Weekend Economists--The Equinoctal Edition April 10-12. 2009

[Demeter]

(Because if I called it Easter, or Passover, or some combination thereof, I'd leave out most of the known world).

Ahem! I had a wonderful idea for a theme, and somewhere along the way I lost it.

Someday, I must give up this mad, carefree existence. ---Snoopy poster, 1970's


Oh well, maybe it will return (around 11PM Sunday night.)

Welcome to the Resurrection Weekend. Obama has seen the light---well, he's seen glimmers, but he extrapolates that to light--thousands of points of light, no doubt reflecting off the tears in the eyes of those who did their taxes and looked at their soi-disant pension plans and savings accounts.

But enough ridicule. On with the news!


(I'm Amazed how many gluttons for punishment are showing up so early tonight! Don't you have eggs to color and hide, or baskets to fill? Baking, or walls to paint? No kiddies at home? Sigh. Well, at least here we have the latest in lies, corruption, and crime. Enjoy! But do get out to enjoy Spring at some point this weekend!)

[Demeter]

1. Legacy of Lies: The Great Economic Cover-Up — By James Ridgeway

http://www.motherjones.com/mojo/2009/04/legacy-lies-great-economic-cover

Remember back in February, when Bill Clinton urged Obama to be more “upbeat” about the economy? Clinton actually implied that the new president could be making the financial crisis worse by being honest about how bad it was, thereby rattling public confidence—and with it, the market. You’d have thought the primary campaign would be enough to convince Obama that nothing good could come from Clinton homme. But the president has clearly taken a page from Clinton’s playbook. He now largely avoids statements that might frighten the horses in favor of cheerful declarations that we are at “a turning point in our pursuit of global economic recovery,” while at the same time promoting the latest bank bailout plan, which he says will get us there.

There are plenty of reasons why its wrong to try to buoy up a sinking economy on a raft of positive rhetoric—among them, the fact that it obscures what actually happened in the past, and clouds our judgment about what should be done to “fix” it. In the current issue of Newsweek, Daniel Gross comments on the Orwellian linguistic feat by which the government seeks to rebrand the piles of worthless crap created by our financial system.

Remember those toxic assets? The poorly performing mortgages and collateralized debt obligations festering on the books of banks that made truly execrable lending decisions? In the latest federal bank-rescue plan, they’ve been transformed into “legacy loans” and “legacy securities”--safe for professional investors to purchase, provided, of course, they get lots of cheap government credit. It’s as if some thoughtful person had amassed, through decades of careful husbandry, a valuable collection that’s now being left as a blessing for posterity.

According to this morning’s New York Times, the administration is now taking things a step further by promoting a plan that would let us ordinary folks buy what are being called “bailout bonds”—shares in mutual fund-type bundles of lousy mortgage securities. These are supposed to eventually become profitable, thereby allowing us to share in the wealth. But of course, they could also go the other way. As the Times notes: “If, as some analysts suspect, the banks’ assets are worth even less than believed, the funds’ investors could suffer significant losses.” In other words, having been screwed once by Wall Street, we’re now being asked to bend over for a twofer—which some people just might do, if they believe the rhetoric that happy days are about to be here again.

Another point of view came from William K. Black, who was the chief federal regulator during the S&L crisis, in a long interview with Bill Moyers on Friday. Black calls Bernie Madoff a “piker” in comparison with the Wall Street giants that committed mass fraud, and are now nonetheless raking in government funds. When Moyers asks Black “why the bankers who created this mess are still calling the shots” instead of being fired like the auto executives, Black mentions the close relationships between Washington and Wall Street, which applies to Tim Geithner and Larry Summers as much as to Henry Paulson. Then he talks about what he doesn’t hesitate to call a “cover-up”:


WILLIAM K. BLACK: But the other element of your question is, we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
BLACK: Sure. The cover up.
MOYERS: That’s a serious charge.
BLACK: Of course.
MOYERS: Who’s covering up?
BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion—a trillion is a thousand billion—$2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses of losses, and that they’re fine.

Black insists that “the entire strategy is to keep people from getting the facts…about how bad the condition of the banks is.” So instead of closing bad banks, as regulators did after the S&L crisis, the government is simultaneously pumping money into them and covering up their losses, while avoiding any hard-nosed investigation into their past conduct—all based on the idea that “we have to lie to the people to create confidence.”

MOYERS: Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
BLACK: Absolutely.
MOYERS: You are.
BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we’ll run screaming to the exits. And we won’t rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it’s foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, “We just can’t let the big banks fail.” That’s wrong.…

MOYERS: So, you’re saying that people in power, political power, and financial power, act in concert when their own behinds are in the wringer, right?

BLACK: That’s right. And it’s particularly a crisis that brings this out, because then the class of the banker says, “You’ve got to keep the information away from the public or everything will collapse. If they understand how bad it is, they’ll run for the exits.”

Promoting this scenario, of course, serves the interests of these same bankers, since it insists that the only way to prevent complete catastrophe is to keep bailing out the big financial institutions, regardless of their credibility and regardless of the cost.

Black believes that the only antidote for this self-serving myth lies in Congress having the wherewithal to launch a real investigation and reveal the facts to the American people—and then base future policymaking on these facts, instead of on a legacy of lies.

[Demeter]

9. The Beatification of Ben Bernanke

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=04&year=2009&base_name=the_beautification_of_ben_bern

The Washington Post gave a glowingly positive account of Ben Bernanke's efforts to deal with the economic crisis. Missing from this discussion was any mention of the fact that he deserves a large part of the blame for this crisis.

Bernanke was a persistent and vigorous bubble denier, first in his capacity as a member of the Board of Governors and then on his becoming Fed chair in January of 2006. Even as the bubble began to unwind in the winter of 2007 he gave assurances that the problems would be contained in the subprime market. After he engineered the takeover of Bear Stearns in March of 2008, Bernanke told Congress that he did not see another Bear Stearns out there. Needless to say, he was surprised by the collapse of Lehman and the market's response six months later.

It might have been worth including some acknowledgment of the fact that, in addition to being the person trying to lead us out of this crisis, Bernanke was also one of the people who deserves the most blame for leading us into the crisis.

The media have a tendency to write glowing accounts of people in positions of power in the United States. I recall when a person I knew quite well was given a high position, the news reports described this person as being brilliant and having a sharp intellect. I personally liked and respected this person, but I doubt very much that anyone who knew this person would have made a point of talking about their brilliance or sharp intellect.

Unfortunately, reporters often seem to believe that it is their job to promote confidence in the people in power. It isn't.

--Dean Baker

[truedelphi]

36. Bernanke has no overseer. He knows he won't be audited.

Does he strike you as being honest?

He and Geithner are the TOTAL OVERLORDS of the printing press.

On "Sixty Minutes" he said that , no the taxpayers were not going to have to worry that they would be penalized in any way for the Obama Administration offering funds to the bank.
That that was one of the bigger misunderstandings that the public was holding on to.

No not the taxpayers. You see, Bernanke sets up an "Account" for the bank in trouble at the Federal Reserve, and he just throws in whatever numbers of dollars are authorized and needed.


SO his explanation somehow managed to leave out the more important matters at hand - that inflation is one of the most pernicious taxes or penalties to fall upon the heads of the middle incomed.

[DemReadingDU]

10. Janice Dorn: Trading and Living in a Cesspool of Lies

Trading and Living in a Cesspool of Lies
by Janice Dorn, MD, PhD, The Trading DoctorSM | April 9, 2009

What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system…James Howard Kuntsler, Legitimacy Dwindles
There is a contagious epidemic of lies spreading all over the world, and it starts with rot at the highest levels of government. We are drowning in a cesspool of lies.

.All you have to do is open your eyes and ears. The litany of lies is everywhere. Even those who are doing everything possible to lead lives of radical honesty will slip and catch themselves in a lie. Maybe it’s a “little white lie” or something that is euphemistically called an “error of omission” or a “slip of the tongue.” Nonetheless, a lie is a lie. Why do people lie? Because they can.

We start lying at around age 4-5 when we gain the power and awareness of language. The first lies we tell as children are not malicious, rather they are tests of the degree to which we can manipulate our environment. Eventually, children learn that lying can be used to get what they want or get out of trouble. Everyone lies a little. How many times today have you told a lie? Right now, I might be lying to you about lying.

So we have the little liars and then we have the big liars. These are people who are compelled to lie about almost everything. They lie to protect themselves, make themselves look good, gain financial, sexual or social rewards, avoid punishment or manipulate others. Manipulation is a huge motivation for these big liars. In the extreme, such individuals are given vague descriptions like “pathological liar” or actual psychiatric DSM-IV diagnoses (Antisocial Personality Disorder, Borderline Personality Disorder, etc). How neatly official. Big Deal. They now have a name and a label, but if their lips are moving, they’re lying. Period.

One lie leads to another and another until there is no way to distinguish the truth from the lie. Lying wears people out. Lying causes stress and stress kills. Lying puts people into a prison cell of their own making. There is no freedom, rather more and more need to keep boxing themselves further into the corner of their lying brain box. I assure you that once you have been “played” by a compulsive liar, you will never be the same person. If you want to feel the depths of total frustration and absolute crazy-making, then get intimately involved with a big time liar.
The internal rot that plagues a family, culture or country begins at the top and like an unleashed deluge of contaminated rotting sewage, trickles downward. We all know that politicians lie. After all, the origin of the word politics might as well be from poly (many) and tics (small blood-sucking insects). It is a foregone conclusion that those in poli-tics will lie to us to get what they want from us and to further their own agendas.

Take the financial markets, for example. My inbox is polluted with crap. I make it a point to stay on over 25 mailing lists of hocus-pocus newsletter services that offer unlimited riches (without your doing any work of course!) by trading this or that Holy Grail indicator or magical formula that has just been discovered and will turn your $1,000 to $1,000,000 in less than a year.

Right. Sure. Please give us all a break here. Marketing to groups of people who are addicted to money (that means just about everyone in the world) is easy. All the “neuromarketers” have to do is to appeal to the dopamine-driven rat brain areas. Just the thought of making money through these “revolutionary instant cash machines” produces dopamine and “lights up” the pleasure centers of your brain. .

The interesting aspect of this is that the most effective way to sell is to lie. Oh, no! Can that possibly be true? In order to sell you something, people have to lie to you? It doesn’t have to be a whole lie; it can be a partial lie. So how do you know what part of it is a lie and what part isn’t? You don’t and you likely never will until after it’s too late and your money is long gone.
They are there to get your money, and they will do everything possible to separate you from your hard-earned cash. There are some very powerful hammerhead sharks lurking around every corner and doing every sneaky deal imaginable to convince you to buy something; anything. Come on in, the water’s fine, so just keep buying. There is no danger here---none at all! Everything is just wonderful, so keep buying these worthless pieces of paper.

There appears to be no limit to the sneaky slimy cesspool of deception that runs through the financial markets and our society. As the social mood continues to darken, and our currency spirals downward, the rot and stench will increase. Desperate people do desperate things and it’s all about separating you from your money. My bonus report published today for subscribers begins a series on how not to be scammed by gypsies tramps and thieves. There is nothing underneath the glitz. There are no invisible golden threads. The emperor is naked. It is a sham that will devour and steal from you until it has the greed has gorged itself and moved on to the next victim and the next and the next.

Please, everyone who is reading this: Open your eyes; do not allow yourself to be led down some garden path that appears lush with trees and flowers, but ends up in the vast wasteland of wiping out your life savings and stealing what is left of your sanity. Beware of false prophets, hypesters and crooks. Your rat brain is always out to get you, and the scam artists know exactly where your rat brain lives.

Use your rational brain to override the rat brain impulses and allow yourself time to measure and judge with logic and reason. Beware and be careful. Verify. Believe in a Higher Power, but remember to lock your car.

One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. The bamboozle has captured us. Once you give a charlatan power over you, you almost never get it back…Carl Sagan

http://www.financialsense.com/fsu/editorials/dorn/2009/0409.html

[Demeter]

14. Great Rant, DemRDU!

It appears that this weekend's theme is lies, and the lying liars who tell them....

[CoffeeCat]

19. Will they be able to cover up this mess?

I'm wondering...will the bailouts and the government collusion with the banks--succeed in covering up this heist?

If the bailout works and the banks return to "business as usual"--then eventually, the banking system will stabilize
and most people will never know how dire the situation was.

Is that really possible and could that happen?

Could the $2 trillion really make these insolvent behemoths healthy again?

[Demeter]

22. No, I Don't Think So

You can't be a little bit insolvent, just as you can't be a little bit pregnant. Well, these big boys can't, at least. There isn't enough money in the world to fill the gaping holes in their balance sheets.

The banks and the Fed and the Treasury can try to paper over the holes. They can try to inflate the holes out of existence. They can try to con the public into flinging their last coppers into those holes, but these are Black Holes. They swallow and swallow, and never fill up or give up anything.

Besides, too many people know about the holes. It's an open secret. With the Internet, even people without an inside connection can know, if they want to. The MSM can't keep secrets any more because they've lost the monopoly of the press. Anybody can exercise the First Amendment now: all you need is a connection and a keyboard and monitor.

Corporate Media is defeated. It will never ever regain the clout it had to hide the evil men do. That is our blessing and our responsibility: to use and keep our intellectual freedom and lines of communication open.

[CoffeeCat]

41. That makes sense, and I appreciate...

...your insight and opinion.

I sensed that the toxic assets were like a cancer that spread all over the financial industry. We're at
stage four right now, and band-aids aren't going to work at this point.

What's worrisome, is that YOU know this. I know it. Many others know it. So don't tell me that the bankers
don't know it--or that Geithner, Paulson and the rest of the gang don't know it either.

So what the hell are they doing? Are they really making a serious attempt to save the system? Or do they
know it's futile, and are they stealing the money?

Also, it's been obvious to me that the MSM theme switched to "cover up with happy talk" in January. It's as if
someone flipped the silver-lining loop that they're all repeating. I spent a lot of time wondering what was going
on. Suddenly, it wasn't all gloom and doom. They're desperately trying to get us to believe that this setback
is oh-so temporary and soon it will all be a bad memory.

As you said, they're attempting to get us to buy into the system again. That's most likely what is happening.

As far as the media goes--I am convinced that most of the media talking heads and reporters are victims of the
cabal that sits way at the top of the media conglomerates and in politics and other corporations. I have a friend
who is a financial reporter for CNN. This person is on air daily. They are completely clueless and when I mention
that smoke is being blown--this person is oblivious and shocked that I think this. This is not acting. This is
someone who takes marching orders and believes in the power of the press. It's only a matter of time before most
of them figure out that they've been used--and they join the revolt too.

[Demeter]

49. Denial Is Not Just a River in Egypt

It's an addiction to gambling and money. You get paid to trade.

People without the stomach for it go into other lines of endeavor.

[Demeter]

2. Why didn't Fed force big banks to take less of AIG bailout?

http://www.mcclatchydc.com/227/story/65609.html

WASHINGTON — The Federal Reserve Bank of New York in November chose not to pursue tough negotiations with large foreign and domestic banks and instead allowed them to receive 100 cents on the dollar in government funds to settle tens of billions of dollars of exotic financial bets guaranteed by American International Group.

At the time, Timothy Geithner, now Treasury Secretary, headed the powerful New York Fed. On his watch, the decision was made to forgo a reduced payout — called a "haircut" in industry parlance — to creditors of AIG to prevent financial chaos around the world, the officials told McClatchy.

Had the Fed negotiated a reduction of just 10 cents to 15 cents on the dollar, it could've saved between $2 billion and $3 billion.

The revelation sheds new light on last month's disclosure by AIG that it used loans from the New York Fed to pay more than $17 billion to foreign creditors such as France's Societe Generale and Credit Agricole, and Germany's Deutsche Bank. U.S. investment banks, including Goldman Sachs and Merrill Lynch, also were paid $10 billion in what amounted to a back-door bailout of the troubled institutions that had financed the insurer's risky investments.

The real reasons behind these decisions weren't revealed at the time. And like the Obama administration's decision last month to allow more than $165 million in controversial bonuses to AIG executives, their disclosure is fueling new criticism.

Geithner's office declined requests to comment.

At issue is the Fed's handling of nearly $30 billion that AIG owed on complex insurance-like financial instruments known as credit-default swaps, which are unregulated products that the company issued to guarantee often risky investments.

AIG had at least $440 billion in credit-default swaps outstanding when the New York Fed and the Treasury Department rode to the rescue of its creditors in September with an unprecedented $85 billion cash infusion — a bailout that has since been revamped and grown to some $180 billion.

The rescue, which gave the Fed control of almost 80 percent of AIG, was designed to prevent what Fed Chairman Ben Bernanke has since said could've been a collapse of the global financial system.

The decision to extinguish some of AIG's credit-default swaps, however, was made in mid-November, after the waters had calmed.

Gerald Pasciucco, the new chief executive of AIG's Financial Products division, which sparked the company's meltdown, recently told McClatchy that Fed officials made the decision to pay full value, but he declined to elaborate when pressed. Pasciucco is negotiating the sale of the remaining $1.4 trillion in the division's business.

The decision to pay full contract value is the latest example of the Fed appearing to be "very much out of sync with the attitude of the public and the taxpayers," said John Coffee, a Columbia University law professor who testifies frequently before Congress on matters of corporate finance.

The Fed could have offered 85 cents on the dollar — saving billions of dollars — and claimants would've had little recourse but to sue, he said.

Once the Fed decided against bankruptcy for AIG, it was logical to presume that the company would fully honor its swaps contracts, a senior Fed official said.

By then, AIG had been downgraded by credit-rating agencies. The downgrade meant that AIG had to post $35 billion in collateral with various swapholders _and the company faced catastrophe, another Fed official said. Both officials requested anonymity to speak freely.

After the Fed intervened in September, it made attempts to convince some of AIG's foreign counterparties to accept a reduced payout. They declined. New York Fed officials worried that U.S. defaults on the swaps would lead to "a cascade of other defaults" by firms around the world that had counted on full payouts, one of the officials said.

The idea of a discount was met with "a very hostile reaction" and warnings that such a stance would be viewed as a default, officials said. They pointed to the global financial chaos after the 1991 collapse of the Bank of Credit and Commerce International. Authorities in England and Luxembourg seized Pakistan-based BCCI, and its creditors scrambled for assets across the globe.

Once the decision was made to fully pay AIG's foreign counterparties, including $2.8 billion to Deutsche Bank and $6.9 billion to Societe Generale, the officials concluded that it would be discriminatory to pay less than 100 cents on the dollar to U.S. banks holding the same contracts.

"I was concerned that people would say the Fed used its power to exploit some domestic financial institutions," said Thomas C. Baxter, the general counsel of the New York Fed, in a telephone interview.

At that time, he said, it was easy to explain "why an entity you kept out of bankruptcy was paying its legitimate and lawfully incurred debts. That didn't seem hard."

That, however, was before public anger mounted over Wall Street rescue efforts.

Columbia's Coffee countered that "you could have asked everybody to scale down their expectations at least 10 or 15 percent, and that wouldn't have been discriminatory. And if you asked Congress, I think they would have been much more in favor of being discriminatory towards foreign banks, because this is funded with U.S.-taxpayer-funded dollars."

In bankruptcy, he said, the swaps might've been settled at 20 cents on the dollar. In other words, the government had leverage and chose not to use it.

"So I think that there has been an absence of hard bargaining here, and it is because the Fed puts its highest priority on its loyalty to the banking system and tends to subordinate economizing with taxpayer dollars."

The payouts also have fueled allegations of unnecessary back-channel bailouts on top of the publicly disclosed taxpayer-funded efforts.

New York Insurance Commissioner Eric Dinallo, the most vocal advocate for regulating credit-default swaps, told Congress on Oct. 18 that regulators were working in a vacuum.

"Because the credit default swap market is not regulated, we do not have valid data on the number of swaps outstanding," he said.

[Demeter]

3. Goldman Sachs mulls stock sale to repay TARP money: report

http://news.yahoo.com/s/nm/20090410/bs_nm/us_goldmansachs_1

Reuters) – Goldman Sachs Group Inc is considering making a multibillion dollar share offering to investors as part of its efforts to repay a $10 billion government loan, the Wall Street Journal reported citing people familiar with the matter.

The announcement could be made as early as next week and though Goldman executives haven't determined the exact size of the offering, it is expected to be at least several billion dollars, the people told the Journal.

A final decision hasn't been taken and will be based partly on market conditions, the Journal reported.

Goldman Sachs, which is due to report its quarterly earnings on Tuesday, is one of several recipients of the U.S. government's Troubled Asset Relief Program investment and plans to repay the money as soon as possible.

Goldman Sachs could not be reached immediately for comments.

(Reporting by Sweta Singh in Bangalore; Editing by Vinu Pilakkott)

[Demeter]

4. Fannie Mae, Freddie Mac executives to receive millions in bonuses

http://wsws.org/articles/2009/apr2009/bonu-a07.shtml

Fannie Mae and Freddie Mac, the mortgage lending giants currently under federal conservatorship, will pay out $210 million in retention bonuses over the course of 18 months, a recent letter by the companies’ federal regulator, James Lockhart, states.

The Obama administration is tacitly backing the payouts, since it has kept Lockhart, a Bush appointee, as the head of the federal agency that regulates the two mortgage finance companies.

Some $51 million in bonuses was paid late in 2008. The remainder will be released in 2009 and early in 2010, according to the letter, sent Friday to Iowa Republican Senator Charles Grassley.

Two hundred and thirteen executives and employees at the two firms will each take home more than $100,000 in 2009 bonuses. Two high-level executives will each be awarded more than $700,000.

Last year, Fannie paid out $4.4 million in bonuses to its top four executives.

In the letter, Lockhart defended the bonuses as necessary to retain talent at Fannie and Freddie. “It is not realistic to expect that experienced and highly skilled employees will indefinitely continue to work as hard as they have if we do not provide reasonable incentives to perform,” Lockhart wrote.

“If the bonuses are rescinded, it sends the exact opposite signal, and it would be extremely dangerous for the American economy to lose these workers at this point,” he added.

The two companies lost $108 billion in 2008 and have survived only because of two government infusions of cash and loans totaling $400 billion.

The plan to pay bonuses to executives at Fannie and Freddie provoked public outrage when it became known on March 18. Amidst the scandal concerning bonuses paid to executives and traders at the bailed-out insurance firm American International Group (AIG), politicians of both parties railed against executive bonuses awarded by firms receiving taxpayer bailouts. However, under pressure from the Obama administration, Senate Democrats have waylaid legislation that would heavily tax bonuses at AIG and other firms.

Now, Fannie and Freddie have announced a new round of executive bonuses. Implicitly acknowledging growing public anger, Lockhart’s letter does not disclose the executives’ names “for personal privacy and safety reasons.”

The plan to carry forward executive bonuses at Fannie, Freddie, AIG and other bailed-out firms has the support of the Obama administration. During the AIG scandal, Obama initially declared he was “outraged” that AIG, which has received some $180 billion in government funds, was rewarding some of the very executives and traders whose risky bets on credit default swaps and other derivatives had led the company to ruin and helped bring the US and global financial system to the point of collapse. In the face of a furious counterattack by Wall Street firms and much of the media, following passage of a bill by the House of Representatives imposing a 90 percent surtax on some AIG bonuses, Obama quickly shifted gears and mounted a public campaign opposing congressional efforts to tax the bonuses.

Significantly, Obama has kept Lockhart, who was appointed by President George W. Bush, as the head of the agency tasked with overseeing Fannie and Freddie, the Federal Housing Finance Agency. According to the New York Times, “The law creating Mr. Lockhart’s office...established him as the lead regulator until his successor is named by the president and confirmed by Congress.”

“This is a de facto White House endorsement of these payments,” Karen Shaw Petrou, partner at Federal Financial Analytics, told the Times. Petrou called Obama’s stance “a little odd considering that everyone spent days talking about how they were shocked by the bonuses given to AIG.”

Fannie and Freddie are the two largest mortgage lending firms in the US. Together, they underwrite more than half the nation’s mortgages.

A rising tide of delinquencies and defaults on mortgage payments led to the government rescue of Fannie and Freddie in September 2008. The two government-sponsored enterprises, or GSEs, have combined obligations in debts and mortgage-backed securities of more than $5 trillion.

Fannie Mae and Freddie Mac buy mortgages, repackage them and resell them as mortgage-backed securities to banks and investors. Fannie Mae (Federal National Mortgage Association) was created in 1938 during the Great Depression as a New Deal reform to create lending liquidity in the housing market. It was privatized in 1968 in order to remove its debt obligations from the federal balance sheet.

Freddie Mac (Federal Home Loan Mortgage Corporation) was created as a government-sponsored but privately owned firm to further expand the secondary market for mortgages in 1970.

The Obama administration’s role in backing the firms’ bonuses underscores its preoccupation with protecting the wealth and power of the American financial elite.

[Zenlitened]

5. Zero Hedge is sounding a little tinfoil-hat-ish.

Which, as a closet tinfoil-hatter myself, makes me a bit nervous! :) (x-post from SMW)

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

and

As more and more quants focus on trading exclusively with themselves, and the slow and vanilla money piggy backs to low-vol market swings, the aberrations become self-fulfilling. What retail investors fail to acknowledge is that the quants close out a majority of their intraday positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bagholder to what can only be classified as an unprecedented ponzi scheme. As the overall market volume is substantially lower now than it has been in the recent past, this strategy has in fact been working and will likely continue to do so... until it fails and we witness a repeat of the August 2007 quant failure events... at which point the market, just like Madoff, will become the emperor revealing its utter lack of clothing.

So what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility.

Full post:
http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-market-liquidity.html

[Demeter]

16. Tinfoil Is the New Chapeau

It come in colors for Easter, red and green for mas, and so on.

[Demeter]

6. Failed Bank Information: Cape Fear Bank, Wilmington, NC

http://www.fdic.gov/bank/individual/failed/capefear.html


On Friday, April 10, 2009, Cape Fear Bank, Wilmington, NC was closed by the North Carolina Office of Commissioner of Banks and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information, which should answer many of your questions.

The FDIC has issued a press release (PR-052-2009) about the institution's closure. If you represent a media outlet and would like information about the closure, please contact David Barr at 202-898-6992.

III. Acquiring Financial Institution
All deposit accounts, excluding certain brokered deposits, have been transferred to First Federal Savings and Loan Association, Charleston, SC ("assuming institution") and will be available immediately. On Monday, April 13, 2009, the former Cape Fear Bank locations will reopen as branches of First Federal Savings and Loan Association.

Your transferred deposits will be separately insured from any accounts you may already have at First Federal Savings and Loan Association for six months after the failure of Cape Fear Bank. Checks that were drawn on Cape Fear Bank that did not clear before the institution closed will be honored as long as there are sufficient funds in the account. You may speak to an FDIC representative regarding deposit insurance by calling: 1-866-806-6128 or visit EDIE the FDIC's Electronic Deposit Insurance Estimator.

EDIE - FDIC's Electronic Deposit Insurance Estimator

You may withdraw your funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with First Federal Savings and Loan Association as long as the deposits are not pledged as collateral for loans. You may view more information about First Federal Savings and Loan Association by visiting their web site.

First Federal Savings and Loan Association (www.firstfederal.com)

[Demeter]

18. But Wait! There's More!

http://www.fdic.gov/bank/individual/failed/newfrontier.html

On Friday, April 10, 2009, the State Bank Commissioner, by order of the Banking Board of the Colorado Division of Banking, closed New Frontier Bank, Greeley, CO and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information, which should answer many of your questions.

II. Press Release
The FDIC has issued a press release (PR-053-2009) about the institution's closure. If you represent a media outlet and would like information about the closure, please contact David Barr at 202-898-6992.

III. Is My Account Fully Insured?
FDIC provides a tool that will allow you to verify the insurance status of each of your accounts. That status will be available no later than the first business day after bank failure.

Click the link below and enter your account number in the search screen. One of two messages will appear:

1. "Your account is fully insured" along with a link will that provides additional information or
2. a message advising you to contact the FDIC along with contact information.

Is My Account Fully Insured?

IV. Deposit Insurance National Bank (DINB)
The FDIC has created the Deposit Insurance National Bank of Greeley (DINB), Greeley, CO to facilitate the resolution of New Frontier Bank, Greeley, CO. All insured deposits, except for brokered deposits, CDs, and IRAs, have been transferred to DINB and will be available immediately. All secured public unit deposits have also been transferred. FDIC contracted Bank of the West, San Francisco, California, from Monday, April 13, 2009, through Friday, May 8, 2009 to provide operational management of DINB at the former New Frontier Bank locations.

Checks for insured CDs and insured IRAs will be sent to your mailing address on record with New Frontier Bank. These will be mailed on Monday, April 13, 2009 and you should receive these checks by the end of the week.

[Demeter]

7. You should probably know that the U.S. currency is now backed by risky assets

http://www.newsneconomics.com/2009/04/you-should-probably-know-that-us.html

Today is Fed balance sheet day. That is, every Thursday except for federal holidays, the Fed releases its H.4.1 report, Factors Affecting Reserve Balances. In response to the Fed's sharp deviations away from traditional interactions with the banking system - i.e., open market operations and discount window lending - the H.4.1 has been seriously modified, in part from the efforts of Roger Shealy.

Roger noticed that the Fed's modifications (listed below) were not sufficient and has done some hefty leg work for you all (also explained below). His efforts reiterate why Bloomberg sued the Fed, and the Fed responded with a lame description of the collateral held on their website: the Fed is holding a larger share of risky assets as collateral for its riskless currency and Treasuries lent on the open market.

Listed below are the Fed's announced modifications to Table 1 (to the best of my knowledge):

1. Term Auction Facility (TAF) on December 27, 2007, with no mention of it in the balance sheet; it simply shows up as a new line.

2. Primary Dealer Credit Facility (PDCF) and the Fed's loan, $28.8 billion, to JPMorgan to facilitate the takeover of Bear Stearns on March 20, 2008.

3. Term Securities Lending Facility (TSLF) on April 3, 2008. This account is held off balance since it is a swap of assets and technically does not "affect reserve balances" (as the statement says). The line "other federal reserve assets" started to grown - one had to assume that this was the new currency swaps. Note: under this facility the Fed swaps up riskier assets for riskless assets (Treasuries).

4. Finally, the Fed included the Bear loan as a separate line. It set up a limited liability company, Maiden Lane LLC, to manage the Bear assets on July 3, 2008.

5. First AIG loan, $28 billion, listed under "other credit extensions" on September 18, 2008.

6. Treasury Supplementary Financing Account (TSP), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCP MMMF) on September 25, 2008.

7. Commercial Paper Funding Facility (CPFF) on October 30, 2008.

8. Wow: AIG gets a separate line, Maiden Lane III LLC is established to manage the CDOs and MBS assets that the Fed is purchasing from AIG, Maiden Lane II LLC is established, and the Money Market Investor Funding Facility (MMIFF) is added on November 28, 2008.

9. GSE-guaranteed mortgage-backed securities (MBS) are added as a line under U.S. Treasury securities on January 15, 2009.

10. Finally, nine months after foreign central banks visibly started to draw on the lines of credit, the Fed itemizes the currency swaps on January 29, 2009.

11. Term Asset-Backed Securities Loan Facility (TALF) on March 26, 2009.

But Roger deemed that inefficient on both the H.4.1 statement and the H.6 statement, money stock measures. He contacted the Fed on multiple occasions, resulting in the following statement changes:

1. H.6: The Treasury Supplemental Financing Account (TSFP), originally established in an attempt to sterilize the Fed's early liquidity measures (the Fed no longer sterilizes flows), is now included as a column in Table 7, Other Memorandum Items to the M2 money stock.

2. H.4.1: per Roger. "the Fed added the disclosure I asked for on the H.4.1 by indicating that the balance of Treasury securities provided as collateral includes securities lent under the Term Securities Lending Facility". You can see this under Table 11 of the release.

Table 11 is often glazed over as an arcane part of the H.4.1 release (actually, the whole release is rather arcane). It reports the collateral held against Federal Reserve Notes (i.e., printed currency); the Fed currently holds assets to collateralize $864.5 billion of Notes. This collateral includes the following: gold, special drawing rights (SDR's), U.S. Treasury, agency debt, and mortgage-backed securities pledged, and "other assets pledged".

In normal times, "other assets pledged" doesn't mean a whole lot. Most of the collateral takes the form of U.S. Treasury, agency debt, and mortgage-backed securities (probably mostly U.S. Treasuries); but since the start of the crisis, the category "other assets pledged" has surged.



The chart illustrates the share of total collateral pledged that is in the form of Treasury and MBS assets and in the form of "other assets". "Other types of assets" grew from 0% in December 2007 to a peak of 46% in February 2009. It since fell because the Fed is buying MBS like it is going out of style. This surging share of "other assets" is troubling because it represents the growing risk on the Fed balance sheet.

Honestly, I don't know what "other assets" is, but presumably it's similar to the stuff held as collateral under the TSLF or PDCF programs, which aren't Treasuries. The Glass-Steagall Act of 1932 - different from the famous Banking Act of the same name, which allowed U.S. Federal Reserve Notes to be backed by U.S. Treasury securities - probably did not intend to for the U.S. currency to be backed by ABS and other risky assets (i.e., non-agency backed MBS, CMO, corporate market instruments, etc.).

This could be a problem. Thank you, Roger, for your contributions.

Rebecca Wilder

[Demeter]

8. ‘Lehman Shock’ Fuels New Wave of Homeless in Osaka (Update1)

http://www.bloomberg.com/apps/news?pid=20601109&sid=aFTPC.EzvUsA&refer=home

April 9 (Bloomberg) -- Within two months of losing his job packing shelves at a cold-storage company in Osaka, Toshiyuki Miki says, he was homeless. “Lehman Shock” turned his life upside down, he says.

Lacking the 60,000 yen ($600) a month he needs to pay rent, Miki, 40, sleeps in cardboard boxes under the elevated Hanshin expressway in Umeda, Osaka’s central business district. It’s his home as the global recession triggered by the implosion of Wall Street banks batters Japan. About 460,000 people have lost their jobs since the Sept. 15 collapse of Lehman Brothers Holdings Inc., according to government data.

“I never realized it would affect me in this way,” said Miki, who picked up the Japanese phrase “Lehman Shokku” from the pages of discarded newspapers. “Before, I could always find some kind of job, but now there’s nothing.”

Miki’s loss of housing shows how Japan’s 2.95 million unemployed people threaten to fuel a rise in homelessness. Prime Minister Taro Aso may unveil a 15.4 trillion yen stimulus package tomorrow, according to a document obtained by Bloomberg News. Finance Minister Kaoru Yosano said April 6 the package will include a new social safety net for non-regular workers.

Yosano didn’t specify what help would be given to the lower-paid temporary or part-time workers. They accounted for 34.5 percent of Japan’s 55.3 million employed in September 2008 compared with 24 percent in 1999, official data show.

‘Crisis Situation’

Japan’s jobless rate will soar to a record of 5.7 percent by the end of March 2010 after reaching a three-year high of 4.4 percent in February, according to a Bloomberg survey of 11 economists. That’s the highest since 1953 when records began. Companies from Toyota Motor Corp. to Sony Corp. are firing thousands of workers and reducing output as Japan’s exports plunged a record 49.4 percent in February.

“We’re seeing a crisis situation here,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. “The spike in unemployment is much faster, and younger people have much less of a buffer.”

Many are temporary workers like Miki who find themselves in a downward spiral with little savings and an inadequate welfare system to fall back on, said Michihiko Okino, secretary-general of a nonprofit group that manages a homeless shelter in Osaka.

Across Japan, 77 percent of unemployed people don’t receive benefits, according to an International Labor Organization report released March 24. That compares with 57 percent in the U.S. and 13 percent in Germany.

‘Serious Problem’

“You’re going to have a serious problem,” Okino said. “People will use their savings first, then stay with friends if they can. It’s what happens after that we are bracing for.”

Japan’s average unemployment rate since 1953 is 2.5 percent, less than half the 5.7 percent in the U.S., according to Bloomberg data. Unemployment is above 8 percent in the U.S. and the euro region.

The rate in Japan is historically lower because there are fewer women in the workforce and men have tended to have long- term contracts they hold onto, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London. He forecasts a rate of about 5.5 percent for the end of March 2010.

A rush of newly homeless is expected starting in May as workers exhaust their savings after being released from six- month or annual contracts that expired at the end of the fiscal year on March 31, Okino said.

Welfare Applications

Applications for state welfare assistance in Osaka surged 30 percent in December and 54 percent in January. City officials say they fear a rebound in homeless numbers that they have brought down to 4,024 from 7,757 in 2003, according to an official count, as the economy expanded for 5 1/2 years to October 2007.

“The numbers will definitely increase,” said Kazuo Furuya, head of homeless affairs in the city government, which is already 5 trillion yen in debt. “It’s not just Osaka, it’s a national problem.”

Osaka, with its blue-collar working base centered on traditional steel, manufacturing and shipping industries, is an indicator of the nation’s economic health, Schulz said.

Miki is two decades younger than most men sleeping in the streets of Osaka, a city of 2.64 million people that is 400 kilometers (250 miles) southwest of Tokyo. It has the largest number of homeless of any Japanese city.

Miki said he came to Osaka a decade ago, having previously worked on building sites in Yokohama, 30 kilometers south of Tokyo, after graduating from high school in Hiroshima when he was 18. Until his cold-storage job ended, he secured enough short-term contracts and part-time jobs in construction to feed and house himself, he said.

Soup Kitchens

Homeless since October, he keeps his hair neatly groomed and his red jacket, blue jeans and sneakers clean. The only hint of his circumstances is the black nylon suitcase he carries everywhere, containing his belongings.

A 15-minute drive south of where Miki spends his nights is Airin, a district where shelters and soup kitchens have sprung up to serve hundreds of older day laborers who are veterans of the streets.

Workers came to Airin, known locally as Kamagasaki, in the 1960s to work on construction sites for the 1970 Osaka Expo, which is regarded as marking Japan’s recovery from World War II. During the building boom of the 1980s and early 1990s, Airin’s population swelled to as many as 120,000 in an area the size of 116 football fields. There were more jobs than workers, and accommodations were cheap.

200 per Job

Now there are 200 applicants for every job, up from 30 to 40 a year ago, said Eriko Otani, a career counselor at Hello Work, a placement agency that fills lower-paid or temporary jobs. The number of factories in Osaka declined to 16,913 in 2005 from 28,392 in 1995 as manufacturers shifted jobs overseas, government data show.

On a cold March afternoon, more than 300 men stood in line at the labor office that assigns the next day’s shifts. Most left dejected. In the evening in Airin’s dirt-covered park, dozens of men with graying hair and thick coats warmed themselves around a fire as others rummaged through trash piles.

A stream of homeless men arrived at the entrance of the area’s largest shelter, whose 20-foot pale green metal walls dominate the park. Each got a pack of plain biscuits and could take a shower before claiming one of the 1,040 iron-framed beds with a thin mattress and a blanket. The only rule is no alcohol.

Beds Filling Up

“The situation has never been as bad as this for the residents of Airin,” said Yoshiko Mochihara, manager of the shelter. Its beds, which usually fill up in May and June, are already approaching full capacity, and the nonprofit group is considering building another shelter in the north of the city, she said.

“Most newly homeless will choose net cafes and other parts of the city before they come here,” she said.

Noboru Moto, 60, said he is too old to be hired for one of the few construction jobs available, so he collects aluminum cans around Airin’s park to sell to scrap metal merchants.

Until last year, he could earn 160 yen a kilogram, or 2,300 yen a day, enough for three square meals, he said. A drop in aluminum prices means he now gets 50 yen a kilogram, reducing him to a solitary lunch box of rice, vegetables and a little meat sold at convenience stores, he said.

“I’ll keep collecting; what else can I do?” Moto said, pausing by his cart with his prized possession, a pocket radio in a plastic bag tied to the handle.

‘Dirty and Smelly’

Miki tried sleeping in Airin but was put off by the conditions.

“It’s just not a good place, dirty and smelly,” he said. “There are better places to go that aren’t so desperate.”

No one knows how many like him are moving on to Osaka’s streets, charity officials say.

In 2004, then-Prime Minister Junichiro Koizumi extended labor laws, allowing carmakers and other manufacturers to use more lower-paid temporary workers and for longer periods. That helped employers cut production costs because they could hire and fire to meet demand.

“The labor laws switched the burden for supporting Japan’s workforce from the companies to the government,” said Wataru Kishi, in charge of welfare assistance at Osaka’s city government. “The issue is whether the government can provide the support or the entire system will collapse.”

Japan’s national government, which pays 75 percent of welfare costs, according to Kishi, has already pledged 1.1 trillion yen in economic stimulus to subsidize temporary workers’ jobs and house those out of work.

‘Felt Ashamed’

In December, the government announced it secured 13,000 housing units nationwide to give to the newly unemployed. It also said it would pay companies 60,000 yen a month to keep temporary workers they planned to eliminate on the payroll. The subsidy lasts for 6 months.

Miki said he didn’t know he might be entitled to assistance and hasn’t applied for any.

Instead, he makes around 3,600 yen a day from selling the Big Issue, a magazine for the benefit of homeless people, outside the Hankyu railway station in northern Osaka from 8 a.m. to 7 p.m., he said. That’s far less than the 260,000 yen a month he reports making in a 60-hour week at his packing job.

“The first time I sold Big Issue, I felt so ashamed,” he said. “But I’m not doing it out of choice. This could happen to anyone.”

Miki said he reads newspapers he finds looking for signs of an economic rebound. For now, he said, he worries that a prolonged recession may reduce the number of shoppers who buy the Big Issue.

“If that happens,” he said. “I’m really going to be in a tough spot.”

To contact the reporters on this story: Stuart Biggs in Osaka at [e-mail]; Masatsugu Horie in Osaka at [e-mail].

[Dr.Phool]

20. More squatters call foreclosures home

More squatters call foreclosures home
Advocacy groups screen potential residents, move them into vacant homes


By John Leland
updated 11:31 a.m. ET, Fri., April 10, 2009

MIAMI - When the woman who calls herself Queen Omega moved into a three-bedroom house here last December, she introduced herself to the neighbors, signed contracts for electricity and water and ordered an Internet connection.

What she did not tell anyone was that she had no legal right to be in the home.

Ms. Omega, 48, is one of the beneficiaries of the foreclosure crisis. Through a small advocacy group of local volunteers called Take Back the Land, she moved from a friend’s couch into a newly empty house that sold just a few years ago for more than $400,000.

Michael Stoops, executive director of the National Coalition for the Homeless, said about a dozen advocacy groups around the country were actively moving homeless people into vacant homes — some working in secret, others, like Take Back the Land, operating openly.

In addition to squatting, some advocacy groups have organized civil disobedience actions in which borrowers or renters refuse to leave homes after foreclosure.

The groups say that they have sometimes received support from neighbors and that beleaguered police departments have not aggressively gone after squatters.

(more)http://www.msnbc.msn.com/id/30148409/

[Demeter]

21. Wow

Thanks for posting that, Doc! It's an eye-opener.

[Dr.Phool]

23. I also think it's a good idea.

Nobody should be homeless. And if they keep up the place while they're staying there, even better for the neighborhood.

[Demeter]

11. The US is exporting its recession (by not importing)

http://blogs.cfr.org/setser/2009/04/09/the-us-is-exporting-its-recession-by-not-importing-the-february-trade-data/


The trade deficit continued to shrink in February, even though oil prices stopped falling.

Chalk that up to a huge slide in non-oil imports.

Non-oil goods imports were down 25% y/y. Automobile imports are now down over 50% y/y. Imports from Japan were down close to 50% y/y — a fall that matches the fall in Japan’s exports. Imports from both the eurozone and the pacific rim were down 30% y/y (not seasonally adjusted, and that may be a factor).

Non-oil exports were a bit higher in February than in January, a very positive surprise. It wasn’t the due to Boeing either. Civil aircraft exports were actually down a bit in February v January. Non-oil exports though are still down 18% y/y.

Alas, I tend to think the improvement in the February data will be hard to sustain, given the bleak global outlook and the lagged impact of the dollar’s rebound from its 2007/ early 2008 lows. I agree with Joshua Shapiro, who noted that the fundamentals still point to further falls in exports:

“Given what is happening in the rest of the world, it is highly unlikely that the February result represents the start of a turnaround in demand for U.S. goods abroad,” Joshua Shapiro, chief United States economist at MFR, wrote in a note.

A plot showing real (non-oil) goods imports and exports clearly shows a small bounce in exports in February.



But the main story is that on a y/y basis, both real imports and exports are way down.



I have a longer time series more readily available showing the change in nominal exports (both goods and services). And the smoothed data (which looks at the y/y change in a three month moving average of non-oil exports and imports to limit the impact of month-to-month noise) shows a large, ongoing slide in both exports and imports.



I don’t see any green shoots in the data. Not yet. Exports and imports are both falling at a rapid pace. And — as Calculated Risks’ charts make clear — the fall in both exports and imports is far sharper during this recession than during the 2001 recession.

One last point: Average US oil imports in the first two months of the year were around $15 billion a month. That is down almost $20 billion from this time last year. And it is down over $30 billion from the peak of the summer. The fall in oil prices — more than anything else — explains the improvement in the trade balance. Moreover, US petrol import volumes are down 6% y/y, even with lower prices. That suggests that American behavior has changed. Or perhaps it just suggests that the fall in economic activity trumped any response to lower prices.

[Demeter]

12. What Next For Banks?

The Baseline Scenario

What happened to the global economy and what we can do about it
http://baselinescenario.com/2009/04/09/what-next-for-banks/

The case for keeping banks in something close to their current structure begins to take shape. It’s not about traditional claims that big banks are more efficient, or Lloyd Blankfein’s argument that this is the only way to encourage risk-taking, or even the House Financial Services Committee view that immediate resumption of credit flows is essential for preserving jobs.

Rather, the argument is: those opposed to banks and bankers are angry populists who, if unchecked, would do great damage. Bankers should therefore agree to some mild reforms and more socially acceptable behavior in the short-run; in return, the centrists who control economic policymaking will protect them against the building backlash. This is a version of Jamie Dimon’s line: “if you let them vilify us too much, the economic recovery will be greatly delayed.”

There are three problems with this argument: it is wrong, it won’t work, and it doesn’t move the reform process at all in the right direction.

The “center vs. the pitchforks” idea fundamentally misconstrues the current debate. This is not about angry left or right against the center. It’s about centrist technocrat (close to current big finance) vs. centrist technocrat (suspicious of big finance; economists, lawyers, nonfinancial business, and - most interestingly - current/former finance, other than the biggest of the big, particularly people with experience in emerging markets.)

Just as an example, a broad range of entirely centrist people (including in and around the IMF; former Treasury; you’d be amazed) are expressing support for the ideas in our Atlantic article. People on the left are, not surprisingly, also in line with this view; but we’re also hearing convergent thoughts from some on the right - many who emphasize improving the environment for entrepreneurship don’t see big finance as their friend. So far, the only person who called to complain works for an “oligarch.”

You might think the “anti-pitchfork” strategy might work, particularly as it has in the past (e.g., in the early Clinton years). The problem for this strategy now is not just the fragile state of banks - by itself this can be ignored for a long while through forbearance, behind a smokescreen of complicated schemes with confusing acronyms - but the ways in which the markets they created now operate.

Just as global financial liberalization created the potential for capital to move violently across countries and greatly facilitated speculative attacks on currencies, so financial deregulation within the United States has made it possible for capital markets to attack - or, in less colorful terms, go short or place massive negative bets on - the credit of big banks and, in the latest developments, the ability of the government to bailout/rescue banks.

The latest credit default spreads data for the largest banks show a speculative run underway. As the system stabilizes, it becomes more plausible that a single big bank will fail or be rescued in a way that involves large losses for creditors. This would like trigger further speculative attacks on other banks, much as the shorting of countries’ obligations spread from Thailand to Indonesia/Malaysia and then to Korea in fall 1997.

The government’s own policies are facilitating these attacks, because as the Fed and Treasury make progress towards easing credit conditions, this makes it easier and cheaper for large hedge funds and others to take large short positions. And keep in mind the underlying loss of confidence is self-fulfilling: as you lose confidence, you want to go short, and selling the credit causes further loss of confidence - and banks are forced out of business.

The government’s entirely reasonable and long overdue request for a resolution authority will set up runs on that authority. If the authority is not granted, the runs will be on the government’s low and failing ability to save banks - given that the trust of Congress has been lost and no more cash for bailouts is likely forthcoming (presumably until there are large further shock waves or until Goldman Sachs itself is on the line.)

The continuing pressure on banks has nothing to do with populism and everything to do with the internal contradictions of the house of cards they built. Now they will scramble to limit short selling or find other emergency measures that will protect their credit. Such partial fixes would do nothing to stop the underlying deterioration of their credit; think about how countries facing currency attacks throw up futile defenses, try to change the rules, and squander their reserves on the way down.

You can see where this is going, but do not cheer. The likely result will be misery for many and further financial chaos around the world.

The big issue is of course the financial sector reform process. Some of my colleagues expressed great satisfaction with the progress made by the G20. But progressing down a blind alley is not something to be pleased about. I have yet to hear a single responsible official in any industrial country state what is obvious to most technocrats who are not currently officials: anything too big to fail is too big to exist.

If the bankers were just stupid, as suggested by David Brooks, then regulatory fixes might make some sense. But we know that bankers are smart, so it is their organizations that became stupid. What is the economic and political power structure that made it possible for such stupid organizations to become so large relative to the economy? Answer this and you address what we need to do going forward.

At a high profile conference in the run-up to this crisis, someone destined to become a leading official in the Obama Administration responded to a sensible technocratic critique of the financial system’s incentive structure (from the IMF, no less) by calling it “Luddite”. By all accounts, this is the prevailing attitude in today’s White House.

But the right metaphor is not breaking productive machines, or peasants with pitchforks, or even the poor vs. the rich. It’s as if the organizations running the nuclear power industry had shown themselves to be stupid and profoundly dangerous. You might wish to abolish nuclear power, but that is not a realistic option; storming power plants makes no sense; and the industry has captured all regulators ever sent after them.

The technocratic options are simple, (1) assume a better regulator, of a kind that has never existed on this face of this earth, (2) make banks smaller, less powerful, and much more boring.

By Simon Johnson

[Demeter]

72. The Warren Report: "Liquidate the Banks; Fire the Executives!" By Mike Whitney

http://informationclearinghouse.info/article22396.htm




April 10, 2009 "ICH" -- On Tuesday, a congressional panel headed by ex-Harvard law professor Elizabeth Warren released a report on Treasury Secretary Timothy Geithner's handling of the Troubled Assets Relief Program (TARP). Warren was appointed to lead the five-member Congressional Oversight Panel (COP) in November by Senate majority leader Harry Reid. From the opening paragraph on, the Warren report makes clear that Congress is frustrated with Geithner's so-called "Financial Rescue Plan" and doesn't have the foggiest idea of what he is trying to do. Here are the first few lines of "Assessing Treasury's Strategy: Six Months of TARP":

"With this report, the Congressional Oversight Panel examines Treasury’s current strategy and evaluates the progress it has achieved thus far. This report returns the Panel’s inquiry to a central question raised in its first report: What is Treasury’s strategy?"

Six months and $1 trillion later, and Congress still cannot figure out what Geithner is up to. It's a wonder the Treasury Secretary hasn't been fired already.

From the report:

"In addition to drawing on the $700 billion allocated to Treasury under the Emergency Economic Stabilization Act (EESA), economic stabilization efforts have depended heavily on the use of the Federal Reserve Board’s balance sheet. This approach has permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress. Thus, while Treasury has spent or committed $590.4 billion of TARP funds, according to Panel estimates, the Federal Reserve Board has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities. The total value of all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion."

So, while Congress approved a mere $700 billion in emergency funding for the TARP, Geithner and Bernanke deftly sidestepped the public opposition to more bailouts and shoveled another $3.3 trillion through the back door via loans and leverage for crappy mortgage paper that will never regain its value. Additionally, the Fed has made a deal with Treasury that when the financial crisis finally subsides, Treasury will assume the Fed's obligations vis a vis the "lending facilities", which means the taxpayer will then be responsible for unknown trillions in withering investments.

From the report:

"To deal with a troubled financial system, three fundamentally different policy alternatives are possible: liquidation, receivership, or subsidization. To place these alternatives in context, the report evaluates historical and contemporary efforts to confront financial crises and their relative success. The Panel focused on six historical experiences: (1) the U.S. Depression of the 1930s; (2) the bank run on and subsequent government seizure of Continental Illinois in 1984; (3) the savings and loan crisis of the late 1980s and establishment of the Resolution Trust Corporation; (4) the recapitalization of the FDIC bank insurance fund in 1991; (5) Sweden’s financial crisis of the early 1990s; and (6) what has become known as Japan’s “Lost Decade” of the 1990s. The report also surveys the approaches currently employed by Iceland, Ireland, the United Kingdom, and other European countries."

This statement shows that the congressional committee understands that Geithner's lunatic plan has no historic precedent and no prospect of succeeding. Geithner's circuitous Public-Private Investment Program (PPIP)--which is designed to remove toxic assets from bank balance sheets--is an end-run around "tried-and-true" methods for fixing the banking system. In the most restrained and diplomatic language, Warren is telling Geithner that she knows that he's up to no good.

From the report:

"Liquidation avoids the uncertainty and open-ended commitment that accompany subsidization. It can restore market confidence in the surviving banks, and it can potentially accelerate recovery by offering decisive and clear statements about the government’s evaluation of financial conditions and institutions."
............

The committee agrees with the vast majority of reputable economists who think the banks should be taken over (liquidated) and the bad assets put up for auction. This is the committee's number one recommendation.

The committee also explores the pros and cons of conservatorship (which entails a reorganization in which bad assets are removed, failed managers are replaced, and parts of the business are spun off) and government subsidization, which involves capital infusions or the purchasing of troubled assets. Subsidization, however, carries the risk of distorting the market (by keeping assets artificially high) and creating a constant drain on government resources. Subsidization tends to create hobbled banks that continue to languish as wards of the state.

Liquidation, conservatorship and government subsidization; these are the three ways to fix the banking system. There is no fourth way. Geithner's plan is not a plan at all; it's mumbo-jumbo dignified with an acronym; PPIP. The Treasury Secretary is being as opaque as possible to stall for time while he diverts trillions in public revenue to his scamster friends at the big banks through capital injections and nutty-sounding money laundering programs like the PPIP.

From the report:

"Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability."

This is a crucial point; the toxic assets are not going to regain their value because their current market price--30 cents on the dollar for AAA mortgage-backed securities--accurately reflects the amount of risk they bear. The market is right and Geithner is wrong; it's that simple. Many of these securities are comprised of loans that were issued to people without sufficient income to make the payments. These "liar's loans" were bundled together with good loans into mortgage-backed securities. No one can say with any certainty what they are really worth. Naturally, there is a premium for uncertainty, which is why the assets are fetching a mere 30 cents on the dollar. This won't change no matter how much Geithner tries to prop up the market. The well has been already poisoned.

Also, according to this month’s Case-Schiller report, housing prices are falling at the fastest pace since their peak in 2006. That means that the market for mortgage-backed securities (MBS) will continue to plunge and the losses at the banks will continue to grow. The IMF recently increased its estimate of how much toxic mortgage-backed papaer the banks are holding to $4 trillion.

The banking system is underwater and needs to be resolved quickly before another Lehman-type crisis arises sending the economy into a protracted Depression. Geithner is clearly the wrong man for the job. His PPIP is nothing more than a stealth ripoff of public funds which uses confusing rules and guidelines to conceal the true objective, which is to shift toxic garbage onto the public's balance sheet while recapitalizing bankrupt financial institutions.

So, why is Geithner being kept on at Treasury when his plan has already been thoroughly discredited and his only goal is to bailout the banks through underhanded means?

That question was best answered by the former chief economist of the IMF, Simon Johnson, in an article which appeared in The Atlantic Monthly:

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming... is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation; recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression we're running out of time." (The Atlantic Monthly, May 2009, by Simon Johnson)

The banks have a stranglehold on the political process. Many of their foot soldiers now occupy the highest offices in government. It's up to people like Elizabeth Warren to draw attention to the silent coup that has taken place and do whatever needs to be done to purge the moneylenders from the seat of power and restore representative government. It's a tall order and time is running out.

http://www.youtube.com/watch?v=7bRerUGAOAw&feature=player_embedded

* http://cop.senate.gov/reports/library/report-040709-cop.cfm Elizabeth Warren's 8 minute video summary of the COP report.

Mike Whitney lives in Washington state. He can be reached at [e-mail]


For a Succinct Summary of where We Are, and How We Got there, see

No End In Sight By Mike Whitney

http://informationclearinghouse.info/article22374.htm

[Demeter]

13. Socialism Gaining Ground in America

http://www.nakedcapitalism.com/2009/04/socialism-gaining-ground-in-america.html

Rasmussen just released the results of a recent poll on political attitudes. It found only 53% clearly preferred capitalism (hat tip reader David H):

Only 53% of American adults believe capitalism is better than socialism.

The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.

Investors by a 5-to-1 margin choose capitalism. As for those who do not invest, 40% say capitalism is better while 25% prefer socialism.


Yves here, Not surprising results break along income lines (investing being a rough proxy for income). Back to the article:

There is a partisan gap as well. Republicans - by an 11-to-1 margin - favor capitalism. Democrats are much more closely divided: Just 39% say capitalism is better while 30% prefer socialism. As for those not affiliated with either major political party, 48% say capitalism is best, and 21% opt for socialism...

It is interesting to compare the new results to an earlier survey in which 70% of Americans prefer a free-market economy. The fact that a “free-market economy” attracts substantially more support than “capitalism” may suggest some skepticism about whether capitalism in the United States today relies on free markets.


Yves again. The phrase "free markets" should be banned. It is a slippery, ill defined concept, and perversely conflates "freedom" (lack of restrictions) with "markets" which rely on laws (even Friedman would grant that) and exchange. A market with no rules is a brawl (think of drug dealers, who operate outside the law. deal in often adulterated goods, and contracts are often enforced via violence). It is a brilliant bit of Newspeak. Back to the article:

Other survey data supports that notion. Rather than seeing large corporations as committed to free markets, two-out-of-three Americans believe that big government and big business often work together in ways that hurt consumers and investors.


Yves here. See, everyone fell for the advertising. "Free markets" means the advantages accrue to the big and powerful, but its promoters managed to sell it to libertarians, who somehow bought that this construct would help the little guy. Sorry, you were had. To the story again:

Fifteen percent (15%) of Americans say they prefer a government-managed economy, similar to the 20% support for socialism. Just 14% believe the federal government would do a better job running auto companies, and even fewer believe government would do a better job running financial firms.


Yves again. Rasmussen is conservative, and I'd like to see how those questions were phrased. I bet if you posed the real choice, do you favor continued cash infusions to weak and maybe failing financial firms to a government receivership and restructuring, I bet you'd see over 50% approval.

Nevertheless, the leaning away from capitalism in the survey is not a strong endorsement of socialism (Americans are too wedded to the promise of upward mobility). It is revulsion against capitalism turned Mussolini style corpocracy, Given a choice between capitalism of that form and anything else, they'll gamble on the alternative.

[Demeter]

15. Bill Moyers & Michael Winship: Changing the Rules of the Blame Game

http://www.pbs.org/moyers/journal/blog/2009/04/bill_moyers_michael_winship_ch.html#more

A cartoon in the Sunday comics shows that mustachioed fellow with monocle and top hat from the Monopoly game – “Rich Uncle Pennybags,” he used to be called – standing along the roadside, destitute, holding a sign: “Will blame poor people for food.”

Time to move the blame to where it really belongs. That means no more coddling banks with bailout billions marked “secret.” No more allowing their executives lavish bonuses and new corporate jets as if they’ve won the megalottery and not sent the economy down the tubes. And no more apostles of Wall Street calling the shots.

Which brings us to Larry Summers. Over the weekend, the White House released financial disclosure reports revealing that Summers, director of the National Economic Council, received $5.2 million last year working for a $30 billion hedge fund. He made another $2.7 million in lecture fees, including cash from such recent beneficiaries of taxpayer generosity as Citigroup, JP Morgan and Goldman Sachs. The now defunct financial services giant Lehman Brothers handsomely purchased his pearls of wisdom, too.

Reading stories about Summers and Wall Street you realize the man was intoxicated by the exotic witches’ brew of derivatives and other financial legerdemain that got us into such a fine mess in the first place. Yet here he is, serving as gatekeeper of the information and analysis going to President Obama on the current collapse. We have to wonder, when the President asks, “Larry, who did this to us?” is he going to name names of old friends and benefactors? Knowing he most likely will be looking for his old desk back once he leaves the White House, is he going to be tough on the very system of lucrative largesse that he helped create in his earlier incarnation as a de-regulating Treasury Secretary? (“Larry?” “Yes, Mr. President?” “Who the hell recommended repealing the Glass-Steagall Act back in the 90s and opened the floodgates to all this greed?” “Uh, excuse me, Mr. President, I think Bob Rubin’s calling me.”)

That imaginary conversation came to mind last week as we watched President Obama's joint press conference with British Prime Minister Gordon Brown. When a reporter asked Obama who is to blame for the financial crisis, our usually eloquent and knowledgeable President responded with a rambling and ineffectual answer. With Larry Summers guarding his inbox, it’s hardly surprising he’s not getting the whole story.

If only someone with nothing to lose would remind the President of that old story – perhaps apocryphal but containing a powerful truth – of the Great Wall of China. Four thousand miles long and 25 feet tall. Intended to be too high to climb over, too thick to break through, and too long to go around. Yet in its first century of the wall’s existence, China was successfully breached three times by invaders who didn’t have to break through, climb over, or go around. They simply were waved through the gates by obliging watchmen. The Chinese knew their wall very well. It was the gatekeepers they didn’t know.

Shifting the blame for the financial crisis to where it belongs also means no more playacting in round after round of congressional hearings devoted more to posturing and false contrition than to truth. We need real hearings, conducted by experienced and fiercely independent counsel asking the tough questions, or an official commission with subpoena power that can generate evidence leading, if warranted, to trials and convictions – and this time Rich Uncle Pennybags shouldn’t have safely tucked away in his vest pocket a “Get Out of Jail Free” card.

So far, the only one in the clink is Bernie Madoff and he was “a piker” compared to the bankers who peddled toxic assets like unverified “liars' loan” mortgages as Triple-A quality goods. So says Bill Black, and he should know. During the savings and loan scandal in the 1980s, Black, who teaches economics and law at the University of Missouri, Kansas City, was the federal regulator who accused then-House Speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for campaign contributions and other perks. They got off with a wrist slap but Black and others successfully led investigations that resulted in convictions and re-regulation of the savings and loan industry.

Bill Black wrote a book about his experiences with a title that fits today as well as it did when he published it four years ago – "The Best Way to Rob a Bank Is to Own One." On last Friday night’s edition of BILL MOYERS JOURNAL, he said the current economic and financial meltdown is driven by fraud and banks that got away with it, in part, because of government deregulation under prior Republican and Democratic administrations.

“Now we know what happens when you destroy regulation,” Black said. “You get the biggest financial calamity for anybody under the age of 80.”

What’s more, the government ignored warnings and existing legislation to stop it before the current crisis got worse. “They didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the savings and loan crisis,” Black said. “Even while the institutions were reporting they were the most profitable savings and loans in America, we knew they were frauds. And we were moving to close them down.”

There was advance warning of the current collapse. Black says that the FBI blew the whistle; in September 2004, “there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle.”

But after 9/11, “The Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents.” So today, despite a crisis a hundred times worse than the Savings and Loan scandal, “there are one-fifth as many FBI agents” assigned to bank fraud.

Treasury Secretary Timothy Geithner “is covering up,” Black said. “Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have massive losses, and that they're fine…

“They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent, they think Americans are a bunch of cowards, and that we'll run screaming to the exits… And it's foolishness, all right?

“Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, ‘We just can't let the big banks fail.’ That's wrong.”

Black asked, “Why would we keep CEO’s and CFO’s and other senior officers that caused the problems? That’s nuts… We’re hiding the losses instead of trying to find out the real losses? Stop that… Because you need good information to make good decisions… Follow what works instead of what’s failed. Start appointing people who have records of success instead of records of failure… There are lots of things we can do. Even today, as late as it is. Even though we’ve had a terrible start to the administration. They could change, and they could change within weeks.”

He called for a 21st century version of the Pecora Commission, referring to hearings that sought the causes of the Great Depression, held during the 1930’s by the US Senate Committee on Banking and Currency.

Ferdinand Pecora was the committee’s chief counsel and interrogator, a Sicilian émigré who was a progressive devotee of trust busting Teddy Roosevelt and a former Manhattan assistant district attorney who successfully helped shut down more than a hundred Wall Street “bucket shops” selling bogus securities and commodity futures. He was relentless in his cross-examination of financial executives, including J.P. Morgan himself.

Pecora’s investigation uncovered a variety of Wall Street calumnies – among them Morgan’s “preferred list” of government and political insiders, including former President Coolidge and a Supreme Court justice, who were offered big discounts on stock deals. The hearings led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934.

In the preface to his 1939 memoir, “Wall Street under Oath,” Ferdinand Pecora told the story of his investigation and described an attitude amongst the Rich Uncle Pennybags of the financial world that will sound familiar to Bill Black and those who seek out the guilty today.

“That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt,” Pecora wrote. “Indeed, if you now hearken to the Oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-1933; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob….”

According to Politico.com, at his March 27 White House meeting with the nation’s top bankers, President Obama heard similar arguments and interrupted, saying, “Be careful how you make those statements, gentlemen. The public isn’t buying that…. My administration is the only thing between you and the pitchforks.”

Stand aside, Mr. President, and let us prod with our pitchforks to get at the facts.

[Hugin]

17. I already colored my eggs.

Thought I'd beat the rush.

Two bank failures lurking in the ether tonight.

The second one in CO is being liquidated outright.

Links are posted everywhere... but, if you insist check out http://www.fdic.gov

'Nite, I'm off to dream of bunnies! ;)

[Demeter]

24. Choosing Its Own Path, Ford Stayed Independent

http://www.nytimes.com/2009/04/09/business/09ford.html?ref=business


By BILL VLASIC

DEARBORN, Mich. — On Nov. 29, 2006, Ford Motor made a surprising pitch to the nation’s biggest banks. In a packed ballroom at a New York hotel, Ford’s chief executive, Alan R. Mulally, said he would mortgage all the company’s assets for billions of dollars in loans to finance an overhaul of the troubled automaker. Although the economy was healthy then, Mr. Mulally said the money would give Ford “a cushion to protect for a recession or other unexpected event.”

At the time, the request was considered an act of desperation. But the $23.6 billion in loans it received turned out to be Ford’s salvation.

Plunging car sales have driven its two American rivals, General Motors and Chrysler, to the brink of bankruptcy, forcing them to borrow $17.4 billion from the federal government to stay in business. The future of both companies will be decided in the weeks to come by President Obama and his special auto task force.

But because of the money it borrowed nearly three years ago, Ford is in far better shape than its two crosstown rivals. The loans have kept it independent and on a course to survive the worst new-vehicle market in nearly 30 years.

“It was a defining moment for us,” Mr. Mulally said in an interview. “But they never would have been willing to lend us the money if we weren’t on a different path.”

Mr. Mulally had been on the job as Ford’s chief executive less than 90 days when he asked for the loans. But as he told the bankers, he was prepared to make tough decisions, including selling off brands, shedding jobs and focusing Ford’s efforts on small cars rather than trucks and sport utility vehicles.

Since then, he has accelerated Ford along that path, pursuing a top-to-bottom transformation that extends from its global product lineup to its renewed focus on the Blue Oval trademark.

As a result, for the first time in decades, Ford’s fortunes no longer seem so closely tied to the broader fate of Detroit.

Mr. Mulally, 63, is doing all he can to separate Ford in the public’s mind from its hometown competitors.

To emphasize his point, he pulled out a recent newspaper cartoon that compared college basketball’s Final Four to Toyota, Honda, Volkswagen — and Ford.

“We are competing against the best in the world,” Mr. Mulally said. “It’s not just with the companies in the U.S.”

While G.M. and Chrysler wait for more federal aid, Ford is capitalizing on its status as the only one of the Big Three in Detroit to make it, so far, on its own.

Some surveys are showing consumers migrating away from G.M. and Chrysler to Ford showrooms. Inside Ford headquarters here in Dearborn, management sees a unique opportunity to expand its market share and further separate Ford from the competition.

“I don’t take any joy in watching G.M. and Chrysler struggle,” said William C. Ford Jr., the company’s executive chairman. “I wish them well, but I wish us better. I want us to win.”

Ford is hardly out of the woods. The company lost $14.6 billion last year, when its vehicle sales in the United States slumped 20 percent, compared with 22 percent at G.M. and 30 percent at Chrysler.

Its once-bulging bank account is dwindling as well. Industry analysts estimate that Ford has about a year’s worth of cash left to carry it through a still-depressed car market.

Still, Ford’s decision to borrow billions in 2006 when the capital markets were thriving will go down as one of the most significant moves in the company’s 105-year history.

“We believe this foresight to strengthen the company’s balance sheet is what has separated Ford from its crosstown rivals during the economic downturn,” a Merrill Lynch analyst, John Murphy, said in a report to investors this week.

The Obama administration is forcing G.M. and Chrysler to obtain big concessions from union workers and lenders to qualify for more federal aid.

Ford, however, is having better success on both fronts without a government mandate.

Unlike G.M. and Chrysler, the company has reached agreement with the United Automobile Workers to finance half of its new retiree health care trust with company stock.

Earlier this week, Ford also completed a deal with its creditors to retire $9.9 billion in corporate debt — some of which was part of the big borrowing in 2006.

Investors have welcomed the moves. Ford’s stock climbed 13 percent to close at $3.95 on Wednesday, the highest it has been since October.

That was when the car market crashed and the auto companies began burning through huge amounts of cash. A month later, Mr. Mulally was in the spotlight — along with G.M.’s chairman, Rick Wagoner, and Chrysler’s chairman, Robert L. Nardelli — during Congressional hearings on Detroit’s financial woes.

Mr. Mulally said Ford never intended to ask for federal help but needed to support the industry during its crisis.

“From Day 1, we had no desire to access the government money,” he said.

Ford parted ways with G.M. and Chrysler in December, when its two rivals effectively came under government supervision as part of their loan agreements.

Last month, the presidential task force forced Mr. Wagoner to resign at G.M. and began an effort to replace the company’s board.

Meanwhile, Mr. Ford, whose great-grandfather founded the auto company, and Mr. Mulally continue to pursue their long-range turnaround plans.

When Mr. Mulally came to Ford after 37 years with Boeing, one of his first tasks was to borrow the money needed to streamline the company and hasten its shift to smaller, more fuel-efficient vehicles.

He made his presentation to more than 400 bankers in the ballroom of the Marriott Marquis in New York, and he knew he was facing a skeptical audience.

“The No. 1 thing we need to do is deal with our reality and tackle those issues head on,” he said.

At the time, the consensus among analysts was that G.M. was in better shape than Ford.

“It was not seen as a positive that Ford needed to leverage itself so dramatically,” said John A. Casesa, a former Merrill Lynch analyst and consultant to auto companies. “It was more of an act of desperation.”

But Ford benefited from the easy credit of the times. The company originally sought to raise $18 billion and ended up with $23.6 billion.

It has needed every bit of it. Mr. Mulally acknowledged that he did not foresee that annual auto sales in the United States would drop to 13.2 million vehicles last year, from 16 million in 2006, and possibly as low as 10 million this year.

He also knows that a continued slump in sales will put even more pressure on Ford’s balance sheet.

“We have sufficient liquidity to handle what the situation is now,” he said.

Ford is betting that its newest products can stabilize its falling revenue. It has high hopes, for example, for the new Taurus midsize sedan that Mr. Mulally pushed for in his early days at the company.

But it is still an uphill climb. Ford’s sales are down 43 percent in the first three months of this year compared with the same period a year earlier. The overall United States market is down 38 percent.

Ford’s market share has been holding steady at about 15 percent. But that could move up, particularly if either G.M. or Chrysler is forced into bankruptcy.

A recent national study by the firm AutoPacific found that 72 percent of those surveyed would be more likely to buy a Ford product because the company is not taking government loans.

“This is America, and this is about making products people want and being self-sufficient,” Mr. Mulally said. “Clearly, the reputation of Ford is on the rise in the consumer’s mind.”

[tclambert]

37. 16 million cars sold in 2006, 13.2 million last year, and this year, they project around 9 million

Now that is a tough market.

That was a good article. But it leaves me wondering, did Ford predict this recession? Or did they borrow the money for other reasons and thereby lucked out when the recession hit? And what about Toyota, Honda, and Nissan? How are they faring? And how are they surviving this horrible car market?



Jay Leno came to Detroit (really Auburn Hills, about 20 miles away) to give two free concerts. In an interview he said where he lives he can see Toyota Priuses being parked for storage near the Port of Long Beach. All those Priuses just stacking up, unsold. He also thanked Detroit for the Detroit Lions and all the material they supplied him with. (The Lions are owned by William C. Ford, Sr. Apparently their management was not as foresightful as the car company's.)

[Demeter]

25. How bad is the economy?

It is definitely getting very bad


http://co107w.col107.mail.live.com/mail/SafeRedirect.aspx?hm__tg=%26ct%3daW1hZ2UvanBlZw_3d_3d%26name%3daW1hZ2UuanBn%26inline%3d1%26rfc%3d0%26empty%3dFalse%26imgsrc%3dcid%253aCF226080E881422787BBA8FDB02DD637%2540Barb&oneredir=1&ip=10.12.140.8&d=d4849&mf=0&a=01_51eb5298eb9d19ba049b09edfc8ae1584509f38cdfc598c91da9b23d2370e88e

Click on the link to see




(Cats are so dramatic!)

[Demeter]

26. 3/5ths of Oversight Panel Favor Japanese Solution

http://www.nakedcapitalism.com/2009/04/guest-post-elizabeth-warren-forced-to.html


Submitted by Rolfe Winkler, publisher of OptionARMageddon

The Congressional Oversight Panel released its latest report yesterday. Luckily news outlets reporting on the release (see Bloomberg and Housing Wire) are skipping Warren's YouTube and Executive summaries--awkward exercises in establishing consensus both of them. They focus instead on the report's more provocative suggestion, that liquidating failed banks would be a better way of solving the economic crisis.

And we'd better get a move on. The report makes a very good point that unlike Japan and Sweden, we can't rely on international consumer demand to rescue us:

...we may in fact be more economically vulnerable to a weakened financial system than either Sweden and Japan were because we cannot rely on some larger economy to generate consumer demand for our goods and services.

Unfortunately, the report is not able to conclude that liquidation is the way to go. Three panel members---John Sununu, Richard Neiman and Jeb Hensarling---remain convinced that we're facing a short-term liquidity problem, not a long-term solvency problem. With that in mind, they think Treasury's plan to subsidize banks is the least bad option. Keep them stumbling along until favorable lending conditions return them to profitability. But if the banks ARE insolvent, then subsidizing them is pouring public money down the drain. We know this from Japan's experience. They kept banks on life support for a decade, which solved nothing. They ran up stupendous budget deficits in a failed attempt to stimulate an economy weighed down by broken banks. Hard as they tried, Japan couldn't borrow its way out of its bank crisis. And neither can we.

This point of contention is easy to spot when reading the report's executive summary next to the John Sununu/Richard Neiman "alternative view."

From Warren's exec summary:

One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two.

Were internet stocks "artificially depressed" after the bubble burst in 2001? If you think so, then I've got eToys stock I'd like to sell you for $50 a share. With that in mind, it's absurd to think real estate prices are now "artificially depressed." They are returning to valuations that are fundamentally sound, i.e. supported by actual cash flows as opposed to easy credit. "Mortgage-related assets" are secured by real estate. If houses are declining in value, the loans made to purchase them at obscene valuations must also fall. Back to Warren...

If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis....

On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

She is bending over backwards to give Sununu/Nieman a fair shake. Here's their view:

We affirm that it is entirely reasonable to assume that a liquidity discount is impairing these assets, and thus that the Treasury has adopted a viable plan based on this valid assumption. Further, we believe that a viable plan should be given the opportunity to work. Speculation on alternatives runs the risk of distracting our energy from implementation of a viable plan and needlessly eroding market confidence. Market prices are being partially subjected to a downward self-reinforcing cycle that could be exacerbated by unwarranted consideration of more radical solutions such as nationalization.

How Sununu and Neiman can justify this opinion is beyond me. Banks have but a fraction of tangible common equity relative to their assets, which means there's no cushion to absorb losses. To argue that this is a liquidity problem, one needs to prove that asset values are temporarily depressed, that the values they reached during the bubble were in fact "correct." But of course they weren't. So why give equal weight to bullshit arguments that assets tied to real estate are "depressed?"

Winning this argument is crucial to getting through this crisis with our national balance sheet intact.

Fannie and Freddie are insolvent to the tune of hundreds of billions (so far Obama has committed $200 billion to each of them). You no longer hear arguments that these institutions are just temporarily illiquid. The banking sector has been the recipient of far larger subsidies in total yet opponents of seizing them still delude themselves that banks are still fundamentally sound.

How interesting that a Republican like Sununu is helping to lead the charge here. No doubt he justifies his opposition to "nationalization" on some sort of bastardized free market grounds. The last thing he probably wants is government control of banks. But he's missing the forest for the trees. The socialist solution to the problem isn't taking control of the banks, it's having taxpayers absorb bank losses. Capitalism is about failure. Bad businesses fail and good ones rise in their place. This leads to employment volatility in the short-term but more growth and innovation in the long term.

Because economic activity is particularly sensitive to the fates of the financial sector, we have a particular way of dealing with bank bankruptcies. Receivership or liquidation as directed by FDIC. That's the only "solution" to the bank crisis.

But it's not fair to single out Republicans for permitting this travesty to continue. Yes, the bailout policy originated with the Bush administration, but clearly Obama has taken ownership of it. This is a shame. Having heard him speak about the superiority of the Swedish solution to the Japanese one, I think he knows that a proper bank recapitalization needs to happen. Yet he clearly doesn't have the cojones to deliver the goods. He can't even stand up to his own economic team; Geithner and Summers will move mountains to protect banks and their creditors. This will continue until Barack puts a stop to it.

Hopefully by firing both of them and putting Paul Volcker in charge.



SUNUNU--LIKE FATHER, LIKE SON STILL GOP AFTER ALL THESE YEARS. DAD WAS A GREAT BUSHCO FLUNKY.

[Demeter]

27. In uncertain times, all that glisters is a gold standard By Gillian Tett

http://www.ft.com/cms/s/0/d29f2728-249e-11de-9a01-00144feabdc0.html


Published: April 9 2009 03:00 | Last updated: April 9 2009 03:00

A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis.

The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard.

"Two-thirds of the world's assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement," explains Mr Smith, noting that "it seems . . . the Chinese have now concluded that this is not acceptable".

Just a bit of pie-in-the-sky posturing of the sort that often occurs in high-altitude Davos? Perhaps. But Mr Smith is hardly a do-gooding, state-loving dreamer; on the contrary, Tullett Prebon is about as ruthlessly free-market as they come.

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today's elevated prices.

"The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.

Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.

Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom"*.

In the years since he penned this essay, Greenspan has partly backed away from those ideas (and he blatantly ignored their implications when he was at the Fed) But now they look prescient.

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . in the absence of the gold standard . . . there is no safe store of value," Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

Of course, for the moment all this muttering about gold is simply wild speculation. Even if western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.

But what this debate does show is just how much cognitive dissonance - and utter uncertainty - continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.

Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

*http://www.financialsense.com/metals/ greenspan1966.html

[e-mail]

[tclambert]

38. Excuse me, I'm an instellar traveler just passing through,.

Can any of you explain why Earth Humans think gold is valuable? They seem irrationally obsessed with it. Why not platinum or uranium, both of which are more useful and inherently more valuable?


Ridiculous species, really. Don't get me started on their religions, or on sex! I hope someone records their antics before they invent killer robots and wipe themselves out.

[Demeter]

40. Well, there Isn't Enough Platinum to Make It Feasible

and uranium decays (not to mention it's poisonous and can explode).

[tclambert]

60. I'm sorry, was that an attempt to make a gold monetary standard sound logical?

It's ridiculous on the face of it. Gold is a yellowish rock. It has zero intrinsic value. It doesn't even taste like chicken.

[Demeter]

65. I am Agnostic About Gold

It makes as much sense as paper currency does, to me. I do miss silver coinage, though. It sounded so musical if it dropped to the ground....

[Demeter]

28. Bank Credit Growth Drops Precipitously

http://jessescrossroadscafe.blogspot.com/2009/04/bank-credit-growth-drops-precipitously.html


The Growth Rate of Total Credit at all US Commercial Banks is dropping precipitously as can be seen from the chart below.



This is a negative indicator for most banks involved in the actual business of banking, even as the spreads between Fed money and money on loan widen.

Advantage goes to those banks who are gaming the markets, also known as trading profits, which is probably the opposite outcome which Tim and Ben would desire, if they were thinking about it.

Should banks be trading in the markets at all for their own accounts? We think not.

Glass-Steagall should be reintroduced as quickly as possible to get the banks back in the business of banking. It is a profound disappointment that the Obama Administration with the Democratic leadership have done little or nothing to reverse the speculative trends in the money center banks.

That they have been the recipients of huge campaign contributions from these same banks make the situation all the worse, for how can one stand on principle when the outcome is at odds with your stated objectives, and you are taking money from those who favor that outcome?

If you wish to get the banks lending again, stop giving them hot money and a free ticket to the speculative gaming tables where the rules, or a lack thereof, are in their favor.

[Demeter]

29. FDIC's Insurance Commitments 34% Higher Than Reported by Rolfe Winkler, publisher of OptionARMageddo

http://www.nakedcapitalism.com/2009/04/guest-post-fdics-insurance-commitments.html

.

Conventional wisdom says that financial companies are having trouble borrowing because credit markets are broken. This is dangerously wrong. The credit market itself is fine. It's balance sheets that are broken. They have so little equity relative to their assets, there's no cushion to protect creditors from losses. With few good borrowers available and with the price of credit capped by government, naturally creditors have little inclination to lend. Washington's solution is to "guarantee" all manner of risky investments, to use the public's balance sheet to absorb trillions of dollars worth of private sector losses. We're told this will "restore confidence" in borrower balance sheets, leading to increased lending. But this policy is dangerously misguided and may very well lead to economic Armageddon.

In point of fact, our fractional reserve financial system is just a gigantic Ponzi scheme. It can only survive as long as it expands, which is to say, as long as new debt is flushed through the system to finance old debt. But like all Ponzi schemes, the larger it grows the more unstable it becomes. Eventually, it too will collapse of its own weight.

With this in mind, government should be concerned with paying down debt, not expanding it. Deficit-financed bailouts and stimulus only increase the size of the Ponzi. The bigger it grows, the harder it will crash.

MUCH MORE AT LINK

[Demeter]

30. Wall Street Back To Its Criminal Ways? by Tyler Durden, publisher of Zero Hedge

http://www.nakedcapitalism.com/2009/04/guest-post-wall-street-back-to-its.html


There was a time on Wall Street when insider trading was rampant, when sellside analysts would pump stocks under the guidance of their superiors only to have their corporate finance colleagues do an equity offer shortly after, when the amount of money a bank's corporate clients paid would determine its rating, and when analysts said in internal emails a company is worthless, only to issue reports claiming the company was the next sliced bread. Then things changed for the better briefly, when Spitzer came on the stage. However, with his thunderous fall from grace in an act of utter hypocrisy, the behavior he fought so hard to curb started gradually coming back.

Yesterday, Wall Street's shadiness came back with a vengeance.

As Zero Hedge disclosed yesterday, mall REIT Kimco decided to dilute its equityholders by issuing over $700 million (including the green shoe) in new shares which would be used to buy back the company's debt, as KIM has $735 million in debt maturities over the next 3 years, and a $707 million currently drawn on its secured credit facility. One look at the company's equity prospectus reveals that the lead underwriter is non other than "scandal-central" investment bank Merrill Lynch.



There is, of course, nothing wrong with being a member of an underwriting syndicate - in fact, absent generating profits from AIG structured finance liquidations forever, banks like ML (better known these days as Bank of America's slam dunk acquisition if one listens to Ken Lewis) will need it if they want to generate revenues. However, what Zero Hedge has a major problem with, is what ML equity research analyst Craig Schmidt did hours if not minutes after the offering was announced. In a research note update, Schmidt, who now gets his paycheck from Bank Of America (this will be relevant in a second), raised KIM's rating from Underperform to Buy.



This is where visions of Jack Grubman should resurface. While Zero Hedge will not speculate over the efficiency of the Chinese Wall at Merrill Lynch, aka Bank Of America, something in this transaction stinks to high heaven.

Let's walk through the sequence of events:

1) First Merrill Lynch/BofA gets clients to subscribe to a massively diluting equity offering (105 million new shares out of 271 million pre-offering shares, or 39% dilution). The offering prices at $7.10/share, a 6% discount to the previous day closing price of $7.49. In the process Merrill pockets an underwriting fee likely equal to 3% of the offering or around $20 million.

2) Minutes after the offering Merrill REIT analyst Schmidt comes out with a report, changing the recommendation on the stock from a Sell to a Buy, thereby getting the vanilla money which makes critical fiduciary decisions merely based on what some sell-side analyst will recommend. As a result Kimco stock rises throughout the day and closes at $9.40, a 25% premium to the closing price, and a 30% premium to offering price of $7.10, which closed that very same day.

3) Notable here is that Schmidt had come out with a Sell (aka Underperform) report on the company less than two months ago, on February 5, titled "Write-downs drove the miss." Among Schmidt's concerns were the following very salient points:

Write downs, not Q4 operating metrics, are the issue

KIM’s Q4 operating metrics took a back seat to write downs in the quarter as the company reported a sharp drop in FFO as it booked $111.8mn in non-cash impairment charges. These write-downs included $83.1mn for securities investments, $22.2mn for the equity investment in JVs with Prudential and $6.5mn for development projects in addition to $4mn of severance charges due to a reduction in headcount. While Kimco’s shopping center operations held up reasonably well in Q4 (rent spreads remained positive and same-store NOI was +1.4%), the company expects far weaker results in 2009 which is common theme running through the REIT industry.

Transaction income non-existent; lowering estimates

With the extensive write-downs, KIM’s reported 4Q08 FFO of $0.04 was $0.21 below our estimate. Looking to ’09, we expect NOI to decline 3% which includes a 300bp decline in vacancy by YE09. Given the impact of deteriorating operating metrics combined with a sharp reduction in transaction activity, we are reducing our ’09 FFO estimate from $2.15 to $1.74 while our ’10 estimate drops from $2.14 to $1.60.

Lowering PO to $12.50

Due to lower projected NOI growth for ‘09, we reduced our forward NAV for KIM from $17.04 to $14.13 and as a result our PO falls from $15.50 to $12.50 which is roughly a 10% discount to forward NAV. Given the weakness in retail spending and cautious leasing environment combined with a sharp erosion in Kimco’s noncore business segments we are maintaining our Underperform rating until we gain better visibility on the retail landscape.

4) Even assuming Merrill's Chinese Wall is fully operational, it would be curious to see how the company managed to "sell" to its clients a stock offering in which its very own analyst had a Sell rating: the cynics among us would presume these very clients would have no problem buying into the offering if they knew or anticipated a change in recommendation (especially one from a Sell to a Buy), and knew they could flip the stock they bought through the offering for a 30% gain in one day!

5) And now for the piece de resistance. The company said in its prospectus it would use the offering proceeds to pay down its revolver. "We intend to use the net proceeds from this offering for debt repayment and for general corporate purposes. Our U.S. revolving credit facility is scheduled to mature in October 2011 and accrues interest at LIBOR plus 0.425% per annum. Affiliates of certain of the underwriters are lenders under our U.S. revolving credit facility and will receive their pro rata share of repayments thereunder from the net proceeds of this offering." That last bit is critical. The company's $1.5 billion credit facility, on which it had $707 million outstanding as of December 31, will be the direct beneficiary of the offering as the entire $707 million amount would be paid down with the proceeds. And what entity benefits from this paydown: none other than Bank Of America, otherwise known as Merrill Lynch!

Ah, good old circular conflicts of interest. To summarize: i) Merrill, which is probably not too happy with having lent out Kimco $707 million on its credit facility, underwrites a $720 (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill's analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses to proceeds to repay Merrill's credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco's underperforming properties and operations.

At least Schmidt can sleep with a clean conscience after putting the following disclaimer in his report: "I, Craig Schmidt, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report."

Zero Hedge, for one, hopes that Cuomo is reading Zero Hedge, as this kind of conflicted circularity would never have been allowed in the Spitzer days. Additionally, on a recent trip, this author stumbled upon a mall in a major metropolitan area where a Michael's store (another LBO special) had recently vacated thousands of square feet of retail space: the beneficiary of this lack of future cash flow: Kimco Realty Corporation.

In conclusion - to those that managed to get in on the stock offering: congratulations. The 30% return in one day is nothing to sneeze at. To all those other retail and institutional accounts, who piggybacked, and all day were buying the shares sold by the follow-on participants (likely using Merrill's brokerage desk as an intermediary, thereby generating even more profits for the company), hopefully you see something about the dreary mall REIT space that Zero Hedge is missing. Then again, as these purchasers are likely the very same people who are convinced that all the bad news in this market are lagging indicators, with all the seasonally adjusted "good" news are leading, the fair price of KIM to them is likely much, much higher. We hope they are right: in the meantime it never hurts to look at a cash flow or FFO model, and determine just how much cash a 38% equity-diluted KIM will be generating in the future as the bulk of its mall tenants either go bankrupt or decide they simply can not afford the rising rents that retail REIT operators hope to charge.

Update:

There have been comments concerning the sensationalizing of this event. I disagree with these allegations. My point here has been to point out that ML's benefits from the Kimco affair are numerous, and to a large extent predicated upon the analyst's rating:

- ML trading desk benefits from increased trading volume in the stock based on the report
- ML's credit exposure is mitigated from a risky lender as the entire offering will go to pay down ML as a lender on the credit facility.
- ML's corporate finance department generates a significant amount of revenue on successfully pre-selling the deal to equity investors who apriori only had the ML "Sell" report to fall back on.

Incidentally, a Credit Suisse report from March 12 (Neutral, $9.50 target price), repeats the very same concerns voiced in the earlier ML report. It also goes further to note that KIM needs to raise not $700 million but $300 million more for it to be viable in the long-run. I quote from the CS report:

The initial gameplan for this report was simple: We were going to write a report that would hit KIMCO’s value for the assets outside of core operating portfolio (33% of assets in the company Net Asset Value (NAV) and 27% of our gross assets estimate) and tell you to avoid it. We did exactly that, and still came up with an implied cap rate of 10.5%-one of the highest amongst a study set of trusts. And this is on a company with a management team that knows real estate, has bench strength, and did a lot to deleverage before things got too ugly-they just didn’t do enough.

The problem in our view is that the stock is too leveraged. At a 9% cap rate, we estimate KIMCO’s liabilities to assets leverage nears 70% with 27% of asset value outside of core operating real estate. The global REIT market seems to be applying going concern equity value to trusts with less than 60% leverage at 9% or higher cap rates-not a dumb assumption if this could potentially be the leverage level where conventional first mortgage lending might settle out. The cheapness of KIMCO also deflates when comparing its implied cap rate to its implied bond yield on credit default swap spreads. As a result, we believe KIMCO needs to reduce leverage to become an investable stock.

The trick to deleveraging is that you need to do enough of it. An incomplete offering like GGP’s ill-fated $822 million deal in March 2008 (and for that matter, KIMCO’s $408 million September 2008 offering) does not lead to outperformance. To that end, we estimate that to get to our 60% liabilities to assets goal, KIM needs to issue roughly $1 billion of equity.

Deleveraging can come from other sources: retained cashflow and asset sales come to mind. However, we have sat through too many presentations on how asset sales are on the way in global REITs only to see these transactions fall over at a later date. That being said, perhaps KIMCO can get to our magic 60% number with a combination of asset sales and equity-in other words, requiring less shocking dilution than implied by our $1 billion estimate.

Of course, ML may have had a perfectly innocent goal in mind when it upgraded KIM from a sell to a buy the day it did an equity offering. Whether or not that is the case is up to regulators to decide, if and when they analyze the specifics of the deal, having much more information than I have had access to. I will reiterate: the whole point of the post has been to highlight all the sides of the story, not merely what has been captured by the media or the report. ML could have avoided a lot of this hoopla by disclosing in its research report that it is the lead underwriter on the credit facility that is being repaid by the stock that it has just issued a Buy opinion on.

Another point: on March 25, another REIT AMB properties, on which ML also had a previous Sell rating, raised over $500 million in stock - ML was not a lead arranger on the credit facility but was a lead underwriter on the equity offering. Another ML analyst, Steve Sakwa raised the stock from a Sell to a Neutral (5 days after the offering mind you), not a Buy, on the offering. If the deleveraging thesis was indeed the critical issue here, does it not stand to reason that both stocks would have gotten the same rating (either neutral or a buy) based on the same catalyst?

Lastly the criminality was obviously framed as a question: to be a statement, many more facts need to come to light and hopefully in time they will. To unequivocally state that there are no conflicts between the research side of a bank and the other aspects of a bank's operations would be to ignore the numerous discoveries unearthed in the Grubman scandals early in the decade.

Disclosure: no position in Kimco stock.

[Demeter]

31. Finding a Home for Toxic Assets: Where is the Final Resting Place? Sheila Tendy

http://www.huffingtonpost.com/sheila-tendy/finding-a-home-for-toxic_b_184663.html

There is a thinly veiled conundrum surrounding the new Public-Private Partnership Investment Program (PIPP) created by Treasury to help get toxic mortgage assets off the books of banks. Who will be the ultimate owners?

We've heard the bellows of those you know best, "Sell 'em! Get 'em off the books of the banks! Break the credit freeze!" But where does a toxic asset live once it has been sold?

The present plan is to take the loans off the bank's books through an auction process overseen by the FDIC and Treasury in partnership with the private sector. A handpicked group of fund managers will manage the troubled portfolio. They can also bid for packages of bad loans or buy into newly created investment funds.

Will these loans magically lose their toxicity because they've been "cleansed" via a government sanctioned auction process? The theory is that they will be priced in such a way as to "cleanse" them of their sins. We hope. Now is the time to focus on the Obama Administration's frequently used term, "price discovery."

Treasury and the FDIC will take a best guess on how to price them based upon a number of esoteric market factors. However, if the buyers of the toxic assets bid a low price and the banks hit those bids, the banks will take a current hit on their own P&L. If they don't hit the bids, there will be few, if any, transactions. In lay terms, the price has got to be right or there will be no buyers in the auction process. The banks may have to take a bath on the loans to get them off their books, all at taxpayer expense.

Then we get to the gnarly part. Once they auction off the loans, who will be the ultimate owners? Where is the final resting place of a toxic asset? We know that investment funds have been formed to take advantage of this opportunity. The securities will get sold at auction to, for example, institutional investors and some of the large public pension funds. Stay with me. The ultimate investors in those funds are individuals. Me and you - the folks from Main Street. The wheel has come full circle.

Along the same lines, while banks can't purchase their own assets, under the Treasury program there is no ban on the purchase or sale of securities and loans by financial institutions to one another. The average person likely doesn't realize that banks will be able to sell the loans to each other - which means that toxic loans could wind up back on the books of the same financial institutions but with different parentage. This approach won't rid the financial system of toxic assets. It will merely make the government and taxpayers liable for losses.

It is questionable whether Main Street will be able to make money on ownership of toxic assets as an investment strategy. Wall Street knows how to price risk into the sale of an asset, but the risk adjusted price is likely not going to benefit the ultimate investor if the margin potential has already been realized. Bear in mind that these things are going to be priced with prayers and pixie dust.

Who then will the circle of toxic investing really help? While the banks will get a manufactured "clean bill of health," that is like removing HIV from one person and injecting it into the body of another and expecting that nothing will happen. Private sector participants partnering with Treasury will need assurance that they can make money on the portfolios or they won't get involved. No one could blame them for that. After all, think of the political lion's den they are stepping into in order to assist in saving the global economy.

We are using taxpayer funds to bail out banks, we are using taxpayer funds to dispose of assets that destroyed our economy, wealth and retirement savings. Then we will sell the same toxic assets back to Main Street as investments to rehabilitate our retirement savings. This concept fails the same as the theory that laundering money makes it clean. It is still the same dirty money, just in different hands.

We are not facing the heart of the matter by merely moving these loans around like a Rubik's Cube. Yes, it is a complex question, but I'm scratching my head to figure out why taxpayers have to foot the bill to dispose of these assets to merely bounce them from one institution to another. A toxic asset is no less toxic if it finds a new home in another investment portfolio. Isn't that what got us here to begin with?

Even if the loans are off the books of the banks, it is doubtful that banks will be any more willing to lend in this tough economic environment. Banks should be made to face the music and restructure these loans or unwind positions under the guiding hand of Treasury, the Fed and the FDIC in partnership with the private sector. Then they will be forced to take responsibility for the mess they've created.

As retail investors, we should be scared to death that we will, unwittingly, own these things a second time. These loans originated in banks, got sold to the secondary market, were chopped up eight ways to Sunday, wound up in pension and other types of investment funds all over the world -- and then crashed the market. Today, they are performing worse than before, but will get repackaged and sold again. Fool me once, shame on you. Fool me twice, shame on you and me.

[Demeter]

35. US changes rules on toxic assets plan

http://www.ft.com/cms/s/0/82bc3432-22df-11de-9c99-00144feabdc0.html

Hedge funds and small fund companies could get government loans to buy troubled securities from banks after the US Treasury changed the rules of its $1,000bn (€747bn, £679bn) toxic assets plan amid fears that it would benefit only a few large investors.

The move, announced on Monday, came after lobbying by hedge funds and small investors who argued the large funds that helped shape the programme, such as BlackRock and Pimco, would be its main beneficiaries.....

[Tansy_Gold]

46. Uh, excuse me (whispers quietly while tapping Ms. Tendy on the shoulder)

WE BEEN SCREAMIN' ABOUT THIS ON WEE AND SMW FOR MONTHS NOW! WAKE UP AND SMELL THE FREAKIN' COFFEE, YOU TWIT!
















sheesh.



Tansy Gold

[Demeter]

48. Stressed, Tansy?

Have a happy holiday. You need it.

Sigh. Me too.

I guess I'll open some more email in a bit--maybe around dinner.

[Tansy_Gold]

51. No, not stressed. Just pissed.

I mean, c'mon, this woman acts like she just discovered fire or the wheel or something.

Actually, I'm havin' a pretty decent week-end. We had heavy rain in our part of AZ yesterday, so the ground should be soft enough to give up a few weeds and I may get a chance to work on some "creative" endeavors as well.

That is, if I would get off of DU and . . . . do something. ;-)


:hi:


TG

[tclambert]

61. Gasp! Is there water in your river?

Every time I've been to Phoenix, the river has been dry. Yet my in-laws have a boat. (They live on golf course and cruise the water hazard, which doubles as a reservoir.)

[Tansy_Gold]

73. Depends on which river.

We actually have several in the area, and most would have water in them if they weren't dammed.

The dams, of course, created lakes, so a lot of people have boats.




But we didn't get enough rain to make even the washes by my house run, just a nice soaking.



TG

[Demeter]

32. Are Competitive Devaluations Starting?

http://www.nakedcapitalism.com/2009/04/are-competitive-devaluations-starting.html

In a world of floating rates, driving the value of one's currency down takes a bit of doing, but as China (1994) and Japan (circa 2003) have demonstrated, central banks can lower currency prices. And trashing one's currency is part of the standard program recommended for countries facing deflation.

The preferred method these days appears to be quantitative easing. Futures on the Canadian dollar have fallen 3% on expectations its central bank will move to quantitative easing.

Ambrose Evans-Pritchard, who despite his fondness of apocalyptic pronouncements, has been been for the most part right in calling this downturn, argues the world is moving toward beggar thy neighbor currency debauchment.

From the Telegraph:

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

"This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank.....even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

"We don't fully realise in the West what a catastrophic collapse Japan has suffered," says Albert Edwards, global strategist at Société Générale. "The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen."
This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. "As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust," he said.

Japan's industrial output fell 38pc in February (year-on-year), mostly concentrated into the last four months. No major economy imploded at this speed in the 1930s. The country has been hit by a double shock. As an export power it has taken the brunt of Anglo-Saxon belt-tightening: as the world's top creditor it is cursed by a "safe-haven" currency that soars in moments of danger – largely because the Japanese bring home their wealth till the storm passes. Normally, Japan can cope. This time, the yen's rise has pushed the economy over a cliff.

The yen must come back down to earth, and soon, or Japanese society will start to disintegrate. If necessary, the Bank of Japan will force it down by intervention, as occurred in 2003-2004.

Will China stand idly by as Japanese unleashes a shock to the global system through competitive devaluation? That depends whether you think China's spring recovery is the real thing, or an inventory build-up before the next downward slide. The Communist Party says 20m jobs have been lost since the bubble burst. This cannot be tolerated for long.

It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan.

Of course, Britain has already played the currency card. That is different. The pound's fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention.

Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode....

Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world's lowest CDS at 48, reflecting its status as a petro-democracy.

Switzerland's banks are over-leveraged. Loans to emerging markets equal 50pc of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700bn in net foreign assets for a rainy day. Improvident Britons are less lucky. But that is another story. What we risk now is a game of deflation "pass-the-parcel" worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia's unbalanced relationship with the West was feeding a credit bubble.

It may be caught again as the same warped structure leads to a chain of (panicked) devaluations.

Enjoy the "bear-trap" rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result.

[Demeter]

33. AIG aircraft unit seeks $5bn Fed credit line

http://www.ft.com/cms/s/0/b5bf623c-23c5-11de-996a-00144feabdc0.html

By Justin Baer, Francesco Guerrera and Julie MacIntosh in New York

Published: April 7 2009 23:52 | Last updated: April 7 2009 23:52

AIG’s aircraft-leasing unit is in talks over a $5bn credit line from the Federal Reserve that could be used to facilitate its sale – an unusual move that would raise the stakes in the US government’s bail-out of the stricken insurer.

People close to the situation said discussions between International Lease Finance Corp, AIG and the New York Fed were still ongoing and no decision on whether the facility would be provided, and how big it would be, had yet been taken....

[Demeter]

34. UK court freezes Stanford bank assets

http://www.ft.com/cms/s/0/ba814188-22cf-11de-9c99-00144feabdc0.html


A UK court has frozen more than $100m worth of assets belonging to Stanford International Bank as US regulators ramp up their efforts to track how funds flowed between the complex web of international companies formerly controlled by Sir Allen Stanford.

The US Securities and Exchange Commission has accused Sir Allen, the Texan billionaire, with running an $8bn Ponzi scheme that stretched from Antigua to residential north London, where his auditor kept an office.

A judge at the High Court in London on Monday extended a freezing order covering cash, shares and investments held by SIB in bank accounts at Credit Suisse and HSBC branches in the UK until the end of the month.

.........

Sir Allen, who denies the charges against him, last week petitioned a US judge to thaw his assets so he could hire a lawyer.

He claims that without access to his seized cash and funds, he will be unable to mount a defence. He has been in talks with Dick DeGuerin, a high-profile Houston-based lawyer.

A separate court in Antigua was due to review the status of SIB in the island’s capital of St John’s, the High Court was told.

The SEC has been attempting to map Mr Stanford’s personal assets and those of a vast array of Stanford-affiliated companies since he was first charged with fraud in mid-February.

Regulators also charged two of Stanford’s top deputies, Laura Pendergest-Holt and James Davis.

The decision to extend the UK asset freeze came days after the attorney for Mr Davis, the chief financial officer of the Stanford group, said his client was helping US regulators “follow the money trail” to Europe.

Dallas-based criminal lawyer David Finn said Mr Davis had been co-operating with the SEC to track assets held by European institutions, particularly those in Switzerland. Mr Davis has been working with US authorities since last month.

“The difference is money,” Mr DeGuerin said.

[DemReadingDU]

39. Charles Hugh Smith: Reader Comments on When Belief in the System Fades

Reader Comments on When Belief in the System Fades (April 10, 2009)
Charles Hugh Smith

Here are two wide-ranging and incisive reader comments on Survival+ 10: When Belief in the System Fades (April 9, 2009):

Ed Munson

I want to thank you so much for the wonderful site that you have been producing. I found your site topic of today, Survival+ 10: When Belief in the System Fades, so closely describes how that I think and feel that I had a momentary feeling that you had been spying on me for years!

I just turned 59 years of age, and by education and experience a professional civil engineer, who has lost faith in the system. I had a consulting firm in Central Florida from the late 1980's through 2000. My practice was in "developmental" engineering, predominantly for dozens of residential subdivisions. As the years passed I became more and more aware of the fact that I was helping to support a system of uncomfortable postage stamp lots covered with houses that so-called home builders would slam together.

I noticed a change in the character of the developers that started showing up in my office-in 1998 these jokers were somehow getting people with "D Rated Credit" and fry cook jobs qualified to buy houses that cost at least five times annual earnings. I became more and more ashamed of the antics of other so-called professional engineers willing to short cut quality and diligence to capture developmental work.

Due to the deadly combination of a bad marriage situation to ones' business partner, my practice crashed in 2000. I then went to the corporate world of civil engineering, and was astonished to see the mentality of loading up 60 to 80 hours of billable time on professional staff as the expected norm. If someone such as I were to dare to take the time necessary ethically and professionally to think through the engineering design of these projects, I was accused by upper management of taking too much time, and not having the necessary "sense of urgency".

I began to see that their "sense of urgency" really equated to working double time for single time compensation, with little or no hope of pay increase or bonus consideration. Every day I was made to feel like some kind of archaic throwback by my careful, thought out approach to my projects.

I really don't know where that my rambling is leading me, but I want to say that it has been a year since I packed it in for something new. My lovely wife (2 years now!) is a long time magazine publisher, and a singer/songwriter/musician. This was a wonderful match to the tuggings of my own heart --I am an artist/musician at heart. Her understanding and sensitivity to my emotional pain allowed me to walk off that old 40-year career path into new well-lit territory. In the last year we have a book being printed by an international publisher, are writing new music, performing everywhere while touring for weeks on end (a dream come true to that old youthful wanderlust of mine).

My life opened up to new, delightful possiblities when I took the opportunity to walk away from work that had a large paycheck with such a price. I realize how true and magic one's life can be if he is able to follow his heart and joy. Our incomes have not been near mediocre monetarily, but the intangibles of freedom and happiness are unbelievable.

Loss of faith in the system finally led me to make my own system, at least as much as I can while being immersed in the Matrix.

Ed Munson
www.tonibrownband.com

Anne S. (from Switzerland)

Charles, I am chipping in here because Americans have been so indoctrinated by false assumptions and crazed slogans in the area of taxes and the redistributive (if any) role of the State that it appears that many have simply lost the capacity to digest simple facts. So an educational effort has to be undertaken, and I try not to miss a chance to hammer home some points.

One big question that everyone turns away from is how much the US spends on Defense, lets call it wars. It is a very uncomfortable topic, if not downright taboo. I have often asked US citizens what % of their taxes goes to Defense, the usual response is "don’t know" and the highest figure I ever heard (in real life) is 25%! However, let’s set all that aside.

Amongst the OECD countries, it is the US and Japan that taxes the capital and revenues of businesses the most heavily - a whopping 39%. It is followed by France, Canada and Belgium at 33-34, with the rest at around 30, Switzerland is last with 21. Low US taxes are a myth - except for "low taxes for rich individuals." The OECD website is replete with studies and papers on this topic - they always extoll low taxes, btw. (Numbers here are from them.)

These high US taxes are according to me, the number one factor accounting for de-localisation, ‘globalization’ if one wills, off-shoring and so on. This facet is always ignored (the taboo on taxes) and replaced with the costs of labor, an obfuscation that serves to impress on Americans that they must compete with Chinese workers. On this topic, no sound numbers are readily available; a common rule of thumb in rare EU press articles is that more than 70% of US businesses that employ more than 150 - 500 people (the numbers are very shaky and variable, not to be trusted) have some kind of ‘foreign outpost’, ‘offshore account’, ‘foreign partnership’, ‘head office for the EU’, etc.

Without it, they would not survive. They escape full US taxation in a legal way. Switzerland, for example has hundreds, if not thousands of US businesses or multinationals domiciled on its soil (21% tax, and rebates below that are even possible.)

The recent flap about tax cheaters, the greedy individuals who hide their fortunes from the IRS, and the lists of ‘cooperating countries’ - - colored white, black or grey are another distraction. The number one clients of ‘fiscal paradises’ are banks themselves, multinationals, big businesses and even ‘social’ enterprises like pension funds. The personal fortunes of supposedly canny private individuals are negligible in comparison - which is why one can crack down on them! (Or pretend to for a while.)

The end result, for the US, is that the powerful win. They pay taxes - to the Swiss, amongst others. And the IRS (in the case of Switzerland) has not bothered to collect what it is owed from private persons since 2001. (The qualified intermediary accords came in then, and Swiss banks collected the revenue/capital gains tax, of 30% this year, but never returned the sums to the US, they gave this money to the Swiss Gvmt. The IRS apparently didn’t care, or in any case never made any request..) But all this is complicated, and outside of my area of expertise. No references, sorry.

What I want to impress on US citizens is that ‘Socialism’ - and in many countries it is, directly as in Switzerland, or thru representation as in France decided by the people themselves how much they will want to pay for what services - is simply an in/out accounting system that anyone can make a stab at totting up. Want free education, right up to Doctoral level? Costs so much, paid by all. Don’t want that? Not fair somehow? OK, then only primary and high school to 15 - but they gotta be good. And so on.

Basic, ‘free’ medical care, paid for by the taxpayer - well then Docs can’t become millionaires and efforts have to be made to stop Big Pharma selling dangerous pills or home remedies at extravagant prices... It ain’t rocket science. It is paying for services...and chipping in for the common good, or sharing the burden as some might like to say.

If lowly workers or small business people don’t earn enough to permit them to live, feed their children vegetables, etc. then a redistribution must take place... so the deeper questions are structural but in all cases it is the State’s role to even things out to some bearable position. In a so-called Democracy, that is.

Thank you, Ed and Anne, for your commentaries. The experience of being pounded for billable hours until you drop will resonate with many wage-earners, including many attorneys, as will the experience of being hurried to do substandard work. Freedom and happiness do have a price, and the irony is that some losing their jobs might eventually find it more a liberating transition to a downsized life than an MSM-framed tragedy.

The key takeaway from Anna's commentary is: that the U.S. is a low-tax nation is indeed a myth--or perhaps that is too polite a phrase for a sustained campaign of disinformation. As always, the key question is: Cui bono? To whose benefit?
http://www.oftwominds.com/blogapr09/2comments04-09.html

link backwards to previous chapters...
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3823060&mesg_id=3823197

edit to correct link

[muriel_volestrangler]

42. The equinox was 3 weeks ago

This is 'weekend following the full moon following the equinox'. Just call it 'Easter', and stick in a few 'Ramadan' weekends and anything else that takes your fancy, in future. :D

[Demeter]

43. I'm Just a Little Behind

It's only 24F and I'm wearing long johns, there was a hard frost, and I find it hard to believe in the Equinox under these conditions...


Have a Happy Holiday (in spite of it all)!

[Dr.Phool]

44. Denninger: Do Not Be Stupid.

We're almost to Tax Day.

And the "New Bull Market" callers are out in force.

Just as they were last year.

Let's look at reality here folks:

1. There is a major liquidity disruption under way right now in the markets. Zerohedge put forward a rather esoteric diagram of this; I don't need one, as it is trivial to observe this in the form of real-time time-and-sales data. Volume has been thin and declining while machine-driven ("quant") trading as a percentage of total volume has been flying higher.
2. There have been a series of overnight 'gap higher' moves in sequence followed by days that fail to follow through strongly (that is, larger than the overnight gaps.) This is abnormal and points to "at the margin" price changes. The key point here is that this is unsupportable over the longer term as the actual base of equity trading; "long-term" owners such as individuals and pension funds are NOT following through during market hours and those holders are not trading /ES futures overnight on Globex!

The effect of (1) and (2) is what is known in the investing marketplace as "distribution" - that is, you, the retail bag-holder, wind up with the shares at the end of the day, and the institutional and quant-driven "fast money" departs with your cash. When they stop their high-frequency "pass across the table" game, and they will, you find yourself with some very expensive shares as the floor disappears.

Distribution marks tops, usually very significant ones.

A month or so back I was warning of a potential credit-market dislocation and imminent collapse in the stock market. It was "saved" to a large degree by these quants and other "high frequency" guys, all of whom have a vested interest in seeing that happen (think of the name of any big investment bank; there you will find one of those parties.)

But their firepower and willingness to play this role is not unlimited. Buying and selling between these firms is a nice way to book some profits, but these folks understand the rubber-band problem when markets get stretched, and exactly when their liquidity disappears is a matter of time, not supposition.

The imbalance that is presented here has led to the recent rally, but do not be deceived - this is not a new bull market.

Bull markets don't feature this sort of distorted move. Rather, they are measured, reasonable advances with most of the buying being real and taking place during market hours.

If you got "stuck" in positions either last fall or over the winter months, you've been given a gift. Exactly how far this gift will extend your ability to recover some part of your losses is unknown, but the fact that so long as this pattern persists one must keep a wary finger on the "sell" button is not at issue.

Ignore this warning at your peril.


http://market-ticker.denninger.net/authors/2-Karl-Denninger

[Demeter]

47. Good Advice. Thanks Doc!

Happy holiday of your choice!

[tclambert]

62. Happy National Pecan Month

and Emotional Overeating Awareness Month,

and Autism Awareness Month, which is a real thing, though oxymoronic.

http://www.brownielocks.com/april.html

[Demeter]

66. People With Autism Are VERY Aware

It's just that their interests seldom coincide with those of society. Take my daughter....fiercely locked inside her own brain, sometimes. And she's highly-functioning.

[Karenina]

78. As is my kid unit.

[Demeter]

45. Dogbert Does a Hedge Fund

Click on the link to see




http://dilbert.com/dyn_file/str_strip/48091/gif/strip.print/

[Demeter]

50. Can You Spell Chutzpah? Showdown Seen Between Banks and Regulators

http://www.nytimes.com/2009/04/11/business/economy/11bank.html?_r=2&th&emc=th

By STEPHEN LABATON and EDMUND L. ANDREWS

WASHINGTON — As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.

President Obama emerged from a meeting with his senior economic advisers on Friday to say “what you’re starting to see is glimmers of hope across the economy.” But there were also signs of growing tensions between the White House and the nation’s banks over the next phase of the financial rescue.

Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.

Jamie Dimon, the chief executive of JPMorgan Chase, and two other executives of large banks raised the issue with Mr. Obama and the Treasury secretary, Timothy F. Geithner, at a meeting two weeks ago.

“This is a source of considerable consternation,” said Camden R. Fine, who attended the White House meeting as president of the Independent Community Bankers, a trade group of 5,000 mostly smaller institutions, many of which are complaining about the repayment requirements.

Meanwhile, the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.

Finally, there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes, just as it did with General Motors when officials forced the resignation of its chief executive after examining that company’s books.....

....The tension between the industry and the administration is rising as the government’s bailout fund is dwindling, putting the administration in a bind. It is all but certain to need to seek more money from Congress, which wants to see results from existing programs first.

The fund is down to its final $134 billion, according to Treasury officials, and is expected to face new requests for money in the coming weeks to aid tottering banks, the auto industry and possibly insurance companies.

“Between now and Memorial Day we’re going to know a whole lot more about the degree of trouble the banks are in,” said Senator Charles E. Schumer, a New York Democrat who is vice chairman of the Joint Economic Committee. “At the same time, we will begin to have a good initial reading as to how well the administration’s programs are working.” ......

[tclambert]

63. I'm sorry, you banks are having trouble making your payments?

Well, let's just increase your interest rate to 30%. I'm sure you would do the same for us. Oh, in fact, you have, any time we got in trouble with your credit cards. Thanks for your business and have a nice day.

[Demeter]

52. Credit Suisse starts shutting U.S. offshore accounts: report

http://news.yahoo.com/s/nm/20090412/bs_nm/us_csuisse_1

ZURICH (Reuters) – Swiss bank Credit Suisse (CSGN.VX) has started closing down the offshore accounts of U.S. clients who have not declared the money to the U.S. authorities, a newspaper reported on Sunday.

The Sonntagszeitung newspaper said the bank had about 2,500-5,000 U.S. clients with undeclared offshore accounts worth about 3 billion francs, without citing its sources.

The paper said Credit Suisse had started parting company with its U.S. offshore clients, giving them the option of moving their accounts to its CS Private Advisors subsidiary, which would report the accounts to the U.S. tax authorities, or writing them a check.

It quoted an unnamed Credit Suisse manager as saying the bank was only applying the new "zero tolerance" policy in individual cases for now but was considering a more general withdrawal from the U.S. offshore business.

Credit Suisse was not immediately available for comment on the article. Sonntagszeitung quoted a spokesman as declining to confirm the report, but noting the tougher approach of foreign authorities on offshore wealth management in recent times.

"CS sticks to all valid rules and regulations in various countries," a spokesman told the newspaper.

The move comes after rival UBS (UBSN.VX)(UBS.N) said last year it would stop offering offshore services to U.S. citizens after U.S. authorities alleged that the Swiss bank has helped rich Americans hide money away from the taxman in Swiss accounts.

A newspaper reported earlier this year that Credit Suisse was writing to its U.S. clients holding Swiss accounts asking them to sign a form that would reveal them to U.S. tax authorities.

[Demeter]

53. Madoff feeder funds reaped big fees

http://www.marketwatch.com/news/story/madoff-feeder-funds-reaped-huge/story.aspx?guid={F55AB6E7-29E2-4E38-A4A4-41341AB636F9}&siteid=yahoomy



SAN FRANCISCO (MarketWatch) -- Firms that fed client money to Bernard Madoff likely took in at least $790 million in fees over the years, said the Wall Street Journal Saturday.

The newspaper said it had reviewed lawsuits and documents that had emerged after the New York investment manager was arrested nearly four months ago.

Madoff pled guilty last month to multiple criminal charges related to a massive Ponzi scheme that he ran for at least a decade.

Investors and authorities are now trying to get some of this money back. States and groups of wiped-out investors have sued these funds in an attempt to capture some of the feeder funds' fees. But they might not prevail. And statutes of limitations could limit recovery.

So-called feeder funds funneled more than $10 billion of investors money into Madoff's investment firm, taking fees that could amount to 20% of profits earned. In some cases, prosecutors allege, they did not reveal to clients how much of their money was going to Madoff's firm. And they didn't do enough to make sure his investment operations were legitimate.

New York Attorney General Andrew Cuomo earlier this month sued financier J. Ezra Merkin, who ran feeder funds to Madoff under the Ascot name. The suit alleges the hedge fund manager directed $2.4 billion clients money to Madoff without their permission, taking in $470 million in feeds.

Massachusetts earlier this month sued Fairfield Greenwich Group, a Madoff feeder fund, for failing to do enough to spot problems with the Madoff investment firm. See related story.

Fairfield Greenwich, the largest feeder fund, may have earned at least $400 million from 2005 to 2008, according to a suit filed by Massachusetts securities regulators, said the Journal. On its Fairfield Sentry fund, the firm for many years took a management fee of 20% of profits earned by investors. Massachusetts is seeking a disgorgement of fees.

Banco Santander, one of the biggest feeder funds to Madoff, earned $52.7 million in 2007 and $43.3 million in 2006 in investment manager's feeds from its Madoff-run Strategic U.S. Equity Series, the Journal said.

Tremont Group Holdings, another feeder fund, would have brought in $34 million in fees a year on its Rye Select Broad Market Fund LP, based on fee disclosures in fund documents. It would have brought in $23.5 million of annual fees on another fund. End of Story

[Demeter]

54. Lincoln's Monetary Breakthrough

The bankers had Lincoln's government over a barrel, just as Wall Street has Congress in its vice-like grip today. The North needed money to fund a war, and the bankers were willing to lend it only under circumstances that amounted to extortion, involving staggering interest rates of 24 to 36 percent. Lincoln saw that this would bankrupt the North and asked a trusted colleague to research the matter and find a solution. In what may be the best piece of advice ever given to a sitting President, Colonel Dick Taylor of Illinois reported back that the Union had the power under the Constitution to solve its financing problem by printing its money as a sovereign government. Taylor said:

"Just get Congress to pass a bill authorizing the printing of full legal tender treasury notes ... and pay your soldiers with them and go ahead and win your war with them also. If you make them full legal tender ... they will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution."

The Greenbacks actually were just as good as the bankers' banknotes. Both were created on a printing press, but the banknotes had the veneer of legitimacy because they were "backed" by gold. The catch was that this backing was based on "fractional reserves," meaning the bankers held only a small fraction of the gold necessary to support all the loans represented by their banknotes. The "fractional reserve" ruse is still used today to create the impression that bankers are lending something other than mere debt created with accounting entries on their books. 1

Lincoln took Col. Taylor's advice and funded the war by printing paper notes backed by the credit of the government. These legal-tender U.S. Notes or "Greenbacks" represented receipts for labor and goods delivered to the United States. They were paid to soldiers and suppliers and were tradeable for goods and services of a value equivalent to their service to the community. The Greenbacks aided the Union not only in winning the war but in funding a period of unprecedented economic expansion. Lincoln's government created the greatest industrial giant the world had yet seen. The steel industry was launched, a continental railroad system was created, a new era of farm machinery and cheap tools was promoted, free higher education was established, government support was provided to all branches of science, the Bureau of Mines was organized, and labor productivity was increased by 50 to 75 percent. The Greenback was not the only currency used to fund these achievements; but they could not have been accomplished without it, and they could not have been accomplished on money borrowed at the usurious rates the bankers were attempting to extort from the North.

Lincoln succeeded in restoring the government's power to issue the national currency, but his revolutionary monetary policy was opposed by powerful forces. The threat to established interests was captured in an editorial of unknown authorship, said to have been published in The London Times in 1865:

"If that mischievous financial policy which had its origin in the North American Republic during the late war in that country, should become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off its debts and be without debt. It will become prosperous beyond precedent in the history of the civilized governments of the world. The brains and wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe."

In 1865, Lincoln was assassinated. According to historian W. Cleon Skousen:

"Right after the Civil War there was considerable talk about reviving Lincoln's brief experiment with the Constitutional monetary system. Had not the European money-trust intervened, it would have no doubt become an established institution."

The institution that became established instead was the Federal Reserve, a privately-owned central bank given the power in 1913 to print Federal Reserve Notes (or dollar bills) and lend them to the government. The government was submerged in a debt that has grown exponentially since, until it is now an unrepayable $11 trillion. For nearly a century, Lincoln's statue at the Lincoln Memorial has gazed out pensively across the reflecting pool at the Federal Reserve building, as if pondering what the bankers had wrought since his death and how to remedy it.

[Demeter]

55. Building on a Successful Tradition

Lincoln did not invent government-issued paper money. Rather, he restored a brilliant innovation of the American colonists. According to Benjamin Franklin, it was the colonists' home-grown paper "scrip" that was responsible for the remarkable abundance in the colonies at a time when England was suffering from the ravages of the Industrial Revolution. Like with Lincoln's Greenbacks, this prosperity posed a threat to the control of the British Crown and the emerging network of private British banks, prompting the King to ban the colonists' paper money and require the payment of taxes in gold. According to Franklin and several other historians of the period, it was these onerous demands by the Crown, and the corresponding collapse of the colonists' paper money supply, that actually sparked the Revolutionary War. 2

The colonists won the war but ultimately lost the money power to a private banking cartel, one that issued another form of paper money called "banknotes." Today the bankers' debt-based money has come to dominate most of the economies of the world; but there are a number of historical examples of the successful funding of economic development in other countries simply with government-issued credit. In Australia and New Zealand in the 1930s, the Depression conditions suffered elsewhere were avoided by drawing on a national credit card issued by publicly-owned central banks. The governments of the island states of Guernsey and Jersey created thriving economies that carried no federal debt, just by issuing their own debt-free public currencies. China has also funded impressive internal development through a system of state-owned banks.

Here in the United States, the state of North Dakota has a wholly state-owned bank that creates credit on its books just as private banks do. This credit is used to serve the needs of the community, and the interest on loans is returned to the government. Not coincidentally, North Dakota has a $1.2 billion budget surplus at a time when 46 of 50 states are insolvent, an impressive achievement for a state of isolated farmers battling challenging weather. 3 The North Dakota prototype could be copied not only in every U.S. state but at the federal level.

[Demeter]

56. The Perennial Inflation Question

The objection invariably raised to government-issued currency or credit is that it would create dangerous hyperinflation. However, in none of these models has that proven to be true. Price inflation results either when the supply of money goes up but the supply of goods doesn't, or when speculators devalue currencies by massive short selling, as in those cases of Latin American hyperinflation when printing-press money was used to pay off foreign debt. When new money is used to produce new goods and services, price inflation does not result because supply and demand rise together. Prices did increase during the American Civil War, but this was attributed to the scarcity of goods common in wartime rather than to the Greenback itself. War produces weapons rather than consumer goods.

Today, with trillions of dollars being committed for bailouts and stimulus plans, another objection to Lincoln's solution is likely to be, "The U.S. government is already printing its own money - and lots of it." This, however, is a misconception. What the government prints are bonds - its I.O.U.s or debt. If the government did print dollars, instead of borrowing them from a privately-owned central bank that prints them, Uncle Sam would not have an eleven trillion dollar millstone hanging around his neck. As Thomas Edison astutely observed:

"If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is that the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way. It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people."

[Demeter]

57. And There's Still More----All the Above From Ellen Brown

http://informationclearinghouse.info/article22391.htm

[tclambert]

64. Bad geography alert.

The Federal Reserve Building is north of the Lincoln Memorial. Lincoln is facing east. Here's what Lincoln is staring at:

[Demeter]

67. Probably Artistic License

[Demeter]

58. Banks aren't reselling many foreclosed homes

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/08/MNL516UG90.DTL&type=business


A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.



Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

"There is a real danger that there is much more (foreclosure) inventory than we are measuring," said Celia Chen, director of housing economics at Moody's Economy.com in Pennsylvania. "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."

More than one-third locally (SF Bay Area).....

[Hugin]

69. What I find most shocking about this chart...

Check out the numbers in Jan 2007 (439) vs. Aug 2008 (4321)!

Holy Cow!

[Demeter]

71. About Time You Showed Up! Happy Easter!

Yeah, it's amazing the numbers and facts that have come pouring out these last 3 months. Things nobody ever heard of before....

[Hugin]

76. Happy Easter, Demeter!

:happybunny:

:party:

:hi:

[Demeter]

59. Howard Zinn on Class in America

http://www.youtube.com/watch?v=TlxLa2oKaXY&feature=player_embedded

[Demeter]

68. Shamelessly Stolen from krispos42: Zimbabwe shelves own currency for one-year

http://economictimes.indiatimes.com/News/Zimbabwe-shelves-own-currency-for-one-year/articleshow/4392066.cms

Source: The Times of India

12 Apr 2009, 2018 hrs IST

HARARE: The Zimbabwean government has decided to suspend the country's national currency for a year, which has in fact already disappeared from circulation, state-run media reported Sunday.

"The Zimbabwe dollar will be out for at least a year ....because there is nothing to support and hold its value," Economic Planning Minister Elton Mangoma told the Sunday Mail.

In January, in response to unprecedented hyperinflation, Zimbabwe legalised the use of foreign currencies including the Botswana pula, the South African rand, the United States dollar, the Euro and the British pound. The Zimbabwe dollar immediately went out of circulation.

In the past two years Zimbabwe's central bank knocked 22 zeros off the local currency as the country's economy plunged info freefall.

<more>

[Demeter]

70. Ladies and Gentlemen, a Philosophical Note

It's been hell, this political/economic life. I guess it started with the assassinations: who were all these crazy people, and why didn't somebody lock them up for their own good and ours before they killed JFK RFK MLK MalcomX? Looks like they weren't crazy, they were hired.

Then Nixon, the betrayal of the country, the monetization of the debt, the abandonment of Siagon after bombing the hell out of SE Asia and poisoning people and soil with napalm and Agent Orange.

A breather with Carter, cut short by a stage-managed hostage crisis which brought about the horror of Reagan, being trapped in a B movie that was suddenly real and killing people in little countries and the whole of South and Central America.

Kissinger. Rumsfeld. The slimy bastard I can't even remember his name--there were so many of them, all sporting flags on their lapels and (R) after their names. Cap Weinberger, that's the one, Caspar the Not-So-Friendly Ghost. John Mitchell, Lee Atwater, Karl Rove, their numbers are legion....they die and are reincarnated every 4 years.

It's been going on all my life. Now we learn it was going on all throughout Roosevelt's 10 years: the coup attempt, the budget deficit hawks trying to strangle the US economy back into the Depression, the foot on the worker's neck lifted by unions and Social Security and Glass-Steagal and anti-usury and bankruptcy law, only to be pressed down with greater force now.

There is a point in there somewhere, maybe several points. I guess I just don't know what the point is, anymore. I think that Obama is a Bait-and-Switch deal. I know, it's early, not even 3 full months, but look at the appointees, look at the steps taken: not the photo ops, not the nice speeches, not the new puppy or the cosmetic lifting of illegal signing statements. Guantanamo is closed, he says: has any reporter gone down and verified? Besides Miss America, that is? (What a clanger that one was!)

Look at the things that HAVEN'T been done--really serious, life or death things. Things that are, in Nancy's immortal words "off the table", or as good as.

If I felt I had a future, I'd be angrier. I know I don't and I'm resigned to it. But I want my kids to have one! And yours, and even theirs. I want my country back, with its Constitution intact and strengthened. Give me a government of the People, by the People for the People, a government of Laws, not Men, and the economy will be straightened out, as a direct consequence. As long as the crony crew is in charge, the economy hasn't a chance.

I think that's all I want to say this weekend. Talk amongst yourselves. And sorry about that.

[Karenina]

74. Love you, Demeter!

:hug:

[DemReadingDU]

75. Miss America?

The new Miss America, Katie Stam?

http://pageantcast.com/?tag=katie-stam

[Demeter]

77. Whatever, Whoever

Some bimbo went and was gushing about Guantanamo....