratt
posted July 23, 2010 at 9:55 am EDT

Great Barrington, Mass. —
The American Institute for Economic Research (AIER) first published a book called “How to Invest Wisely” in 1947. Since then there have been vast changes in the United States and world economies, especially in the financial markets. One of the biggest changes has been the relentless erosion in the purchasing power of the dollar.

Six decades ago, the phrase “sound as a dollar” meant something. It didn’t have the ironic ring it has today. At that time, Americans believed that the dollar was “good as gold.” Most families’ wealth consisted of savings accounts, savings bonds, life insurance policies, and money tucked away in cookie jars and shoe boxes.

Today, even working-class and middle-class families typically are invested in the stock market. Some of the pension funds they will need when they retire may, in fact, be invested in high-risk stocks, mutual funds, real estate investment trusts (REITs) and even hedge funds.

Have Americans simply become riskier over the years? No. They’ve been forced to chase higher returns because inflationary policies of the federal government have undermined their traditional forms of investment.

Two generations ago, the investments of most Americans were safe and paid relatively low interest rates. Interest on passbook savings accounts, for example, was typically calculated on the minimum balance during the calendar quarter and was posted at the end of the quarter. This meant that any funds withdrawn or deposited during the quarter earned no interest.

Today, families have a wide variety of “fixed-dollar” options, including money market funds, upon which checks may be written, with interest accrued daily.

Much of what we now take for granted was made possible by advances in information technology. The increased speed and accuracy of data processing has facilitated complex financial transactions, even in small amounts, at greatly lowered costs. As a result, many more people now own stock and other financial assets.

In 1947, direct and indirect ownership of company stock was limited to a relatively small minority of the public. Brokerage commissions were fixed at high rates. Funded pension plans were in their infancy. And there were only a handful of mutual funds in operation: 98 in 1950, according to the Investment Company Institute.

Today there are more than 8,000 mutual funds – more than the total number of publicly traded US companies – and some 51.2 million US households, or 43.7 percent of the total, own shares of mutual funds or other US-registered investment companies, with a combined value in the neighborhood of $10 trillion.

While several factors are involved, these changes were fueled by the decline in the value of the dollar. Since AIER first published “How to Invest Wisely,” the dollar has lost nearly 90 percent of its value and there is no end in sight. To buy what $100 purchased in 1947, a family today would need $972. In the last 20 years alone, since 1990, the dollar’s value has fallen some 65 percent, a phenomenon that could accelerate as we come out of the recession and the effects of the government’s recent spending-spree sink in.

This has meant that everyone concerned with maintaining the family’s standard of living has been forced to accept risks that they often don’t understand and that their parents and grandparents would have avoided.

What most people call investing today is, in fact, speculation, based on the hope that we – or someone we’ve hired – can identify underpriced or overpriced assets. All too often this leads to chasing after financial fads.

Most experts agree that investing, like other disciplines, conforms to certain principles. Chief among these principles are the facts that long term financial returns are related to the risks involved; that market prices of financial assets reflect potential returns and risks; that it is folly to believe that anyone consistently can evaluate those returns and risks more accurately than the market itself; that financial assets can be classified into groups that behave more like one another than like other asset classes; and that broad diversification among asset classes can reduce risk.

Several academics have earned Nobel Prizes for the work behind these findings, which are variously called the “efficient market hypothesis,” the “capital asset pricing model,” and “modern portfolio theory,” among other names.

Even though the financial crisis of 2008-2009 has caused many to question these principles, they still remain valid guidelines to sound investing.

But as long as the government’s monetary and fiscal policies continue to erode the value of the dollar, Americans will have an incentive to accept risks that would be unnecessary if a dollar was still worth a dollar.

Lawrence S. Pratt is a senior fellow at the American Institute for Economic Research, Great Barrington, Mass., and editor of the 2010 edition of “How to Invest Wisely.”

csmonitor.com

Good Money After Bad

2010-07-22T00:36:00.000-04:00

US financial system support up $700 bln in past year-watchdog

Wed Jul 21, 2010 12:08am EDT

* Total US govt financial system support seen at $3.7 trln

* US support swells by $700 bln in past year-watchdog

* Mortgage, housing commitments account for most of rise

* TARP watchdog criticizes Obama housing rescue efforts

By David Lawder

WASHINGTON, July 21 (Reuters) - Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said on Wednesday.

The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and to guarantee more mortgages to the support the housing market.

Increased guarantees for loans backed by the Federal Housing Administration, the Government National Mortgage Association and the Veterans administration increased the government's commitments by $512.4 billion alone in the year to June 30, according to the report.

"Indeed, the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases," the TARP inspector general, Neil Barofsky, wrote in the report.

The total includes Federal Reserve programs and a myriad of asset guarantees, including Federal Deposit Insurance Corp. protection for bank deposits.

The increased government commitments more than offset about a $300 billion decline in the U.S. Treasury's TARP commitments in the past year as programs have closed and banks have repaid taxpayer funds.

HOUSING PROGRAMS CRITICIZED

Barofsky also in the report ramped up his criticism of the Treasury's housing relief efforts, saying that its program to reduce monthly mortgage payments for struggling homeowners was showing "anemic" participation numbers and had failed to "put an appreciable dent in foreclosure filings."

He said Treasury had refused his repeated recommendations to announce more effective goals and benchmarks for its mortgage modification program, which could reach up to $50 billion in TARP funds.

"Treasury's refusal to provide meaningful goals for this important program is a fundamental failure of transparency and accountability that makes it far more difficult for the American people and their representatives in Congress to assess whether the program's benefits are worth its very substantial cost," Barofsky wrote.

Among other recommendations repeated in the report, Barofsky called for the Treasury to consider making its voluntary mortgage principal reduction program mandatory, saying this would make it less likely for "underwater" homeowners to abandon their properties.

The Treasury has declined to adopt the recommendation, citing the prospect that mandatory principal reduction would cause mortgage servicing firms to opt out of the program and fairness issues in reducing principal for both responsible homeowners hit by value declines and homeowners who overleveraged their properties in refinancings.

U.S. Treasury officials defended the Home Affordable Modification Program, saying that it was still on track to reach its goal to keep 3 million to 4 million homeowners in their homes by the end of 2012 and was adapting to changing conditions by offering forbearance to unemployed people and extra funding for the hardest-hit markets.

Herbert Allison, Treasury assistant secretary for financial stability, said the Treasury often agrees with Barofsky's recommendations, "but once in a while, we differ on what type of policy will best carry out our mandate."

The report provoked swift criticism of Obama administration housing policies from U.S. Rep. Darrell Issa, a California Republican who has taken every opportunity to blast the Treasury's handling of financial bailout programs.

"The fact that the Obama administration is treating TARP like its own personal slush-fund is beyond egregious and a complete betrayal of what the American people were told would be then when their tax-dollars were used to bailout Wall Street," Issa said in a statement, adding that the housing efforts were "dumping good money after bad".

reuters.com

Was this The Moment?

2010-07-15T12:37:00.005-04:00

Dwight D. Eisenhower
Farewell Address
January 17, 1961

Good evening, my fellow Americans.

First, I should like to express my gratitude to the radio and television networks for the opportunities they have given me over the years to bring reports and messages to our nation. My special thanks go to them for the opportunity of addressing you this evening.

Three days from now, after half century in the service of our country, I shall lay down the responsibilities of office as, in traditional and solemn ceremony, the authority of the Presidency is vested in my successor. This evening, I come to you with a message of leave-taking and farewell, and to share a few final thoughts with you, my countrymen.

Like every other -- Like every other citizen, I wish the new President, and all who will labor with him, Godspeed. I pray that the coming years will be blessed with peace and prosperity for all.

Our people expect their President and the Congress to find essential agreement on issues of great moment, the wise resolution of which will better shape the future of the nation. My own relations with the Congress, which began on a remote and tenuous basis when, long ago, a member of the Senate appointed me to West Point, have since ranged to the intimate during the war and immediate post-war period, and finally to the mutually interdependent during these past eight years. In this final relationship, the Congress and the Administration have, on most vital issues, cooperated well, to serve the nation good, rather than mere partisanship, and so have assured that the business of the nation should go forward. So, my official relationship with the Congress ends in a feeling -- on my part -- of gratitude that we have been able to do so much together.

We now stand ten years past the midpoint of a century that has witnessed four major wars among great nations. Three of these involved our own country. Despite these holocausts, America is today the strongest, the most influential, and most productive nation in the world. Understandably proud of this pre-eminence, we yet realize that America's leadership and prestige depend, not merely upon our unmatched material progress, riches, and military strength, but on how we use our power in the interests of world peace and human betterment.

Throughout America's adventure in free government, our basic purposes have been to keep the peace, to foster progress in human achievement, and to enhance liberty, dignity, and integrity among peoples and among nations. To strive for less would be unworthy of a free and religious people. Any failure traceable to arrogance, or our lack of comprehension, or readiness to sacrifice would inflict upon us grievous hurt, both at home and abroad.

Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily, the danger it poses promises to be of indefinite duration. To meet it successfully, there is called for, not so much the emotional and transitory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle with liberty the stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.

Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in newer elements of our defenses; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research -- these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs, balance between the private and the public economy, balance between the cost and hoped for advantages, balance between the clearly necessary and the comfortably desirable, balance between our essential requirements as a nation and the duties imposed by the nation upon the individual, balance between actions of the moment and the national welfare of the future. Good judgment seeks balance and progress. Lack of it eventually finds imbalance and frustration. The record of many decades stands as proof that our people and their Government have, in the main, understood these truths and have responded to them well, in the face of threat and stress.

But threats, new in kind or degree, constantly arise. Of these, I mention two only.

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction. Our military organization today bears little relation to that known of any of my predecessors in peacetime, or, indeed, by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But we can no longer risk emergency improvisation of national defense. We have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security alone more than the net income of all United States corporations.

Now this conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet, we must not fail to comprehend its grave implications. Our toil, resources, and livelihood are all involved. So is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades. In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers. The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present -- and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.

It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system -- ever aiming toward the supreme goals of our free society.

Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

During the long lane of the history yet to be written, America knows that this world of ours, ever growing smaller, must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect. Such a confederation must be one of equals. The weakest must come to the conference table with the same confidence as do we, protected as we are by our moral, economic, and military strength. That table, though scarred by many past frustrations, cannot be abandoned for the certain agony of the battlefield.

Disarmament, with mutual honor and confidence, is a continuing imperative. Together we must learn how to compose differences, not with arms, but with intellect and decent purpose. Because this need is so sharp and apparent, I confess that I lay down my official responsibilities in this field with a definite sense of disappointment. As one who has witnessed the horror and the lingering sadness of war, as one who knows that another war could utterly destroy this civilization which has been so slowly and painfully built over thousands of years, I wish I could say tonight that a lasting peace is in sight.

Happily, I can say that war has been avoided. Steady progress toward our ultimate goal has been made. But so much remains to be done. As a private citizen, I shall never cease to do what little I can to help the world advance along that road.

So, in this, my last good night to you as your President, I thank you for the many opportunities you have given me for public service in war and in peace. I trust in that service you find some things worthy. As for the rest of it, I know you will find ways to improve performance in the future.

You and I, my fellow citizens, need to be strong in our faith that all nations, under God, will reach the goal of peace with justice. May we be ever unswerving in devotion to principle, confident but humble with power, diligent in pursuit of the Nations' great goals.

To all the peoples of the world, I once more give expression to America's prayerful and continuing aspiration: We pray that peoples of all faiths, all races, all nations, may have their great human needs satisfied; that those now denied opportunity shall come to enjoy it to the full; that all who yearn for freedom may experience its few spiritual blessings. Those who have freedom will understand, also, its heavy responsibility; that all who are insensitive to the needs of others will learn charity; and that the scourges of poverty, disease, and ignorance will be made [to] disappear from the earth; and that in the goodness of time, all peoples will come to live together in a peace guaranteed by the binding force of mutual respect and love.

Now, on Friday noon, I am to become a private citizen. I am proud to do so. I look forward to it.

Thank you, and good night.

Crisis Wasted

2010-07-12T13:59:00.001-04:00

Tremble, Banks, Tremble
The key to financial recovery: restoring the rule of law on Wall Street.

James K. Galbraith July 9, 2010 12:00 am

The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan.

Mortgages were made with a two-or three-year grace period, with a low, fixed interest rate called a "teaser." These were not real mortgages; they were counterfeits, whose value would collapse when exposed. As with any counterfeit, the profits came early, when the bad paper was first sold. After the grace period, rates would reset, and the lenders knew that the borrowers, who were already stretched by their initial payments, would either refinance or default. If they refinanced, that would mean another mortgage origination fee. And if they defaulted, well ... on to step three.

Third, the counterfeit mortgages were laundered so they would look to investors like the real thing. This was the role of the ratings agencies. The core competence of the raters lay in corporate debt, where they evaluate the record and prospects of large business firms. The value of mortgage bonds depended on the behavior of tens of thousands of individual borrowers, whose individual quality the ratings agencies could never check. So the agencies substituted statistical models for actual inquiry, and turned a blind eye to the fact that the loans were destined to go bad.

Fourth, the laundered goods were taken to market. The investment and commercial banks transformed the bad mortgages into bonds, obtained the AAA ratings, and sold the stinking mess to American pension funds, European banks and anyone else who took the phrase "investment grade" at face value. (Later chumps would include the Federal Reserve.) The European crisis now underway is a direct result, as their banks and investors, stung by losses on American mortgage bonds, are dumping their risky Greek public debt and seeking the safety of U.S. Treasury bills.

When the crisis went public in August 2007, Henry Paulson's Treasury took every step to prevent the final collapse from happening before the 2008 elections, extracting billions from the Federal Housing Authority and from Fannie Mae and Freddie Mac to relieve the pressure on bank balance sheets. It worked until it didn't. In September 2008 the collapse of Lehman triggered the collapse of American International Group (AIG) and the steps that led to the Troubled Assets Relief Program (TARP) and to the effective nationalization of the commercial paper market, meaning that the Federal Reserve has become the primary short-term funder of major American corporations.

Upon taking office, President Obama had a chance to change course and didn't take it. By seizing the largest problem banks, the government could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks' lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened.

None of this happened. Instead the Treasury administered fake "stress tests" and relaxed mark-to-market accounting rules for toxic assets which permitted the banks to defer losses and to continue to carry trash on their books at inflated values. This reassured the banks that they would not be permitted to fail—and so back to bonuses-as-usual they went. The banks survived, and the administration today claims this “proves” they didn’t need to be taken over. But to what end did they survive? The banks are bigger, more powerful, and moer obstructionist than ever—and largely uninterested in making new commercial, industrial, or residential loans.

Today the former middle class is largely ruined: upside down on its mortgages and unable to add to its debts. With housing prices low and falling, banks are delaying foreclosures because they don't wish to recognize their losses; it is a sick fact that the cash homeowners conserve by non-payment is one source of the anemic recovery so far. But construction remains depressed, state and local budgets continue in a death-spiral of spending cuts and tax increases, the stimulus will soon end, and exports may soon fall victim to international austerity and the rapidly declining euro. Meanwhile the deficit hysterics seem determined to block unemployment insurance and aid to states today, and to cut Social Security and Medicare tomorrow.

In this way, the financial sector remains a fatal drag on the capacity for strong growth. And the financial reform bills about to clear Congress will not cure this. The bill in conference has some useful elements but it is neither sufficient nor necessary to clean up frauds, which have always been illegal. Nor will it clean up private balance sheets and permit lending to restart. Still less will it set a new direction for the financial economy going forward.

What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations—Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task. It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

How will this help the economy? The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we've had.

So yesterday's borrow-like-there's-no-tomorrow America is done for in any event; there will not be another bank-sponsored private credit boom. The housing crisis (and therefore the middle-class insolvency) won't go away soon. There is no cure for falling housing prices except time and patience; debt relief will at best stabilize the middle class. It follows that the private banks and dealers and borrowing by households are not going to be at the center of the next expansion.

We are in the post-financial-crash. We need to do what the U.S. did during the New Deal, and what France, Japan, Korea, and almost every other successful case of post-crash (or postwar) reconstruction did when necessary. That is, we need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. To begin with.

A reconstructed financial system should finance the reconstruction of the country. Public infrastructure. Energy security. Prevention and mitigation of climate change, including the retrofitting of millions of buildings. The refinancing of mortgages or conversion to rentals with “right-to-rent” provisions so that people can stay in their homes at reasonable rates. The cleanup and economic renovation of the Gulf Coast. All of this by loans made at low interest rates and for long terms, and supervised appropriately by real bankers prepared to stay on the job for decades.

The entire host of neglected priorities of the past 30 years should be on the agenda now. That is the way—and the effective path—toward prosperity.

The New Republic

2010-07-02T13:31:00.001-04:00

REMEMBERING INDEPENDENCE DAY

Have you ever wondered what happened to the 56 men who signed the Declaration of Independence?

Five signers were captured by the British as traitors, and tortured before they died.

Twelve had their homes ransacked and burned.

Two lost their sons serving in the Revolutionary Army; another had two sons captured.

Nine of the 56 fought and died from wounds or hardships of the Revolutionary War.

They signed and they pledged their lives, their fortunes, and their sacred honor.

What kind of men were they?

Twenty-four were lawyers and jurists. Eleven were merchants, nine were farmers and large plantation owners; men of means, well educated. But they signed the Declaration of Independence knowing full well that the penalty would be death if they were captured.

Carter Braxton of Virginia, a wealthy planter and trader, saw his ships swept from the seas by the British Navy. He sold his home and properties to pay his debts, and died in rags.

Thomas McKeam was so hounded by the British that he was forced to move his family almost constantly. He served in the Congress without pay, and his family was kept in hiding. His possessions were taken from him, and poverty was his reward.

Vandals or soldiers looted the properties of Dillery, Hall, Clymer, Walton, Gwinnett, Heyward, Ruttledge, and Middleton.

At the battle of Yorktown, Thomas Nelson Jr, noted that the British General Cornwallis had taken over the Nelson home for his headquarters. He quietly urged General George Washington to open fire. The home was destroyed, and Nelson died bankrupt.

Francis Lewis had his home and properties destroyed. The enemy jailed his wife, and she died within a few months.

John Hart was driven from his wife's bedside as she was dying. Their 13 children fled for their lives. His fields and his gristmill were laid to waste. For more than a year he lived in forests and caves, returning home to find his wife dead and his children vanished. A few weeks later he died from exhaustion and a broken heart.

Norris and Livingston suffered similar fates.

Such were the stories and sacrifices of the American Revolution. These were not wild-eyed, rabble-rousing ruffians. They were soft-spoken men of means and education. They had security, but they valued liberty more.

Standing tall, straight, and unwavering, they pledged: "For the support of this declaration, with firm reliance on the protection of the divine providence, we mutually pledge to each other, our lives, our fortunes, and our sacred honor."

They gave you and me a free and independent America. The history books never told you a lot about what happened in the Revolutionary War. We didn’t fight just the British. We were British subjects at that time and we fought our own government!

Some of us take these liberties so much for granted, but we shouldn't. So, take a few minutes while enjoying your 4th of July holiday and silently thank these patriots. It's not much to ask for the price they paid.

Remember: freedom is never free!

It's A Big Club and You Ain't In It

2010-06-24T00:30:00.001-04:00

Gold set for growing role as reserve asset

2010-06-23T10:41:00.001-04:00

By Jack Farchy and Javier Blas

Published: June 23 2010 12:22 Last updated: June 23 2010 12:22

Almost a quarter of central banks believe gold will become the most important reserve asset in the next 25 years, according to an annual poll by UBS.

The result highlights the sea-change in attitudes in the official sector towards the yellow metal.

For two decades central banks were net sellers of gold but that trend has reversed as central banks in Europe are scaling down their sales and others, such as China, India and Russia, are making significant purchases.

Asked what the most important reserve asset would be in 25 years, about half of officials polled by UBS said the US dollar but 22 per cent pointed to gold.

Bullion was the second-most popular response, well above others such as Asian currencies or the euro.

UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

The reversal of the trend of central bank gold sales has boosted sentiment towards the metal while removing a significant source of supply.

That has helped prices rise 12.5 per cent since the start of the year, hitting a nominal all-time high of $1,264.90 a troy ounce on Monday. On Wednesday morning, gold prices picked up 0.4 per cent to $1,244.25 following a bout of profit-taking earlier in the week.

The central bank managers believe gold will be the best-performing asset class in the next six months, ahead of equities, bonds, oil and currencies, according to the poll.

In spite of their bullish sentiment towards gold, countries were unlikely to start making large-scale purchases, said Terrence Keeley, global head of sovereign client services at UBS.

“Reserve managers operate at one speed above reverse,” he said. “Decisions to change their investment practices will be taken after great consideration over a long period.”

Sovereign wealth funds are also turning their attention to gold. China Investment Corporation, Beijing’s sovereign wealth fund, this year revealed a small investment in bullion through the New York-listed SPDR Gold Trust, an investment vehicle backed by physical gold.

Bankers said other SWFs, including the Abu Dhabi Investment Authority and the Government of Singapore Investment Corporation, were looking at gold.

GFMS, the precious metal consultancy, estimates that central banks last year sold 41 tonnes of gold, down 82 per cent from the low of 2008 and the lowest level in 20 years.

Philip Klapwijk, chairman of GFMS, said central banks were more likely to be buyers than sellers for the first time in two decades. But he said: “I will be surprised if we see multi-hundred-tonnes purchases.”

There has not been a sustained period of significant central bank gold purchases since the 1960s.
About 10 per cent of global central bank reserves is held in gold, according to the World Gold Council, but that belies a sharp difference between central banks in developed economies, which generally hold more than 50 per cent of assets in gold, and those in emerging markets, which have a relatively small proportion of assets in gold.

ft.com

Last One Out Turn Out the Lights

2010-06-21T01:18:00.001-04:00

US manufacturing crown slips
By Peter Marsh

Published: June 20 2010 17:43 Last updated: June 20 2010 17:43

The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.

The figures are revealed in a league table being published on Monday by IHS Global Insight, a US-based economics consultancy.

Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.

That the US is still top comes as a surprise, since in 2008 – before the slump of the past two years took hold – IHS predicted it would lose pole position in 2009.

However, a relatively resilient US performance kept China in second place, says IHS, which predicts that faster growth in China will deny the US the top spot next year.

The US became the world’s biggest manufacturer in the late 1890s, edging the then-incumbent – Britain – into the number two position.

Hal Sirkin, head of the global operations practice at Chicago-based Boston Consulting Group, said the US should not despair too much at the likelihood that it would lose the global crown in manufacturing to China.

“If you have a country with four times the population of the US and a tenth of the wages, it is fairly obvious they will pull ahead at some time in productive capabilities,“ he said.

Last year, according to IHS, goods output by the US totalled $1,717bn, ahead of China at $1,608bn.

However in 2011, on the basis of IHS’s estimates, China’s factory output will come to $1,870bn, a fraction ahead of the projected US figure for the year.

If China does become the world’s biggest manufacturer, it will be a return to the top slot for a nation which – according to economic historians – was the world’s leading country for goods production for more than 1,500 years up until the 1850s, when Britain took over for a brief spell, mainly due to the impetus of the industrial revolution.

The IHS figures are worked out on the basis of current-year output numbers, translated into dollars, with no adjustments for inflation. If the figures are calculated in inflation-adjusted, constant price terms, then I HS believes that the US will keep its top role in manufacturing for a little longer.

On an inflation-adjusted basis, which is based on a forecast that US inflation will be lower than that in China over the next few years, China is forecast to take over the number one position in manufacturing in 2013-14.

According to the IHS numbers, world manufacturing output last year came to $8,638bn (€6,979bn, £5,825bn) or 16.7 per cent of global gross domestic product.

ft.com

More Equal Than Others

2010-06-16T12:13:00.000-04:00

Do laws even matter today?

By Jonathan Turley

As soon as Arizona passed its recent immigration law, some reporters and commentators were quick to cast the story with the usual actors: "Tea Partiers," race activists, conservatives and liberals. Like our politics, much of our news media coverage has become a clash of caricatures — easily categorized groups with one-dimensional motives for mass consumption. Some commentary even suggested that supporters of the law are either open or closeted racists. Rep. Keith Ellison, D-Minn., recently called the law both "fascist" and "racist."

Though I am a critic of the Arizona law, I do not view its supporters in such one-dimensional terms. Indeed, I do not view the public response in purely immigration terms. Whether it is illegal immigration or the mortgage crisis or corporate bailouts, there seems to be a growing sense among many citizens that they are expected to play by the rules while others are exempt.

With polls showing about 60% of people supporting the Arizona law and almost half supporting similar laws in their states, it is implausible to suggest that all these people are racists or extremists — let alone fascists. Notably, a majority of Americans also opposed the bank bailouts and mortgage forgiveness. In each of these controversies, there is a sense that the government was stepping in to protect people from the consequences of their actions.

In the mortgage crisis, tens of thousands of people accepted high-risk, low-interest loans while other citizens either declined to buy homes or agreed to higher monthly payments to avoid such deals. When Congress intervened with mortgage relief, some of those who had acted responsibly wondered whether they acted stupidly by rejecting low rates and later federal support.

Bailouts and immigration

Then there were the corporate bailouts. For citizens to secure a loan, they have to meet exacting terms and disclosures. Yet, when banks and firms concealed risks or engaged in financial wrongdoing, Congress bailed them out and allowed their executives to reap fat bonuses. The laws on fraud and deceptive practices simply did not seem to apply to them. Just as several companies were declared "too big to fail," many of their executives appeared too big to lose money — unlike the millions of citizens burned by their business practices.

Those prior controversies coalesced with the immigration debate. The last time Congress granted amnesty to illegal immigrants was 1986 — and it was criticized at the time for rewarding those who had evaded deportation. Complaints over the lack of federal enforcement had been percolating for years but exploded along Arizona's long desert border. When a law mandated state enforcement of federal laws, the Obama administration moved to block it.

Indeed, high-ranking Obama officials such as John Morton, head of the Immigration and Customs Enforcement, have suggested that they might refuse to deport those arrested under the Arizona law. While we continue to tell millions around the world that they must wait for years to immigrate legally, Congress and the White House are considering a new amnesty proposal to benefit an additional 11 million illegal immigrants.

In each of these areas, the perception is that the law says one thing but actually means different things for different people. It is a dangerous perception, and it is not entirely unfounded. Such double-standards have become common as Congress and presidents seek to avoid unpopular legal problems.

•Torture: While acknowledging that waterboarding is torture and that torture violates domestic and international law, President Obama and members of Congress have barred any investigation or prosecution of those crimes.

•Pollution: While citizens are subject to pay for the full damage they cause to their neighbors and are routinely fined for their environmental damage for everything from dumping in rivers to leaf burning, Congress capped the liability for massive corporations such as BP and Exxon at a ridiculous $75 million. Though BP is likely to spend much more in litigation (particularly if prosecuted criminally), the current law requires citizens to pay the full cost of their environmental damage while capping the costs for companies producing massive destruction.

•Privacy: When the telecommunications companies found themselves on the losing end of citizen suits over the violation of privacy laws, Congress (including then-Sen. Obama) and President Bush simply changed the law to legislatively kill the citizen suits and protect the companies.

An arbitrary system

The message across these areas is troubling. To paraphrase Animal Farm, all people are equal, but some people are more equal than others.

A legal system cannot demand the faith and fealty of the governed when rules are seen as arbitrary and deceptive. Our leaders have led us not to an economic crisis or an immigration crisis or an environmental crisis or a civil liberties crisis. They have led us to a crisis of faith where citizens no longer believe that laws have any determinant meaning. It is politics, not the law, that appears to drive outcomes — a self-destructive trend for a nation supposedly defined by the rule of law.

Jonathan Turley, the Shapiro Professor of Public Interest Law at George Washington University, is a member of USA TODAY's Board of Contributors.

usatoday.com

How to Plug the Oil Leak in the Gulf

2010-06-15T12:18:00.003-04:00

Reads

2010-06-07T19:38:00.004-04:00

All We Are Sayin' Is Give Free Markets a Chance by Paul Kasriel at Northern Trust. I have argued much of the same for a long time. Our markets have not been free, so don't blame our problems on free markets.

Extraordinarily Large Band-Aids by John Hussman. As always, a wonderful and worthwhile read.

A Golden Wall of Worry by Mark Hulbert at Barrons.

Free Riders

2010-05-31T23:49:00.001-04:00

Owners Stop Paying Mortgages, and Stop Fretting
By DAVID STREITFELD

ST. PETERSBURG, Fla. — For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000. “The volume is killing us,” Judge McGrady said.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.

“The longer I’m in foreclosure, the better,” she said.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.

Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.

“I need another year,” he said, “and I’m going to be pretty comfortable.”

nytimes.com

Reads

2010-05-27T17:24:00.003-04:00

Wall Street's War By Matt Taibbi at Rolling Stone.

Some Thoughts on Gold by Pater Tenebrarum.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus By Ambrose Evans-Pritchard

25 Questions To Ask Anyone Who Is Delusional Enough To Believe That This Economic Recovery Is Real by Michael Snyder at Blacklisted News

Bubble, Bubble, Toil & Trouble

2010-05-26T10:35:00.004-04:00

The WSJ out with an article that reminded me of what I wrote last year, There is No Bubble in Gold.

As an investor in gold since 2002, I find the bubble talk quite interesting. Certainly there are those of us who were early and are riding gains with modest trepidation at this point as it is becoming more of a topic in the financial news (I recommend reading the piece by John Hathaway of Tocqueville Asset Management, A Contrarian's Dilemma to set the mind at ease in those times), but a bubble? It cannot be a bubble without the masses and the masses are not there...yet.

Pay attention to the tone in articles, the commercials on TV and the storefronts in your area. When we see undying bullishness in the media (a magazine cover perhaps?) and more commercials for Monex than Cash4Gold, as well as storefronts opening selling gold (not buying your junk gold) then things have changed. Look for the financial markets capitalizing on the hot trend and numerous mining company IPOs and buy ratings across the sector.

It is coming, but for now we still have a ways to go.

Is Gold the Next Bubble?
By BRETT ARENDS

It's been the amazing, runaway boom of the past decade. If you'd put your money into gold at the lows about 10 years ago, you'd have made a nearly 400% return. That's left pretty much everything else—stocks, China, let alone housing—in the dust.

But with gold now trading near record highs, the big $1,200-an-ounce question is obvious.

Is the gold rush over?

Some smart people wonder. "The time to buy gold was in 1999, not 2010," Harvard professor Niall Ferguson tells The Wall Street Journal—though he added that momentum might still drive it higher. Others will tell you that "the smart money got out of gold months ago." But then people have been saying that for years.

They could be right, of course: The future by definition is unknowable.

But if gold is a bubble, here's why it may not be over—and, indeed, may it may be about to go vertical.

First, the recent rise is deceptive. Yes, gold has risen from around $250 an ounce to $1,200. But that rise started at very depressed levels. Gold had been falling in price for two decades. In 2000-01, it was at the bottom of a very deep bear market. It had touched historic lows compared to consumer prices or other assets like shares. A lot of the past decade's boom has simply seen it recover toward longer-term averages.

Second, before we assume the gold bubble has hit its peak, let's see how it compares with the last two bubbles—the tech mania of the 1990s and the housing bubble that peaked in 2005-06.

The chart is below, and it's both an eye-opener and a spine-tingler.

It compares the rise in gold today with the rise of the Nasdaq in the 1990s and the Dow Jones index of home-building stocks in the 10 years leading up to 2005-06.

They look uncannily similar to me.

So far gold has followed the same path as the previous two bubbles. And if it continues along the same trajectory—a big if—gold today is only where the Nasdaq was in 1998 and housing in 2003.
In other words, just before those markets went into orbit.

Maybe the smart money is out of gold today. But how easily we forget that the smart money got out of these past bubbles way too early. The really smart money knows you make the most money in a bubble right at the end, when it goes manic.

There are other reasons to think that gold is still a long way from that point.

Like the futures market. It is predicting gold will rise by just a few percent a year over the next few years. That's less than you'd get from municipal bonds.

When the market thinks an investment is going to underperform munis, it's safe to say we are not in the midst of euphoria.

And take a look at the coverage of this industry. At the peak of a bubble, the Wall Street analysts covering a sector are usually all bullish. This time around? Far from it. Of the analysts covering gold-mining giant Barrick Gold, only about two-thirds are publicly bullish, according to Thomson Reuters. By Wall Street standards, that's very restrained. Among those covering Newmont Mining and Randgold Resources, it's about half.

And on an anecdotal level, this doesn't feel like the peak of a bubble. Taxi drivers and bartenders may be talking about gold. But they aren't yet handing out mining tips.

There is, of course, no guarantee gold will turn into another mania. But the fact that we now seem to live in Bubblonia—the land of perpetual bubbles—would suggest there is a current opening for the role. And in many ways, gold may be well cast.

It has a "This time is different" story line: The world's central banks are flooding the market with liquidity. That should inevitably devalue the currencies. Gold is the only "currency" they can't just print.

It has an army of true believers behind it, ready to claim each rise as a "victory" and to mock skeptics with the words "They just don't get it."

And it's easy to untether from reality. You can't value gold by traditional financial measures, as it generates no cash flow. So there's plenty of potential to value it by other means. Eyeballs, anyone?

Dylan Grice, a strategist at SG Securities in London, thinks global conditions today could unleash another gold boom like the one in the 1970s. Then, as now, the world lost confidence in the U.S. dollar as a store of value. Back then, central banks started hoarding gold instead. Today, he notes, they are net purchasers of gold for the first time since 1988.

And although gold has risen a long way, so has the U.S. money supply. Mr. Grice calculates that even at today's prices, the bullion that the U.S. government holds in places like Fort Knox is still only worth enough to back 15% of the U.S. monetary base. That is near a record low.

At the peak of the gold mania in 1979-80, gold prices rose so far that the backing exceeded 100%. How far would gold rise if that happened again? To around $6,300 an ounce, Mr. Grice says.

Once again: I am not saying gold is going into the stratosphere. I am saying there is a good case for saying it might.

Gold is a high-risk and potentially dangerous speculation. Anyone thinking of investing needs to do some serious thinking first.

wsj.com

Not Confidence Inspiring

2010-05-18T22:17:00.003-04:00

As we continue along this path on our credit crash adventure, time and again we see the authorities attempt yet another "enhancement" to inspire confidence.

"The whipsawing prices resulted in investors selling at losses during the
decline and undermined confidence in the markets."
So now we will apply our own financial version of Xanax to the markets. Oh, that will fix the problem. It's worked perfectly so far hasn't it?

SEC proposes new rules for avoiding market plunges
Major exchanges to impose stock 'circuit breakers' to prevent plunges under new SEC rules

Tuesday May 18, 2010, 10:06 pm
WASHINGTON (AP) -- U.S. stock exchanges would briefly halt trading of some stocks that have big prices swings under new trading rules proposed Tuesday that are aimed at avoiding market plunges like the one that stunned Wall Street earlier this month.

Regulators say it makes sense to reach for remedies now, even though they have yet to determine the exact cause of the May 6 market dive.

The rules would take effect in mid-June under a six-month pilot program agreed to by major U.S. exchanges and the Securities and Exchange Commission. The SEC announced them Tuesday and put them forward for public comment.

Under the plan, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute span would be halted for five minutes. These rules, known as "circuit breakers," would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That's almost the entire trading day.

In the so-called "flash crash" on May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes.

Importantly, the new circuit breakers would apply to all U.S. exchanges. Most of the 50 or so U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.

During the May 6 plunge, the New York Stock Exchange slowed trading according to its rules but the orders that couldn't be executed migrated in a torrent to electronic exchanges, industry officials said.

The SEC and the Commodity Futures Trading Commission, in a report by their staffs, said the agencies' investigation of the epic dive -- in which the Dow Jones industrials lost nearly 1,000 points in less than a half-hour -- is still in a preliminary stage.

"The decline and rebound of prices in major market indexes and individual securities on May 6 was unprecedented in its speed and scope," said the joint report released Tuesday evening. "The whipsawing prices resulted in investors selling at losses during the decline and undermined confidence in the markets."

Only a preliminary picture has started to emerge, the report said. Investigators are focusing on, among other things, a possible link between the steep decline in prices of stock indexes, and "simultaneous and subsequent" waves of selling in individual stocks.

Also being looked at is a "severe mismatch" of liquidity in the market that may have been worsened by the withdrawal of electronic traders and the use of so-called "stop-loss" market orders, the report said. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level.

SEC Chairman Mary Schapiro told a gathering of financial analysts Tuesday there are issues "we think can be remediated quickly even before we understand necessarily what the exact cause of the crash was."

The SEC would vote on formally approving the rules sometime after a 10-day comment period, unusually short for the agency's rule-making and indicating the urgency of the issue. The changes are intended to prevent a recurrence of the plunge that briefly wiped out more than $1 trillion in the market value of stocks.

"We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges," Schapiro said in a statement. "As such, I believe it is important that all the exchanges quickly reached consensus on a set of uniform circuit breakers that would be triggered when needed."

The markets can use the six-month pilot period, which would end on Dec. 10, to make needed adjustments based on how the new rules work, and the scope of the rules could be expanded to stocks beyond the S&P 500 "as soon as practicable," the SEC said. That could include exchange-traded funds, increasingly popular investments that often track a market index such as the S&P 500 and can be traded throughout the day, unlike mutual funds.

ETFs as a group were affected by the plunge more than any other category of securities, according to the report.

Schapiro has asked the SEC staff to consider during the pilot period ways to address the risks of "stop-loss" and other market orders, and whether so-called "stub quotes" should be curbed or banned. Market makers use stub quotes as placeholders and they are often far above or below actual stock values. But the report said their presence at the top and bottom of order books on May 6 "may have led to a very large number of broken trades."

The pilot period will give all market participants, including the SEC, the exchanges and brokerage firms, an opportunity to study the impact of the new rules and fine-tune them, Wall Street's biggest trade group, the Securities Industry and Financial Markets Association, said in a statement.

But it may take another market meltdown before anyone knows if the new system of circuit breakers will work, independent market analyst Edward Yardeni noted.

"The only way we'll find out is if we have another plunge," Yardeni said. "If they kick in and stabilize the situation, then fine. If not, it's back to the drawing board."

The SEC already has rules requiring market-wide halts in trading if the Dow falls 10 percent, 20 percent or 30 percent. None of them were triggered on May 6, but it's possible that those rules, also known as circuit breakers, will be re-examined in light of the plunge.

The plunge highlighted the growing complexity and splintered diversity of the fast-evolving securities market. Sleek electronic trading platforms compete with the traditional exchanges and powerful computers give traders a split-second edge in buying or selling stocks. The risk looms that electronic errors at high speeds could ripple through markets and disrupt them.

Regulators say new rules could help level the playing field for market players and bring order to a patchwork of regulations that are about a decade old.

The May 6 freefall also underscored the growing importance of trading in index futures, which allow investors to trade based on expectations whether a group of stocks will rise or fall, rather than simply trading the underlying stocks.

While it is too soon to know whether the proposed new rules "will prove sufficient to protect investors and to shelter our markets from sudden, drastic technology-driven swings in our markets, they are an important first step," said Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services subcommittee that oversees the SEC.

Associated Press

Just Scratching the Surface

2010-05-18T12:40:00.001-04:00

Conspiracy of Banks Rigging States Came With Crash

By Martin Z. Braun and William Selway

May 18 (Bloomberg) -- A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market.

The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark.

West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.

They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.

California to Pennsylvania

The workings of the conspiracy -- which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non- profits -- can be pieced together from the Justice Department’s indictment of CDR, civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials.

“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.”

Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars. Anderson said prosecutors are lining up conspirators to plead guilty and name names.

“This will go on for a long time and a lot of people will be indicted,” he said in a telephone interview.

Bidding Encouraged

The U.S. Treasury Department encourages public bidding for GIC contracts to ensure that localities are paid proper market rates. Banks that conspired in the bid rigging for GICs paid kickbacks to CDR ranging from $4,500 to $475,000 per deal in at least 10 different transactions, government court-filed documents say.

A GIC is similar to a certificate of deposit, but its rates aren’t advertised publicly. Instead, towns rely on advisory firms such as CDR to solicit competing offers.

In the bid-rigging deals, CDR gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay, the indictment says. Banks took their illegal gains from the additional returns and paid CDR kickbacks, according to the indictment.

Not Guilty Plea

Wolmark, 54, who was indicted by a federal grand jury in Manhattan on antitrust, conspiracy and wire fraud charges, to which he pleaded not guilty, declined to comment when reached by telephone at CDR’s office. Goldberg, who hasn’t been charged, declined to comment, says his attorney, John Siffert.

Court records in the broadest-ever criminal investigation of public finance shed new light on how Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse.

As the banks were steering the world’s financial system to the brink of catastrophe by loading more than $1 trillion of subprime mortgage loans into opaque debt investments, they were also duping public officials across the U.S.

Many of the same bankers and advisers who sold public officials interest-rate swap deals that backfired for taxpayers are now subjects of the criminal antitrust investigation involving GICs.

The swaps are derivatives designed to keep monthly interest payments low as lending rates change. Municipal- derivative units of the largest U.S. banks also sold the contracts, public records across the nation show.

Key Witness

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.

A key witness in the government’s case is a former banker whom the government hasn’t named, according to a civil lawsuit filed by Baltimore, Maryland, and six other municipal borrowers against Bank of America, JPMorgan and nine other banks. The banker is providing evidence against his peers.

The witness, who was employed by Bank of America Corp. starting in 1999, has laid out the inner workings of the scheme in confidential meetings with investigators, according to the civil lawsuit.

Bank of America, based in Charlotte, North Carolina, has also been providing prosecutors with evidence since at least 2007. The bank voluntarily reported its own illegal activity and agreed to cooperate with the Justice Department’s antitrust division, according to a press release from the company.

Amnesty Agreement

In exchange, the government promised in an amnesty agreement not to prosecute the bank. Bank of America spokeswoman Shirley Norton in San Francisco said in an e-mail the firm is continuing to cooperate.

The banker who has been cooperating with the Justice Department said he overheard his colleagues change Bank of America’s bids after coaching from brokers or other banks bidding on the same deal, according to information that the firm provided to plaintiffs in the civil case filed by seven municipalities.

At least five former bankers with New York-based JPMorgan, the second-biggest U.S. bank by assets, conspired with CDR to rig bidding on investment deals sold to local governments, according to the Justice Department list now under seal.

At least three other former JPMorgan bankers are targets of the investigation, according to filings with the Financial Industry Regulatory Authority. Six bankers with Bank of America, the biggest U.S. lender, are also named in the sealed Justice Department list as participants.

16 Companies

Eighteen employees at 16 other companies, including units of General Electric Co., UBS AG and FSA, then a unit of Brussels lender Dexia SA, are also cited as co-conspirators by the Justice Department, according to the list under seal. None have been charged in the case.

Citigroup spokesman Alex Samuelson, Dexia spokesman Thierry Martiny, GE spokesman Ned Reynolds, JPMorgan spokesman Brian Marchiony, UBS spokesman Doug Morris, and Ferris Morrison, a spokeswoman for Wells Fargo & Co., which acquired Wachovia in 2008, declined to comment.

Former CDR employees Douglas Goldberg, Daniel Naeh and Matthew Rothman, pleaded guilty in federal court in Manhattan in February and March to wire fraud and conspiracy to rig bids.

In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48, vice president Evan Zarefsky and Wolmark. They pleaded not guilty. Rubin, who was also charged with making fraudulent bank transactions, faces as much as $3 million in fines and more than 30 years in jail if convicted.

No Law Broken

Rubin declined to comment in a telephone call.

“Mr. Rubin doesn’t think that CDR broke the law in any of these transactions,” said Laura Hoguet, his attorney in New York.

Daniel Zelenko, a lawyer for Zarefsky in New York, said he was confident his client will prevail at trial.

“The government continues to show that it simply doesn’t understand how this market operated,” Zelenko said in an e- mail.

During more than three years of investigation, federal prosecutors amassed nearly 700,000 tape recordings and 125 million pages of documents and e-mails regarding public finance deals.

$400 Billion

Municipalities and states raise $400 billion a year by selling bonds. They invest much of those proceeds in GICs, sold by banks or insurance companies. Those accounts hold taxpayer money and earn interest before public agencies spend it.

Banks and advising firms illegally siphoned money from taxpayers by paying artificially low interest rates in the GICs, the CDR indictment says. The money was intended to build schools, hospitals, roads and sewers and refinance higher-cost debt.

The bid-rigging schemes were orchestrated by CDR and other advisory firms, according to the indictment and the civil suits. Advisers are unregulated private firms hired by local governments to consult on public finance deals -- and are almost always paid by the banks that arrange the transactions or manage the GICs.

Wilshire Boulevard

CDR, which was located on Wilshire Boulevard in Beverly Hills, California, during the transactions under investigation, has provided advice on more than $158 billion in public transactions since it was founded in 1986, according to its website.

CDR helped arrange deals in which financial firms took millions of dollars in profits from GICs, Bloomberg News reported in October 2006. Almost all of the deals were shams: As much as $7 billion in bond-issue proceeds were invested in GICs but never spent for the intended purpose of providing services to taxpayers.

CDR signed off on interest-rate swaps to municipalities, as banks took hidden fees sometimes 10 times as much as they charged on fixed-rate bond deals, according to data compiled by Bloomberg. For the public, the swaps were fraught with risks.

In the past decade, banks have peddled swaps the world over, from Jefferson County, Alabama -- which was forced to the brink of bankruptcy -- to the hill towns of the Umbria region of Italy. Many of these swaps soured when the credit crisis began in 2007.

Getting Out

Dozens of municipalities have paid banks billions to get out of swap contracts. The agency that oversees the San Francisco-Oakland Bay Bridge said it spent $105 million to escape its deal in July 2009.

“They were gouging the municipalities,” said retired IRS investigator Anderson, 59. “Beside the excessive fees, some of the swap deals just didn’t work. It was just awful. The same people were involved in the GIC end of the market.”

Bid rigging not only cheated cities and towns, it also illegally denied the IRS required taxes from GIC income, Anderson said. The evidence is clear in telephone recordings made on GIC desks, he said. “We could hear people talking about how everyone knew who was going to win the bid. You could tell it was just everyday business.”

The Securities and Exchange Commission is conducting a probe of bid rigging from its Philadelphia office that’s parallel to the Justice Department investigation.

More Probes

State attorneys general in California, Connecticut and Florida are also investigating. Bank of America, JPMorgan, Fairfield, Connecticut-based GE, and Zurich-based UBS have disclosed in regulatory filings that they may be sued by the SEC.

The Federal Bureau of Investigation has raided at least two of CDR’s competitors, Pottstown, Pennsylvania-based Investment Management Advisory Group Inc., known as Image, and Eden Prairie, Minnesota-based Sound Capital Management. Neither has been charged.

Robert Jones, a managing director of Image, declined to comment, after answering a call to the firm’s office. Johan Rosenberg of Sound Capital didn’t return calls seeking comment.

Tape recordings cited in a letter by Justice Department prosecutor Rebecca Meiklejohn show how those deals worked. In two GIC bids for the Utah Housing Corp., CDR’s Zarefsky advised an unidentified trader that his firm could lower its offer by “a dime,” or 10 basis points (a basis point is 0.01 percentage point).

‘A Couple Bucks’

The West Valley City-based housing agency accepted contracts with GE’s FGIC Capital Market Services division for 5.15 percent and 3.41 percent in 2001, public records show. Zarefsky didn’t return calls seeking comment.

“I can actually probably save you a couple bucks here,” Zarefsky told the trader, according to the letter citing the tape recording.

The Utah agency, which finances mortgages for low-income residents, didn’t know that financial firms were cheating it out of money that could have been used to help home buyers, said Grant Whitaker, who runs the agency. “It sounds like somebody got a better deal than we did,” he said in a telephone interview.

Such deals could produce large illegal profits by banks, said Bartley Hildreth, public finance professor at the Andrew Young School of Policy Studies at Georgia State University in Atlanta.

A New Wrinkle

“Just a basis point on many of these deals is tens to hundreds of thousands of dollars,” he said.

This isn’t the first time Wall Street has faced accusations of reaping excessive fees on investment deals with public officials. Goldman Sachs Group Inc., Lehman Brothers, which filed for bankruptcy in 2008, Merrill Lynch & Co. and other securities firms agreed by 2000 to pay more than $170 million to settle SEC charges that they had sold overpriced Treasury bonds to municipalities.

The so-called yield burning drove down the returns that local governments earned and trimmed required payments to the IRS. The firms neither admitted nor denied wrongdoing.

Even as the banks were settling with regulators, they devised another way to burn yield, this time by skimming money from GICs, according to the indictment, which said the conspiracy went from 1998 to at least 2006.

In the lawsuit against Bank of America and JPMorgan filed in New York in June 2009, the city of Baltimore, two Mississippi universities and four other municipal borrowers say that bankers from those two companies colluded in bidding for GIC contracts in Pennsylvania.

Holiday Party

At a holiday party sponsored by advising firm Image at Sparks Steak House in Manhattan early in the past decade, the Pennsylvania deals were discussed by the Bank of America trader who is cooperating with prosecutors and Sam Gruer of JPMorgan, the civil antitrust lawsuit says.

The Bank of America trader told Gruer that he was happy that the two banks weren’t “kicking each other’s teeth out” on bidding for certificates of deposits for bond proceeds, the suit says. That information was provided by Bank of America to the plaintiffs.

Gruer, who was informed by prosecutors in 2007 that he was a target of the investigation, declined to comment.

Coaching a Bidder

The trader who is now a federal witness joined Bank of America after being recommended by Image, according to information that the bank turned over to the Baltimore-led plaintiffs. He was assigned by Phil Murphy, who headed the municipal trading desk, to be Bank of America’s point person for investment contracts bid by Image, the lawsuit says.

Image coached Bank of America in winning an investment contract in Pennsylvania, according to an internal e-mail exchange in May 2001 between Bank of America trader Dean Pinard and Image’s Peter Loughhead that was obtained by Bloomberg News. The e-mail was provided to Bloomberg by a person who got it from Bank of America and asked to remain unidentified.

Loughead, who ran bids for Image, advised Pinard on how much to offer for managing the cash fund for a $10 million bond issued by the sewer authority of Springfield Township, York County, 100 miles (161 kilometers) west of Philadelphia.

‘Don’t Fall on Any Swords’

Pinard said in the e-mail to Loughead that Bank of America was willing to pay the town as much as $40,000 upfront to win the deal. Loughead wrote that the bank didn’t need to pay that much.

“Don’t fall on any swords,” Loughead wrote to Pinard the day before bids were submitted. He suggested that the bank could win the contract with a bid of slightly more than $30,000. The next day, Bank of America offered $31,000. It won the bidding, authority records show.

Loughead didn’t return calls seeking comment. Pinard didn’t respond to telephone requests for an interview and no one responded to a knock on the door at his Charlotte home.

Image ensured that Bank of America would dominate GIC deals in Pennsylvania by soliciting sham bids from other banks to make the process look legitimate, according to testimony from the trader cooperating with the Justice Department.

Bank of America would return the favor to Image by submitting so-called courtesy bids at the adviser’s request, allowing JPMorgan to win some of the deals, according to information that Bank of America gave plaintiffs’ attorneys.

Switching Jobs

Bank of America has cooperated with the municipalities that were suing the bank as part of its 2007 amnesty agreement with the Justice Department.

Traders such as FSA’s Goldberg often had worked for several banks and insurance companies that had a role in GIC contracts, according to employment records with Finra, the self-regulator of U.S. securities firms. CDR employees went on to work in the derivative departments of Deutsche Bank AG and UBS, the records show.

Before joining Bank of America, Pinard, 40, worked at Wheat, First Securities Inc. in Philadelphia with two bankers who would later join Image, according to broker registration records.

“Few people understand this part of public finance,” Georgia State’s Hildreth said. “It is a very small band of brothers who know the market. So, of course, they are going to reap the benefits.”

34 States

For nearly a decade, CDR founder Rubin, Wolmark, and Zarefsky helped fix prices on investment deals that cheated taxpayers in at least 34 states, according to their indictments and records filed in the case.

FSA’s Goldberg, who received a bachelor’s degree in accounting from St. John’s University in Queens, New York, worked with CDR employees on GIC deals, according to the indictment and public records. Goldberg worked from 1999 to 2001 at GE, which gets 35 percent of its revenue from financial services.

Goldberg was referred to only as “Marketer A” in the CDR indictment. “Marketer A” was then later identified as FSA’s Steven Goldberg in the Justice Department list of co- conspirators.

At GE, Goldberg worked with Dominick Carollo, a senior investment officer for FGIC, and Peter Grimm, who worked there from 2000 until at least 2006, according to court documents and public records. GE sold FGIC in 2003 to a group led by mortgage insurer PMI Group Inc.

Funneling Kickbacks

Goldberg and Grimm worked with CDR to increase their gains on GIC deals, according to the CDR indictment and conspirator list. Carollo left GE in 2003, joining the derivatives unit of Royal Bank of Canada. Grimm and Carollo didn’t respond to telephone calls and e-mails seeking comment.

Goldberg continued to participate in the conspiracy after he left for FSA in 2001 and used swap deals with Toronto-based Royal Bank of Canada and UBS to funnel kickbacks to CDR, according to the indictments and the Justice Department list of conspirators. Royal spokesman Kevin Foster said the company is cooperating the government.

FSA, Royal Bank of Canada and UBS all worked on public finance deals in West Virginia that prosecutors say involved bid rigging.

At least three times, Goldberg conspired with CDR to pick up deals with West Virginia agencies, according to a guilty plea by former CDR employee Rothman and other records filed in federal court in Manhattan. Among them was a $147 million investment contract with the West Virginia School Building Authority.

‘Raw Greed’

That state’s schools need every penny they can get, said Mark Manchin, executive director of the school authority. With 17 percent of West Virginians below the poverty line in 2008, the state was 45th among the 50 U.S. states, according to a 2009 Census Bureau report. Manchin said some students study in dilapidated, century-old buildings.

“It’s just raw greed at the expense of the most vulnerable,” he said in a telephone interview. “With deteriorating facilities all over the state, that money is what we use to build schools.”

Bank of America’s municipal derivatives division, which was formed in 1998, worked on the 14th floor of the Hearst Tower in Charlotte. The space was so tight that the banker who’s cooperating with the Justice Department said he could hear others in the office change their bids when they got word from financial advisers, according to information Bank of America gave Baltimore.

Bank of America’s Murphy told the banker helping prosecutors that Image would use sham auctions to steer deals to Bank of America if the employee told Image that he “wanted to win” and “would work with” Image, according to the civil suit filed by Baltimore. Murphy declined to comment.

Verbal Cues

They would use verbal cues to communicate. The banker would ask whether the bid was a “good fit” to get information on competing bids from Image. Sometimes Image’s Martin Stallone said Bank of America’s bids were “aggressive,” or too high, and had to be reworked.

At other times, Stallone would ask the banker to bid a specific number, according to the civil suit.

Stallone didn’t respond to messages left for him at work or to a list of questions faxed and e-mailed to Image.

Like Financial Security Assurance, Bank of America also paid kickbacks to brokers for their help in getting deals, according to the Baltimore lawsuit, which based its allegations on information provided by Bank of America.

On June 28, 2002, Douglas Campbell, a former municipal derivatives salesman at Bank of America, wrote in an e-mail to his boss, then managing director Murphy, that he had paid $182,393 to banks and brokers not tied to any particular deals.

‘Better Relationship’

Three payments totaling $57,393 went to CDR, which played no role in any transaction connected to that amount. A copy of the e-mail was contained in a North Carolina lawsuit filed by Murphy against Bank of America in 2003.

“The CDR fees have been part of the ongoing attempt to develop a better relationship with our major brokers,” Campbell wrote.

The bid rigging in GIC contracts has reduced public funding for schools and housing across the U.S.

“If this was going on in a small state like West Virginia, it must have been huge elsewhere,” the state’s Assistant Attorney General Doug Davis said.

bloomberg.com

Reads

2010-05-17T15:17:00.002-04:00

The Second Debt Storm by Allistair Barr at Marketwatch.

America's Ten Most Corrupt Capitalists at Alternet.

The Cupboard is Bare

2010-05-17T10:10:00.001-04:00

‘There’s No Money Left,’ U.K. Minister Learns

By Robert Hutton

May 17 (Bloomberg) -- Arriving for work at the U.K. Treasury last week, the incoming chief secretary, David Laws, found a note from his predecessor, Liam Byrne, offering advice on the job.

“Dear Chief Secretary, I’m afraid to tell you there’s no money left,” Laws cited it as saying.

“Which was honest,” Laws, whose position is the No. 2 in the Treasury after the chancellor of the exchequer, told a press conference in London today. “But slightly less than I was expecting.”

The note underscores the task facing Britain’s Conservative-Liberal Democrat coalition as it seeks to reconcile demand for improved health and education services with promises to reduce the largest budget deficit since World War II.

It was also in the tradition of Reginald Maudling, Conservative chancellor of the exchequer from 1962 to 1964. Leaving his residence after election defeat, he was reported byJames Callaghan, his successor, to have remarked, “Sorry, old cock, to leave it in this shape.”

Byrne didn’t respond to requests for comment. He was quoted by Sky News as saying the note was a joke. “I do hope David Laws’ sense of humour wasn’t another casualty of the coalition deal,” he said, according to Sky News.

According to the Treasury, the letter read as follows: “Dear Chief Secretary, I’m afraid there’s no money. Kind regards -- and good luck! Liam.”

bloomberg.com

It's Easy to Bat 1.000 When the Fed is Pitching

2010-05-12T13:24:00.002-04:00

‘Perfect Quarter’ at Four U.S. Banks Shows Fed-Fueled Revival

By David Mildenberg and Dawn Kopecki

May 12 (Bloomberg) -- Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.

“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

Yield Curve

The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.

It’s an awkward moment for the largest banks to be reporting more profitable trading. President Barack Obama is seeking to prohibit banks from trading solely for their own profit, a proposal favored by Paul Volcker, the former Fed chairman who is now a White House adviser.

“The banks are getting while the getting is good because you have regulatory reform and the Volcker rule and possible bank taxes down the road,” said Matthew McCormick, a banking analyst at Bahl & Gaynor Inc. in Cincinnati, which manages about $2.8 billion including bank stocks. “It’s statistically improbable to have three firms batting 1,000 and also pitching a perfect game. You wonder why the rest of America has some suspicion about proprietary trading.”

‘Implausible’ Proprietary Model

Wells Fargo & Co., the No. 4 U.S. bank, doesn’t disclose how many days it had trading gains or losses, said John Shrewsberry, head of the bank’s securities and investment group. Bank of America declined to comment beyond its filing, according to spokesman Jerry Dubrowski. JPMorgan also wouldn’t comment, spokesman Joseph Evangelisti said. Fed spokesman David Skidmore didn’t reply to an e-mail left after regular office hours yesterday.

At Goldman Sachs, which is contesting a fraud lawsuit from the Securities and Exchange Commission tied to the sale of a mortgage-linked security in 2007, net revenue was $25 million or higher on each of the days it traded. The New York-based firm said it made more than $100 million on 35 of those days, or more than half the time.

The company’s fixed-income, currencies and commodities businesses and equities unit generate those returns by making markets for clients rather than betting the firm’s own money, Chief Operating Officer Gary Cohn said yesterday at a financial services conference in New York.

“There is often speculation that proprietary trading revenues drive our outperformance in these businesses,” Cohn said. “Over the last 12 months, we have only recorded 11 loss days. It is implausible that a proprietary-driven business model could be right 96 percent of the time.”

Less Competition

The demise of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. also helped surviving banks, said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and holds shares of Bank of America and JPMorgan.

“It was like a perfect storm for the fixed income market where you had very low volatility, tightening spreads and a buyer of last resort in the Federal Reserve,” said Paul Miller an analyst at FBR Capital Markets in Arlington, Virginia. “Even if a trade was going against you, you could just dump it on the Fed very quickly.”

The trading-powered gains may not last. At the end of March, the Fed wound up a program in which it had bought $1.25 trillion of Fannie Mae, Freddie Mac and Ginnie Mae home-loan securities. The purchases had helped drive debt buyers from U.S. mortgage bonds with government-supported guarantees and into riskier debt, helping banks that were holding or trading it.

The European debt crisis this month drove many investors back to safer assets, hurting prices for debt such as corporate bonds and commercial mortgage securities.

“The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010,” JPMorgan said in its filing.

bloomberg.com

Kyle Bass and the "Keynesian End"

2010-05-11T20:16:00.002-04:00

Hayman Advisors letter to shareholders courtesy of Absolute Return + Alpha.

The BIS working paper he references is here.

New All Time High in Gold

2010-05-11T19:41:00.001-04:00

The Market Crashed Today and the Robots are to Blame

2010-05-06T21:51:00.003-04:00

The Dow Jones Industrial Average was down an amazing 998.50 points for a few moments today, fully 1010 points off the high of the day. Within six minutes the Dow had gone from being down less than 400 points to almost a thousand. The plunge was rapid and devastating, it was a nuclear bomb blast in the financial markets.

The stock market crashed today.

As 1987's crash had its "Portfolio Insurance" , today's gives us High Frequency Trading (HFT).

This was no "fat finger" trade and no matter how many trades they cancel , there is no doubt that what took place today was a result of the machines.

Excelon, EXC , printed a low of one-hundreth of a cent. $0.0001 for what started the day as the largest utility company in America.

Accenture, ACN , a global consulting firm with 181,000 full time employees printed trades of one cent.

The Boston Beer Company, SAM, the producer of Samuel Adams craft beer traded at one cent.

Phillip Morris International, PM, traded to a low of $2. Quite a departure from its $48.58 opening price.

The list goes on and on.

Pervasive amongst the off the beaten track ETFs tracking individual sectors (ITA, PHO, IAT, PBE, PIC, PBS, etc.) were prices that were as close to zero as the decimal system allows.

As long as High Frequency Trading is allowed to continue, this will happen again.

Reads

2010-04-30T17:09:00.002-04:00

My favorite journalist/finger-in-the-eye man, Matt Taibbi on The Feds vs. Goldman at Rolling Stone.

Mark Ames gives us Fraudonomics at the New York Press.

Both are not just reads, but must reads.

Bill Black

2010-04-25T23:19:00.002-04:00

A favorite here, ever since his book on the Savings & Loan Scandal, The Best Way to Rob a Bank is to Own One. Professor Black breaks it down for the House Financial Services hearing.

Jeremy Grantham Interviewed by FT

2010-04-21T23:12:00.001-04:00

Grantham on Bubbles

Have They Already Paid the Fine Without Admitting Any Wrongdoing?

2010-04-16T11:11:00.001-04:00

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages
FOR IMMEDIATE RELEASE
2010-59

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

# # #

For more information about this enforcement action, contact:

Lorin L. Reisner
Deputy Director, SEC Enforcement Division
(202) 551-4787

Kenneth R. Lench
Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4938

Reid A. Muoio
Deputy Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4488

sec.gov

The Magnetar Trade

2010-04-12T13:07:00.001-04:00

by Jesse Eisinger and Jake Bernstein, ProPublica - April 9, 2010 1:00 pm EDT

A hedge fund, Magnetar, helped create arcane mortgage-based instruments, pushed for risky things to go inside them and then bet against the investments.

In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.

At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.

Get ProPublica's Top Stories and Major Investigations Delivered to Your Inbox
When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.

Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.

continued - propublica.org

Looting Main Street

2010-04-05T12:33:00.001-04:00

How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece

MATT TAIBBI
Posted Mar 31, 2010 8:15 AM

If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff's precincts had to be closed so that Wall Street banks could be paid.

A must read by Matt Taibbi at Rolling Stone continued here.

3 Reasons Public Sector Employees are Killing the Economy

2010-03-31T15:58:00.001-04:00

Truth Has Fallen and Taken Liberty With It

2010-03-26T10:59:00.000-04:00

By PAUL CRAIG ROBERTS

There was a time when the pen was mightier than the sword. That was a time when people believed in truth and regarded truth as an independent power and not as an auxiliary for government, class, race, ideological, personal, or financial interest.

Today Americans are ruled by propaganda. Americans have little regard for truth, little access to it, and little ability to recognize it.

Truth is an unwelcome entity. It is disturbing. It is off limits. Those who speak it run the risk of being branded “anti-American,” “anti-semite” or “conspiracy theorist.”

Truth is an inconvenience for government and for the interest groups whose campaign contributions control government.

Truth is an inconvenience for prosecutors who want convictions, not the discovery of innocence or guilt.

Truth is inconvenient for ideologues.

Today many whose goal once was the discovery of truth are now paid handsomely to hide it. “Free market economists” are paid to sell offshoring to the American people. High-productivity, high value-added American jobs are denigrated as dirty, old industrial jobs. Relicts from long ago, we are best shed of them. Their place has been taken by “the New Economy,” a mythical economy that allegedly consists of high-tech white collar jobs in which Americans innovate and finance activities that occur offshore. All Americans need in order to participate in this “new economy” are finance degrees from Ivy League universities, and then they will work on Wall Street at million dollar jobs.

Economists who were once respectable took money to contribute to this myth of “the New Economy.”

And not only economists sell their souls for filthy lucre. Recently we have had reports of medical doctors who, for money, have published in peer-reviewed journals concocted “studies” that hype this or that new medicine produced by pharmaceutical companies that paid for the “studies.”

The Council of Europe is investigating the drug companies’ role in hyping a false swine flu pandemic in order to gain billions of dollars in sales of the vaccine.

The media helped the US military hype its recent Marja offensive in Afghanistan, describing Marja as a city of 80,000 under Taliban control. It turns out that Marja is not urban but a collection of village farms.

And there is the global warming scandal, in which NGOs. the UN, and the nuclear industry colluded in concocting a doomsday scenario in order to create profit in pollution.

Wherever one looks, truth has fallen to money.

Wherever money is insufficient to bury the truth, ignorance, propaganda, and short memories finish the job.

I remember when, following CIA director William Colby’s testimony before the Church Committee in the mid-1970s, presidents Gerald Ford and Ronald Reagan issued executive orders preventing the CIA and U.S. black-op groups from assassinating foreign leaders. In 2010 the US Congress was told by Dennis Blair, head of national intelligence, that the US now assassinates its own citizens in addition to foreign leaders.

When Blair told the House Intelligence Committee that US citizens no longer needed to be arrested, charged, tried, and convicted of a capital crime, just murdered on suspicion alone of being a “threat,” he wasn’t impeached. No investigation pursued. Nothing happened. There was no Church Committee. In the mid-1970s the CIA got into trouble for plots to kill Castro. Today it is American citizens who are on the hit list. Whatever objections there might be don’t carry any weight. No one in government is in any trouble over the assassination of U.S. citizens by the U.S. government.

As an economist, I am astonished that the American economics profession has no awareness whatsoever that the U.S. economy has been destroyed by the offshoring of U.S. GDP to overseas countries. U.S. corporations, in pursuit of absolute advantage or lowest labor costs and maximum CEO “performance bonuses,” have moved the production of goods and services marketed to Americans to China, India, and elsewhere abroad. When I read economists describe offshoring as free trade based on comparative advantage, I realize that there is no intelligence or integrity in the American economics profession.

Intelligence and integrity have been purchased by money. The transnational or global U.S. corporations pay multi-million dollar compensation packages to top managers, who achieve these “performance awards” by replacing U.S. labor with foreign labor. While Washington worries about “the Muslim threat,” Wall Street, U.S. corporations and “free market” shills destroy the U.S. economy and the prospects of tens of millions of Americans.

Americans, or most of them, have proved to be putty in the hands of the police state.

Americans have bought into the government’s claim that security requires the suspension of civil liberties and accountable government. Astonishingly, Americans, or most of them, believe that civil liberties, such as habeas corpus and due process, protect “terrorists,” and not themselves. Many also believe that the Constitution is a tired old document that prevents government from exercising the kind of police state powers necessary to keep Americans safe and free.

Most Americans are unlikely to hear from anyone who would tell them any different.

I was associate editor and columnist for the Wall Street Journal. I was Business Week’s first outside columnist, a position I held for 15 years. I was columnist for a decade for Scripps Howard News Service, carried in 300 newspapers. I was a columnist for the Washington Times and for newspapers in France and Italy and for a magazine in Germany. I was a contributor to the New York Times and a regular feature in the Los Angeles Times. Today I cannot publish in, or appear on, the American “mainstream media.”

For the last six years I have been banned from the “mainstream media.” My last column in the New York Times appeared in January, 2004, coauthored with Democratic U.S. Senator Charles Schumer representing New York. We addressed the offshoring of U.S. jobs. Our op-ed article produced a conference at the Brookings Institution in Washington, D.C. and live coverage by C-Span. A debate was launched. No such thing could happen today.

For years I was a mainstay at the Washington Times, producing credibility for the Moony newspaper as a Business Week columnist, former Wall Street Journal editor, and former Assistant Secretary of the U.S. Treasury. But when I began criticizing Bush’s wars of aggression, the order came down to Mary Lou Forbes to cancel my column.

The American corporate media does not serve the truth. It serves the government and the interest groups that empower the government.

America’s fate was sealed when the public and the anti-war movement bought the government’s 9/11 conspiracy theory. The government’s account of 9/11 is contradicted by much evidence. Nevertheless, this defining event of our time, which has launched the US on interminable wars of aggression and a domestic police state, is a taboo topic for investigation in the media. It is pointless to complain of war and a police state when one accepts the premise upon which they are based.

These trillion dollar wars have created financing problems for Washington’s deficits and threaten the U.S. dollar’s role as world reserve currency. The wars and the pressure that the budget deficits put on the dollar’s value have put Social Security and Medicare on the chopping block. Former Goldman Sachs chairman and U.S. Treasury Secretary Hank Paulson is after these protections for the elderly. Fed chairman Bernanke is also after them. The Republicans are after them as well. These protections are called “entitlements” as if they are some sort of welfare that people have not paid for in payroll taxes all their working lives.

With over 21 per cent unemployment as measured by the methodology of 1980, with American jobs, GDP, and technology having been given to China and India, with war being Washington’s greatest commitment, with the dollar over-burdened with debt, with civil liberty sacrificed to the “war on terror,” the liberty and prosperity of the American people have been thrown into the trash bin of history.

The militarism of the U.S. and Israeli states, and Wall Street and corporate greed, will now run their course. As the pen is censored and its might extinguished, I am signing off.

Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: PaulCraigRoberts@yahoo.com

counterpunch.org

Our Dollar is Backed by Junk!

2010-03-22T21:55:00.002-04:00

New York Fed Warehousing Junk Loans On Its Books: Examiner's Report

First Posted: 03-22-10 01:12 PM Updated: 03-22-10 04:34 PM

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

"The Fed legally is forbidden from taking such assets. There's a legal requirement that the Fed's assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.

"The net result of this is we know the Fed knowingly bought assets for more than they were worth -- substantially more than they were worth -- and actually created a market for garbage that Lehman was more than happy to push on the Fed because they regarded the public as the suckers of last resort," said Grayson.

A Fed spokesman told the New York Times that a "third party" valued the assets and found they met the standards. Yet the Fed, after accepting the assets, "reduced prices to limit the risk" -- an immediate concession that they were, in fact, over-priced. Otherwise, why reduce their price?

For once, Grayson and Fed Chairman Ben Bernanke are in agreement, to a point. A New York Fed spokesman directed HuffPost to congressional testimony Bernanke delivered last month. "While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation," Bernanke said. "Accordingly, we would welcome a review by the GAO of the Federal Reserve's management of all facilities created under emergency authorities."

Just how far that review would go is the subject of debate in the Senate.

The Valukas report found clear evidence that the New York Fed knew that Lehman was sending it garbage that it had no intention to market. In other words, the baskets of assets were created for the specific purpose of selling to the Fed for far more than they were worth.

Lehman knew it too: "No intention to market" was scrawled on one of the internal presentations about the assets. A separate bank, Citigroup, later characterized the assets as "bottom of the barrel" and "junk" when Lehman tried to push them their way, according to the report.

If Lehman hadn't gone bankrupt anyway, the public would have no knowledge of this backdoor bailout. "It's just fortuitous that we found out about this through a bankruptcy proceeding and a trustee that was willing to allow and pay for some digging," said Grayson. "Do we really just have to hope for the best, that whenever the Fed does something wrong, we might someday find out about it?"

Geithner himself was aware that there was a gap between what Lehman claimed the assets were worth and what they were really worth. "The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in 'collateral damage' by demonstrating weakness and exposing air' in the marks," Geithner said, according to the report.

The assets, called "Freedom CLOs", were sold to the Fed's "Primary Dealer Credit Facility," according to the report.

Lehman immediately recognized the value of what the Fed had set up. A day after the PDCF was announced, an internal Lehman analysis suggested that "the new 'Primary Dealer Credit Facility' is a LOT bigger deal than it is being played to be." The facility could be a used as "as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures."

It was a get-out-of-debt scheme and could "serve as a 'warehouse' for short term securities [b]acked by corporate loans [and] "MAY BE THE 'EXIT STRATEGY' FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET," according to the Lehman analysis.

But not one that Lehman felt like discussing with the public. "Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I'd suggest deleting the reference in the summary below," CEO Dick Fuld wrote in an April 4, 2008 email uncovered by the report. "Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story."

Fuld has declared himself vindicated by the report.

The Fed won't say how much more toxic "garbage" is in the Fed's "warehouse" and that also concerns Grayson.

"The Fed's balance sheet is a cartoon version of what's actually inside," said Grayson.
"We only get to basically do autopsies on the carcasses of the Fed's failures, but what we don't find out is when they show favoritism to companies that do not end up in bankruptcy."

The Treasury didn't immediately respond to a request for comment. Below is the relevant section of the report:

(c) In Addition to a Liquidity Backstop, Lehman Viewed the PDCF as an Outlet for Its Illiquid Positions

The PDCF not only provided Lehman with a ready response to those who speculated it would go the way of Bear Stearns, but also a potential vehicle to finance its illiquid corporate and real estate loans. A day after the PDCF became operational, Lehman personnel commented: "I think the new 'Primary Dealer Credit Facility' is a LOT bigger deal than it is being played to be . . . ." They mused that if Lehman could use the PDCF "as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures . . . ." Additionally, by viewing the PDCF as "available to serve as a 'warehouse' for short term securities [b]acked by corporate loans," the facility "MAY BE THE 'EXIT STRATEGY' FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET."

Lehman did indeed create securitizations for the PDCF with a view toward treating the new facility as a "warehouse" for its illiquid leveraged loans. In March 2008, Lehman packaged 66 corporate loans to create the "Freedom CLO." The transaction consisted of two tranches: a $2.26 billion senior note, priced at par, rated single A, and designed to be PDCF eligible, and an unrated $570 million equity tranche. The loans that Freedom "repackaged" included high‐yield leveraged loans, which Lehman had difficulty moving off its books, and included unsecured loans to Countrywide Financial Corp.

Lehman did not intend to market its Freedom CLO, or other similar securitizations, to investors. Rather, Lehman created the CLOs exclusively to pledge to the PDCF. An internal presentation documenting the securitization process for Freedom and similar CLOs named "Spruce" and "Thalia," noted that the "[r]epackage[d] portfolio of HY [high yield leveraged loans]" constituting the securitizations, "are not meant to be marketed."

Handwriting from an unknown source underlines this sentence and notes at the margin: "No intention to market."

Lehman may have also managed its disclosures to ensure that the public did not become aware that the CLOs were not created to be sold on the open market, but rather were intended solely to be pledged to the PDCF. An April 4, 2008 email containing edits to talking points concerning the Freedom CLO to be delivered by Fuld stated:

"Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I'd suggest deleting the reference in the summary below. Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story."

It is unclear, based solely on the e‐mail, why a reference linking the FRBNY's liquidity facility to the Freedom CLO was deleted. One explanation could be that Lehman did not want the public to learn that it had securitized illiquid loans exclusively to be pledged to the PDCF. Another reason may have been to hide the fact that Lehman needed to access the PDCF in the first place, given that accessing the securities dealers' lender of last resort could have negative signaling implications.

The FRBNY was aware that Lehman viewed the PDCF not only as a liquidity backstop for financing quality assets, but also as a means to finance its illiquid assets. Describing a March 20, 2008 meeting between the FRBNY and Lehman's senior management, FRBNY examiner Jan Voigts wrote that Lehman "intended to use the PDCF as both a backstop, and business opportunity." With respect to the Freedom securitization in particular, Voigts wrote that Lehman saw the PDCF

as an opportunity to move illiquid assets into a securitization that would be PDCF eligible. They [Lehman] also noted they intended to create 2 or 3 additional PDCF eligible securitizations. We avoided comment on the securitization but noted the firm's intention to use the PDCF as an opportunity to finance assets they could not finance elsewhere.

Thus, the FRBNY was aware that Lehman viewed the PDCF as an opportunity to finance its repackaged illiquid corporate loans. The Examiner's investigation has not determined whether the FRBNY also understood that these Freedom-style securitizations were never intended for sale on the broader market.

In response to a question from FRBNY analyst Patricia Mosser on whether Voigts knew "if they [Lehman] intend to pledge to triparty or PDCF,"5359 Voigts replied that the Freedom CLO was "created with the PDCF in mind."

According to internal Lehman documents, Lehman did in fact pledge the Freedom CLO to the PDCF. On three dates, March 24, 25 and 26, 2008, Lehman pledged the Freedom CLO to the FRBNY on an overnight basis, and received $2.13 billion for each transfer.5361 FRBNY discussions concerning the CLO's underlying assets, however, took place on or around April 9, 20085362 -- more than a week after the FRBNY began accepting the CLO.

huffingtonpost.com

Rob McEwen Says $2,000 Gold in 2010

2010-03-16T19:10:00.003-04:00

It would be easy to dismiss such comments coming from most, but Mr. McEwen is the highly respected founder of Goldcorp (GG) and current Chairman and CEO of US Gold (UXG).

Goldcorp's story is an interesting one, founded by McEwen's father as a holding company for gold mining shares, Rob McEwen transformed it into one of the most successful gold mining operations in history. Probably one of the most successful companies period since its founding in 1983.

Mr. McEwen calls for $2,000 gold by the end of 2010 and $5,000 gold as the eventual peak.

Enjoy the interview here - bnn.ca

Change You Can Believe In

2010-03-16T12:33:00.004-04:00

Our US readers should keep this article in mind as the current metallic value of 1982 and older pennies are 221.61% of the face value and nickels are 109.82% of face value (courtesy of the great site coinflation.com).

This is Gresham's Law in action and it will be here soon enough.

Change needed as Argentina coin shortage grows
The Argentina coin shortage is growing as inflation makes a coin's metal worth more than its face value.

A shortage of coins in Buenos Aires has spawned a black market for them in the Argentine capital.

By Nathalie Rothschild Contributor
posted March 15, 2010 at 5:27 pm EDT

Despite Argentine President Cristina Fernández de Kirchner’s promise more than a year ago to introduce electronic bus tickets in Buenos Aires, the vast majority of the capital’s bus lines still only accepts coins. This would not be such a big deal if not for the fact that Argentina has had a coin shortage for more than three years. The crisis has turned normally mundane tasks – like buying a newspaper or a snack – into a big hassle.

There are various theories about the origin of the crisis. Some claim people are hoarding coins because inflation is making the metal worth more than the coins’ face value.

Bus companies run side businesses selling change to companies for a fee, and a black market in coins has sprung up. Government advertisements urge people not to hoard.

It may simply be a sign of exasperation, but people here seem to agree that the situation is getting worse. People like Estefania Franceschi, a journalist, is fed up with being offered candies instead of change.

“Banks only give you up to 10 pesos in coins," explains Daniela Zeitune, a psychologist. "You can get change at the main train station, too, but if you’re working, you simply don’t have time to join the long queues.”

Zeitune's husband, a doctor, has befriended the man who services the vending machines at his hospital, and so he often gets a fresh batch of coins.

The situation is also leaving buskers and the homeless short-changed. Alita Casal, a postgraduate student, says, “People sometimes hesitate handing coins to street musicians and beggars because they are afraid to run out.” Some enterprising performers now offer change back to passersby.

Though one Chinese-owned supermarket chain has come up with an innovative solution – giving out vouchers whenever they run out of coins – it is clear that Buenos Aires is in need of a lot more change.

csmonitor.com

Quotable

2010-03-11T13:30:00.001-05:00

"When the people find that they can vote themselves money, that will herald the end of the republic.”

- Benjamin Franklin

Reads

2010-03-03T11:21:00.003-05:00

US Dollar Money Supply Is Underreported by James Turk.

Berkshire Hathaway's Annual letter is always worth a read.

Make Markets Be Markets from the Roosevelt Institute.

NYPD Officer claims pressure to make arrests at NYC's ABC7. A cop, Adil Polanco, admits that patrolmen are pressured to meet quotas for tickets and arrests and they have it on tape.

What was TARP for again?

2010-02-24T12:45:00.001-05:00

Troubled banking industry sharply reduced lending in 2009

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, February 24, 2010; A08

Lending by the banking industry fell by $587 billion, or 7.5 percent, in 2009, the largest annual decline since the 1940s, as the number of troubled financial institutions rose sharply, the Federal Deposit Insurance Corp. reported Tuesday.

FDIC Chairman Sheila C. Bair said that some small banks have reduced lending because of financial weakness, a problem the Obama administration aims to address with a proposal to pump $30 billion in new federal aid into community banks.

The FDIC considered 702 banks to be in some danger of failing as of the end of 2009, more than double the number at the beginning of the year.

But Bair said that the vast majority of the lending decline was the result of cutbacks by the nation's largest banks, which have tightened qualification standards for borrowers and increased the proportion of money that they hold in reserve against unexpected losses.

"Large banks do need to do a better job of stepping up to the plate here," Bair said.

The decline in lending is a looming issue as the economy begins to recover. Companies start by returning to full capacity, filling open desks with new workers or running equipment more hours each day. But for the recovery to continue, for businesses to expand and employment to grow, lending must begin to expand, too.

The decline also has become a major political issue amid broad public anger that the federal rescue of the banking industry has restored profitability but not the flow of loans.

The FDIC, which reports every three months on the health of the banking industry, said Tuesday that the nation's 8,012 banks posted an aggregate profit of $12.5 billion in 2009, up from the depths of 2008 but far below the profits recorded during the golden age of the mid-2000s.

The largest banks accounted for most of those profits as a growing number of smaller banks have struggled to survive losses on commercial real estate loans. Almost 30 percent of all banks lost money in 2009, the largest share of losers in the 26 years of available data.

Regulators closed 140 banks in 2009, and Bair said she expected the number to rise this year.

There were modest signs of better days ahead. The FDIC continues to project that loan delinquencies will peak this year. But the industry's health tends to lag behind that of the broader economy as banks absorb losses from lending mistakes, and Bair said banks would continue to convalesce through 2010.

"We're still bumping along the bottom of the credit cycle," she said.

The amount of money that banks extend to customers has fallen for six consecutive quarters. The drop in the last three months of 2009 was about $129 billion.

Banks cut back most sharply on funding for construction and development, reducing the volume of such loans by 23.6 percent. Business lending followed close behind, down 18.3 percent. The reductions in those two categories accounted for most of the overall decline. Lending to individual borrowers declined more modestly.

James Chessen, chief economist for the American Bankers Association, said banks are building strength so they can increase lending as the economy recovers.

"The banking industry continues to buttress its financial position to assure it can meet the credit needs of communities throughout the country," Chessen said. "Banks are increasing their capital levels, and the industry continues to set aside strong reserves to cover problem loans created by the high levels of unemployment and business failures."

The FDIC reported an improvement in its own financial health in the fourth quarter.

The agency's insurance fund, which repays depositors in failed banks, has been drained by the largest wave of failures since the early 1990s. The agency estimates that the 140 failures in 2009 will cost the fund $37.4 billion.

But a special assessment on the industry raised the FDIC's cash reserves to $66 billion at the end of the year, and Bair said she is confident that the fund has enough money to cover the current round of failures. Historically, most banks on the troubled list do not fail, but the 702 on the list still represent the largest number since the early 1990s. The agency does not disclose the names of banks on the list.

The FDIC reported that its insurance fund had a negative balance of $20.9 billion at the end of the year, but there are two differences between that number and the agency's cash reserves. First, the fund balance does not include $44 billion already placed in a separate reserve to cover expected losses. Second, the FDIC is delaying the inclusion of some of the money collected through the special assessment to limit the accounting impact on the banks that provided the money.

washingtonpost.com

Basically, It's Over

2010-02-21T22:20:00.000-05:00

A parable about how one nation came to financial ruin.
By Charles Munger
Updated Sunday, Feb. 21, 2010, at 3:30 PM ET

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.

Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.

Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.

The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.

Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.

Charles Munger is vice chairman of Berkshire Hathaway.

slate.com

A Greek crisis is coming to America

2010-02-12T12:34:00.001-05:00

By Niall Ferguson

Published: February 10 2010 20:15 Last updated: February 10 2010 20:15

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.

That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.

Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.

The writer is a contributing editor of the FT and author of ‘The Ascent of Money: A Financial History of the World‘

ft.com

What the Past Tells Us

2010-02-09T11:02:00.002-05:00

By David Walker

From the Daily Reckoning

02/08/10 New York, New York – Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time. Nations, like corporations and people, can lose discipline and morale. Economic and political vulnerability go hand in hand. Remember, without a strong economy, a nation’s international standing, standard of living, national security, and even its domestic tranquility will suffer over time.

Many of us think that a superpowerful, prosperous nation like America will be a permanent fixture dominating the world scene. We are too big to fail. But you don’t have to delve far into the history books to see what has happened to other once-dominant powers. Most of us have witnessed seismic political shifts in our lifetime. In 1985, Mikhail Gorbachev settled into his job as the Soviet Union’s young and charismatic new leader and began acting on his mandate to reenergize the socialist empire. Seven years later that empire collapsed and disappeared from the face of the Earth. Gorbachev runs a think tank in Moscow now.

In a sense, the larger world is starting to resemble the nasty and brutish life that long has characterized the corporate world. Just ask Jeffrey Immelt, chairman and CEO of General Electric. Of the twelve giants that made up the first Dow Jones Industrial Average in 1896 – all of them once considered too big to fail – only GE remains. The other towering names of the era – the American Cotton Oil Company, the US Leather Company, the Chicago Gas Company, and the like – all have faded away. And as GE stands against the winds of today’s financial challenges, ask Immelt whether there is such thing as a company that is too big to fail.

I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire – which included five hundred years as a republic – came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?

The trouble is not that we see ourselves as an empire with global swagger. But we do see ourselves as a superpower with global responsibilities – guardians if not enforcers of a Pax Americana. And as a global power, America presents unsettling parallels with the disintegration of Rome – a decline of moral values, a loss of political civility, an overextended military, an inability to control national borders, and a growth of fiscal irresponsibility by the central government. Do these sound familiar?

Finally, there is what Murphy calls the “complexity parallel”: Mighty powers like America and Rome grow so big and sprawling that they become impossible to manage. In comparing the two, he writes, one should “think less about the ability of a superpower to influence everything on earth, and more about how everything on earth affects a superpower.”

A superpower that is financially reliant on others can be vulnerable to foreign influence. The British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt. The Soviet Union was threatening to intervene on Egypt’s side, turning the regional dispute into a global showdown between Moscow and Washington. The Eisenhower administration wanted to avoid that, and the United States also happened to control the bulk of Britain’s foreign debt. President Eisenhower demanded that the British and French withdraw. When they refused, the United States quietly threatened to sell off a significant amount of its holdings in the British pound, which would have effectively destroyed Britain’s currency. The British and French backed down and withdrew from Suez within weeks.

The US dollar has never come under a direct foreign attack (though its vulnerability is growing). A direct foreign attack would result in a dramatic move away from the dollar. That would lead to a significant decline in its value, as well as higher interest rates. This is often referred to by economists as a “hard landing.” In lay terms, it’s more like a crash landing. Still, Americans have become intimately acquainted with the shocks of financial instability. Americans of a certain age still vividly recall the depths of the Depression in the 1930s and the chaos of inflation and long gasoline lines during the oil shock of the 1970s. We will also remember the financial collapse that began in 2008, and we pray for nothing worse. Some of our smartest financial thinkers are praying right along with us. “I do think that piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line,” investor Warren Buffett has said, “and increases the possibility that demagogues [will] come along and do some very foolish things.”

Regards,

David Walker
for The Daily Reckoning

David Walker

David Walker served as United States Comptroller General from 1998 through to 2008 and is now the President and CEO of The Peter G. Peterson Foundation. He is also the author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.

Nanny State

2010-02-06T13:58:00.002-05:00

Nanny State

Imperial Milds @ BrewDog

We felt a little bit hard done by with the onslaught of mass hysteria, consensual hallucination and nailing of BrewDog to the stake which surrounded the Tokyo* launch a few weeks ago. Anyone who knows BrewDog, knows beer, or has more common sense than a common (or garden) gnome will know that the scathing and unrelenting criticism we faced was pretty unjustified.

We have consistently made the point in writing and interviews that Tokyo* was all about the craft, the challenge and pushing the boundaries of beer and the perception of beer in Britain. We constantly cited the fact that BrewDog is all about educating the consumer and about promoting safe consumption through information and a responsible pricing strategy. It appears our well reasoned arguments fell on deaf ears. Both the Portman Group and The Scottish Parliament have commenced official movements to ban the beer for sale in the UK.

However we are a brewery, beer is what we are passionate about, beer is our canvas, beer is how we express ourselves. Consequently we have decided we would also make our point with a new, special beer.

Nanny State is our quiet and dignified response to the ongoing controversy surrounding Britain's strongest ever beer, Tokyo*. Nanny State is a 1.1% ale. We have gone from making Britain's strongest beer to a brew so low in alcohol it is below the legal classification of beer and not strong enough to be subject to beer duty.

If logic serves the same people who witch-hunted and publically slated us should now offer us heartfelt support and public congratulations. However I fear that this, unfortunately, is an arena devoid of logic and reason

Nanny State is an extraordinary little beer. It contains more hops than any other beer we have ever brewed. There is over 60 kilos used in our tiny 20HL batch. It contains more hops than any other beer ever brewed in the UK. It has a theoretical IBU of 225. It is jam packed with our favourite hops and already tastes amazing. Nanny State picks up where How to Disappear Completely http://www.brewdog.com/blog-article.php?id=88 left off and takes the low ABV hop-bomb concept to the next level and cranks the BrewDog craziness up a few notches.

With How to Disappear Completely and now Nanny State, will we legitimately go down as having invented the Imperial Mild genre in the beer splattered pages of brewing history?

Nanny State will be available in cask and in bottles from www.brewdog.com . Watch this space for more information (or not) it is really up to you, this is not a beer dictatorship.

Obama's $3.83 trillion Budget

2010-02-02T15:51:00.002-05:00

The tagline of The Office of Management and Budget's 2011 Budget is "A New Era of Responsibility". It includes the following quote -

Rather than fight the same tired battles that have dominated Washington for
decades, it’s time to try something new. Let’s invest in our people without
leaving them a mountain of debt. Let’s meet our responsibility to the citizens
who sent us here. Let’s try common sense.

– President Barack Obama

It all sounds so good doesn't it?

Unfortunately in reading the actual budget a few things stand out:

In table S-1 deficits are projected through 2020. Not exactly aligned with the President's statement is it?

In table S-14 gross federal debt outstanding is projected to climb from $13.787 trillion this year to $25.777 trillion by 2020. That is a 7.34% annual compounded growth rate or a 117% increase over the 2009 debt level. Sounds like leaving a "mountain of debt" to me, what do you think?

But don't worry, Obama says that his administration is planning on eliminating the deficit by 2015, less the payments on the national debt of course.

I plan on writing more about this document, but want to first point out the staggering size of the budget at $3.834 trillion dollars.

- The federal budget has more than doubled since 2001 (101.57% increase).

- The federal budget has grown at a compound rate of 6.06% since 1996.

- The federal budget has not declined year over year since 1965. This is the only post WWII year decline on record.

- The federal budget has increased 554,100.69% in the last 100 years.

- The federal budget is greater than the Gross Domestic Product of the following 124 countries combined (according to 2008 IMF data):

Morocco
Slovakia
Belarus
New Zealand
Ecuador
Angola
Iraq
Syria
Qatar
Bulgaria
Sri Lanka
Libya
Sudan
Croatia
Tunisia
Serbia
Dominican Republic
Azerbaijan
Uzbekistan
Ethiopia
Guatemala
Burma
Oman
Lithuania
Kenya
Slovenia
Yemen
Tanzania
Lebanon
Costa Rica
El Salvador
Bolivia
Uruguay
Cameroon
Luxembourg
Latvia
Panama
Uganda
Ghana
Côte d'Ivoire
Honduras
Nepal
Jordan
Bosnia and Herzegovina
Turkmenistan
Paraguay
Cambodia
Estonia
Trinidad and Tobago
Bahrain
Botswana
Cyprus
Equatorial Guinea
Albania
Senegal
Georgia
Afghanistan
Gabon
Jamaica
Democratic Republic of the Congo
Madagascar
Brunei
Macedonia
Armenia
Mozambique
Burkina Faso
Zambia
Nicaragua
Chad
Mauritius
Mali
Republic of the Congo
Laos
Namibia
Papua New Guinea
Tajikistan
Benin
Iceland
Haiti
Kyrgyzstan
Malawi
Moldova
Guinea
Niger
Rwanda
Malta
Mongolia
The Bahamas
Montenegro
Mauritania
Swaziland
Togo
Barbados
Suriname
Sierra Leone
Eritrea
Fiji
Bhutan
Central African Republic
Lesotho
Burundi
Guyana
Belize
East Timor
The Gambia
Djibouti
Saint Lucia
Seychelles
Cape Verde
Maldives
Antigua and Barbuda
Liberia
Grenada
Samoa
Saint Vincent and the Grenadines
Solomon Islands
Vanuatu
Guinea-Bissau
Comoros
Saint Kitts and Nevis
Dominica
Kiribati
Tonga
São Tomé and Príncipe

I Know Who Wins this Battle

2010-01-26T18:36:00.000-05:00

Don't Reappoint...Resign

2010-01-26T18:19:00.004-05:00

It's Time for Ben Bernanke to Resign
By John Tamny

Newspaper headlines last week and over the weekend pointed to a vote on Fed Chairman Bernanke's re-nomination that is increasingly dicey. Rather than achieve the lame-duck status that will come with a near-miss vote, Bernanke should step down.

The irony in all of this is that absent the happy bonus situation on Wall Street which revealed a healthier banking system, Bernanke likely would have sailed through to re-nomination. The bank bonuses, while arguably correct, reminded voters of the bailouts of those same banks which were incorrect, but that Bernanke helped engineer.

Bonuses aside, Bernanke should step aside for the simple reason that the Fed which he oversees has failed miserably. Indeed, while in a rational world the Fed's sole mandate would involve it overseeing a dollar-price rule in terms of gold (thus making it largely irrelevant) to the exclusion of all other policies, it is presently charged with maintaining full employment, low inflation and a sound banking system. It has done none of those things.

Though unemployment was in the 4.8% range at the time of his nomination, the government's calculation of unemployed Americans has more than doubled since he took over. The dollar price of gold has similarly more than doubled on the Bernanke Fed's watch, and while Treasury policy under Presidents Bush and Obama is not given nearly enough credit for the dollar's collapse, Bernanke certainly didn't bolster the greenback with his frequent suggestions that inflation was quiescent. As for the banking system, its decline while under the allegedly watchful eye of the Bernanke Fed is well documented.

Perhaps worst of all, Bernanke is captive to the impoverishing notion that economic growth itself is inflationary. No evidence supports such a claim, and with good reason: in an economy comprised of individuals, it would be hard to find one who feels there's such thing as prospering too much. A top-down economic thinker at best, Bernanke's view of the world learned on campus has made him blind to inflation's true nature, while in thrall to mere theory that's never jibed with reality.

The arguments in favor of a second term for Bernanke are charitably weak. Top Obama advisor David Axelrod observed on CNN's "State of the Union" that "Bernanke offered very strong and steady leadership during this crisis, without which we also may have slipped into the abyss."

What Axelrod misses is the previously mentioned point that as opposed to entities unto themselves, economies are nothing more than a collection of self-interested individuals working in order to save and consume; savings and consumption one and the same. Broken down in this fashion, we can see that individuals fail stupendously all the time, and that their personal economic failures frequently author future success for telling them what not to do in the future.

In that sense, the notion that our capitalistic economy would have been irretrievably harmed had banks and other businesses been allowed to go bankrupt does not measure up to the most basic of scrutiny. In truth, we'd be much better off had the economy been cleansed of non-economic practices, much as the individual is always better off when forced to pay for his or her mistakes.

Some would say that the government's various interventions pre-crisis helped create these commercial mistakes such that bailouts were warranted, and while true in the sense that government error is always at the heart of downturns, it's not a proper defense of the bailouts. Simply put, not all banks bought into the weak-dollar "money illusion" in such a way that they made horrific housing loans to those unable to pay them back, not all banks housed mortgage-backed securities set to wither in value, and not all insurance firms failed to properly account for looming credit defaults. No matter the government's role here, the prudent shouldn't be forced to subsidize the imprudent.

Regularly suggested as another reason for keeping Bernanke around is that as "a student of the Great Depression", our present Fed Chairman knows what to do so that we can avoid repeating the same mistakes of the 1930s. A more laughable defense of Bernanke would be hard to find.

Indeed, if Bernanke were the depression expert that so many assume, he would know well that any understanding of the 1930s downturn must be measured against and include an understanding of the economic collapse of the early 1920s. The brutal 1920-21 recession was of course met with spending cuts, a commitment to the dollar's soundness and the very kind of non-intervention that made it so short, and which led to a huge economic rebound.

Looking at the 1930s, it's increasingly understood that Washington's failure to follow the non-interventionist ‘20s playbook gave us the Great Depression for the ‘30s economy suffering from all manner of mandates, currency devaluation, heavy spending/taxation and broad "regime uncertainty" such that the individuals who comprised the ‘30s economy were production averse. Bernanke's plan to fix that which he helped break shows that far from an expert on the Great Depression, he learned nothing from that decade as evidenced by his desire to repeat many of its same policy mistakes.

Of course it is due to "uncertainty" as to who might replace Bernanke that some who aren't pleased with his tenure say he should be kept around. No doubt they have a point, but by this logic every failed CEO and coach in business and sports should be retained to maintain the same failed certainty.

Back in the real world, failures should be replaced. Bernanke was a flawed choice as Fed Chairman right from the beginning, and now it's time for President Obama to put his stamp on the Fed so that he can be held accountable for future policy emanating from the world's most important central bank.

Of course Ben Bernanke could speed this process along by simply resigning. His resignation would ultimately serve as a big boost for the global economy, not to mention that it might actually achieve for him a level of sympathy that will never be gained so long as he stays in a role for which he's unsuited, and in which he's increasingly unwanted.

John Tamny is editor of RealClearMarkets, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

realclearmarkets.com

Expert Fail

2010-01-07T23:21:00.004-05:00

I was struck recently in reading Sorkin's Too Big to Fail at how the "experts" were so wildly wrongheaded in some of the actions taken during the depths of the credit crisis last year. Confounded in reading Time's Person of the Year about Bernanke scurrying from the exploding adjustable rate mortgage on his Capitol Hill townhouse. Amazed that the list of truly epic Expert Fail keeps getting longer every single day.

These people are the experts. The enlightened technocrats who we are so blessed to have working the levers inside the wheelhouse of our economy. Yet they have been proven time and again to be not only wrong, but downright dangerous.

Seriously, who in their right mind did not see this colossal disaster waiting to happen in real estate? When Greenspan came out saying "Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity" at the height of the real estate madness in October of 2004, I thought he was just bullshitting us while furiously working those levers behind the scenes trying to keep the ship on course. Then we find out that Bernanke had an option ARM on his own house? This is the guy who has all the information that none of us have and he picks an exploder for a mortgage? Is this really happening? Is it just plausible deniability?

I am not an expert, nor do I play one on TV, because frankly from what I see being an expert means having your head up your ass and the unwavering certitude in knowing that it truly belongs there.

Perhaps we should just let seven year olds run around with loaded weapons and give a handful of firecrackers to each and every newborn once they pop out of the womb. Could it be much worse?

The economic 'experts' who stopped making sense
Why, despite the financial crisis, do we still put our faith in economists, asks Edmund Conway.

By Edmund Conway
Published: 6:16AM GMT 31 Dec 2009

After a night at the orgy, the ancient Romans would cure their hangovers by stuffing themselves with deep-fried canaries. The Greeks favoured frying up sheep's lungs. For decades, we Britons have relied on bacon sandwiches to soak away the headache and nausea after a night out. But it was not until earlier this year that scientists at Newcastle University claimed to have pinpointed how fried meats cure hangovers by boosting the metabolism and creating amines which clear the head.

In much the same way, economics is a science which employs some of the world's most intelligent people and most powerful computers in order to prove the bleeding obvious. When I first started writing about the subject, one excited academic told me to look into behavioural economics, which he described as the most "exciting and radical" of all the fields of economic research. Its most edgy, controversial finding? That people occasionally behave irrationally, driven by emotion rather than reason. Well, duh.

One of the real achievements of Paul Samuelson, the revered American economist who died earlier this month, was to put into mathematical form so much of what was rather obvious to the man in the street (for instance, the idea that people tend to buy what they prefer to buy).

But there was an unintended consequence to this: so much maths was injected into the discipline that economists became terrified of making assumptions that couldn't be backed up by equations. This ascent to a lofty peak of geekery and abandonment of common sense helped precipitate the economic and financial crisis of the past few years.

Consider: in the run-up to the crash, there was no shortage of laymen pointing out that people often take out mortgages or overdrafts without thinking hard about the long-term consequences for their finances, and that investors are prone to over-excitement when the promise of easy money is dangled before them; but the economists, surrounded by their slide rules and spreadsheets, failed to listen.

They are listening now – as the wonks in the City scramble to justify their failure to see the crunch coming, they argue that the flaw lay not so much with economics per se, as with the fact that the discipline had failed to remain receptive to common sense. In short, it had disappeared up its own statistical fundament.

Is it a good enough excuse? Judging by the way the economic fraternity have been treated in the past year or so, you might think so. 2009 ought to have been the year that economists well and truly fell from grace. There is surely adequate ammunition to explode any remaining faith in their powers of prediction: the scale of the economic slump, the rise in unemployment, the fact that a small number of extremely rich people have been getting richer while the majority have suffered.

But bizarrely enough, it hasn't happened. Sure, there has been plenty of muttering about economists' shortcomings; the groans at their failed forecasts (for instance, the fact that house prices, far from falling by 10 per cent this year as predicted, have actually risen by around 3 per cent) are louder. But even today, in the shadow of the worst economic collapse since the Great Depression, we still listen obediently when they dispense their wisdom. The ratings agencies, which ought to have had the hardest fall from grace after famously deeming worthless "toxic" assets to be among the highest-grade investments, are still able to provoke panic by merely hinting that they are planning to downgrade a country's debt. We continue to hang on the words of Nobel laureates and professors who entirely failed to see the crisis coming.

Why? We have surely not forgiven the sinners. Rather, in the confusion of economic collapse, and as the economists did themselves, we have lost trust in our common sense and are seeking refuge in apparent certainty. There is a deep-seated human instinct to seek out oracles, and in a world that is less religious than it once was, in an internet age characterised by a relentless blizzard of information, noise and data, we have become more reliant than ever before on "experts": anyone with qualifications or distinctions which make them worthy of attention.

Yet, if there is one thing this crisis ought to have taught us, it is that those apparently "in the know", and in power, often have just as little clue about what is going on as the rest of us. The public looked to the politicians; the politicians looked to the economists; the economists looked to their mathematical models. The upshot was the financial crisis.

Of course, an alternative explanation for our continued faith in economists could be that we have yet to feel the real pain of the recession. By lumping so much debt on to governments' balance sheets, we have merely put the full effects of the crisis off for a bit. Perhaps, then, when countries start defaulting, our faith in the "experts" will be well and truly shattered. I think I prefer the first explanation.

telegraph.co.uk

Who Does Number 2 Work For?

2010-01-07T07:55:00.002-05:00

Geithner’s New York Fed Told AIG to Limit Swaps Disclosure
By Hugh Son

Jan. 7 (Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

Bank Payments

Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking.

The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye. Issa’s comments add to criticism from Republican lawmakers, including Senator Chuck Grassley of Iowa and Representative Roy Blunt of Missouri, who wrote letters in the past two months demanding information from Geithner, 48, about the costs of the AIG bailout.

Securities Lawyers

AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.

“Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”

Mark Herr, a spokesman for New York-based AIG, declined to comment. Andrew Williams of the Treasury referred questions to the New York Fed.

Kathleen Shannon, an AIG deputy general counsel, wrote to the insurer’s executives in a March 12, 2009, e-mail about the conflicting demands from the New York Fed and SEC.

‘Reasonable Basis’

“In order to make only the disclosure that the Fed wants us to make,” Shannon wrote, “we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

AIG disclosed the names of the counterparties, which included Deutsche Bank AG and Merrill Lynch & Co., on March 15. The disclosure said AIG made more than $27 billion in payments without identifying the securities tied to the swaps or listing the value of individual purchases by each bank, details the Fed wanted to keep out, according to the March 12 e-mail from AIG’s Shannon.

Earlier that month, Fed Vice Chairman Donald Kohn testified to Congress that disclosure of the counterparties would harm AIG’s ability to do business. The insurer agreed to turn over a stake of almost 80 percent in connection to its bailout.

‘No Mention of the Synthetics’

The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures. The correspondence includes e-mails between AIG’s Shannon and attorneys at the New York Fed and its law firm, Davis Polk & Wardwell LLP. Tom Orewyler, a spokesman for Davis Polk in New York, declined to comment as did Shannon.

According to Shannon’s e-mails obtained by Issa, the New York Fed suggested that AIG refrain in a filing from mentioning so-called synthetic collateralized debt obligations, which bundled derivative contracts rather than actual loans.

The filing “reflects your client’s desire that there be no mention of the synthetics in connection with this transaction,” Shannon wrote to Davis Polk on Dec. 2, 2008. “They will not be mentioned at all.”

AIG had about $9.8 billion of swaps protecting the synthetic holdings as of September 2008, the company said on Dec. 10, 2008. Goldman Sachs said in a press release last month that it was among banks that had losses on synthetic CDOs.

As part of a bailout that swelled to $182.3 billion, AIG and the Fed created Maiden Lane III, a taxpayer-funded facility designed to remove mortgage-linked swaps from the insurer’s books. Shannon told the New York Fed on Nov. 24, 2008, that AIG executives wanted to publicly disclose details about Maiden Lane the next day.

‘Guided by Your Counsel’

“Do you think it might be feasible to hold off on the Maiden Lane III 8K and press release until next week?” Brett Phillips, a New York Fed lawyer wrote in an e-mail that day. “The thinking is that the Maiden Lane III closing will be a less transparent event, and it might be better to narrow the gap between AIG’s announcement and the New York Fed’s publication of term sheet summaries.”

“Given the significance of the transaction, AIG would be best served by filing tomorrow,” Shannon wrote. “We will of course be guided by your counsel.” The document outlining the Maiden Lane agreement was posted on Dec. 2, 2008.

In at least one instance, AIG pushed for documents to be disclosed and then released the information.

‘Better Disclosure’

“We believe that the agreements listed in the index (i.e., the Master Investment and Credit Agreement and the Shortfall Agreement) do not need to be filed,” Peter Bazos, a Davis Polk lawyer wrote on Nov. 25, 2008. “Please let us know your thoughts in this regard.”

AIG’s Shannon replied that “the better practice and better disclosure in this complex area is to file the agreements currently rather than to delay.” The agreements were included in the Dec. 2 filing.

More details of the negotiations over swaps payments emerged in November 2009 when Neil Barofsky, the special inspector in charge of policing the Troubled Asset Relief Program, assessed the Fed’s role in the bailout.

“Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received,” Barofsky wrote in a Nov. 17 report. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”

AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion for Maiden Lane facilities to buy mortgage-linked assets owned or backed by the company.

bloomberg.com

Zero

2010-01-05T13:08:00.001-05:00

Keynesianism Delivers a Decade of Zero

This past week we celebrated the end of what most people agree was a decade best forgotten. New York Times columnist and leading Keynesian economist Paul Krugman called it the Big Zero in a recent column. He wrote that “there was a whole lot of nothing going on in measures of economic progress or success” which is true. However, Krugman continues to misleadingly blame the free market and supposed lack of regulation for the economic chaos.

It was encouraging that he admitted that blowing economic bubbles is a mistake, especially considering he himself advocated creating a housing bubble as a way to alleviate the hangover from the dotcom bust. But we can no longer afford to give prominent economists like Krugman a pass when they completely ignore the burden of taxation, monetary policy, and excessive regulation.

Afterall, Krugman is still scratching his head as to why “no” economists saw the housing bust coming. How in the world did they miss it? Actually many economists saw it coming a mile away, understood it perfectly, and explained it many times. Policy makers would have been wise to heed the warnings of the Austrian economists, and must start listening to their teachings if they want solid progress in the future. If not, the necessary correction is going to take a very long time.

The Austrian free-market economists use common sense principles. You cannot spend your way out of a recession. You cannot regulate the economy into oblivion and expect it to function. You cannot tax people and businesses to the point of near slavery and expect them to keep producing. You cannot create an abundance of money out of thin air without making all that paper worthless. The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever. You cannot live beyond your means indefinitely. The economy must actually produce something others are willing to buy. Government growth is the opposite of all these things.

Bureaucrats are loathe to face these unpleasant, but obvious realities. It is much more appealing to wave their magic wand of regulation and public spending and divert blame elsewhere. It is time to be honest about our problems.

The tragic reality is that this fatally flawed, but widely accepted, economic school of thought called Keynesianism has made our country more socialist than capitalist. While the private sector in the last ten years has experienced a roller coaster of booms and busts and ended up, nominally, about where we started in 2000, government has been steadily growing, because Keynesians told politicians they could get away with a tax, spend and inflate policy. They even encouraged it! But we cannot survive much longer if government is our only growth industry.

As for a lack of regulation, the last decade saw the enactment of the Sarbanes-Oxley Act, the largest piece of financial regulatory legislation in years. This act failed to prevent abuses like those perpetrated by Bernie Madoff, and it is widely acknowledged that the new regulations contributed heavily not only to the lack of real growth, but also to many businesses going overseas.

Americans have been working hard, and Krugman rightly points out that they are getting nowhere. Government is expanding steadily and keeping us at less than zero growth when inflation is factored in. Krugman seems pretty disappointed with zero, but if we continue to listen to Keynesians in the next decade instead of those who tell us the truth, zero will start to look pretty good. The end result of destroying the currency is the wiping out of the middle class. Preventing that from happening should be our top economic priority.

Texas Straight Talk

Reads

2010-01-05T01:12:00.002-05:00

Timothy Geithner Meets Vladimir Lenin from John Hussman. An absolute must read.

Fannie, Freddie, and the New Red and Blue from our favorite newsman, Matt Taibbi at TrueSlant.

World's tallest building: Is the Burj Khalifa a herald of economic woe? at the Christian Science Monitor. What is the world coming to when the Mises Institute is mentioned at CSM?

School Bills Due But State Can't Pay: "There is No Money"; Let the War on Public Unions Begin from Mish.

That 1937 Feeling by Paul Krugman. Haven't we had enough of things his way yet?

Quotable

2010-01-03T23:55:00.000-05:00

"Skepticism is the chastity of the intellect, and it is shameful to surrender it too soon or to the first comer: there is nobility in preserving it coolly and proudly through long youth, until at last, in the ripeness of instinct and discretion, it can be safely exchanged for fidelity and happiness."

-George Santayana
US (Spanish-born) philosopher (1863 - 1952)

Move Your Money!

2009-12-29T20:40:00.002-05:00

I fully support and recommend the following to all our readers. Watch the following youtube clip and visit the site Move Your Money.

HuffPo

The Term is "Capture"

2009-12-22T13:01:00.001-05:00

Banks with political ties got bailouts, study shows

By Steve Eder

NEW YORK, Dec 21 (Reuters) - U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.

Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.

As of late September, nearly 700 financial institutions had received bailouts of $205 billion under the capital purchase program, the study said.

The banking industry has long been criticized for using political influence to obtain bailouts.

Scott Talbott, a senior vice president with industry lobbying group The Financial Services Roundtable, said the study was skewed because it did not exclude nine of the largest banks that were "strongly asked" by the government to take bailouts.

Those banks included Goldman Sachs Group Inc, JPMorgan Chase & Co, and Morgan Stanley -- all of which repaid their bailouts in June.

Bank of America Co and Citigroup Inc more recently announced plans to pay back taxpayers.

Talbott also noted that $116 billion has been repaid with interest.

"This demonstrates the banks were excellent stewards of the taxpayer's money," Talbott said.

But a watchdog for the government's bailout, the special inspector general for TARP, said last month that the broader $700 billion bailout program "almost certainly" will result in an overall loss for taxpayers.

President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses.

reuters.com

There Is No Bubble in Gold

2009-12-18T14:36:00.006-05:00

It's really ridiculous to call it a bubble at this point. A post from FT Alphaville, courtesy of CIBC, has the graphical depiction to prove it is far from a bubble.

The first chart compares the price movement up to and beyond the 1980 top (in blue) with this decade's move (in red).

Here CIBC compares the action in gold to the Nasdaq bubble...

But what about the gold mining stocks? Could they be in bubble territory? Hardly.

Todd Harrison of Minyanville recently put together a chart of the decade's bubbles (Nasdaq, Homebuilders, China and Crude Oil) as well as gold. Notice the red line all the way down at the bottom. Does that look like a bubble to you?

Clearly there is no bubble in gold.

But there will be...soon enough.

He Who Sees No Inflation

2009-12-17T10:56:00.000-05:00

From Forbes.com

Ben Bernanke thinks deflation is the problem. He must not pay for his own gas.

Keith R. McCullough, 12.16.09, 11:20 AM ET

"I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."--Alan Greenspan

I understand that Wall Street memories can be as short a New York CrackBerry minute; particularly into year-end bonus time. After a 63.8% rally from the March 2009 lows, you have a lot of people proclaiming their mystery of faith as "long term" investors again. It's funny to watch.

At 52.2%, this morning's Institutional Investor "Bullish-to-Bearish" Survey shows the highest weekly reading of bulls for 2009-to-date. The depressionistas (bears) have been blown out of the water. Only 16.7% of institutional investors in the survey were allowed to admit they are currently bearish.

That said, I am begging you. Yes, begging you, ahead of Ben Bernanke's FOMC testimony today, to take three seconds to remember what Alan Greenspan told Henry Waxman on Capitol Hill just over a year ago about his forecasting and risk-management process.

The aforementioned quote was in response to Greenspan being questioned on his free market ideology. One maestro. One view. One man who became "very distressed" for a few months, before he started giving $50,000 dinner speeches again.

Here's the rest of that riveting revelation of our Wizard of Oz, captured by David Leonhardt at The New York Times:

"Mr. Waxman pressed the former Fed chair to clarify his words. 'In other words, you found that your view of the world, your ideology, was not right, it was not working.'

'Absolutely, precisely,' Mr. Greenspan replied. 'You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.' "

Well, it's all good and fine for Greenspan to chalk up the failure of his free money leverage doctrine to being "shocked." But that doesn't do me or this country's future any good if He Who Sees No Bubbles (Bernanke) goes right back to upholding it.

Since Bush, Greenspan, Obama and Bernanke have embarked on this cut-rates-to-zero campaign of socializing Wall Street losses and privatizing levered-up gains, the percentage of participants in the USDA's Food Stamp Program has almost doubled.

No, that's not a typo. The percentage of people in this country needing food stamps to eat has gone from 6% during the Greenspan easy-money tech bubble in 1999 to over 11% today. One in four American children now participate in some form of food assistance program. This is the result of what Goldman Sachs CEO Lloyd Blankfein said was "the Lord's work."

This is plain sad. President Obama, these are your fat cats. Those who subscribe to starving their population's fixed income by cutting the rate of return on their savings accounts to zero and reflating the cost of everything they have to pay for in their daily lives.

Despite yesterday's November report showing a massive ramp in the monthly producer prices (+2.7% year-over-year inflation), this is what He Who Sees No Inflation had to say to U.S. Senator Jim Bunning's request for reconciliation of the math:

"I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead."

Are you kidding me, Ben? First of all, what does that mean? Second of all, what in God’s good name does that do for the 99% of people on Main Street who are paying two times what they did last Christmas at the pump? Thirdly, are you kidding me?

The sad reality is that the Fed Chairman is an academic who specialized in researching the history of the Great Depression. He is not a risk manager. He is not a forecaster. He has never seen a price bubble nor should you expect him to.

This morning you are going to get another inflating price report at 8:30 a.m. via U.S. consumer prices for November. Then, you are going to see Bernanke get YouTubed for the umpteenth time at 2:15 p.m. when he tells the free world that he sees no price inflation. The Chinese will be watching.

The problem with Bernanke has already been established by Greenpan himself. Again, reread the aforementioned quotes.

The bankers are getting paid in size by the government. The Piggy Banker Spread (the spread between 10-year and 2-year Treasury yields) is +272 basis points wide this morning. That’s only 4 basis points (0.04%) off of the fattest spread ever. Yes, Mr. Bernanke, Mr. Geithner and President Obama--you have set the table, and now the bankers are simply chowing down on what you served up. Don’t put the onus solely on them for eating.

All the while we are seeing Mr. Macro Market bake the long-term effects of price inflation into the cake. Greenspan and Bernanke may have an admittedly "significant or permanent" impairment in their vision, but I can tell you this--Americans don’t get paid to wake up every morning willfully blind.

We are now seeing marked-to-market prices break out to the upside in classic Federal Reserve rate hike leading indicators. Both the U.S. dollar and long-term U.S. Treasury yields have broken out above my intermediate-term trend lines to the upside (those breakout lines are $76.30 dollar and 3.41%, respectively).

Greenspan and Bernanke can run from Mr. Macro Market, but they can't hide. Prices don't lie. The outputs of their perceived wisdoms do. History has a funny way of writing herself that way. While it may be hard for Washington to see this in their CrackBerry caves of Groupthink Inc., with time it becomes crystal clear.

My immediate-term support and resistance levels for the S&P 500 are now 1,100 and 1,115, respectively. I am sure we will test the top end of that range if Bernanke ignores this morning's inflation data and panders to the most politicized monetary policy wind in U.S. economic history this afternoon.

That's why I invested 7% of the cash in my asset allocation on yesterday’s market-down move. I moved longs versus shorts in the virtual portfolio to 21-11. Bernanke’s burden of proof remains something the risk manager in me cannot ignore.

Best of luck out there today,

Keith R. McCullough

Chief Executive Officer

www.researchedgellc.com

This Is Not Over

2009-12-16T23:31:00.001-05:00

4 Big Mortgage Backers Swim in Ocean of Debt

By MARY WILLIAMS WALSH
Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support.

These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state.

And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them.

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.

Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”

All the companies have recently drawn new government money or are in talks to do so:

Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment.

GMAC, which finances auto sales, already has $13.4 billion from the Troubled Asset Relief Program, and has been in talks with the Treasury about getting up to $5.6 billion more, because a government “stress test” showed it was still too weak.

A.I.G., the insurance conglomerate, recently drew $2 billion from a special $30 billion government facility, which was created in the spring after a $40 billion infusion proved inadequate.

Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.

Timothy F. Geithner, the Treasury secretary, welcomed the repayment plans by Citigroup and Wells Fargo this week. Although Citi later ran into difficulty with the share sale to raise money for the repayment, Mr. Geithner said the actions meant that taxpayers were “now on track to reduce TARP bank investments by more than 75 percent.” That means that of the $245 billion awarded to banks, more than $185 billion is either recovered or about to be.

But that is just a fraction of the money that the four troubled debtors have received or may still get. Together, they have been offered nearly $600 billion, and that lifeline could climb to nearly $1 trillion if the commitment to Fannie and Freddie is doubled, as some predict. What’s more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.

A spokeswoman for GMAC pointed out that the company had made all its scheduled dividend payments to the Treasury, as had Freddie Mac. While Fannie Mae has said it will have trouble paying its dividends, A.I.G. does not have to pay dividends.

A spokeswoman for A.I.G. said that the insurance company was committed to repaying taxpayers, but repayment would depend on market conditions. A Freddie Mac spokesman said that the company was dependent on continued support from the Treasury to stay solvent. A.I.G.’s latest request for money offers an example of why it needs more government aid to pay its debts. The company has a big aircraft leasing unit, International Lease Finance Corporation, which is considered a valuable asset but not a core part of its business.

Ever since the company announced in 2008 that it would dismantle itself and sell subsidiaries to pay back the government, analysts have expected International Lease to be sold.

But there is a big catch. A.I.G. does not own International Lease outright. A big block of the unit’s stock is actually held by an insurance subsidiary, which uses the shares to secure its promises to pay claims. If A.I.G. sold International Lease and gave the proceeds to the Fed to pay down debt, it would strip too much money out of the insurer, making it insolvent.

So A.I.G. used part of the $2 billion that it recently received from the Treasury to buy back the International Lease shares. That way, when a buyer finally appears, A.I.G. can sell the leasing business and pay the Fed.

“The irony is, for the government to recoup its value, it has to keep its support behind A.I.G.,” said a former company executive, who requested anonymity because of the delicacy of the matter. “The thing is a total Catch-22.”

A.I.G. said it also recently used some money from the Treasury to restructure its mortgage-guaranty business — something GMAC, Fannie and Freddie are struggling to do as well.

All four of the companies had businesses that provided mortgage guarantees. When defaults began soaring in 2007, they all suffered big losses. In some cases, they have insured each other; in other cases, banks or investors have to be paid.

Although GMAC’s main business is financing auto sales, its executives have said its biggest problem is containing the troubles in its mortgage business, known as Residential Capital. “What we want to do, to the best we’re able to, is draw a box around it and say that it is contained,” Michael Carpenter, the new chief executive, told a trade publication in November.

For its mortgage guarantee unit, A.I.G. used some Treasury money to reinsure $7 billion of obligations through a Vermont subsidiary. The terms call for the unit, United Guaranty of Greensboro, N.C., to pay the claims that it can afford and send the rest to the Vermont affiliate.

Little is known about the Vermont unit because the state does not require that type of company to file annual reports. If the Vermont company needs additional money, it presumably could turn to A.I.G., which can draw more from the Treasury.

nytimes.com

Must Read

2009-12-10T16:53:00.000-05:00

Obama's Big Sellout
The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway
MATT TAIBBI

Posted Dec 09, 2009 2:35 PM

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

Continued at rollingstone.com

Ceiling? What Ceiling?

2009-12-10T09:30:00.001-05:00

Dems to lift debt ceiling by $1.8 trillion, fear 2010 backlash
By: David Rogers
December 9, 2009 07:24 PM EST

In a bold but risky year-end strategy, Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than have to face the issue again prior to the 2010 elections.

“We’ve incurred this debt. We have to pay our bills,” House Majority Leader Steny Hoyer told POLITICO Wednesday. And the Maryland Democrat confirmed that the anticipated increase could be as high as $1.8 trillion — nearly twice what had been assumed in last spring’s budget resolution for the 2010 fiscal year.

The leadership is betting that it’s better for the party to take its lumps now rather than risk further votes over the coming year. But the enormity of the number could create its own dynamic, much as another debt ceiling fight in 1985 gave rise to the Gramm-Rudman deficit reduction act mandating across-the-board spending cuts nearly 25 years ago.

Already in the Senate, there is growing pressure in both parties for the creation of a novel bipartisan task force empowered to force expedited votes in the next Congress on deficit reduction steps now shunned by lawmakers.

As introduced Wednesday, the legislation sets no specific targets for deficit reduction, but its 18-member task force — 16 of whom would come from Congress — is promised immense leverage to force change if they can first come together behind a plan.

“This is a defining moment,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.), one of the lead sponsors, and New Hampshire Sen. Judd Gregg, the panel’s ranking Republican, is already maneuvering to try to add the legislation as an amendment to any bill tapped to carry the debt increase.

As explained by Hoyer and other Democrats, that will almost certainly be a pending $636.4 billion Pentagon appropriations bill that includes $128.3 in contingency funds for military operations in Iraq and Afghanistan.

The House leadership has held back the bill for weeks, saving it for this moment, but now appropriations clerks have been instructed to have a final package ready to go by Monday.

Leadership staff stressed that nothing was yet final in what has become a year-end negotiation between top Democrats in the House and Senate. But the Senate appears to have been the first to put the $1.8 trillion number on the table. And Hoyer’s comments are the clearest yet on the scale of the increase and the expectation that it will be part of a larger year-end legislative train pulled along by the must-pass military bill.

House Appropriations Committee Chairman Dave Obey, who is pursuing job-related measures he would also like to add, insisted that the debt issue is a “leadership call” alone. But the Wisconsin Democrat showed no sign of opposition to the strategy outlined by Hoyer.

“It is December. We don’t really have a choice,” Obey told POLITICO. “The bill’s already been run up; the credit card has already been used. When you get the bill in the mail you need to pay it.”

Though Treasury can buy itself time by moving assets around, it is already coming close to the current debt ceiling of $12.1 trillion. Last spring, the Democratic-backed budget proposed to raise this to about $13 trillion, but given the current pace of borrowing, no one now expects that will be sufficient to get through 2010.
In fact, fiscal year 2009 ended Sept. 30 with a $1.4 trillion deficit, which demanded higher-than-expected Treasury borrowing. Most of that was due to the downturn in the economy and spending commitments in place before Barack Obama took office. And as much as Republicans point to the president’s economic recovery bill last February as the culprit, only a small share of that $787 billion package was spent by Sept. 30.

The picture in 2010 is different. The administration is predicting the stimulus will hit its stride with much more spending. And there will be a steady escalation of outlays driven by back-to-back increases in 2009 and 2010 appropriations for domestic agencies.

The White House has vowed to be more deficit conscious in its forthcoming 2011 budget due out in February. But the House could vote as early as Thursday on a $446.8 billion year-end package covering more than a dozen Cabinet departments and agencies and representing a healthy 9 percent to 10 percent increase over current spending for the same accounts.

For example, transportation and housing resources would grow by 12 percent, including $2.5 billion for high-speed-rail investments on top of the $8 billion already added by the White House to the giant stimulus bill in February. A $163.5 budget for the Departments of Labor, Health and Human Services, and Education would add an additional $8.6 billion to annual spending, and Veterans Health Administration spending would grow to $45.1 billion, a $4.1 billion increase.

politico.com

A Contrarian's Dilemma

2009-12-09T09:46:00.001-05:00

From obscurity to celebrity in ten years, gold's transformation in the public eye epitomizes the Groucho Marx school of investing. "I am a man of principle, "he said, "and if you don't like my principles, well…….I've got others." For a principled contrarian, dealing with prosperity poses a dilemma. How long should we run with the herd? Or, does the herd really know where it is running?

Tocqueville Asset Management's John Hathaway "A Contrarian's Dilemma"

Our Last Chance...Ignored

2009-12-08T13:29:00.000-05:00

A lonely voice against the Fed now leads a chorus
Rep. Ron Paul's attempt to rein in central bank is finally close to passing -- just don't expect him to vote for it

By Tomoeh Murakami Tse
Washington Post Staff Writer
Tuesday, December 8, 2009

Ron Paul is used to going it alone. During 20 years in Washington, the libertarian Republican congressman from Texas has proposed doing away with personal income taxes, federal antitrust laws and the minimum wage. He's advocated pulling the United States out of the United Nations, NATO and the International Monetary Fund.

Those efforts have mostly been legislative non-starters. Many of his bills fail to attract a single co-sponsor.

But one of his perennial causes is headed to the House floor Wednesday with widespread support: to audit the Federal Reserve. That measure, which he first introduced in 1983, has the backing of more than 300 legislators and last month won bipartisan approval in the House Financial Services Committee.

The proposal would subject the Fed to unprecedented scrutiny by allowing the Government Accountability Office to audit all central bank operations, including its decisions on interest rates, lending to individual banks and transactions with foreign central banks. Fed officials and many private economists have argued strenuously against the measure, saying it would threaten economic stability by undermining the central bank's independence from political pressure.

"I'd like to know who they bail out and why," said Paul, who brought together a small cult following across the political spectrum in the last presidential election. "I'd like to know how much they pay for securities that they buy. Did they overpay? Why did Goldman Sachs come out well and Lehman Brothers go bankrupt?"

Author of 'End the Fed'

That Paul's proposal has garnered so much support despite opposition from the Obama administration is not so much a testament to his political prowess. Rather, it reflects populist discontent over an institution increasingly blamed for its failure to head off the financial crisis and for its role in rescuing large financial firms that helped cause it.

"He's been dogged about it and stayed with it," said Steve H. Hanke, an economics professor at Johns Hopkins University. "The lesson in salesmanship is illustrated by Paul's actions. However, the consuming public is obviously ready to buy now. . . . There's just a great deal of skepticism out there. And in that environment, a bill that would require more transparency and less secrecy gets some traction."

But Paul's critique of the Fed goes well beyond the lessons of the financial bailout. He believes market forces alone, not the Fed, should set interest rates. His best-selling book is called "End the Fed." He has a separate bill to abolish the Fed altogether. (He is the lone sponsor.)

Paul said in an interview that his measure is strictly about transparency at the "all-powerful" Federal Reserve.

"What they're talking about when they say they want no political influence, what they're talking about is they just want secrecy," Paul said. "Why would they be so nervous about us finding this out? It tells you there's something big going on."

Leaders at the Fed have repeatedly stressed to Congress their increased efforts at transparency. Fed officials have noted that the central bank is disclosing more information than ever about its operations and balance sheet, which has expanded by more than $1 trillion as the Fed has carried out unprecedented actions to stabilize the financial system. Fed officials have also said they would work with Congress to provide additional information about how taxpayer funds are being used.

First elected to Congress in 1976, Paul has earned the nickname Dr. No from colleagues for his record of voting against almost anything he sees as intruding on free markets or amounting to government overreach.

He was one of only a few Republicans to vote against the war in Iraq. He opposed federal aid to Hurricane Katrina victims. He has called for abolishing the Internal Revenue Service, and during his career as an obstetrician-gynecologist in Texas, Paul saw some patients for free rather than accept Medicare or Medicaid, he recalled. None of his five grown children took out federal student loans.

Paul's principled, outside-the-mainstream stance has left him with few legislative victories. Of the nearly 200 bills Paul has proposed in the latest three congressional sessions, only two have made it to the House floor. His Fed audit bill, now part of broader legislation overhauling the regulation of financial markets, is by far the most popular.

Driven by beliefs

His bill's opponents do not suggest that Paul is driven by anything other than his beliefs.

"Ron has his views, it's very strongly felt, and he's been pounding on this one 30-some-odd years," said Sen. Judd Gregg (R-N.H.). "This is a very bad idea that's very foolish and incredibly destructive to our nation if it were to pass."

Paul said his views on government, the economy and monetary policy developed gradually. He enrolled in his first economics class at Gettysburg College, where he graduated in 1957 with a degree in biology. While in medical school, he continued to read Ludwig von Mises and F.A. Hayek, Austrian economists who opposed central economic planning.

In the 1970s, the Nixon administration suspended the dollar's convertibility into gold and made the decision to impose import surcharges and wage and price controls. Then came the collapse of the Bretton Woods system of fixed exchange rates, which had defined the global economy since the aftermath of World War II.

"It was a very bad decade in the 1970s. That was a big influence on me," Paul said. "It just energized me to start speaking out."

Paul views support for his Fed audit proposal as recognition of "the failure of the current system, the failure of Keynesian economics."

Back in Washington, the outlook for Paul's bill is bright, with leaders on both sides of the aisle supporting some version of it.

"I agree with much of what he's doing," Rep. Barney Frank, chairman of the House Financial Services Committee, said in an interview. "I find him very reasonable and amiable."

Despite his unusual success in advancing the proposal, however, Paul is unlikely to cast a rare "yes" vote for it. That's because it is part of the bill proposing broad new financial regulation, something Paul simply cannot approve.

"That's my tradition," he said. "I won't vote for a bill that's a disaster because 1 or 2 or 5 percent of it is an improvement."

washingtonpost.com

Are You "Really" Unemployed?

2009-12-04T16:38:00.001-05:00

Worse Than Enron?

2009-12-02T14:49:00.002-05:00

by Nomi Prins

Nomi Prins is author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009). Before becoming a journalist, she worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.

Wall Street’s big banks are playing dangerous new accounting games—and this time taxpayers are on the hook for hundreds of billions. Nomi Prins uncovers a scandal in the making.

Enron was the financial scandal that kicked off the decade: a giant energy trading company that appeared to be doing brilliantly—until we finally noticed that it wasn’t. It’s largely been forgotten given the wreckage that followed, and that’s too bad: we may be repeating those mistakes, on a far larger scale.

Specifically, as the largest Wall Street banks return to profitability—in some cases, breaking records—they say everything is rosy. They’re lining up to pay back their TARP money and asking Washington to back off. But why are they doing so well? Remember that Enron got away with their illegalities so long because their financials were so complicated that not even the analysts paid to monitor the Houston-based trading giant could cogently explain how they were making so much money.

After two weeks sifting through over one thousand pages of SEC filings for the largest banks, I have the same concerns. While Washington ponders what to do, or not do, about reforming Wall Street, the nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.

I was trying to answer the simple question that you'd think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk? Only, there's no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren’t easy to answer.

Goldman Sachs and Morgan Stanley, for example, altered their year-end reporting dates, orphaning the month of December, thus making comparison to past quarterly statements more difficult. In the cases of Bank of America, Citigroup and Wells Fargo, the preferred tactic is re-classification and opaqueness. These moves make it virtually impossible to get an accurate, or consistent picture of banks ‘real money’ (from commercial or customer services) vs. their ‘play money’ (used for trading purposes, and most risky to the overall financial system, particularly since much of the required trading capital was federally subsidized).

Trading profitability, albeit inconsistent and volatile, is the quickest way back to the illusion of financial health, as these banks continue to take hits from their consumer-oriented businesses. But, appearance doesn’t equal stability, or necessarily, reality. Here’s how BofA, Citi and Wells Fargo play the game:

Bank of America: The firm reclassified its filing categories upon acquiring Merrill Lynch, but it doesn't break down the trading vs. investment banking revenues of Merrill. This either means the firm doesn’t truly know what's going on inside its new problem child, or doesn’t want to tell. (No wonder no one’s jumping for the upcoming CEO vacancy.) That said, despite the obvious information clouding, new acquisitions generally don’t have their activities broken out, which makes it a lot harder for regulators, shareholders, or we, taxpaying subsidizers, to know whether the merger was a success or not.

According to Scott Silvestri, Bank of America’s spokesman, “On our second quarter's earnings release, there was a note explaining why we changed reporting structure. But, with every quarter that passes, it's harder to unscramble the egg. It's been a merged entity since January 1, 2009.”

He added that “we have an earnings supplement. Every quarter, we put out a standalone Merrill 10-Q that shows its profitability.” True, but what’s the point of issuing a separate Merrill report, without delineating Merrill’s contribution in its main books so that you can clearly see how specific parts of Merrill’s business impact similar ones in the merged entity? Furthermore, we can’t even figure this out ourselves—the Merrill results in the 10-Q don’t map directly to those of BofA’s books. This all just creates more complexities for a bank that still floats on $63.1 billion in various government subsidies.

When it wants to, it appears that BofA can merge and then break out Merrill’s numbers. Under the "Global Wealth & Investment Management ” classification, we discover that Merrill contributed three-quarters of the $12 billion BofA took in over the first nine months of 2009. According to Silvestri, “The numbers of the old Merrill are there because the brand name was kept, vestiges of the old Merrill Lynch exist.”

Talk about semantics. Why not also break out the area where revenues tripled and trading account profits jumped significantly (from a $6 billion loss in 2008 to an almost $14 billion gain in 2009)? Something is clearly going on there: the best measure of trading risk, VaR (“value at risk” or a firm’s daily trading variation) doubled between 2008 and 2009. If I was the CEO, I’d want to see this critical comparison on my merged company filing.

Elsewhere, the sum of Bank of America’s quarterly figures doesn’t quite add up to the nine months totals. (A few hundred million of discrepancies between friends.) Another item "all other" is off by nearly a quarter of a billion dollars. And so on. The firm also declared, that it “may periodically reclassify business segment results based on modifications to its management reporting methodologies and changes in organizational alignment." In other words, whenever it feels like it. Comforting, isn’t it?

Citigroup: Another balance-sheet renovation, this time because of a sale (Smith Barney, which it offloaded to Morgan Stanley) rather than a purchase, and another trading miracle. Citigroup’s main trading arm, housed in what it calls the Institutional Clients Group (ICG), made $31.5 billion in net revenue for 2009, compared with a $7.8 billion loss in 2008. Its average daily value at risk jumped too, though “only” by 15 percent or so.

That’s a huge and extremely fast trading rebound for the main recipient of government subsidies (at $373.7 billion). But, there is no overall breakdown present in the summaries of Citigroup’s latest filings. And the sum of the trading totals doesn’t equal the parts, because the firm also noted that certain numbers deemed an “integral part of profitability” weren’t included in those computations, without giving any apparent reason. (After adding the missing number, it still didn’t add up.)

Again, it’s “just” a couple billion of discrepancies, but with books this massive at banks this big and risky, accuracy matters. Plus, such nuances make it extremely difficult to understand its books for regulators or the public.

Citigroup's Danielle Romero-Apsilos said that they periodically change reporting. "ICG existed, but after Smith Barney's joint venture with Morgan Stanley, we moved the private bank into the securities and banking reporting line in the ICG."

That describes the chain of events, but doesn’t get closer to determining trading related revenue. Romero-Apsilos said, “We don’t break up the financials specifically for those businesses. Over the years, we may have broken out different things."

Wells Fargo: Yet more innovative accounting maneuvers. For example, the innocuous sounding category, “wholesale banking” which provides traditional lending, finance and asset management services, was expanded (following the Wachovia acquisition that completed on December 31, 2008) to include more speculative activities like fixed-income and equity trading. But, those activities aren’t broken down in the firm’s SEC filing, making it difficult to determine which portion comes from trading vs. commercial or investment banking.

Wells Fargo spokesperson, Mary Eshet (who still has a Wachovia email address) confirmed there is no separate Wachovia 10-Q (like there is for Merrill Lynch), but that it wasn't the case that "Wells Fargo broke out trading related revenue previously either."

In fact, Wells just provides totals for their four main business segments, each of which increased sharply. Community banking rose from $33 billion in 2008 to an annualized $59 billion in 2009. Wholesale banking shot up from $8.2 billion in 2008 to $20 billion in annualized 2009. And, wealth, brokerage and retirement quadrupled from $2.7 billion in 2008 to $11.6 annualized for 2009. (The fourth segment is called ‘other.’) Yet, all these rosy numbers come with no specific breakdowns for their various trading business areas.

Separately, Wells states in its filing that its management accounting process is “dynamic” and, not “necessarily comparable with similar information for other financial services companies.” This statement should give lawmakers pause: if banks are so complex as to constantly fluctuate their own reporting, deciphering figures just before a crisis won’t exactly be a walk in the park.

With taxpayers now on the hook, we need an objective, consistent evaluation of bank balance sheets complete with probing questions about trading and speculative revenues, allowing for comparisons across the banking industry. This lack of transparency leaves room to misrepresent risk and trading revenue.

The long-term solution is bringing back Glass-Steagall. Being big doesn’t just risk bringing down a financial system—it means you can also more easily hide things. Remember the lesson from the Enron saga: when things look too good to be true, they usually are.

thedailybeast.com

Lessons Unlearned

2009-12-02T10:09:00.001-05:00

Fears grow about overheated US debt market
By Henny Sender in New York

Published: December 1 2009 22:00 Last updated: December 1 2009 22:00

Some of the most controversial financing practices of the credit-bubble years – from cov lite loans to Pik toggle notes and dividend recap exercises – have returned to Wall Street, stoking fears that debt markets are growing overheated.

The techniques fell into disrepute during the financial crisis because they were based to varying degrees on the same rosy expectations that encouraged companies and consumers to assume what proved to be crippling levels of debt.

In a cov light – short for covenant light – loan, borrowers are granted credit with few, if any, conditions.

Pik toggle transactions make it possible for debt to be repaid with more debt – payment-in-kind notes. In a dividend recap, companies take on additional debt to pay dividends to their owners.

The reappearance of such instruments in recent weeks has stirred concerns that government efforts to stimulate lending are having unintended consequences, encouraging lenders to take positions based on “best-of-all-possible-worlds” assumptions.

“We have had a huge rally in debt,” said Dino Kos, a former New York Federal Reserve Bank official and now a managing director of Portales Partners, a research boutique. “Everything needs to be just right for that rally to be validated.”

The return of cov lites was highlighted last month when Pinnacle Foods, owned by Blackstone, took on $900m of such debt to help finance its $1.3bn purchase of Birds Eye Foods.

Days before, Wall Street witnessed the first Pik toggle deal since the crisis – a $250m financing for JohnsonDiversey, a cleaning services company.

Meanwhile, several dividend-recap attempts have been mounted, including one involving the Booz Allen Hamilton consultancy, which is arranging $350m in loans that is likely to help pay a $550m dividend to Carlyle, its private equity owner.

Carlyle said that after the proposed dividend, Booz Allen would have less leverage than when Carlyle bought it.

Tops Friendly Markets, a grocery chain, was using about a third of a $300m bond to pay a dividend to its owners, Morgan Stanley Private Equity, a Morgan Stanley executive said.

Goodman Global, a maker of heating and cooling systems, has approached lenders seeking permission to use older borrowings to pay its owners – including Hellman & Friedman – a $115m dividend, according to the Standard & Poor’s leveraged commentary and data division.

Fed policymakers have signalled their concerns about the impact of low rates on market practices.

In the minutes of its November meeting, the Federal Open Market Committee noted “the possibility that some negative side effects might result from the maintenance of very low short-term interest rates including the possibility of excessive risk-taking”.

ft.com

Credit Market Thoughts

2009-12-01T19:25:00.007-05:00

Thinking much about the credit markets lately as news crossed regarding MF Global pulling their $250 million deal today. Deals not getting done have been somewhat of a rarity this year. In fact, the only major failure that comes to mind since risk was cool again was GM minutes before their bankruptcy.

Issuance has been huge this year as the article below details, in both investment grade and junk credits.

Since the Fed is not buying corporates (yet), someone has to be buying them. The flow of funds into bond mutual funds has also been historic this year as seen in the chart below courtesy of Gluskin Sheff's David Rosenberg:

High-Grade Bond Sales Approach $1 Tln, A Milestone And Record

By Kellie Geressy-Nilsen
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Companies eager to fix their balance sheets and
refinance old debts at today's low interest rates will sell more than $1
trillion of investment-grade bonds this year, Bank of America Research said
Tuesday. That is a milestone and a record.

Issuers have already sold $979 billion of bonds so far this year, exceeding the previous annual record of $960 billion set in 2007. Bank of America said that companies will sell another $40 billion in fresh debt this month. "We expect issuance of $15 billion this week and the next before volumes taper off for the holidays," analysts said in a report.

The bonanza isn't limited to the most creditworthy companies. Issuers with lower debt ratings have also been busy, selling $131 billion of high-yield, or "junk," bonds so far this year, according to data provider Dealogic. That is almost three times the $47.7 billion issued in all of 2008, though still shy of the record $143.5 billion in 2006.

Bond buyers looking for adequate payoffs on their investments are behind the huge amount of supply, said Bill Larkin, portfolio manager of Cabot Money Management. "If you bought a safe asset, there wasn't any return," he said, referring to government- backed bonds. With yields on Treasury securities barely above zero, corporate bonds offer investors good value, spurring demand.

Historically, issuance across credit markets slows in the period after the U.S. Thanksgiving holiday and through the beginning of January. "Many people have folded the tents and headed home," said Scott MacDonald, senior managing director of research at Aladdin Capital Management.

Still, relatively low interest rates and no shortage of buyers continue to present borrowers with opportunities, and many may take advantage of that during an otherwise quiet period.

On Tuesday, for instance, Xerox Corp. (XRX) said it would be offering a benchmark-sized three-part bond issue. The debt is rated Baa2 by Moody's Investors Service and BBB by Standard & Poor's and will include 5-, 10- and 30-year tranches.

This chart is what has really piqued my interest today, it is the ratio of the SPDR Lehman High Yield Bond ETF (JNK) divided by the iShares Investment Grade Corporate Bond ETF (LQD). Outperformance of JNK over LQD has correlated strongly with equity market performance as seen in the chart underneath.

You may just want to keep an eye on that ratio chart. With the average High Yield bond fund being up 42.7% year to date, next year embracing risk in the fixed income space may end up being so 2009....

Hubris is Missing from 85 Broad

2009-11-25T13:22:00.003-05:00

Global Insight: Goldman’s claims to genius
By Chrystia Freeland

Published: November 24 2009 19:23 Last updated: November 24 2009 19:23

Ayn Rand’s most famous acolyte in US public life is Alan Greenspan, the former chairman of the Federal Reserve, but I am beginning to think she must have a lot of readers at 85 Broad Street, the headquarters of Goldman Sachs. That is the best explanation I have hit on for why the leaders of the smartest investment bank on Wall Street – they were not only better positioned than anyone else before the crash, they have made the most spectacular recovery in its aftermath – are taking such a beating in the court of public opinion.

You cannot accuse Goldman of not trying to improve its image. Or, if you happen to work there, you cannot brush off the bank’s poor reputation among the public by pretending Goldman does not care. Lloyd Blankfein, the chief executive, and other Goldman executives, submitted to lengthy questioning by Britain’s Sunday Times and talked to Vanity Fair for a piece that will appear in next month’s issue.

Goldman has been giving away money in cleverly conceived ways, designed for maximum effect: both the 10,000 women programme, launched last year, and this month’s 10,000 small businesses initiative. And Mr Blankfein has gone further than most of his Wall Street brethren in taking responsibility for the financial crisis, including his mea culpa last week.

Yet none of it seems to stick. Instead of remembering Mr Blankfein’s admission that Goldman had “participated in things that were clearly wrong and have reason to regret”, the only line anyone seems to recall is Mr Blankfein’s unfortunate jest about doing “God’s work”.

The apologies, the donations, the new enthusiasm for the word “humble” in Goldman’s communications with the outside world – none of them is working because they cannot disguise the implicitly Randian world view of today’s Goldman Sachs.

A former partner summed up this philosophy to me by recounting a conversation with a young executive whose job it is to manage his personal account with the firm.

“It turns out we didn’t really need the government’s money after all!” the young Goldman Sachs enthusiast told his older client.

In this version of history, the patriots at Goldman Sachs accepted the money thrust upon them by Hank Paulson, their own former chief executive, only to provide cover for the weaker Wall Street firms, which would have been stigmatised had the bail-out been more selective.

The same sentiment lurked behind the assertions of Gary Cohn, Goldman’s president, who this summer insisted “we did not have a near-death experience”.

The view that Goldman did not really need Uncle Sam’s billions last year is echoed today by the conviction that Goldman’s swift return to hyper-profitability is due entirely to the genius of its traders, risk-managers and risk-management culture.

If you buy this vision of Goldman as a meritocratic tribe of Randian supermen, you can understand the frustration at 85 Broad: they have apologised for participating in the subprime madness and given away hundreds of millions of dollars of their own money.

The rest of America should actually be delighted by the size of Goldman’s bonus pool, one partner told me – after all, some of it will flow back to the Treasury in taxes.

The problem with the Atlas Shrugged version of Goldman’s success is that it ignores the ways in which Goldman depended – and continues to depend – on the state’s largesse.

Goldman would not exist without Washington’s rescue of Wall Street. No matter how brilliantly hedged it might have been, it could not have survived a systemic collapse.

Today, Goldman continues to benefit from government support: both from the explicit state-backed financial safety net all the Wall Street firms can rely on, and from access to state-underwritten funding.

In Atlas Shrugged, the supermen, led by John Galt, tired of supporting the parasitic underclass, retreat to Galt’s Gulch, their free-market nirvana – and the rest of the country collapses once their efforts are withdrawn.

But there is no Galt’s Gulch for Goldman: it is critically dependent on the US and global financial systems for its prosperity. Until the American people are convinced Goldman Sachs understands that, the John Galts of 85 Broad Street will be in for a rough ride.

ft.com

Last to Notice???

2009-11-25T09:31:00.002-05:00

Fed sees risks in low rates policy

From: FT.com

By Sarah O’Connor in Washington
Published: November 24 2009 21:23 | Last updated: November 24 2009 23:20

Federal Reserve officials have expressed concerns that near-zero interest rates could fuel “excessive risk-taking in financial markets” but believe the possibility of such an outcome is “relatively low”, minutes from its November meeting show.

Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates “exceptionally low” for an “extended period” could be laying the groundwork for a new speculative bubble.

The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials “noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period”.
The minutes said: “While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks."

Read the rest here

Quotable

2009-11-24T14:46:00.002-05:00

"The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth." - H. L. Mencken.

FDIC Quarterly Banking Profile Report

2009-11-24T12:26:00.003-05:00

A must read here.

Some notes...

REO +65.5% YoY
Non-current loans and leases +95.7% YoY
Restructured loans & leases +138% YoY
Notional amount of derivatives +16.5% YoY
Net Operating Income -62.2% YoY

Percent unprofitable institutions clearly favor the smaller banks as only 25.65% of institutions of less than $100 million in assets were unprofitable while 40.18% of institutions over $10 billion in assets were in the red. In total, 26.55% of the industry was unprofitable.

Deposit Insurance Fund (DIF) balance is at negative $8.2 billion.

FDIC's "Problem List" rose to 552 institutions from 416 last quarter with total assets of those problem banks of $345.9 billion. Both are at the highest level since 1993.

Do I Look Like Mrs. Obama?

2009-11-23T15:56:00.000-05:00