Thursday, December 31, 2009
The Center does Not Hold...
But Neither Does the Floor
There are always disagreements in a society, differences of opinion, and contested ideas, but I don't remember any period in my own longish life, even the Vietnam uproar, when the collective sense of purpose, intent, and self-confidence was so muddled in this country, so detached from reality. Obviously, in saying this I'm assuming that I have some reliable notion of what's real. I admit the possibility that I'm as mistaken as anyone else. But for the purpose of this exercise I'll ask you to regard me as a reliable narrator. Forecasting is a nasty job, usually thankless, often disappointing - but somebody's got to do it. There are so many variables in motion, and so much of that motion is driven by randomness, and the best one can do in forecasting amounts to offering up some guesses for whatever they are worth.
I begin by restating my central theme of recent months: that we're doing a poor job of constructing a coherent consensus about what is happening to us and what we are going to do about it.
There is a great clamor for "solutions" out there. I've noticed that what's being clamored for is a set of rescue remedies - miracles even - that will allow us to keep living exactly the way we're accustomed to in the USA, with all the trappings of comfort and convenience now taken as entitlements. I don't believe that this will be remotely possible, so I avoid the term "solutions" entirely and suggest that we speak instead of "intelligent responses" to our changing circumstances. This implies that our well-being depends on our own behavior and the choices that we make, not on the lucky arrival of just-in-time miracles. It is an active stance, not a passive one. What will we do?
The great muddlement out there, this inability to form a coherent consensus about what's happening, is especially frightening when, as is the case today, even the intelligent elites appear clueless or patently dishonest, in any case unreliable, in their relations with reality. President Obama, for instance - a charming, articulate man, with a winning smile, pectorals like Kansas City strip steaks, and a mandate for "change" - who speaks incessantly and implausibly of "the recovery" when all the economic vital signs tell a different story except for some obviously manipulated stock market indexes. You hear this enough times and you can't help but regard it as lying, and even if it is lying ostensibly for the good of the nation, it is still lying about what is actually going on and does much harm to the project of building a coherent consensus. I submit that we would benefit more if we acknowledged what is really happening to us because only that will allow us to respond intelligently. What prior state does Mr. Obama suppose we're recovering to? A Potemkin housing boom and an endless credit card spending orgy? The lying spreads downward from the White House and broadly across the fruited plain and the corporate office landscape and through the campuses and the editorial floors and the suites of absolutely everyone in charge of everything until all leadership in every field of endeavor has been given permission to speak untruth and to reinforce each others lies and illusions.
How dysfunctional is our nation? These days, we lie to ourselves perhaps as badly the Soviets did, and in a worse way, because where information is concerned we really are a freer people than they were, so our failure is far less excusable, far more disgraceful. That you are reading this blog is proof that we still enjoy free speech in this country, whatever state of captivity or foolishness the so-called "mainstream media" may be in. By submitting to lies and illusions, therefore, we are discrediting the idea that freedom of speech and action has any value. How dangerous is that?
Where We Are Now
Tuesday, December 29, 2009
Alternatively, as someone suggested, the Treasuries may never have been issued in the first place, and the entire thing may be an empty charade aimed solely at keeping up the appearance of a functioning US sovereign debt market.
This possibility, which Sprott failed to mention, opens up whole new vistas, and would certainly lend a lot more credence to the idea that US finance policy, as designed and engineered by the Treasury Department and the Federal Reserve, is indeed nothing but the giant Ponzi scheme Sprott suspects it may be.
The Tyler Durden collective at ZeroHedge takes Sprott’s suspicions a step or two further, one might say, in a little directive called "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else".
Durden looks at what the net issuance of US fixed income has been in 2009, after you subtract the part purchased by the Fed (which is after all not a real purchase, but just money going from one's left pocket to the right one, I’ve used the metaphor numerous times in relation to US financial policies).
What Tyler Durden then finds is that net US$ denominated fixed income issuance was only $200 billion this year. For 2010, though, since the Fed is set to leave the scene stage left along with Quantitative Easing sometime early spring, over $2.06 trillion will have to be sold to parties other than the Fed.
continue reading Eyes Wide Open And Pedal To The Metal…
Sunday, December 27, 2009
Dead Men Walking
Why 2009's truly top thinkers are yesterday's news.
BY NIALL FERGUSON | DECEMBER 2009
There is nothing like a really big economic crisis to separate the Cassandras from the Panglosses, the horsemen of the apocalypse from the Kool-Aid-swigging optimists. No, the last year has shown that all is not for the best in the best of all possible worlds. On the contrary, we might be doomed.
At such times, we do well to remember that most of today’s public intellectuals are mere dwarves, standing on the shoulders of giants. So, if they had e-mail in the hereafter, which of the great thinkers of the past would be entitled to send us a message with the subject line: "I told you so"? And which would prefer to remain offline?
It has, for example, been a bad year for Adam Smith (1723-1790) and his "invisible hand," which was supposed to steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets. By contrast, it has been a good year for Karl Marx (1818-1883), who always maintained that the internal contradictions of capitalism, and particularly its tendency to increase the inequality of the distribution of wealth, would lead to crisis and finally collapse. A special mention is also due to early 20th-century Marxist theorist Rudolf Hilferding (1877-1941), whose Das Finanzkapital foresaw the rise of giant "too big to fail" financial institutions.
Joining Smith in embarrassed silence, you might think, is Friedrich von Hayek (1899-1992), who warned back in 1944 that the welfare state would lead the West down the "road to serfdom." With a government-mandated expansion of health insurance likely to be enacted in the United States, Hayek's libertarian fears appear to have receded, at least in the Democratic Party. It has been a bumper year, on the other hand, for Hayek's old enemy, John Maynard Keynes (1883-1946), whose 1936 work The General Theory of Employment, Interest and Money has become the new bible for finance ministers seeking to reduce unemployment by means of fiscal stimuli. His biographer, Robert Skidelsky, has hailed the "return of the master." Keynes's self-appointed representative on Earth, New York Times columnist Paul Krugman, insists that the application of Keynesian theory, in the form of giant government deficits, has saved the world from a second Great Depression.
Saturday, December 26, 2009
anyone who wants my weekly emailing of selected and leftover links from this post, contact me....
Thursday, December 24, 2009
|The Daily Show With Jon Stewart||Mon - Thurs 11p / 10c|
|Home Crisis Investigation|
You Can't Make This Stuff Up
from the Time Magazine Person of the Year extended interview with Ben Bernanke:
I: What's your interest rate?
B: That I'm earning?
I: No, on your house. Do you have a mortgage?
B: Oh, yes, we refinanced.
I: Oh, perfect. When?
B: About 5%. A couple of months ago.
I: Good time.
B: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."
inspires confidence, doesnt it?
Monday, December 21, 2009
Saturday, December 19, 2009
anyone who wants my weekly emailing of selected and leftover links from this post, contact me....
Friday, December 18, 2009
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
|The Word - The Green Mile|
I've heard it said that laughter is an interupted defense mechanism. Perhaps this wouldn't be so funny but for the fact that's it's also so true.
Thursday, December 17, 2009
While posting breathtaking profits in the last two quarters – Wells Fargo’s $3.2 billion, Citigroup’s $3 billion and Chase’s $2.7 billion – U.S. banks have figured out a way to squeeze some extra dollars from those who can least afford it, the unemployed.
Here’s how it works. In the past two years, states have been overwhelmed with unemployment claims. Always eager to serve, America’s banks offered a deal the states couldn’t refuse.
Sign a contract — which won’t cost you a dime — and send us your weekly unemployment funds, the banks said. In return, we’ll issue our VISA or MasterCard debit cards to your laid-off workers, on which we’ll post their benefits electronically.
Thirty states signed on with the usual suspects — Citi, Wells Fargo, JPMorgan Chase, Bank of America — and some smaller ones, too. More states are lining up.
In a stroke, states dropped all their costs for printing and mailing checks. Andrew James, with North Carolina’s Employment Security Commission, told me that in the past year, his state saved a whopping $10 million. During the same time, Nevada saved $800,000, Maryland $400,000 and West Virginia $340,000.
But if the system is good for the states, it's great for the banks. A February 2009 Associated Press article noted that Missouri’s Central Bank, which won that state’s contract, could reap $6.3 million this year alone.
The banks profit from interest earned on the funds the states deposit with them until the money is posted onto the debit cards. Then there’s the money the banks get from retailers where the unemployed shop with their cards — from 2 percent to 3 percent per transaction.
But such sums are not large enough, it seems. So the banks have figured how to extract more money from the millions of unemployed now using the debit cards. The devil’s in the fees.
it gets worse: continue reading about How Banks Fleece the Unemployed...
Wednesday, December 16, 2009
- Profits from the Federal Reserve go to the US Treasury.
- The US Government appoints most of the critical members of the Fed’s governing board.
- During the crisis, the Fed and Treasury worked hand in glove to achieve their ends.
- The Fed takes actions that an ordinary Central Bank would not. Why bail out Bear Stearns and AIG? Why aid Fannie and Freddie? Why buy mortgage-backed securities? There is no reason for a central bank to own anything but the highest quality securities.
So long as there is slack labor, slack capital, and slack resources, the cheap lending rates to the US government can persist. But in the ’70s resources were not slack, and inflation occurred while there were recessionary conditions. If the global economy is markedly stronger than the US economy, that could be our situation again — stagflation.
Central banks by their nature abhor two risks, credit risk, and lending long. In the present environment, the Fed is doing both. Bagehot said to lend against impeccable capital at a penalty rate. In the current crisis, the Fed, far from being independent, is absorbing credit risk, and lending long risk, and is doing so without abnormal compensation, indeed the compensation is sometimes subpar.
My sense is that when the Fed stops its purchases of mortgage bonds in the next few months, the longer-dated debt markets will cease to be so friendly, and rates will rise. That is what should be happening. It is risky to lend for long periods in US Dollar terms, and those that do so should be amply rewarded.
There are many who are arguing that the US should borrow more and spend with abandon. They are fools; fools believe that the government can create prosperity through legislative or regulatory actions. As it is, the creditworthiness of our government declines as we use its credit to bail out private interests.
We might not be as bad off as Greece, but what assurance do creditors of the US have that they will be repaid in purchasing power similar to that which they lent? I don’t see the assurance. Better to invest in the debt of non-PIIGS euro-debt. [PIIGS -- Portugal, Ireland, Italy, Greece and Spain]
There is a lot of stress in the global economy as it attempts to reconcile economies that must export, no matter what, with those that must run deficits, no matter what. The exporters take in debt from the nations that borrow in order to make books balance. I don’t know when that system will break, but it will break, delivering losses to the exporters, much as that happened in the era of mercantilism.
That said, when the exporters lose, so will the countries that relied on the cheap financing, including the US. Interest rates will be higher, and the US economy will be that much weaker, aside from exporters benefiting from a weaker dollar. This may not take place for years, but it will eventually happen.
In other words, the cheap finance that the US has will eventually fail. I don’t know when that will be, but eventually the world will tire of handing over goods for promises.
...from the Aleph Blog
Monday, December 14, 2009
A weekly column
The Fed's Money Monopoly
Last week, in the name of protecting the little guy from Wall Street, the House passed HR 4173 to increase the little guy’s false sense of security in the financial system. This mammoth piece of legislation would massively increase government regulation and oversight in the banking industry under the misguided reasoning that more government could have stopped faulty lending practices, when in actuality it caused them. This bill would also greatly increase the powers of the Federal Reserve, which too many in Congress still see as savior rather than perpetrator in this mess.
Posted by Ron Paul (12-14-2009, 12:14 PM) filed under Monetary Policy
Sunday, December 13, 2009
Who Owns America's Debt - A Dynamic Perspective on Major Foreign Holders of Treasury Securities (2002-Present) from Michael J Bommarito II on Vimeo.
Three Things to Notice
(1) China Passes Japan — This dynamic visual demonstrates how in the fall of 2008 China surpassed Japan as the top foreign holder of U.S. Debt.
(2) The Rise of Russia – Notice how Russia becomes a significant holder of U.S. Debt between late-2006 and mid-2007.
(3) The Increasing Amount of U.S. Debt Held Abroad — The pie chart is sized by the total debt held by the current top ten debt holders. As a function of U.S. expenditures over the relevant time period, this pie grows in nearly every time period. In the bottom right corner, we track the total debts held by the current top debt holders. Of course, this alone does not represent the complete picture as there is additional U.S. debt held by a variety of other other countries. Therefore, we also track the grand total of all debts held abroad in the bottom right corner of the visual.
Dynamic Perspective on the Increasing Amount of American Debt Held Abroad
Focusing upon the ”Major Foreign Holders of Treasury Securities,” we were interested in considering how today’s major debt holders acquired their top position. The data used the generate the visual above is drawn from United States Department of Treasury. For those interested in replicating our results, the current data is located here and the historical data is located here.
related post: A Decade of Debt — The American Dream and the Road to Riches?
Worse yet, foreclosures on large rental-unit buildings are also on the rise. This means, reports Robin Shulman of the Washington Post, that not just homeowners but renters are now being swept up in the housing crisis as landlords of apartment buildings in trouble let upkeep go while maintenance problems soar. Nor are the latest figures on home prices offering much cheer. Two key price indexes released last week, write David Streitfeld and Javier Hernandez of the New York Times, “indicated that the momentum the housing market showed over the late spring and summer is faltering.”
There was, however, a rare ray of good news amid this dismal scene: Wall Street has, according to Louise Story of the Times, figured out how to make money from the mortgage mess by “buying billions of dollars’ worth of home loans, discounted from the loans’ original value” and pocketing profits while shifting “nearly all the risk for the loans to the federal government -- and ultimately taxpayers.”
With this grim picture in mind and with California one of four Sunbelt states that account for 43% of all foreclosures started in recent months, we sent TomDispatch regular Andy Kroll to the Ground Zero of the mortgage crisis to see what an economic “recovery” looks like firsthand in post-meltdown America.
continue reading The Illusion of Recovery...
Saturday, December 12, 2009
anyone who wants my weekly emailing of selected and leftover links from this post, contact me....
Friday, December 11, 2009
The old legend of the Holy Grail has a plot twist that’s oddly relevant to the predicament of industrial civilization. A knight who went searching for the Grail, so the story has it, if he was brave and pure, would sooner or later reach an isolated castle in the midst of the desolate Waste Land. There the Grail could be found and the Waste Land made green again, but only if the knight asked the right question. Failing that, he would wake the next morning in a deserted castle, which would vanish behind him as soon as he left, and it might take years of searching to find the castle again.
As we approach the twilight of the age of cheap energy, we’re arguably in a similar situation. It seems to me that a great deal of the confusion that grips the peak oil scene, and even more of the blind commitment to catastrophically misguided policies that reigns outside peak-aware circles, comes from a failure to ask the right questions. A great many people aware of the limits to fossil fuels, for example, have assumed that the question that needs answering is how to sustain a modern industrial society on alternative energy.
Ask that, though, and you’re back in the Waste Land, because any answer you give to that question is wrong. The question that has to be asked is whether a modern industrial society can exist at all without vast and rising inputs of essentially free energy, of the sort only available on this planet from fossil fuels, and the answer is no. Once that’s grasped, other useful questions come to mind – for example, how much of the useful legacy of the last three centuries can be saved, and how – but until you get past the wrong question, you’re stuck chasing the mirage of a replacement for oil that didn’t take a hundred million years or so to come into being.
continue reading The Human Ecology of Collapse...
Thursday, December 10, 2009
An army of lobbyists from banks and Wall Street have worked for months to block, water down and delay the bill, which would threaten the profits of many financial services firms. Reformers have reduced their goals since earlier this year, abandoning a wholesale reorganization of existing regulatory agencies as too politically difficult, for instance.
Mike Konczal, author of the Rortybomb blog, has found one thing those lobbyists have been up to:
“Have lobbyists snuck another major loophole into the OTC Derivatives bill? This week the final touches are being put on Barney Frank’s financial regulation bill – H.R. 4173 – “Wall Street Reform and Consumer Protection Act of 2009.” One of the centerpieces of this reform is Title III: Over-the-Counter Derivatives Markets Act. And one of the goals of this reform would be to get as many derivatives as possible to trade on exchanges.
An initial hurdle for Barney Frank was what to do with an “end-user exemption.” This would exempt certain types of derivative buyers who use derivatives, say corporations hedging interest rate risk without speculating, from the extra scrutiny and regulation that comes with the exchange/clearing system. One of the narratives of financial reform so far has been that this initial end-user exemption was too large a loophole at first, and instead of just handling 10-20% of the market, it would let a large majority of the market sneak through, but ultimately Barney Frank was convinced by consumer groups and people pushing for stronger financial regulation and fixed this issue. See Noah Scheiber here in “Could Wall Street Actually Lose in Congress?” for this story, and it shows up as well in a recent profile of Barney Frank in Newsweek.
I thought it was a little too early to declare victory, and sure enough instead of attacking and weakening how people will have to use the exchanges, lobbyists have re-focused their attack on the idea of the exchange itself. For a while, reformers have been worried about an “alternative swap execution facility.” This would be a way of essentially allowing the current way things are done to be allowed to count as an exchange. Fighting off this loophole was a battle from a month ago, and it had appeared to be won. Now many are worried that this language appears to have snuck back into the final bill now.
Colin Peterson (D-MN), Chairman of the House Committee on Agriculture, along with Barney Frank, has added an amendment to the OTC Bill (opens large pdf). There are two relevant sentences for reformers from the long document. The first is on page 32:
(49) SWAP EXECUTION FACILITY.—The term ‘swap execution facility’ means a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.This replaces other language in the original bill (opens even larger pdf), on page 546:
SEC. 5h. SWAP EXECUTION FACILITIES.So notice any differences? First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms. So now we are moving from the definition of something that is a platform for swaps to be traded on to instead something that simply helps swaps get traded. This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?). Instead of changing the way business is done for reform it looks like it redefines reform as the way things are currently done, and just calls it a victory.
(A) No person may operate a swap execution facility unless the facility is registered under this section.
(B) The term ‘swap execution facility’ means an entity that facilitates the execution of swaps between two persons through any means of interstate commerce but which is not a designated contract market.
Now on page 89 of the amendment:
(2) RULES FOR TRADING THROUGH THE FACILITY.—Not later than 1 year after the date of the enactment of the Derivative Markets transparency and Accountability Act of 2009, the Commission shall adopt rules to allow a swap to be traded through the facilities of a designated contract market or a swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a swap, notwithstanding section 2(k), if the swap is executed, reported, recorded, or confirmed in accordance with the rules of the designated contract market or swap execution facility.The second sentence here allows an intermediary to execute a swap, ignoring the section 2(k) which is the meat of the reform, as long as the swap is recorded somewhere. Now we already have, from above, that a swap execution facility can be something other than the exchange. This is a rule that guts the regulation right out the door, and for no apparent benefit to reform. Many of these alternative swap facilities will be owned by the banks, so it won’t necessarily force the price transparency that has been promised. To trust regulators to simply do the right thing is naive at best when the ability to follow fixed rules is available.
From what I’m hearing, it is possible Frank doesn’t even know that this language, once in the bill as an amendment but removed, has snuck back into his reform legislation. Things are moving very quickly on the hill right now, and this is scheduled to be wrapped up by tomorrow. However this new language runs counter to the reforms Frank has promised to deliver to the American people. Either this language needs to be clarified before the bill is complete, or removed entirely.”
(the above from a guest post on The Baseline Scenario)
Tuesday, December 8, 2009
Jobs Crisis Fact Sheet - Economic Policy Institute
View in printer-friendly PDF format
(Note that all numbers are current as of December 4, 2009. States numbers are current as of November 20, 2009.)
The jobs crisis
- Number unemployed: 15.4 million (up from 7.5 million in December 2007)
- Portion of unemployed who have been jobless more than six months: 38.3%
- Total jobs lost during the recession: 8.0 million
- Jobs lost in November, 2009: 11,000
- Jobs needed to return to pre-recession unemployment rate: 10.9 million
- Number of jobseekers per job opening: 6.1
- Unemployment rate: 10.0%
- States with double-digit unemployment in October, 2009: 15
- White unemployment: 9.3%; black unemployment: 15.6%; Hispanic unemployment: 12.7%
- Manufacturing jobs lost since the start of the recession: 2.1 million (15.5% of sector’s jobs)
- Construction jobs lost in the recession: 1.6 million (20.8%, nearly one in five construction jobs)
- Mass layoffs (50 or more people by a single employer) in October 2009: 2,127; jobs lost: 217,182
- Underemployment rate: 17.2%; Share of workers un- or underemployed: more than 1 in 6
- Under- and unemployed, marginally attached and involuntary part-time workers: 26.9 million
Hardships and the safety net
- Americans with no health insurance in 2008: 46.3 million
- Drop in children covered through parents’ employers, 2000 to 2007: 3.4 million
- Annual Social Security benefit for average retiree: $13,922; Share of older Americans receiving all their income from Social Security: more than 1 out of 4
- Number of children in poverty in 2008: 14.1 million (over one-third)
- Drop in real median income from 2007 to 2008: 3.6% (largest one-year drop since 1967)
- Growth rate of nominal, hourly wages of production workers over the last three months: 1.7%
- Additional people covered by Medicaid/SCHIP in 2008: 3 million
- Average weekly unemployment benefit in October (including additional $25 per week from the American Recovery and Reinvestment Act): $334
- Number of additional people each week receiving unemployment compensation because of ARRA in October: 3.9 million
- Average monthly cost of COBRA with American Recovery and Reinvestment Act subsidy: $370; Without American Recovery and Reinvestment Act subsidy: $1,057
- Jobs lost since February 2008: 2.7 million ; Jobs likely lost since February 2008 without passage of ARRA: 4.0 to 4.5 million
Sunday, December 6, 2009
Dec. 6 (Bloomberg) -- Kuwait Investment Authority, the nation’s sovereign-wealth fund, sold its stake in Citigroup Inc. for $4.1 billion after helping the U.S. bank boost capital amid the worst financial crisis since the Great Depression.
The fund converted preferred securities of Citigroup that it purchased for $3 billion last year into common shares and sold them, making a profit of $1.1 billion, KIA said in an e- mailed statement today.
The transaction “will be a confidence-booster,” said M.R. Raghu, head of research at Kuwait Financial Center, a Kuwait- based investment bank, in a telephone interview. “It looks to be good news, making a profit in these times.”
Sovereign wealth funds are selling investments in financial stocks as they seek to reduce risk and address domestic criticism over investment priorities. The funds, fueled in part by oil revenue, had become sources of capital around the world for companies including Citigroup and Morgan Stanley, helping them to withstand the credit market seizure that followed the collapse of U.S. subprime mortgages.
Singapore’s Temasek Holdings Pte, KIA and China Investment Corp. are among the sovereign funds that helped U.S. investment banks replenish more than $200 billion of capital. KIA and Temasek owned shares in Merrill Lynch & Co., which was bought by Bank of America in 2008 after the shares slumped 35 percent.
Saudi Arabia’s Prince Alwaleed bin Talal remains a shareholder in New York-based Citigroup, even after an 88 percent drop in its stock price during the past two years. Alwaleed has been among the company’s top shareholders since the early 1990s, when he helped rescue it from near-collapse. He said Dec. 1 that he expects 2010 to be a year of “stabilization” for the bank.
Barclays Plc, Britain’s second-biggest bank, avoided a government bailout in part by selling 5.3 billion pounds ($8.7 billion) of stock and convertible notes to the Qatar and Abu Dhabi sovereign wealth funds. The bank’s Abu Dhabi investors made a profit of 1.46 billion pounds when they sold shares in the lender in June.
Sovereign funds, together valued at about $3.2 trillion, operate as government-owned, special purpose investment vehicles.
Saturday, December 5, 2009
After a brief holiday respite, bank failure Friday came back with a vengeance yesterday. The FDIC and its fellow regulators closed six institutions, bringing the total to 130 for the year. (See our complete list of failed banks  this year.)
By far, the largest institution to go down was Cleveland-based savings and loan AmTrust . It’s the fourth largest bank or thrift to fail this year. As of late October, AmTrust had total deposits of approximately $8 billion. Its demise is expected to cost the FDIC’s deposit fund about $2 billion.
In a geographic departure, New York Community Bank of Westbury, New York entered into an agreement with the FDIC to assume all of AmTrust’s deposits and its 66 branches. Until now, New York Community only had branches in New York and New Jersey.
The Wall Street Journal has a detailed account of AmTrust’s slow demise , including how politicians in Cleveland and Washington interceded with regulators to give the thrift more time, thereby likely increasing the ultimate cost to the FDIC.
Also failing on Friday were three banks in Georgia. The Peach State now leads the country in bank failures, with 24 this year. Among the failures was Buckhead Community Bank , located in a tony suburb of Atlanta. The Atlanta Journal-Constitution describes the bank  as “founded by Atlanta business royalty to cater to a wealthy clientele.” It had total deposits of approximately $838 million. The failure will cost the FDIC’s deposit fund an estimated $241 million.
I have said from the beginning that this is not "the greatest transfer of wealth in history". Rather it is the greatest "CONSOLIDATION OF WEALTH" .And we still have the same Banksters leading this charade that got us into this charade.
Friday, December 4, 2009
Over the last few years, drug-makers have embraced a startlingly simple tactic for fending off competition from generic brands: paying them off. In a nutshell, the company that holds the patent on a profitable drug strikes a deal with the maker of the cheaper generic brand: you hold off on marketing your generic for several years, and in return, we'll give you a share of our profits on the drug.
The vehicle for these deals is patent litigation. When a generic drug is approved to come to market, the maker of the more expensive name-brand drug sues the generic for patent infringement. But instead of a conventional settlement, in which the generic pays the patent-holder to settle the claim that it infringed the patent, the payment goes the other way: the patent-holder pays the maker of the generic, in exchange for a pledge to delay bringing the generic to market. That suggests the patent-holder fears its patent wouldn't hold up in court, as many don't. And it runs counter to the intent of the Hatch-Waxman Act of 1984, which sought to speed the path of generics to market, and to provide a legal framework for these cases.
So common have these deals become lately that they've been given a name: pay-for-delay. The approach -- a textbook anti-competitive tactic -- is worth billions to drug-makers, because it essentially allows them to buy more protection than their patent confers.
Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you. In fact, I was the only Senator to even raise serious concerns about you. I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right. But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.
The Greenspan legacy on monetary policy was breaking from the Taylor Rule to provide easy money, and thus inflate bubbles. Not only did you continue that policy when you took control of the Fed, but you supported every Greenspan rate decision when you were on the Fed earlier this decade. Sometimes you even wanted to go further and provide even more easy money than Chairman Greenspan. As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street. Those purchases, by the way, led to some nice profits for the Wall Street banks and dealers who sold them to you, and the G.S.E. purchases seem to be illegal since the Federal Reserve Act only allows the purchase of securities backed by the government.
for the rest, go to the Bunning Statement On The Re-Nomination Of Ben Bernanke To Be Chairman Of The Federal Reserve...
Thursday, December 3, 2009
[Posted by Karl Denninger in Editorial at 09:25]
This is a riot (well, ok, I might be a week - or a month early on that):
Dec. 1 (Bloomberg) -- “I just wrote my first reference for a gun permit,” said a friend, who
told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied
to the local police for a permit to buy a pistol. The banker had told this friend of mine that
senior Goldman people have loaded up on firearms and are now equipped to defend
themselves if there is a populist uprising against the bank.
Let me give those fine bankers from Goldman Sachs (and the other big banking and trading houses) a few pieces of advice. And yeah, it's unsolicited and free, so you figure out whether it has value.
1. A handgun is a close-quarters defensive weapon. The FBI says that of shootings involving a handgun, most happen at something like 7 feet (yes, feet) of range or less. Oh, and you'd be surprised at how many people miss at that same seven feet. No, guns in real life don't work like in the movies where each bullet has a GPS in it and directs itself to its target, and when shot people don't go flying backward through windows. Guns simply make holes in things, wherever they are pointed when they go "bang" is where the bullet will travel, and all the energy that goes into the target also goes into your body (Newton's laws of motion and all.)
2. There are, by some estimates, more firearms in America than there are people. Americans bought something like 20 billion rounds of ammunition this year alone. Indeed, there are shortages of many sorts of ammunition and have been all year. While some of that lead undoubtedly was expended at the practice range, an awful lot of it is being stockpiled. Everyone who is stockpiling it in various amounts is doing so for different reasons, and most would self-declare it as protection against "zombies." Definitions of "zombie" differ.
3. There are a lot of hunting rifles in America. Most hunters can easily hit a deer-sized target at well beyond 100 yards with said rifle. I'm willing to bet that Mr. Investment Banker can't hit the broadside of a barn at 100yds with his brand new pistol that he's probably never fired, and probably never will.
4. Don't bother with soft body armor. It's useless against rifles. It is effective against pistols, which is why cops wear it (see that FBI stat about most handgun battles happening within seven feet.) But again, a hunter can easily hit a deer-sized target at well beyond 100 yards, common hunting rifles are legal almost literally everywhere, even in places like NYC, and a person armed with a handgun doesn't have a prayer in hell defending against a person with a rifle 100 or more yards away that has drawn a bead on them.
5. Unless you're prepared to practice with that weapon on a regular basis, and unless you have personally been in a life-threatening situation (a real one, not some mock-up or fake "game" run at some "weekend commando" class you were undoubtedly sold to make you feel macho with that shiny new handgun) there is at least a 50% chance that if you really do wind up confronted by some crazed nutball at close range you will either miss or worse, freeze - and the "bad guy" will simply take your gun from you and then kill you with your own weapon. Go ask the military about this - studies have shown that despite putting new soldiers through a grueling "basic training" course a very significant number of them will, when first confronted with an enemy shooting at them, intentionally fire high - that is, they miss on purpose in their first firefight. It turns out that most people have a hard-wired aversion to killing other humans. That's probably a good thing but psychopaths seem to be missing that inhibition. If someone really does come after you they're pretty much by definition one of those psychopaths.
Finally, if you're a "big banker" and concerned about your safety you might want to consider that in the 1800s there were lots of guns too, and yet they were both unnecessary and inadequate. Bankers during the panic of 1873 were simply hauled out of their offices bodily and hung from the lamp posts. We don't have lamp posts any more in Manhattan, so you have an advantage there, and I've not noted a run on boiled rope.
In “Obama’s Big Sellout”, Matt Taibbi argues that President Obama has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway. Rather than keeping his progressive campaign advisers on board, Taibbi says Obama gave key economic positions in the White House to the very people who caused the economic crisis in the first place. Taibbi also points to the ties Obama’s appointees have to one main in particular: Bob Rubin, the former Goldman Sachs co-chairman who served as Treasury secretary under Bill Clinton.
Click above for Taibbi’s video breakdown of his argument in which he identifies the major players on Obama’s economic team, untangles the web that ties them to Rubin and points to how these relationships play into the financial “reforms” the Democrats are currently pushing through Congress. — Rolling Stone
Tuesday, December 1, 2009
The U.S. Preventive Task Force caused quite a stir recently when they revised their recommendations on the frequency and age for women to get mammograms. Many have speculated on the timing for this government-funded report, with the Senate vote on health care looming, and cost estimates being watched closely. Just the hint that the government would risk women’s health to cut costs is causing outrage on both sides of the aisle.
Even the administration is alarmed at its own panel’s recommendation. One official, the Secretary of Health and Human Services, Kathleen Sebelius told women to ignore the new guidelines, keep doing what they are doing and make the best decisions for themselves after consulting with their doctors.
Continue reading article....
Monday, November 30, 2009
The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the US and the shift of economic power from west to east. There is only one effective way for governments to address the combined impact of both: press for a sea change in currency relationships, especially a permanently and greatly weakened dollar.
The roots of this situation are well known. The American budget deficit of this past fiscal year reached 10 per cent of gross domestic product, the largest since the aftermath of the second world war. Meanwhile, the net external debt of the US nearly tripled last year to $3,500bn and it is projected to increase by nearly $1,000bn every year for the next decade. All this underestimates the problems of a country where unfunded liabilities for baby boomer entitlements are in the stratosphere, infrastructure deterioration is scandalous and many large states are out of money. To close the gaps, taxes would have to be raised to sky-high levels and spending brutally slashed. It would take a miracle if America’s political system – one rife with vicious partisanship and riddled with well-financed special interests – could do either, let alone both.
Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out.
There is another factor pushing America towards a weaker dollar: lacking the domestic consumer demand that came with the unrestrained credit of the past 15 years, the US is desperate to find buyers abroad, especially in emerging markets where the middle class is growing and infrastructure requirements are soaring. A cheaper dollar could make US products and services more competitive.
Meanwhile, in the coming decade, the big emerging markets of Asia will be growing twice as fast as the US and three times faster than the European Union. By 2020, China, India, Indonesia, Korea and Vietnam together could generate more wealth than the the US, Japan and the EU combined. China, India, and South Korea have all been amassing dollar reserves and will be looking to reduce them. While imports into leading industrial countries have slowed, intra-Asian trade is booming and need not be financed only in dollars. The bottom line: Asian currencies are likely to strengthen against the dollar.
A much cheaper dollar is a sad development for the US, even though it is inevitable. It will make the US poorer, since Americans will pay higher prices for everything they buy from abroad – clothes, computers, cars, toys, food, you name it. It will make the US military presence abroad more expensive, since the cost of contractors and local suppliers will escalate in dollar terms. It will slow imports, removing competition that is essential to hold down the general price level in America, thereby making inflation more likely. It will send the wrong price signals for a country that prides itself on creating sophisticated, highly valuable products, for a low dollar will encourage producers to compete on price more than quality. It will diminish the political influence and prestige that the US has had while the dollar has been king.
Moreover, the US dollar has been at the heart of the global economy for well over half a century. Its demise, if not smooth and gradual – hardly certain – could lead to an era of competitive devaluations and other mercantilist trade policies.
An alternative to a global monetary system that has been centred on the dollar is now imperative. That means a multi-currency framework including the euro, the yen, the renminbi and significant issuance of an IMF-backed currency called “special drawing rights”. This regime will take time to devise, but it should start now.
That is why Tim Geithner, US Treasury secretary, should invite his colleagues in the UK, eurozone, Japan and China to meet secretly, perhaps between Christmas and New Year, to start discussions out of the public spotlight (to avoid spooking markets). The big question: what kind of monetary system will best serve the world given deep-seated changes in the balance of economic power, and what process can be followed to develop it?
Since the late 1980s I have believed that a strong dollar was in the US and world interest. Now, however, the context has fundamentally changed. The issue is no longer whether the dollar is in long-term decline but which of two options will be taken. Should Washington and other capitals calmly and deliberately manage the transition to a new era, or, by default, should they let the market do it, with the risk of massive financial disturbances. Today, governments have a choice. Soon they may not.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Saturday, November 28, 2009
Dubai was meant to be a Middle-Eastern Shangri-La, a glittering monument to Arab enterprise and western capitalism. But as hard times arrive in the city state that rose from the desert sands, an uglier story is emerging. Johann Hari reports
But something has flickered in Sheikh Mohammed's smile. The ubiquitous cranes have paused on the skyline, as if stuck in time. There are countless buildings half-finished, seemingly abandoned. In the swankiest new constructions – like the vast Atlantis hotel, a giant pink castle built in 1,000 days for $1.5bn on its own artificial island – where rainwater is leaking from the ceilings and the tiles are falling off the roof. This Neverland was built on the Never-Never – and now the cracks are beginning to show. Suddenly it looks less like Manhattan in the sun than Iceland in the desert.
Once the manic burst of building has stopped and the whirlwind has slowed, the secrets of Dubai are slowly seeping out. This is a city built from nothing in just a few wild decades on credit and ecocide, suppression and slavery. Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.
I. An Adult Disneyland
Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. She is slim and angular and has the faded radiance of the once-rich, even though her clothes are as creased as her forehead. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months, thanks to the kindness of the Bangladeshi car park attendants who don't have the heart to move her on. This is not where she thought her Dubai dream would end.
Her story comes out in stutters, over four hours. At times, her old voice – witty and warm – breaks through. Karen came here from Canada when her husband was offered a job in the senior division of a famous multinational. "When he said Dubai, I said – if you want me to wear black and quit booze, baby, you've got the wrong girl. But he asked me to give it a chance. And I loved him."
All her worries melted when she touched down in Dubai in 2005. "It was an adult Disneyland, where Sheikh Mohammed is the mouse," she says. "Life was fantastic. You had these amazing big apartments, you had a whole army of your own staff, you pay no taxes at all. It seemed like everyone was a CEO. We were partying the whole time."
Her husband, Daniel, bought two properties. "We were drunk on Dubai," she says. But for the first time in his life, he was beginning to mismanage their finances. "We're not talking huge sums, but he was getting confused. It was so unlike Daniel, I was surprised. We got into a little bit of debt." After a year, she found out why: Daniel was diagnosed with a brain tumour.
One doctor told him he had a year to live; another said it was benign and he'd be okay. But the debts were growing. "Before I came here, I didn't know anything about Dubai law. I assumed if all these big companies come here, it must be pretty like Canada's or any other liberal democracy's," she says. Nobody told her there is no concept of bankruptcy. If you get into debt and you can't pay, you go to prison.
"When we realised that, I sat Daniel down and told him: listen, we need to get out of here. He knew he was guaranteed a pay-off when he resigned, so we said – right, let's take the pay-off, clear the debt, and go." So Daniel resigned – but he was given a lower pay-off than his contract suggested. The debt remained. As soon as you quit your job in Dubai, your employer has to inform your bank. If you have any outstanding debts that aren't covered by your savings, then all your accounts are frozen, and you are forbidden to leave the country.
"Suddenly our cards stopped working. We had nothing. We were thrown out of our apartment." Karen can't speak about what happened next for a long time; she is shaking.
Daniel was arrested and taken away on the day of their eviction. It was six days before she could talk to him. "He told me he was put in a cell with another debtor, a Sri Lankan guy who was only 27, who said he couldn't face the shame to his family. Daniel woke up and the boy had swallowed razor-blades. He banged for help, but nobody came, and the boy died in front of him."
continue reading this and all ten chapters of the Dark side of Dubai...
Friday, November 27, 2009
Pittman suffered from heart-related illnesses. The precise cause of his death wasn’t known, said his friend William Karesh, vice president of the Global Health Program at the Bronx, New York-based Wildlife Conservation Society.
Pittman, a former police-beat reporter who joined Bloomberg News in 1997, wrote stories in 2007 predicting the collapse of the banking system. That year, he won the Gerald Loeb Award from the UCLA Anderson School of Management, the highest accolade in financial journalism, for “Wall Street’s Faustian Bargain,” a series of articles on the breakdown of the U.S. mortgage industry.
Pittman’s fight to make the Fed more accountable resulted in an Aug. 24 victory in Manhattan Federal Court affirming the public’s right to know about the central bank’s more than $2 trillion in loans to financial firms. Pittman drew the attention of filmmakers Andrew and Leslie Cockburn, who gave him a prominent role in their documentary about subprime mortgages, “American Casino,” which was shown at New York City’s Tribeca Film Festival in May.
“Who sues the Fed? One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg. “The more complex the issue, the more he wanted to dig into it. Years ago, he forced us to learn what a credit- default swap was. He dragged us kicking and screaming.”
Police Reporter, Ranch Hand
James Mark Pittman was born Oct. 25, 1957, in Kansas City, Kansas, where he played linebacker on the high school football team. He took engineering classes at the University of Kansas in Lawrence before graduating with a degree in journalism in 1981. He was married soon after and had a daughter, Maggie, in 1983. The marriage ended in divorce.
Pittman’s first reporting job, covering the police department for the Coffeyville Journal in southern Kansas, paid so little he took a part-time job as a ranch hand across the Oklahoma border in Lenapah, according to an interview he gave to Ryan Chittum for the Columbia Journalism Review’s The Audit, a watchdog for the business press.
“What a funny guy -- huge personality,” Chittum said in an e-mail message. “Mark was my favorite reporter working. In a time when too much journalism is timid or co-opted, Mark personified the whole ‘afflict the comfortable’ tenet of the business. Mark’s passing is a huge loss for journalism at a time when we can least afford it.”
No Small Moves
Pittman spent a year in Rochester, New York, with the Democrat & Chronicle newspaper and 12 years at the Times Herald- Record in Middletown, New York, where he met his second wife, Laura Fahrenthold-Pittman in 1995.
“All I know is we fell in love the moment we met,” Fahrenthold-Pittman said in an interview Friday. “We moved in together a week later. He was as serious about his family life as he was about work. Mark did nothing in a small way.”
Pittman joined Bloomberg News in 1997. In 2007, he was writing about the securitization of home loans when subprime borrowers, who have bad or limited credit histories, began missing payments on their mortgages at a faster pace.
Pittman’s June 29, 2007, article, headlined “S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds,” was excoriated at the time by Portfolio.com for “trying to play ‘gotcha’ with the ratings agencies.”
“And that really isn’t helpful,” said the unsigned posting.
Beating the Pack
Pittman’s story proved prescient. So did his reports on U.S. banks exporting toxic mortgages overseas, on Treasury Secretary Henry M. Paulson’s role in creating those troubled assets while he was chief executive officer of Goldman Sachs Group Inc. and on the U.S. bailout of American International Group Inc.
“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the New York Times. “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication. His investigative work during the crisis set the standard for other reporters everywhere. He was a giant.”
In the “Faustian Bargain” series, Pittman explained how 5 percent of U.S. mortgage borrowers missing monthly payments could lead to a freeze in lending throughout the world.
‘Fearless, Most Trusted’
“Mark Pittman proved to be the most fearless, most trusted reporter on the most important beat during the 12 years he wrote about credit markets, corporate finance and the Federal Reserve at Bloomberg News,” said Bloomberg Editor-in-Chief Matthew Winkler. “His colleagues will miss his laughter and generous sense of mission. Bloomberg readers were rewarded by his many achievements culminating with a federal court ruling validating his search for records of taxpayer-financed policies withheld from the public and the Gerald Loeb Award.”
Public policy would be more effective if reporters, lawmakers and citizens understood how the financial system worked and why the crisis happened, Pittman said in the Feb. 27, 2009, interview with Chittum.
“Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed,” he said with a laugh. “We need to know how to prevent it from happening again, and we need to know who did it.”
Standing 6 feet 4 inches with a booming laugh, a loud telephone voice, and a taste for bourbon, Pittman made lifelong friends on Wall Street, in Congress, in journalism circles and in the artistic community after he and his wife opened an art gallery in Yonkers in 2005.
‘A Great Loss’
“I always learned something new when I spoke with Mark,” said Representative Scott Garrett, a New Jersey Republican on the House Financial Services Committee. “He was dogged in pursuit of the truth. This is a great loss for journalism and for those who relied on Mark for his insight.”
In “American Casino,” the title of which comes from an expression Pittman uses in the documentary, the filmmakers profile subprime borrowers who are losing their homes, mortgage brokers who made loans they knew their customers could never repay and bankers and ratings analysts whose companies profited from the housing boom.
Pittman provides an anchor for the narrative, at one point searching the Bloomberg terminal and finding the mortgage of a Baltimore teacher going through foreclosure inside a security underwritten by Goldman Sachs.
“He was a wonderful friend, a seeker of truth, a fighter for right, a proud family man, a big and jovial hand, a lover of food, drink and celebration of life,” said Joshua Rosner, managing director of Graham Fisher & Co., a consulting and analysis firm in New York. “This is a personal loss, a professional loss and a societal loss. He is truly irreplaceable.”
Along with his wife and daughter Maggie, Pittman is survived by daughters Nell, 10, and Susannah, 8, from his second marriage; his father Warren Pittman; mother Donna Pittman- Nealey; and brothers Barry Pittman and Craig Pittman.
“He was so large -- in spirit and in person -- and his passion for his craft was so great, it is impossible to think that it could just end,” said Jeffrey Taylor, Pittman’s editor on the “Faustian Bargain” series.
Bloomberg’s lawsuit against the Fed, which was filed after Pittman’s requests under the U.S. Freedom of Information Act were denied, continues without him. The central bank won a delay pending an appeal, which is scheduled for the week of Jan. 4.
“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a Nobel Prize-winning economist and Columbia University professor. “His death is shocking.”
At the time of his death, Pittman’s outgoing messages offered a link to a black-and-white photo of Woody Guthrie. Written on Guthrie’s guitar: “This machine kills fascists.”
Thursday, November 26, 2009
...and In the End the LOVE WE TAKE
is Equal to the LOVE WE MAKE...
THE GIVING TREE
by Shel Silverstein
Once there was a giving tree who loved a little boy. And everyday the boy would come to play Swinging from the branches, sleeping in the shade Laughing all the summer’s hours away. And so they love, Oh, the tree was happy. Oh, the tree was glad. But soon the boy grew older and one day he came and said, "Can you give me some money, tree, to buy something I’ve found?" "I have no money," said the tree, "Just apples, twigs and leaves." "But you can take my apples, boy, and sell them in the town." And so he did and Oh, the tree was happy. Oh, the tree was glad. But soon again the boy came back and he said to the tree, "I’m now a man and I must have a house that’s all my home." "I can’t give you a house" he said, "The forest is my house." "But you may cut my branches off and build yourself a home" And so he did. Oh, the tree was happy. Oh, the tree was glad. And time went by and the boy came back with sadness in his eyes. "My life has turned so cold," he says, "and I need sunny days." "I’ve nothing but my trunk," she says, "But you can cut it down And build yourself a boat and sail away." And so he did and Oh, the tree was happy. Oh, the tree was glad. And after years the boy came back, both of them were old. "I really cannot help you if you ask for another gift." "I’m nothing but an old stump now. I’m sorry but I’ve nothing more to give" "I do not need very much now, just a quiet place to rest," The boy, he whispered, with a weary smile. "Well", said the tree, "An old stump is still good for that." "Come, boy", she said, "Sit down, sit down and rest a while." And so he did and Oh, the tree was happy. Oh, the tree was glad.
Tuesday, November 24, 2009
I was pleased last week when we won a vote in the Financial Services Committee to include language from the Audit the Fed bill HR1207 in the upcoming financial regulatory reform bill. As it stands now, if HR 3996 passes, because of this action, the Federal Reserve’s entire balance sheet will be opened up to a GAO audit. We will at last have a chance to find out what happened to the trillions of dollars the Fed has been giving out.
Finally, the blanket restrictions on GAO audits of the Fed that have existed since 1978 will be removed. All items on the Fed’s balance sheet will be auditable, including all credit facilities, all securities purchase programs, and all agreements with foreign central banks. To calm fears that we might be trying to substitute congressional action for Fed mischief in tinkering with monetary policy, we agreed to a 180 day lag time before details of the Fed’s market actions are released and included language to state explicitly that nothing in the amendment should be construed as interference in or dictation of monetary policy by Congress or the GAO. This left no reasonable objections standing and the amendment passed with a vote of 43 to 26.
Monday, November 23, 2009
The indisputable fact is that billions of cash went out the door to Goldman et al as a result of the Fed’s actions. The Fed took ownership of the CDOs underlying the swaps that AIG had entered with the banks, and effectively paid the banks 100 cents on the dollar. That is, they ensured that the CDO hedges were perfect (belying the old trader adage that the only perfect hedge is in a Japanese garden).
The question is, therefore, what were the alternatives? The alternative that has garnered all the attention is that the Fed should have paid less than 100 cents on the dollar.
But that’s not the only alternative. Hank Greenburg has suggested that the Fed should have simply guaranteed the swaps, thereby vitiating the need to provide any collateral payments. (I made a similar suggestion in an earlier post on AIG).
The SIGTARP report states clearly (p. 14) that this alternative was considered, but dismissed. The ostensible reasons for the rejection seem very dubious, indeed.
First, “FRBNY told SIGTARP that a perceived downside of this structure from FRBNY’s perspective was that it could involve FRBNY in long-term credit relationships with supervised institutions.” Please. The Fed has gone hog wild in extending credit (through repos, for instance) with supervised institutions. It has taken all kinds of dodgy collateral at all kinds of dodgy valuations. That certainly involves taking a long term credit exposure. (Spare me any protests that there is no credit risk here because these repos are collateralized. Given the quality of the collateral, and the counterparties, there is an appreciable probability that the Fed will suffer a credit loss on these deals.) And if the Fed’s actions were a response to an existential event, which is the gravamen of its defense of its actions, such prissiness over protocol appears decidedly inappropriate–making this explanation exceedingly implausible.
Further thought (added at around 1900 CT): Given that the CDS were so far underwater to AIG, if the government had guaranteed them, the likelihood that the Fed would have become a creditor to the banks on the other sides of the deals was exceedingly remote. That is, it was highly unlikely that the Fed would have been exposed to default losses on these deals, meaning that the “credit relationship” was a fiction. (Besides, at the time, were most of the counterparties even under Fed supervision? Most were foreign banks, and even the US counterparties, with the exception of Wachovia, were investment banks that I do not believe were under direct Fed supervision, except perhaps as Treasury primary dealers, rather than as banks.)
Second, “there was a lack of statutory authority of the Federal Reserve to provide such a guarantee.” Please, again. There are a variety of structures that effectively create guarantees. For instance, if the Fed could see its way clear to setting up and capitalizing a special purpose vehicle (SPV) to buy the CDOs, it could have set up and capitalized an SPV, and then novated the deals to the SPV. If it was concerns about counterparty risk that made the banks so insistent on receiving collateral payments, this structure would have allayed their concerns–and required no cash to go out the door.
In this structure, the government’s risk exposure would have been the same as under Maiden Lane and its purchase of the underlying CDOs: it would have been long the CDOs.
In sum, the rationales given for not providing some sort of guarantee are completely unpersuasive. Completely. A guarantee would also not have required agreement on valuation with the counterparties. They would have been assured of receiving their contractual payments, and that should have been that.
The transparently implausible rationale for eschewing the guarantee alternative tells me that the Fed’s–and Geithner’s–injured and adamant denial that “the financial condition in the counterparties was not a relevant factor” (p. 15) in deciding to pay 100 cents on the dollar is dishonest. Geithner has said many other things that do not pass the honesty smell test, so it wouldn’t surprise me that if this was the case here as well.
Thus, it is highly likely in my view that this was a backdoor way of providing liquidity to systemically important institutions at a time that their financial condition was in serious question.
In this regard, it could well be that Goldman was the firm that was in greatest need of an injection of cash. The SIGTARP report states that, unlike the other AIG counterparties, “Goldman Sachs did not hold the underlying CDOs but rather had sold equivalent credit protection to its clients who held those positions.” Very interesting. It is likely that these client counterparties were demanding collateral from Goldman. If so, if Goldman didn’t receive cash from AIG–or the government–it would have needed to find additional cash to make these payments.
Yes, Goldman states that it was hedged by its purchase of credit protection on AIG. But, (a) in prevailing conditions, there was considerable credit risk in those CDS, meaning that Goldman may not have been paid out 100 percent of what it was owed, and (b) even if the CDS paid out, there would almost certainly have been a cash flow date mismatch, with Goldman needing the cash to make margin calls to its clients immediately, and receiving any cash payments on CDS at some later date. Given the state of the credit markets at the time, funding this gap would have been an expensive, and dicey, proposition.
Given the supposed First Commandment to Treat All Banks Equal (p. 29), the Fed could not have bought out Goldman and not the other banks.
Against that, if providing liquidity to Goldman alone was the objective, there should have been ways of doing that directly–unless the Fed was concerned that special treatment of Goldman would have commenced a destablizing run on it like the one that cratered Lehman.
I therefore can’t conclude for certain that the AIG bailout was really a Goldman rescue in drag. One can tell that story, but there are alternative explanations. However, given that the Fed’s explanation for not taking actions that would have required no cash payments is so weak, my conclusions are that the AIG bailout was an indirect of providing liquidity to systemically important institutions, and that one cannot exclude the possibility that this was an indirect way of providing liquidity to one institution in particular–Goldman.
(One question unanswered by the SIGTARP report: if Goldman didn’t own the CDOs that eventually wound up in Maiden Lane, how did they get there? Did Goldman buy them from its clients in a mirror image deal that involved swap tearups, and then sell them to Maiden Lane? It would seem that would be necessary to deal with Goldman’s own sales of protection. )
A couple of other points related to the SIGTARP report. First, as I emphasized in “It’s a Wonderful Life: AIG Edition,” if AIG hadn’t been born and hence not around to sell protection, the owners of the CDOs would have taken a bath. Thus, it is not credit default swaps per se that were the ultimate source of the problem; it was the underlying CDOs. Only to the extent that the existence of AIG contributed to a larger CDO market could CDS have contributed to the financial crisis. Indeed, the crisis–that is, the losses suffered by big banks–could have been worse if AIG hadn’t taken a $50 billion hit.
Second, one of the narratives has been that AIG didn’t have to post collateral, and hence took on bigger positions than it would have if it had been required to do so. It indeed didn’t post any initial margin, but it is clear that the deals contemplated the posting of collateral even absent an AIG credit event. AIG had posted at least $22 billion in collateral prior to its downgrade (Table 1). Perhaps the necessity of posting initial margin would have reduced AIG’s appetite, but likely not, in my view. First, by not requiring original margin, counterparties were extending AIG credit, and presumably charged for it; only to the extent that it would have been costlier to finance initial margin payments would the posting of such margin have made AIG reduce its positions. Second, given that it lost huge sums on mortgage backed in its security lending program and other operations, it is clear that AIG viewed these as very attractively priced risks. Sure, a slightly higher cost (due to the necessity of posting initial margin) might have induced it to cut back some, but likely not very much.
To conclude: given the availability of another alternative to buying out the banks at 100 percent of par, that would not have required a cash payment, and the weak justifications for avoiding that option, make it highly likely that the AIG bailout was structured in part to provide liquidity to major banks (and perhaps, but not conclusively, one particular bank). Which makes the Fed’s–and Geithner’s–denial that the financial health of these firms was an irrelevance highly dubious, not to say, a lie.
Who is more foolish, the child afraid of the dark, or the man afraid of the light?