Weekend Economists Boldly Go Where No Thread Has Gone Before: May 22-25, 2009

[Demeter]

On this Memorial Day, let us remember the vision Gene Roddenberry gave us, of a people who put aside childish things like physical warfare and economic warfare, made peace and equality for all living things their lodestone, and set out among the stars to find out if the universe agreed with them.

If the intelligentsia has a religion, it might just be Star Trek. Lessons in ecology, sociology, human relations, war and peace, equality, and more were presented every week, absorbed through the skin, imprinted on the growing minds of Boomers, their children, their parents even, and now grandchildren.

Roddenberry and company were a truly creative and gifted bunch of people. While Jews were heavily represented in the cast and crew, the Middle East and the American shtick were not. While most of the faces were white males, there was more diversity in the 23rd century than is yet to be seen in many corporations and communities today.

Roddenberry and crew gave us a blueprint for the future, a curriculum for higher education, and finally, a leader who has the potential to further them. If President Obama can stick to the Prime Directive, then we will survive as a nation, a people, a world. If the President is sucked into the maelstrom of Wall Street and the GOP insanity, then all is lost. I for one feel my heart leaping into my mouth on a daily basis, as I watch from my little lost outpost the battles of the giants.

So you know which side I'm on: the one that gives me and mine the best outcome. The one that gives children a real future, one worth living.

Make it so.

[Demeter]

1. There Is No New Bank Failure---Yet 5:30 PM

Of course, it looks like Thursday's take down of BankUnited, FSB, of Coral Gables, FL, will keep the FDIC busy for a bit...and then, there's always the GM bankruptcy which is going gangbusters. I cannot understand that enthusiasm. Of course, living at Ground Zero might color my perception a bit...

[burf]

5. Maybe the FDIC crew

stopped for pizza on their way to the next victim.

On Friday, May 22, 2009, Strategic Capital Bank, Champaign, IL was closed by the Illinois Department of Financial and Professional Regulation, Division of Banking and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

Source: http://www.fdic.gov/bank/individual/failed/banklist.html

Going where 35 (?) banks have gone before and where many more will soon visit!

[Demeter]

7. thank you! Illinois Is in a Different Time Zone

They wait until 5:30pm local time for the announcement.

[DemReadingDU]

12. also, Citizens National Bank, Macomb, IL

more?

[AnneD]

31. Better quote......

where tarp funds and insolvent banks end up...."The undiscovered country from whose bourn no traveler returns".
William Shakespeare

[Demeter]

40. You're not exactly catching us at our best" -- Kirk

* "That much is certain" -- Spock

[Robbien]

46. Something is really wrong with the BankUnited deal: Blackstone buys BankUnited on the cheap

I've got a deal that you can't refuse. How would you like to buy a bank worth nearly $13 billion by assets for a measly $900 million?

That's what a group led by Blackstone Group LP (NYSE: BX) did. The bank in question is BankUnited, which failed and was taken over by the FDIC. Regulators decided to put it up for auction. Blackstone will share in $10.7 billion of the bank's 12.8 billion in assets. The government will will take 80% of the first $4 billion in losses and 95% of any remaining losses. In return the government will receive warrants giving it a share on any further upside.

BankUnited was the largest independent bank in Florida. Its demise was caused by its large portfolio of adjustable rate mortgages.Terms and conditions of the sale have been ongoing for several months

Regulators have been reluctant to put failed banks up for auction because of potential public criticism that the deals favor the buyer with the government taking the big hit. Such was the case earlier this year when JC Flowers Company bought the assets of IndyMac. In that deal the government had all the downside and the JC Flowers Company had all the upside.

http://www.bloggingstocks.com/2009/05/22/blockstone-consortium-buys-bankunited-on-the-cheap-for-900-mill/

This answers the question of why the bankruptcy happened on a Thursday. It happened Thursday so that the next business day this shady deal could be settled and the news be dumped into the holiday weekend news cycle.

[Demeter]

47. And Can Blackstone Run a Bank?

They'd have to follow rules and regulations. They'd have to be monitored.

Somehow they don't strike me as being capable or compliant.

[Demeter]

48. BankUnited's Sordid History by Rolfe Winkler

http://www.nakedcapitalism.com/2009/05/guest-post-bankuniteds-sordid-history.html


Guest Post: BankUnited's Sordid History

Posted: 18 May 2009 05:00 AM PDT

Reader Note: Last fall, I published a detailed (recent) history of BankUnited in the pages of Housing Wire Magazine. With the bank's future likely to be settled over the next week, I thought NC readers might appreciate a look at the piece. Thanks to HW's Paul Jackson for allowing me to re-publish.

October 2008
No Option on Financial Pain
Florida’s BankUnited Faces Tough Choices in an Even Tougher Mortgage Market

September was a bad month for BankUnited Financial, Florida’s largest regional bank (Nasdaq: BKUNA). The company’s regulatory capital status was downgraded, it fired 12 percent of its employees, and it received a cease and desist order from the Office of Thrift Supervision. BKUNA has thus far failed to raise capital to protect its balance sheet and, with its stock at 55 cents as of this writing, appears likely to join the ranks of imploded lenders.

Marked by poor quality of earnings, nepotism, self-dealing and managerial incompetence, BKUNA’s story makes a fascinating case study—one that’s highly relevant for analysts studying the financial statements of America’s big banks.

BKUNA’s lending business is concentrated in Florida, California and Arizona, states that have been hammered by the housing bust. And 60 percent of the company’s $12 billion loan portfolio is made up of pay option adjustable rate mortgages, a particularly toxic loan that put thousands into houses they couldn’t afford.

Option ARMs are like credit cards: Borrowers have the option to make a minimum payment each month, with any unpaid principal and interest added to the balance of the loan. When the borrower pays less than the interest and principal due, the loan is said to be “negatively amortizing.”

And few of BKUNA’s borrowers regularly make full payments—only 9 percent as of June 30. Eighty percent of the rest were paying the minimum.

But according to GAAP, any interest owed is earned, including any portion the borrower chooses to defer. The lender recognizes the full amount as revenue with any unpaid balance added to receivables.

During the three fiscal years ending Sept. 2007, BKUNA recognized $360 million of pretax income. Over that same period non-cash interest income was $270 million.

In a perpetually rising housing market, the lender isn’t concerned about the collectability of this revenue. Eventually the borrower will refinance his loan, paying off all outstanding principal and interest. But if house prices fall 40 percent, the borrower goes upside down, complicating collections.

BKUNA executives defend their lending practices saying they didn’t engage in “subprime lending” and that borrower FICO scores averaged over 700. But as analyst Zach Gast of RiskMetrics Group notes, “borrowers with less equity in their homes have a higher probability of default regardless of credit score.”

And this makes perfect sense. A borrower with zero equity making a minimum payment is effectively a renter with an option to buy. If the house price goes up, the borrower can refinance the original loan and capture any incremental equity. But if the price goes down, it makes more sense to mail your keys to the lender, letting the option expire worthless. The lender is left with a defaulted loan to write down and a pile of non-cash interest income to charge off.

Even if house prices stay flat, an option ARM borrower making minimum payments will have another incentive to walk away: When the loan balance grows too large, the payment schedule automatically recasts, forcing the borrower to make a (usually much higher) fully-amortizing monthly payment. Call it the option ARM emergency override. Theoretically it protects the lender by capping the growth of the loan’s balance; in reality, it’s the moment when the loan goes toxic. The borrower suffers severe payment shock and has extra incentive to default.

Fit for a Minsky

Stepping back for a moment, it’s worth pondering how negatively amortizing loans inflated the last stages of the housing bubble. For this we turn to the late economist Hyman Minksy and his financial instability hypothesis. In a nutshell, Minsky theorized that stability destabilizes because it encourages imprudent risk-taking. Stability becomes instability in three stages, with three corresponding types of debt—so-called hedge units, speculative units and Ponzi units. The debt products perpetuating the housing bubble fit this mold perfectly.

A “hedged” debt unit is one where the borrower’s income is sufficient to pay interest and principal in full each month. He should be able to pay off his mortgage on schedule, regardless of price fluctuations.

A “speculative” debt unit is one where the borrower’s income is sufficient to pay interest but not principal. The borrower is speculating that the value of the collateral will not decline, and that sale proceeds will be sufficient to pay off the principal. If prices climb, the borrower ‘s bet pays off.

A “Ponzi” debt unit is one where the borrower’s income is insufficient to pay down either interest or principal. The borrower is speculating that the house price will go up, and that sale proceeds will be sufficient to pay off principal and unpaid interest.

Over the last 10 years, mortgage finance progressed from hedge units (fixed rate, 20 percent down mortgages) to speculative units (interest-only, 10 percent down), to Ponzi units (negative amortization, zero down). Towards the end of the bubble, prices got “too high” because marginal buyers had no hope of paying off their mortgage without further price appreciation. Eventually there are no greater fools looking to buy and the Ponzi scheme implodes. Option ARM lenders bankrolled this, the last stage of the housing bubble, by pumping Ponzi-finance into the market.

And BKUNA was the “option ARM specialist extending loans beyond all others,” according to RiskMetrics’ Gast. He says other lenders specializing in option ARMs—Downey Savings and Loan, FirstFed Financial, Countrywide, WaMu and Wachovia’s Golden West Financial—slowed such lending by Fall 2006. BKUNA kept at it for another year.

And while all competing in the space played fast and loose with accounting rules, BKUNA was particularly aggressive. At the end of the June quarter, BKUNA’s loan loss reserves were a puny 2.5 percent of loans held. That compares to Downey’s six percent, and FirstFed’s four percent.

Lastly, because BKUNA’s option ARMs were largely originated through outside brokers, accounting rules allow them to defer and capitalize origination fees. As BKUNA writes down its exposure to option ARM loans, it must also expense any corresponding origination costs in one shot. This may prove a fatal hit to shareholder’s equity—35 percent of which is accounted for by deferred costs.

A question of when, not if

Much of the Florida and California property market is in full-fledged depression, and BKUNA’s financial picture is just as ugly. Consider their June 10-Q filing with the SEC:

* Non-performing loans as a percentage of total loans were eight percent, up from one percent at the start of 2007.

* Shareholder’s equity of $575 million was off 30 percent since its high last September.

* The stock, which traded as high as $28 last year, is now under a dollar.

And the situation will only grow worse. Gast says peak defaults for BKUNA’s Option ARM loan book won’t arrive until 2010.

BKUNA has managed to stay afloat with brokered deposits and Federal Home Loan Bank loans. But even these sources of capital have now been cut off. The FHLB cut BKUNA’s credit line in July and OTS eliminated its access to brokered deposits in September, downgrading the bank to “adequately-capitalized.”

Now BKUNA is racing to raise $400 million. At the current market price, they’d have to sell 700 million new shares. Only 35 million are outstanding today. Is it any wonder the stock is below $1? If the bank succeeds in raising capital, existing shareholders will be diluted to zero. If it doesn’t, the bank will likely get seized.

Until late October, BKUNA’s executive ranks had been remarkably stable, thanks to a dual-class share structure that left CEO Alfred Camner with voting control. As recently as August, Camner continued to defend his bank’s lending practices, telling the New York Times that option ARMs “for a very long time an excellent performing package.” For qualified borrowers, “it was an excellent loan.”

By “very long time” does he mean the four years his bank was writing these loans?

As for borrowers’ qualifications, how would he know? According to BKUNA’s investor presentation, the company verified employment, income and assets for less than 20 percent of its residential borrowers. Incidentally, the Times also quoted him dismissing concerns about the bank’s lending practices as “completely absurd” and “idiotic.”

Back in June, Camner offered to relinquish his Class B shares if a white knight should sally forth with the $400 million. But no investors stepped up. On Oct. 20, he resigned.

He’ll receive a year’s pay, health insurance, $12,000 towards the lease on his car, $50,000 towards an office and an assistant, and up to $25,000 to reimburse legal expenses. Additionally, the company will buy back 340,000 of his Class B shares at “market value.” All of the above add up to a meaningful sum for a company desperately in need of cash, even if Camner only gets $0.55 per share for his stock.

Luckily for Camner, he has another gig to fall back on. Besides being CEO of BKUNA, he’s also senior managing director of law firm Camner, Lipsitz and Poller, which has billed BKUNA $12 million in legal fees over the last three years. (For this nugget, see “related party transactions” in the 10-K. There, you’ll also find that Camner’s daughter Errin is CLP’s managing director.)

Another of Camner’s daughters, Lauren, was a BKUNA senior vice president and board member. At 33 years old, she was the youngest director on a board the average age of which is 61. She resigned the same day as her father. A third daughter, Danielle, was BKUNA’s vice president for government affairs from 2001-2004, according to a resume published on social network website LinkedIn.

Replacing Camner as CEO is Ramiro Ortiz. As president and COO of BKUNA since 2002, Ortiz played a key role building up the bank’s option ARM loan book.

Not too big to fail

Eighteen months ago, it was thought BKUNA’s retail franchise and deposit base would help it survive the housing bust. If the situation deteriorated, an acquirer with designs on Florida would buy them out. But back then, Gast says analysts were assuming loan loss rates of 4-5 percent. Today it’s clear loss rates will be substantially higher. It’s hardly surprising that acquirer banks are waiting for targets to be seized and for the FDIC to absorb losses before they move in.

One exception is Wells Fargo, which plans to acquire Wachovia’s toxic loan book with no guarantees from the government. Before Wachovia acquired them in 2006, Golden West Financial was one of the largest purveyors of option ARMs nationwide, having pioneered the loan product 20 years ago. Wachovia’s legacy option ARM loan book from Golden West was $122 billion prior to the merger announcement, making it the largest option ARM lender by dollar volume. Concentrated in California, those loans may have to be written down 50 percent over time, according to industry analyst Mark “Mr. Mortgage” Hanson.

Perversely, Golden West’s more liberal lending policies are helping it delay write-downs. Banks like BKUNA, Downey and FirstFed typically force option ARM borrowers to make a full mortgage payment after 5 years or when the loan balance reaches 115 percent of its original value, whichever comes first. When borrowers face this payment shock, they default in large numbers.

But Golden West’s option ARMs allow the loan balance to grow for 10 years or to 125 percent of original value. Borrowers can continue making minimum payments longer so loans don’t “default” for years. Though this ultimately puts Wachovia on the hook for steeper losses, it also delays the day of reckoning.

Why would Wells Fargo take on Wachovia’s loan book with no government guarantee? According to Hanson, it’s an “all or nothing bet to make themselves too big to fail, to grab deposits, and to take advantage of both new tax laws and the potential generosity of the government with taxpayers dollars.”

Taxpayers have already been generous to Wells, to the tune of a $25 billion equity injection. The TARP will likely throw billions more their way to deal with Wachovia’s toxic paper and Wells’ own $180 billion book of HELOCs, prime jumbos and subprime. Throw in the tax benefits from the write downs on Wachovia’s assets and Wells might just come out ahead.

However the deal comes off, with $1.4 trillion of combined assets, Wells-Wachovia won’t be allowed to fail. With only $14 billion of assets, however, the same probably can't be said for BankUnited.

[Demeter]

2. An Avalanche of Claptrap by Bill Bonner

http://dailyreckoning.com/forever-in-bubbles/


Illusions pile up... They're sure to come down sooner or later

Like snow at high altitudes, the central banks' new money is piling up. As reported last week, all the world's major central banks have turned on their snow machines. The US Federal Reserve has been authorized to "print" $1.75 trillion worth of new money in order to buy Treasury bonds. The Bank of England has its own program - worth 75 billion pounds, so far. Even Switzerland has been printing money - so much that its money supply, as measured by M2, is growing at 30% per year. And two weeks ago, the European Central Bank announced that it too would begin creating money in order to buy corporate bonds.

"Quantitative Easing" it is called. As a refresher for readers with real lives and better things to do, QE is how central banks describe what is essentially an act of counterfeiting. They buy bonds with money created - electronically - specifically for that purpose. Abracadabra - "money" comes into being.

The feds aim to provide liquidity for the cities and farms. But so far, only a trickle is coming down. Instead, chilly weather in the upper reaches of the financial sector holds it frozen in place. Hundreds of billions comes down from central banks, but there it stays...waiting for spring.

Today, here on the back page, we ask ourselves a simple question: what will happen to it?

The feds' counterfeit money does such a good imitation of the real thing, you can't tell them apart. But the problem with all money is that it is as fickle and unreliable as a bad girlfriend. One minute she goes along with the flow. The next minute she turns silly and bubbly. And then, she gives you the cold shoulder.

According to theory, an increase in the supply of something leads directly to a decrease in the price of it... That is, if other things remain constant. Despite the credit crunch, the banking freeze-up, and the economic recession, the money supply in the US as measured by M1 is actually rising at 14% per year. Yet consumer prices are not keeping pace. The latest report shows them actually going down slightly over the last 60 days.

Turns out, causing inflation is not as easy as it looked; controlling it probably will be even harder. It's not enough to manage the quantity of money; you also need to be able to control its behavior. Money can be a solid, a liquid, or a gas depending upon the temperature of the economy. At normal temperatures, money runs freely, watering the economy. And when things really get hot, it vaporizes, creating gaseous bubbles such as those of the late Bubble Period. But when the temperature falls, money shivers in wallets and bank accounts - reluctant to go out into the cold. Economists refer to the 'velocity of money" to describe the magnifying effects of motion. When the same dollar bill appears in three different places in the same day, it is as if the money supply had been multiplied three-fold. In a freeze, on the other hand, it comes to a dead stop.

"We thought the Bubble Epoch was the peak in claptrap and illusions. But we were only in the foothills."

When the thaw will come, we don't know. But the authorities are ready for it. When consumer prices begin to rise, they'll stop adding to the money supply. Then, they'll withdraw liquidity, as need be, to keep it under control.

They know that runaway inflation would cause problems - the collapse of the dollar...and the US Treasury bond market, for example. So, at the first signs of inflation, they will move quickly to remove excess liquidity from the system. How? Their emergency plan is simple enough. Now, they are buying bonds. When their inflation targets are met, they will begin selling them.

We thought the Bubble Epoch was the peak in claptrap and illusions. But we were only in the foothills. The feds now pretend to bail out the economy by giving money to companies that pretend to be concerned, run by people who pretend to know what they are doing. And when they run short of money, they create more of it, pretend it is real...and pretend they can tell it what to do.

What is likely is that money will have a mind of its own. First, the markets will react...and the authorities will not. They will remember their own critiques of Japanese and Roosevelt-era monetary policy. In both cases, they believe central banks removed the punch bowl too early - before the party really got rolling. In both cases, the recovery was cut off.

Then, while they are hesitating, money will turn on them. Inflation rates will rise further. The velocity of money will pick up. And investors - including foreign governments - will become eager sellers of government debt. Suddenly, it will be too late. In order to remove the monetary inflation they previously added, central banks will have to sell bonds instead of buying them, trying to re-absorb money from the economy. The extra cash would then disappear back into the central banks. But in order to bring inflation under control, the biggest bond buyers in the world must turn into the world's biggest sellers. Bond prices, already falling as investors feared the worst, will collapse immediately. An avalanche of dollars will fall upon the world markets - as dollar holders all over the world become desperate to get rid of them.

We don't know what day it will happen. But we have a good idea as to what time of day central bankers will realize that they are doomed. About 4 AM is our guess. That is the moment when Ben Bernanke and other central bankers begin to feel like members of the Donner Party. That is, like imbeciles.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

[Demeter]

42. "I need a shower." -- Kirk

* "Yes." -- Spock

[Robbien]

45. San Francisco Fed Concerned About Consumer Deleveraging

While the administration is doing all it can through various media conduits to imprint the idea that inflation is all but a guaranteed reality at this point, so that consumers begin borrowing at an expansive pace yet again, consumer leveraging is exactly the process that has commenced unwinding, and the obvious impact on the personal saving rate which has been growing at a dramatic pace, has been visible throughout the economy. And as the consumer deleverages additionally, deflation is a certainty, as the combined impact of asset value decline and associated leverage flow through the economy, further depressed prices of goods and services.

Unfortunately for Bernanke and Geithner, the deleveraging process has commenced, and regardless of how many treasuries are issued, and how much additional debt the U.S. incurs, the demand side for credit is just not there, sticking banks with basements full of shrinkwrapped packages of hundred dollar bills, that will sit dusty and unused for years. The only immediate impact is that at some point in the not too distant future, the U.S. will need to print bonds to satisfy just the interest payments on these very bonds, which is an unsustainable state and only has one outcome.

In a very amusing section from the release, the San Fran Fed is discussing the financial behaviour of the consumer, when in fact the very same words are 100% applicable to the U.S. Treasury itself:

More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing.The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

The last paragraph is probably the most lucid explanation of the conundrum the Federal Reserve and the Treasury are in currently. And all that Bernanke and Geithner are attempting to do is not just make sure these very banks can survive another day with trillions of worthless loans on their books, but do all they can to relend them once again into private (consumer and hedge fund) hands.

This approach is flawed and as time passes and the consumer savings rate increases, the bifurcation between the Fed's plans and reality will only become more evident, with the cost being increasing deflation, while the U.S. accumulates higher and higher sovereign debt. The combined impact of both processes could end up having a devastating geopolitical impact on the United States.

http://www.istockanalyst.com/article/viewarticle/articleid/3243139

[Demeter]

3. An Animated President!

http://www.washingtonpost.com/wp-dyn/content/opinions/anntelnaes/?hpid=opinionsbox1

[Demeter]

4. A Call For Greater Accountability For the Fed

http://www.nakedcapitalism.com/2009/05/call-for-greater-accountability-for-fed.html


The notorious Public Private Investment Partnership, aka "Son of MLEC," was supposed to be up and running as of early May but its debut has instead been pushed off to July. The need to sort out some details is the official reason for the delay, but the Financial Times' Gillian Tett says that the banks themselves are not so keen about the program.

As we said with every iteration of the idea (MLEC, TARP version 1.0, now the PPIP), it seeks to finesse, in an opaque and frankly dishonest way, the fact that banks are unwilling to sell the toxic dreck on their balance sheets for anything below their "marked" value, which is above market (put it this way, if it were at market, there would be no reason for the program, they'd just dump the stuff and be done with it).

And even selling the nuclear waste at marked value does not do a lot for them. As various observers ranging from Alan Greenspan, Meredith Whitney, and Nouriel Roubini have noted, the stress tests to the contrary, the banks are certain to be back to the well for more equity. If nothing else, fearsome commercial real estate losses are in the offing, and housing has not yet bottomed either. All a sale at "booked" value does is increase liquidity of their balance sheet. They need more equity, either via selling the garbage at a profit, retained earnings, or selling stock.

Let us face it, no amount of leverage is going to induce a rational investor to put up even a teeny amount of equity to pay an above market price. Who wants an embedded loss? And all the claims contrary-wise, the overwhelming majority of this stuff trades. It is not that there are no markets for these assets, as the banksters and their minions at Treasury would like us to believe; they just don't like the prices.

As Tett tell us:

If you listen to some senior US bankers, it is easy to feel pretty doubtful that the PPIP can really fly. The key sticking point is price. The PPIP plan will work if banks take part to sell assets. But right now, no banker wants to participate in an auction that produces asset prices lower than those on bank books. After all, if that were to happen, banks would face pressure to make more writedowns – which they can ill afford.

The Treasury and FDIC hope to avoid this scenario by encouraging asset managers to place high bids for the bank assets, by offering non-recourse leverage of up to five times (or far higher than non-recourse leverage available in the market). Some politicians hate that, since the details of the deals mooted so far appear to leave taxpayers with little embedded upside.

That political scrutiny, in turn, makes asset managers nervous. As a result, it is still unclear whether enough asset managers will produce bids that are high enough to make the banks happy with an auction price.

So some large banks are – unsurprisingly – adopting a policy of quiet footdragging. A senior official at one large bank observed this week that his group would participate in a pilot scheme, as a gesture of goodwill. But after that token gesture, this bank will probably stop.

And while the government wants to set a minimum lot size of $1bn, this bank is lobbying for a figure nearer $250m to limit the auction to a few choice (token) assets


Yves here. This was an outcome we had anticipated, that it anything traded, it would be the best of the dreck, where the bid-offer spread was lowest, Back to the article:

Unsurprisingly, this banker – like others – concludes that he is “not optimistic” about PPIP, not least because the urgent pressure to sell assets is receding as banks raise capital.

That view may not be entirely representative: another bank tells me it is preparing to get properly involved (not least because it has the financial strength to have written many assets down). Government officials running the PPIP scheme insist there is strong overall interest from potential buyers and sellers. They also point out that it need not matter if the scheme ends up being limited in size. After all, what PPIP is trying to do (like Talf and much else) is reignite market activity, not replace it. Think of it as a chunk of firelighter on a pile of wet wood. Thus, the sheer act of talking about PPIP – and then staging a few sales – may be enough to kickstart a private sector trading toxic assets again. Or so the hope in Washington goes. “Success is what happens to the market overall,” says one.


I guess no one told these guys these markets are functioning. And the really werido stuff (that was never designed to be traded) is so on-off that single assets trading here and there do not a market make. They are so heterogeneous that isolated liquidation do not have implications for other holdings. But surprisingly, the normal savvy Tett buys into the party line on this point.

A Call For Greater Accountability For the Fed

Posted: 21 May 2009 11:13 AM PDT


It's been obvious to anyone who bothered paying attention that the Fed is increasingly acting as an extension of the Administration, without the oversight and disclosure to which the Executive Branch is subject. For instance, only the Federal Reserve Board of Governors appears to be obligated to honor to Freedom of Information Act requests (the Board of Governors has a FOIA office). The New York Fed, which is the where the alphabet of new programs is domiciled, argues that it is a private organization and has made only limited. voluntary disclosures.

As Willem Buiter has commented:

I have written at length before about the ever-expanding quasi-fiscal role of the Fed. This began as soon as the Fed began to take private credit risk (default risk) onto its balance sheet by accepting private securities as collateral in repos, at the discount window and at one of the myriad facilities it has created since August 2008. It is possible - I would say likely - that the terms on which the Fed accepted this often illiquid collateral implied even an ex-ante subsidy to the borrower. But the Fed is refusing to provide the necessary information on the valuation of the illiquid collateral, interest rates, fees and other key dimensions of the terms granted those who access its facilities, for outsiders, including Congress, to find out what if any element of subsidy is involved.

Should the borrowing bank default and should the collateral offered also turn out to be impaired, the Fed will suffer an ex-post capital loss on its repos and other collateralised lending operations against private collateral. It does not have an indemnity from the Treasury for such capital losses.

The Fed also created the Maiden Lane I (for Bear Stearns toxic assets), Maiden Lane II (for AIG’s secured loans and Maiden Lane III (for AIG’s credit default swaps) special purpose vehicles in Delaware. The losses made by Maiden lane II and III when the Fed paid off the investors (counterparties) of AIG at par, were, however, not booked on the balance sheets of the two Maidens, but were booked on AIG’s balance sheet, keeping Maiden Lane I and II, and the Fed, clean for the time being. The financial shenanigans used by the Fed (in cahoots with the US Treasury) to limit accountability for these capital losses are quite unacceptable in a democratic society. Clearly, the US authorities are using the financial engineering tricks and legal constructions whose abuse by the private financial sector led to our current predicament, to engage in Congressional- and tax payer accountability avoidance/evasion. To watch the regulators engage in regulatory arbitrage is astonishing.


It's time we put a stop to this nonsense.

Rep. Alan Grayson has sent the letter below to all Democrats in the House to promote Democratic co-sponsorship for the HR1207 Bill, aka The Federal Reserve Transparency Act. It will enable the GAO to audit the Federal Reserve, and requires that the Federal Reserve report to Congress by the end of 2010.

The actions taken by the Fed on a daily basis have a huge impact on the public at large. Any shortfall on its large commitments will be funded either by "printing", as in creating inflation, or by having the Treasury reimburse the Fed for its losses. The notion of Fed independence became a sham with Alan Greenspan, when he, in contradiction to the actions of his predecessors, supported both Clinton and Bush Administration initiatives. Under Bernanke, the Fed has worked even more closely with the Treasury. The idea that it is independent is a farce.

We encourage all readers who believe in transparency and accountability join me as well as Dean Baker, Bill Black,Glenn Greenwald, Naomi Klein, James K. Galbraith, Tyler Durden, US PIRG, Public Citizen, Mike Farrell, Digby, Rob Kuttner, Ian Welsh, Bill Greider, Stirling Newberry, ANWF, Les Leopold, Mike Lux and others in supporting Alan Grayson and asking Democratic members of Congress to cosponsor the Federal Reserve Transparency Act. Please sign the petition.

Forwards this broadly, Grayson already has good support for the bill, but given the odds of serious Fed and financial services industry pushback, he needs all the firepower he can get.

Alan Grayson's letter to colleagues:

Bring Some Accountability to the Federal Reserve

Dear Colleague,

I write to ask you to co-sponsor HR 1207, the Federal Reserve Transparency Act, which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components and require a report to Congress by the end of 2010.

The Federal Reserve System operates as the central bank for the United States, managing the economy’s money supply and overseeing the banking system. Until recently, the Fed has not picked winners and losers when distributing money, nor has it brought credit risk onto its balance sheet. It has slowed or stimulated the economy by raising or lowering interest rates. Since March 2008, the Fed has resorted to using its emergency powers to pick winners and losers, and to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has expanded from around $800 billion to over $2 trillion, not including off-balance sheet liabilities it has guaranteed for Citigroup, AIG, and Bank of America, among others. The bank is also ‘monetizing’ the debt of the United States Government by purchasing massive amounts of agency and Treasury bonds. An audit is the first step in bringing this unaccountable system under the control of the public, whose money it prints and disseminates at will.

The Federal Reserve is an odd entity, a public-private chimera that controls the US monetary system and supervises the banking system. The system is governed by a Board of Governors, with twelve regional reserve banks that serve a supporting role. While the Governors are appointed by the President with confirmation by the Senate, the regional Reserve Banks have boards of directors chosen primarily by private banking institutions. Right now, for instance, the CEO of JP Morgan, Jamie Dimon, serves on the Board of Directors of the New York Federal Reserve Bank, as did Goldman Sachs Director Stephen Friedman.

This creates striking conflicts of interest and unseemly appearances in the management of what is ultimately the public’s money.

Consider:

JP Morgan’s CEO was a board member of the New York Fed even as he negotiated on behalf of JP Morgan with the New York Fed for a $29 billion bridge loan to allow his company to take over Bear Stearns.

New York Fed and Goldman Sachs board member Stephen Friedman purchased 37,300 shares of Goldman Sachs stock in December at the same time as Goldman received permission to convert to a bank holding company regulated by the Federal Reserve. Friedman at the time was also overseeing the selection of a New York Federal Reserve President to replace Tim Geithner, and the New York Fed ended up hiring another alumni from Goldman Sachs.

According to the bank’s website, the two “class B” directorships of the New York Fed that are supposed to represent the public are vacant.

Enron’s Jeff Skilling was on the board of the Dallas Federal Reserve Bank.

Criticism of banker influence and control of our monetary system is not new. However, the urgency of the financial crisis and the actions of the Fed picking investment bank winners and losers have changed the nature of the criticism. The Senate just passed a non-binding resolution requiring more transparency at the Federal Reserve in its Budget Resolution.


Still, neither the GAO nor the Federal Reserve Inspector General has audited the books of the Federal Reserve or its regional banks. The Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet. With discussions of allocating even more power to the Federal Reserve as the ‘systemic risk regulator’ of the credit markets, more oversight over the central bank’s operations is clearly necessary.

The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress. The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”. The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.

An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it back into balance, but it is a start. The public has a right to know to whom the US government is lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing liquidity’ and ‘private financial intermediation’ is preventing a full and long overdue public debate on the role of the Federal Reserve and the influence of private banking interests in the governing of our economy.

I encourage my colleagues to support H.R. 1207, so that we can bring some transparency to our banking system and allow the public to have a real debate over the fundamental direction of our nation’s political economy.


Please sign the petition. Thanks!

http://action.firedoglake.com/page/s/Fed1207

[Demeter]

6. Dilbert Takes on the MBAs

http://dilbert.com/strips/

[AnneD]

32. Good but still not as good...

as the secretary's financial plan....a GED, promiscuity and a rented trailer.

http:dilbert.com/strips/comic/2009-05-04/

[Demeter]

44. "Humour. It is a difficult concept" -- Saavik

[Demeter]

8. US investors get to nominate boards

http://www.ft.com/cms/s/0/80f7667c-4561-11de-b6c8-00144feabdc0.html

By Deborah Brewster in New York

Published: May 20 2009 18:34 | Last updated: May 20 2009 18:34

US shareholders scored one of their biggest victories in many years on Wednesday when regulators proposed new rules allowing them to nominate company directors.

The controversial rule has been considered by the Securities and Exchange Commission three times in the past five years, but failed to pass. The commission voted to propose the rule, by three votes to two. The Republican commissioners were the two dissenters.

The SEC said that it had decided to revisit the rule because the economic crisis had called into question whether boards were exercising enough oversight over companies. It said shareholders had “a fundamental right under state law” to nominate and elect company directors, but were being impeded.

Companies at present nominate their own directors. Shareholders have the right to vote, but not to nominate any directors, except through a difficult process that requires them to mail shareholders at their own expense. The new rule would allow large shareholders such as pension funds to nominate up to a quarter of a company’s board members.

The SEC move is part of a groundswell of support for shareholders’ rights. Publicity over generous executive pay packages and the need for a taxpayer-funded bailout of several large financial companies appears to have changed the regulatory mood.

Mary Schapiro, SEC chairman, has already publicly supported the proposal, saying she would like it to be enacted before the next proxy season, which starts early next year.

The Council of Institutional Investors on Wednesday applauded the move, saying it was long overdue.

Joe Dear, council chairman who is also chief investment officer of Calpers, said: “The credit debacle represents a massive failure of oversight – by boards as well as by regulation... Investors must have the tools to hold directors accountable so they will do a better job of monitoring and, if necessary, reining in management.”

The rule includes two provisions, one of which would allow shareholders who own from one per cent to 5 per cent of stock – depending on the company’s size – for at least one year, to nominate directors.

The second provision amends a federal rule that allows company management to exclude shareholder proposals which nominate directors.

The proposal will be open to a public comment period of 60 days. The SEC staff will then review the comments and make a recommendation to the commission, which will hold a final vote.

[Demeter]

9. WHERE ARE THE DAMN COPS (BAC)

http://market-ticker.org/archives/1051-WHERE-ARE-THE-DAMN-COPS-BAC.html

This is getting very, very old folks.

Bloomberg reported CNBC said (yeah, I know):

May 19 (Bloomberg) -- Bank of America today made a secondary stock offering priced at $10 a share, CNBC reported citing a person familiar with the situation.

CNBC could not confirm the volume of the offering, which is about 10 percent below the bank’s close of $11.25 in New York Stock Exchange composite trading.

Shortly after the close there was chatter that a huge clean-up block order was being shopped and nobody wanted it.

Well here's the chart of trading in BAC today:



From this chart it is clear that "someone" (or a handful of someones) knew of this offering before the market closed.

The volume that started showing up at 2:00 PM - to the downside - was VERY significant and the selling picked up bigtime going into the bell.

This sort of information leak and trading on it before it is disclosed is illegal.

What's even worse is that an hour after this news "broke" Bank of America still hasn't issued a press release on the matter.

We saw this sort of "favored garbage" all the time in the 90s. As a consequence Regulation FD, for "fair disclosure", was passed. It mandates that you cannot issue information that is material to your stock price to only a few select people - you have to give it to everyone at the same time, and the most common way you do this is to request a halt on your stock from the NYSE, issue the press release, then have the NYSE lift the halt.

This way nobody can get either long or short in front of your announcement and nobody gets to profit unfairly (or get screwed unfairly) as a consequence of whatever it is you need to announce.

Banks are not immune from this regulation.

People need to start going to prison for this BS. There are real investors who are harmed by this intentional and outrageous gaming in the markets, sometimes very significantly. This issue is at a 20% discount to the trading price earlier today and the dilution will hit EPS forever.

Oh, and it gets better. What happened yesterday?

LONDON (MarketWatch) -- Bank of America was upgraded to buy from neutral and added to the conviction buy list at Goldman Sachs, which says the stock overhang should start to abate and that the bank may earn 25 cents a share during the second quarter, well above consensus estimates of a penny a share. "Our optimism is based on another solid mortgage and capital markets quarter, given observable activity levels since March," the broker said.

The stock overhang should start to abate?

I want to know who ran the book for this secondary and further, I want to know if Goldman was one of the firms selling into this.

What I do know, because I have a real-time squawk feed with commentary, is that Goldman was very quietly selling S&P futures in the back of the pit this afternoon.

The SEC needs to start issuing subpoenas NOW. This has gone on now for more than two years, dating back to the 2007 "surprise" discount rate cut, the "short ban" on financials and more. It is abundantly clear from a simple examination of the price and volume immediately in front of these announcements that someone is being given the information before the rest of the market gets it and they are trading on it, and that is against the law.

Period.

I have said that you can't buy or own any financial-related stock at present as an investor. This sort of BS is why - you will be traded against by people with inside information who will take every opportunity to destroy your investment while profiting from your loss, and they will do so using information that is not available to you, the average person, until well after their trade against your position has been put on - whether those acts are legal or not.

WHERE ARE THE DAMN COPS?

PS: BAC will probably be up tomorrow. That doesn't change a thing - Reg FD is not there so that a handful of "special folks" can profit on opportunities you don't get to take advantage of.

Disclosure: No financial firm positions; with this sort of blatant, unpunished lawlessness your IQ would have to be in the single digits to invest in any of these firms.

[Demeter]

41. "Nobody understands you in this century unless you swear every other word.

You'll find it in all the literature of the era: Jackelyn Susann, the novels of Harrold Robbins." -- Kirk

* "Ah, the giants." -- Spock

[Demeter]

10. Activist Financier 'Terrorizes' Bankers in Foreclosure Fight

http://online.wsj.com/article/SB124276441945635993.html


By JAMES R. HAGERTY and RUTH SIMON

Bruce Marks doesn't bother being diplomatic. A campaigner on behalf of homeowners facing foreclosure, he was on the phone one day in March to a loan executive at Bank of America Corp.

"I'm tired of borrowers being screwed!" Mr. Marks yelled into the phone. "You're incompetent!" Before hanging up, he threatened to call bank CEO Kenneth Lewis at home to complain about the loan executive.

Mr. Marks's nonprofit organization, Neighborhood Assistance Corp. of America, has emerged as one of the loudest scourges of the banking industry in the post-bubble economy. It salts its Web site with photos of executives it accuses of standing in the way of helping homeowners -- emblazoning "Predator" across their photos, picturing their homes and sometimes including home phone numbers. In February, NACA, as it's called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted.

In the 1990s, Mr. Marks leaked details of a banker's divorce to the press and organized a protest at the school of another banker's child. He says he would use such tactics again. "We have to terrorize these bankers," Mr. Marks says.

Though some bankers privately deplore his tactics, Mr. Marks is a growing influence in the lending industry and the effort to curb foreclosures. NACA has signed agreements with the four largest U.S. mortgage lenders -- Bank of America, Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup Inc. -- in which they agree to work with his counselors on a regular basis to try to arrange lower payments for struggling borrowers. NACA has made powerful political friends, such as House majority whip James Clyburn of South Carolina, and it receives federal money to counsel homeowners.

Some 1.7 million U.S. households will lose their homes in foreclosure this year, according to a forecast by Moody's Economy.com, versus under 500,000 a year early in the housing boom. Banks want to show they're making every effort to keep people in their homes. That can mean working with housing-advocacy groups that routinely bash the industry, increasing the clout of such nonprofits. Less certain is whether these groups can translate their new leverage into long-term influence over how mortgage lenders treat customers.

"We have the opportunity to change how lending gets done in this country," says Mr. Marks, whose group is itself a mortgage broker and has 40 offices staffed with housing counselors. He favors a return to more traditional standards, with full documentation of income and the same fixed interest rate for everyone.

Instead of relying on credit scores, he thinks lenders should look into the reasons for any late payments in prospective borrowers' past and prepare renters for the responsibilities of home ownership. Then, if people are given a loan they can afford, they shouldn't be required to make a down payment, he argues....

MUCH MORE AT LINK

[Robbien]

16. Redstate is calling Marks group brownshirts

Aren't brownshirts supposed to be thugs who do the wetwork for elites? Brownshirts intimidate the little guy for the benefit of people in power, right?

Does Redstate/right wingers really believe banksters are the underdogs?

[Demeter]

27. Ferengi Rules of Acquisition

http://www.sjtrek.com/trek/rules/


---------------------------------------------------------------------
Ferengi Rules of Acquisition
---------------------------------------------------------------------

1. Once you have their money ... never give it back.
3. Never pay more for an acquisition than you have to.
6. Never allow family to stand in the way of opportunity.
6. A man is only worth the sum of his possessions. (From Enterprise, episode "Acquisition"; sloppy script-writing, as rule 6 (see above) was already given in DS9)
7. Keep your ears open.
8. Small print leads to large risk.
9. Opportunity plus instinct equals profit.
10. Greed is eternal.
13. Anything worth doing is worth doing for money.
16. A deal is a deal ... until a better one comes along.
17. A contract is a contract is a contract (but only between Ferengi).
18. A Ferengi without profit is no Ferengi at all.
19. Satisfaction is not guaranteed.
21. Never place friendship above profit.
22. A wise man can hear profit in the wind.
23. Nothing is more important than your health--except for your money.
27. There's nothing more dangerous than an honest businessman.
31. Never make fun of a Ferengi's mother ... insult something he cares about instead.
33. It never hurts to suck up to the boss.
34. Peace is good for business.
35. War is good for business.
40. She can touch your lobes but never your latinum.
41. Profit is its own reward.
44. Never confuse wisdom with luck.
45. Expand, or die.
47. Don't trust a man wearing a better suit than your own.
48. The bigger the smile, the sharper the knife.
52. Never ask when you can take.
57. Good customers are as rare as latinum -- treasure them.
58. There is no substitute for success.
59. Free advice is seldom cheap.
60. Keep your lies consistent.
62. The riskier the road, the greater the profit.
65. Win or lose, there's always Hyperian beetle snuff.
75. Home is where the heart is ... but the stars are made of latinum.
76. Every once in a while, declare peace. It confuses the hell out of your enemies.
79. Beware of the Vulcan greed for knowledge.
82. The flimsier the product, the higher the price.
85. Never let the competition know what you're thinking.
89. Ask not what your profits can do for you, but what you can do for your profits.
94. Females and finances don't mix.
97. Enough ... is never enough.
99. Trust is the biggest liability of all.
102. Nature decays, but latinum lasts forever.
103. Sleep can interfere with profit. (DS9 season 2, episode 7 - "Rules of Acquisition")
104. Faith moves mountains ... of inventory.
106. There is no honour in poverty.
109. Dignity and an empty sack is worth the sack.
111. Treat people in your debt like family ... exploit them.
112. Never have sex with the boss's sister.
113. Always have sex with the boss.
117. You can't free a fish from water.
121. Everything is for sale, even friendship.
123. Even a blind man can recognize the glow of latinum.
139. Wives serve, brothers inherit.
141. Only fools pay retail.
144. There's nothing wrong with charity ... as long as it winds up in your pocket.
162. Even in the worst of times someone turns a profit.
177. Know your enemies ... but do business with them always.
181. Not even dishonesty can tarnish the shine of profit.
189. Let others keep their reputation. You keep their money.
192. Never cheat a Klingon ... unless you're sure you can get away with it.
194. It's always good business to know about new customers before they walk in the door.
202. The justification for profit is profit.
203. New customers are like razortoothed grubworms. They can be succulent, but sometimes they can bite back.
211. Employees are rungs on the ladder of success. Don't hesitate to step on them.
214. Never begin a negotiation on an empty stomach.
218. Always know what you're buying.
223. Beware the man who doesn't make time for oo-mox.
229. Latinum lasts longer than lust.
236. You can't buy fate.
239. Never be afraid to mislabel a product.
242. More is good ... all is better.
255. A wife is a luxury ... a smart accountant is a necessity.
261. A wealthy man can afford anything except a conscience.
263. Never allow doubt to tarnish your love of latinum.
266. When in doubt, lie.
284. Deep down everyone's a Ferengi.
285. No good deed ever goes unpunished.
286. When Morn leaves, it's all over.

---------------------------------------------------------------------


SJTrek © Copyright Stephen Jacob, 1994-2006.

[Hugin]

11. "The needs of the many outweigh the needs of the few."

One of the most important lessons from Star Trek... As any Trekker knows.

Great write-up in the OP, Demeter. Food for thought... I mean it, literally... FOOD! Will think for FOOD! Especially, a home made Banana Cream Pie! (BCP) :9

Also, something said in Friday's SMW. "Actual labor has been totally discounted in modern American society." Yes, it has.

A (non-Trekker) thought extended itself to me after I read that...

What if we started working smarter and not harder... If these guys are correct about the Ancient Egyptians. (Which IMVHO they are) Then, well... We have some catching up to do.

Enjoy.

http://www.thepump.org/index.htm

[Tansy_Gold]

13. I'd have written that differently.

"The needs of the many outweigh the WANTS of the few."

The banksters and greedsters don't NEED what they are stealing; they only want it.



Tansy Gold, who does not hesitate to correct Alex Trebek or edit Mr. Spock

[Hugin]

14. Very true... Maybe it should even say.

"The needs of the many outweigh the GREED of the few."

:spock:

[Demeter]

15. I LIKE!

The 60's weren't characterized by greed--maybe that's nostalgia speaking, but the move towards income equality at the time was good for society, that Great Society that LBJ envisioned. Hell, it probably fed into Roddenberry's concept. Unions. That's what this country needs desperately, and good regulations.

[Demeter]

17. Are You On a Diet, Hugin?

All this talk of pie....

[Hugin]

18. I'm just looking for my piece of it.

Y'know... The American One. ;)











(Oh, and I really do like Banana Cream Pie.)

[DemReadingDU]

19. Yum, Pie. and Ice Cream!

morning everyone!
:hi:

[DemReadingDU]

20. video: Lost Vegas

During the boom years, no place in America boomed more than Las Vegas. But when the economy collapsed, Vegas fell hard. Laura Ling tours the wreckage of Sin City, from unemployed strippers and half-built, abandoned casino projects, to hospitals turning away cancer patients and ambulances, to one of the few remaining boom industries--evicting people. appx 25 minutes
http://www.youtube.com/watch?v=rFTZ3flsipE


warning: there is a short segment of a girl pole dancing

[DemReadingDU]

21. Related video, 60 Minutes: Closing the Health Clinic

4/5/09 The Recession's Impact: Closing The Clinic
60 Minutes: Bad Economy Leaves Cancer Patients Without Health Insurance In Dire Straits

The economic crisis is affecting society's most vulnerable as a county hospital is forced by budget cuts to close an outpatient cancer clinic. Scott Pelley reports

videos and text
http://www.cbsnews.com/stories/2009/04/03/60minutes/main4917055.shtml

[Demeter]

22. More thoughts on the fake recovery

http://www.nakedcapitalism.com/2009/05/guest-post-more-thoughts-on-fake.html


A recent post I published on both Credit Writedowns and Naked Capitalism, “Both initial (unemployment) claims and continuing claims now pointing to recovery,” has left the impression that I am a wild-eyed bull – for which I have been duly smacked about the head. This is far from the case. A recent post by Nouriel Roubini to which Marshall Auerback alerted me is very much in line with my viewpoint...
First, a translation of what Roubini is saying: this is no garden-variety recession, it is the D-process as outlined by Ray Dalio (see post below). Therefore, there will be no V-shaped recovery. I happen to agree with that assessment. Back in February, I said we are in a mild depression with a small ‘d.” The unwind process will be very different.

In Roubini’s post, he enumerates three reasons why he does not see an early or V-shaped recovery.

First, the current deep and protracted U-shaped recession recession in the US and other advanced economies will continue through all of 2009 rather than reaching a trough in the middle of this year as expected by the current optimistic consensus.

Second, rather than a rapid V-shaped recovery of growth to a rate close to potential, US and global economic growth will remain sluggish, sub-par and well below trend growth for at least two years into all of 2010 and 2011; a couple of quarters of more rapid growth cannot be ruled out as we get out of this recession towards the end of the year and/or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But at least ten structural weaknesses of the US and the global economy will cause both a below trend growth and even the risk of a reduction of potential growth itself.

Third, we cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.

Please read the entire Roubini post which is linked below. It is quite thorough. In it, he references a piece by Robert Gordon regarding jobless claims signalling the end of recession that I have also covered. However, I don’t think the recession has ended or is about to end as Gordon indicates. I said when reviewing Gordon’s work:

So, jobless claims are definitely a number to watch as we head into the spring and summer. Absent claims numbers averaging 700,000 by mid-to-late summer, it will be safe to say, we are on the road to recovery. What kind of a recovery we get is another entirely different question.

So I see Roubini’s view as very much in line with what I said in my post “Both initial claims and continuing claims now pointing to recovery” – key bits are now highlighted below, but you will notice he stresses the downside risk in his post title whereas my title stresses the upside surprise.

And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post “The Fake Recovery”).

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal. Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week. In the past, one had seen these two series as harbingers of imminent recovery. But, I am talking Q4 here. Why? Deleveraging.

In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment. Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless. This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop. In my view, this means recovery will be delayed and once it gets going it will be weak. The potential for a double dip is very high.

So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough. But, with structural problems still remaining, the U.S. economy will be weak for a long time to come...Look, the fact of the matter is we are in depression. This is no ordinary recession. That means the negative effects of deleveraging and its drag on growth will continue for the foreseeable future until the excesses are largely unwound – recovery or not. This is the principle reason I do not see the recession ending this Spring despite the jobless claims signal. While I wrote the jobless claims post to highlight this fact, I cannot dismiss the data out of hand. The signal is there and it has been reliable for the 40 years of data collected on jobless claims as Robert Gordon has indicated.

In my view, econobloggers and their readers are suffering from the same recency bias that created the housing bubble – viewing future events through the distorted lens of recent events only, without adequate consideration of the natural boom-bust nature of the global economy. I said as much in my post, “Through a glass darkly: the economy and confirmation bias in the econoblogosphere.” Where the recency bias caused people in 2006 to extrapolate ever increasing asset prices and a world of low interest rates and muted business cycles, today it has caused many to think we are headed straight for the Great Depression II and that financial Armageddon is upon us.

However, the picture is not as stark as this. While we may be in a mild depression, policymakers around the world have gone to great lengths to prevent a Great Depression II. In my view, the Federal Reserve has effectively demonstrated it is willing to risk hyperinflation in order to beat back the deflationary forces. And with most major economies engaging in extreme fiscal stimulus and monetary stimulus, one can only conclude that the worst is over and we will see a cyclical recovery. Moreover, the gifts to the financial sector have been large and will continue (see posts here and here) and have diminished the crisis of confidence we suffered post-Lehman. You may not like the means used to achieve this, but the effects are clear.

This is what I call The Fake Recovery. Underneath the surface, all of the problems are still there to a lesser extent: the massive debt burdens, the weak financial sector, the poor savings in the U.S.. We are likely to see the lingering effects of deleveraging to fix these problems take a percentage point away from growth for some time to come. This means the recovery in 2010 is going to be weak. Could we see jobless claims average 450,000 in recovery? Certainly. And 450,000 jobless claims was a figure that meant recession in 2001, so that is no recovery to write home about. And, while it seems increasingly likely we will get a recovery by year’s end or Q1, a double dip recession like we saw in 1980-82 is still a very distinct outcome.

The reason that recovery will come and it won’t feel like one is simply because the terms ‘recession’ and ‘recovery’ are misunderstood. Most people would define a recession loosely as ‘a period when the economy is not doing well.’ A recovery is axiomatically then ‘a period when the economy is doing better.’ But, that is a misnomer. I don’t think many people get the fact that GDP as reported is a first derivative statistic or that recession is a first derivative term (i.e. it measures the change in output, income, sales and employment). Now, I tried to make this point in “Economic recovery and the perverse math of GDP reporting,” the point being a fall from 100 in year 0 to 90 in year 1 and jump back to 92 in year 2 would be considered a deep recession followed by a weak recovery. Anyone living through such an experience would not be experiencing ‘recovery.’ And as far as the U.S. goes, the middle class has been losing ground for some 35 years. The deleveraging process is going to further this sense of loss.

So, I have an idea which Marshall Auerback inspired. Let’s get rid of the term recovery altogether. Let’s call what we see coming an end of the recession or an end to the worst of it. My worry is that any recovery will be used to prevent true reform to our financial system, to roll back recent trends in regulatory oversight and anti-trust, or to provide sufficient relief to two-income families. Unfortunately, for most of us, it will not feel anything like a recovery. Yet, it may be used to continue business as usual.

I hope this helps to contextualize my recent post on jobless claims.



Source

Green shoots or yellow weeds? A trifecta of risks to the early bottoming out of the recession and short-term economic recovery and to the medium-term actual and potential growth prospects of the global economy – RGE Monitor

http://www.rgemonitor.com/roubini-monitor/256792/green_shoots_or_yellow_weeds_a_trifecta_of_risks_to_the_early_bottoming_out_of_the_recession_and_short-term_economic_recovery_and_to_the_medium-term_actual_and_potential_growth_prospects_of_the_global_economy

............................

It’s the writedowns, stupid

http://www.creditwritedowns.com/2009/03/its-the-writedowns-stupid.html

Today, I want to make the case for seeing writedowns as central to this global downturn. To do so, we need to rewind and compare what is going on today with what we have experienced in the past. Drawing on this comparison, I can demonstrate that traditional policy tools are likely to be ineffective today. Moreover, the present course of action will also prove inadequate. Other more aggressive means must be applied in order to ensure a more stable banking system and a path to recovery. Likely remedies will include a reorganization of large swathes of the U.S. banking system.

Now, looking back, if one hearkens back to 1992 and the election that took Bill Clinton to the White House, ‘it’s the Economy, stupid’ was the phrase that symbolized Clinton’s victory and George H. W. Bush’s defeat. Today, as we are mired in a deep economic downturn, we should be tempted to bring back that phrase.

But, 2009 is not 1992. This is no garden variety downturn. It is something altogether different. We are not witness to a case of over-production and overheating as is usually the case. It is a case of over-leverage and over-indebtedness. As a result, the key to the outlook for the American economy is fairly simple and it hinges on a single word: credit.

My view of credit
The way I see it, our economic system is not built on work today for money today to consume today. Rather, we work in order to consume today and into the future. The mechanism through which we make this inter-temporal transfer is credit.

Think about any particular year in which you have worked. Certainly, you bought goods and services to consume straight away. But you also purchased homes, cars, television sets, shoes, washer/dryers, and tennis rackets, all to be ‘consumed’ today and into the future. In effect, you were using money in the present in order to consume later.

Now, here’s the thing. Irrespective of whether you saved money from past earnings to buy those goods and services or bought those goods on credit, it was credit that was always behind the transaction. Had you saved, ninety-percent of your savings was loaned out as credit by your bank as soon as you deposited the funds. And if you bought on credit, you were the recipient of a credit loan yourself. No inter-temporal transactions could ever occur without credit. So, in a very real sense, credit is at the core of our system (a longer explanation is here).

Garden-variety recession
In a normal recession, credit becomes tight, but it is not central to the downturn. In fact, 80% of the decline in GDP is due to a de-stocking of inventory. Basically, businesses get ahead of themselves and forecast future demand that turns out not to exist. They are forced to ratchet back production and sell off inventories. In this case, policy makers can step in with fiscal and monetary stimulus and re-kindle domestic demand with a bit of a lag. Bing, presto, we are off to the races again. That’s why recessions are over in 12-18 months tops.

Depression
That’s not what happens in a depression - and this is a depression. In a depression, what happens is macro disequilibria build up so much and become so unsustainable that when the break in demand happens, there is no bing, presto from traditional policy responses. The leverage and debt in the system is just too large. The debt cannot be worked off without de-leveraging (See my post “De-leveraging“).

Ray Dalio of Bridgewater Associates did a fantastic job of explaining this process in a Barron’s interview last month.

Barron’s: I can’t think of anyone who was earlier in describing the deleveraging and deflationary process that has been happening around the world.

Dalio: Let’s call it a “D-process,” which is different than a recession, and the only reason that people really don’t understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn’t live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process…

Barron’s: You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what’s essential to combat deflation and a depression?

Dalio: The D-process is a disease of sorts that is going to run its course.

When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?

The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the ’90s, that occurred in Latin America in the ’80s, and that occurred in the Great Depression in the ’30s.

Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

For more on this, see my post “A conversation with Bridgewater Associates’ Ray Dalio“

[Demeter]

23. RealtyTrac: 500,000 REOs being held off the market

http://www.businessweek.com/the_thread/hotproperty/archives/2009/05/are_banks_keepi.html

...Buyers looking to purchase foreclosures should still have plenty of opportunities. Only 30% of bank-owned properties are listed on the multiple listing services, says Rick Sharga, senior vice president at foreclosure listing firm RealtyTrac. He figures banks still own as many as 500,000 properties that they want to sell but haven't put on the market.

A home many not be listed because the bank is wrestling with title, repair or owner right of redemption issues. (Several states such as Michigan and Wisconsin give the previous owners the chance to buy back a home that's been foreclosed on). Banks may also be holding houses off the market because selling them now would lower prices even further. Foreclosures typically sell at a 31% discount to similar homes whose owners aren’t in distress. Listing all those homes now, Sharga says, “would have a devastating impact on inventory and pricing." ...

“Foreclosures are the heart of the real estate crisis and the key to the recovery,” says Pete Flint, co-founder and CEO of Trulia. All home sellers have to compete with the bank-owned properties on the market. As a result, “homeowners are absolutely pricing to sell,” Flint says. “Nationally, one quarter of all homes have cut their listing price at lease once in the past year.”...

[Demeter]

24. Mass Layoff Events Pick Up, Faciliate EPS Beats

http://zerohedge.blogspot.com/2009/05/mass-layoff-events-pick-up-faciliate.html


The Bureau Of Labor Statistics' Mass Layoff Events statistic indicates that the wholesale firing by corporations is accelerating once more again after a small respite in the January to March period. The BLS defines a Mass Layoff Event as one that occurs when an establishment has at least 50 initial unemployment compensation claims filed against it within a five-week period and the layoff lasts longer than 30 days. In other words, as the name implies, a mass layoff (and the reason for EPS to be sterling when revenues continue collapsing in all those Q1 earnings calls). This goes hand in hand with initial jobless claims reports. Chart of both are provided below (link to BLS data in article). Kinda tough to spot the green shoots through the very deep parasitic undergrowth on these two charts.


http://4.bp.blogspot.com/_FM71j6-VkNE/ShbmgzmYX3I/AAAAAAAACws/LV7RbhExlg8/s400/mass+layoffs+5.22.09.jpg

http://3.bp.blogspot.com/_FM71j6-VkNE/ShbnteTVY2I/AAAAAAAACw8/qZBV_wyXpcI/s400/BLS+Initial+Unemployment.jpg

For expanding graphs, see link to article.

[Demeter]

25. Geithner Calls for ‘Very Substantial’ Change in Wall Street Pay

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCwz3Hlyo9sg&refer=home

May 22 (Bloomberg) -- Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

He said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.

The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. Chairman Sheila Bair.

Geithner, 47, shied away from declaring the financial crisis over, saying that credit is still "tight" and interest rates are still "high" for many business borrowers. He forecast that will improve gradually as companies and consumers reduce their debt levels to sustainable levels.

Recovery Process

“That’s going to make the process of recovery somewhat slower than it would otherwise be,” he added.

The Treasury chief said it was a “real concern” that some banks that received money from the government will rush to pay it back, impinging on their ability to increase lending. To discourage that from happening, banks that want to repay must show they have more capital than regulatory guidelines call for, and are able to raise money from the private sector “on a substantial scale” without government help, he said.

Geithner told lawmakers earlier this week that every $1 of capital at banks can generate more than $8 of lending. Still, he said in the interview that the Treasury won’t require that banks commit to specific increases in their lending as a precondition for paying the government back....

[Hugin]

28. I actually had to look and see if this was from The Onion!

Okay... Okay... Ya got me Timmeh G.

:rofl:

This whole article should have a huge asterisk along side it. A whole page asterisk! An asterisk that would make even Vonnegut proud!

Hahahahaha!

Okay, that is it... These guys really do live in lala-land! Either that or they are the biggest liars the world has ever seen.

[Hugin]

29. Ah-ha! This is where that particular tripe came from...

"...every $1 of capital at banks can generate more than $8 of lending."

BUT.THEY.DON'T!

That, my friends... Is why you direct your taxpayer stripped recovery Dollars toward the BOTTOM.OF.THE.ECONOMIC.PYRAMID.SCHEME! The little guy has no choice, but, to spend the money on NECESSITIES! Y'know... Food, Water, Child care, Medicine. Whereupon, as time worn experience has shown, it will bounce approximately three times until it eventually lands to mold forevermore in some 1%-er's offshore tax haven account. It's called 'Trickle-up' and it has empirically been shown to at least provide some economic movement before it gets caught in the vortex of greed that is our predatory Financial System.

Who's selling that 8-times crap? The Banking Lobby? Maybe they have it on some poster down at Goldman-Sachs with a cute picture of a kangaroo above it? I want to know because I've heard President Obama use this same pap recently.

[Demeter]

33. It's the Theory of Fractional Reserves

the fact that a bank can legally lend 8 times its weight (and the shadow banks were approaching 40, if I recall correctly).

[Demeter]

43. "I'd give real money if he'd shut up." -- McCoy to Spock

[Hawkowl]

62. Best thread EVER

I view the entire world through the lense of Star Trek on a daily basis!

[Demeter]

63. You Aren't Alone in That

so, how do you like being exiled 200 years into the past?

[Demeter]

26. Regional Federal Reserve Banks Think the Plan Is Failing the Real Economy

http://jessescrossroadscafe.blogspot.com/2009/05/regional-federal-reserve-banks-think.html



Torches on the right, and pitchforks on the left.

Have a happy Memorial Day weekend to all our readers in the States. US markets will be closed on Monday.

Perhaps a reminder that the freedom won by those who came before us at so dear a price should not be dealt away so easily out of fear and greed.

"But, in a larger sense, we can not dedicate - we can not consecrate - we can not hallow - this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us - that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion - that we here highly resolve that these dead shall not have died in vain - that this nation, under God, shall have a new birth of freedom - and that government of the people, by the people, for the people, shall not perish from the earth."

(This is of course part of Lincoln's Gettysburg Address, delivered on the afternoon of Thursday, November 19, 1863, during the American Civil War, four and a half months after the Union armies defeated those of the Confederacy at the decisive Battle of Gettysburg.

http://en.wikipedia.org/wiki/Gettysburg_Address )


CentralBankNews.com
Why the regional feds are up in arms
22 May 2009

A number of presidents of regional Federal Reserve banks and senior staff have recently expressed dissent from the official line taken by the US authorities in managing the banking crisis.

This development may surprise central bankers in other countries, used as they are to enforcing conformity among officials of their organisation to the official line. It would be astonishing, for example, if several governors of euro-area central banks were to suddenly challenge Jean-Claude Trichet's handling of the crisis or the crisis management policies of governments of euro member states. Collective responsibility and cover-ups are the watchwords in Europe.

The heads of the district fed banks are particularly concerned with the inequities and inefficiencies arising from official protection of banks deemed too big to fail.

Hoenig speaks out -

In April, Tom Hoenig, president of the Kansas City Fed, said that actions that had been taken in an attempt to protect the largest US institutions from failure risked "prolonging the crisis and increasing its cost."

Support for firms considered too big to fail had provided them with a competitive advantage and subsidised their growth with taxpayer funds. They were, he said, not only too big but also "too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions."

To those who might be surprised at such forthright criticism from a senior official, he reminded his listeners that the 12 regional banks were set up by Congress "specifically to address the populist outcry against concentrated power on Wall Street." He added: "Its structure reflects the system of checks and balances that serves us well at all levels of government, and it is the reason I am here today able to express an alternative view."

- Lacker protests

A few weeks later another senior Federal Reserve official also asserted that the implicit guarantee that the government would step in and save those institutions deemed too big to fail was a key cause of the current economic malaise.

Speaking at the Asian Banker Summit in Beijing on 11 May, Jeffrey Lacker, president of the Richmond Fed, said that the existence of the financial safety net created incentives for too-big-to-fail institutions to pay little attention to some of the biggest risks.

"Their tendency to underprice such risk exposures reduces market participants' incentive to prepare against and prevent the liquidity disruptions that are financial crises, thus increasing the likelihood of crises."

It was, Lacker said, "worth noting that some large firms that appear to have benefited from implicit safety-net support were heavily involved in the securitisation of risky mortgages."

Lacker said that the implicit belief that some institutions were too big to fail had built up over the years in response to a series of events and government actions involving large financial institutions.

- and Stern maintains his criticism

Gary Stern, the president of the Minneapolis Federal Reserve has also been a vociferous critic of the Fed's bank bailouts. Writing with Ron Feldman, the senior vice president for supervision, regulation and credit at the Minneapolis Fed, for a book entitled Towards a New Framework for Financial Stability (published by Central Banking Publications), Stern said that the Fed was right to come to Bear's rescue, but criticised the decision to expand its safety net as "not subtle or implied." "Uninsured creditors of other large financial firms may now have heightened expectations of receiving government support if these firms get into trouble," he said.

More recently, in a statement to the Committee on Banking, Housing and Urban affairs on 6 May, Stern returned to the subject: "If policymakers do not address TBTF , the United States will likely endure an inefficient financial system, slower economic growth, and lower living standards than otherwise would be the case."

Gary Stern is retiring as he turns 65 in a few months, the mandatory retirement age for senior officials in the reserve banks.

Contrary to public perception, the 12 regional Fed banks are not government agencies. Nor are they private banks. Each is owned by member commercial banks.

[AnneD]

30. Hi de ho weekenders.........

:toast: Demeter.....Memorial Day started out as a day that folks remember to care for the graves of those that fought defending our country. War movies (at least the good ones) are nothing more than the retelling of their heroics. Before there was Hollywood there was Homer telling the story of the Iliad and the Odyssey. The same can be said of westerns. In fact Gene Roddenberry frequently said that Star Trek was nothing more than a serial western. Granted, we all wish for peace, but there will always be Klingons, Romulans, Reevers, or whatever. In reality, the price of freedom is always bought and paid for in blood.

I was very lucky and served in that rare period when the US was not at war, yet I was prepared to make the ultimate sacrifice. There is nothing more sobering to a 23 yo than to make out your last will and testament. Every time 'the balloon went up' and I got a call and scrambled to grab my bag-I knew this could be the last time I would see my home.

My Dad was career military (USAF) but my step dad saw horrible action as a Merchant Marine-clearing out caves of snipers in the Pacific. Yeah, he use to watch war movies on Saturday too. He use to laugh sometime during some of the Hollywood heroics and say things like that will get your family a metal and a flag. Maybe it was therapy for him. Same with Uncle Max-he was a Ranger sniper that was dropped behind enemy line and literally lived off the land while seeking out 'political leaders' of the enemy for 'disposal'. Ken Burn's documentary about WWII comes close to their descriptions, but I don't think most folks want to see that. Folks want to see the Iliad and Oddessy or get into total fantasy.

So I guess I'll take in a movie, maybe even eat some barbecue. But my quote for today ......

Gen. George C. Marshall: I have here a very old letter, written to a Mrs. Bixby in Boston. "Dear Madam: I have been shown in the files of the War Department a statement of the Adjutant-General of Massachusetts that you are the mother of five sons who have died gloriously on the field of battle. I feel how weak and fruitless must be any words of mine which should attempt to beguile you from the grief of a loss so overwhelming. But I cannot refrain from tendering to you the consolation that may be found in the thanks of the Republic they died to save. I pray that our heavenly Father may assuage the anguish of your bereavement, and leave you only the cherished memory of the loved and lost, and the solemn pride that must be yours to have laid so costly a sacrifice upon the altar of freedom. Yours very sincerely and respectfully, Abraham Lincoln."

[Demeter]

34. Thank You AnneD and All Veterans for Your Loyal Service

and have a holiday worth remembering!

[Demeter]

35. Prophet Motive by Julia Ioffe Is Nouriel Roubini lucky or just good?

http://www.tnr.com/politics/story.html?id=72d11e65-5086-4f71-a91d-408211a6b8b7


....Though he hasn't attacked the Obama administration's policies with Paul Krugman's fury, and though he is no longer the most bearish of the bears, his short-term outlook is still quite bleak: a 36-month downturn, double-digit unemployment, and sluggish, recessionary growth well into 2010. At best.


THE REST OF THE ARTICLE IS A PUFF PIECE, LIKE THOSE MADDENING, POINTLESS NYTIMES SUNDAY MAGAZINE THINGS.

[Demeter]

38. Handy Phrases for Dr. Doom

USE "DOCTOR" OR "ECONOMIST" OR "PROFESSOR" AS SITUATION WARRANTS:



* "I don't know, MR. PRESIDENT. This is a big ECONOMIC MESS. I'm just a country PROFESSOR."

* "I'm an ECONOMIST, not a CORPORATE SHILL."

* "I'm AN ECONOMIST, not a psychiatrist."

* "Look, I'm an ECONOMIST, not an escalator."

* "I'm a doctor, not a mechanic."

* "I'm a doctor, not an engineer."

* "I'm not a magician, BARACK, just an old country doctor."



http://memory-alpha.org/en/wiki/I%27m_a_doctor%2C_not_a...

[Karenina]

53. BWHAHAHAHAHAHA!

:rofl:

[Demeter]

36. Congress attacks GM revamp (congress geting scared)

http://www.ft.com/cms/s/0/2dca3956-46f2-11de-923e-00144feabdc0.html

By Julie MacIntosh in New York and Tom Braithwaite in Washington

Published: May 22 2009 18:58 | Last updated: May 23 2009 00:34

General Motors is preparing to file for bankruptcy protection as early as May 31, but a speedy restructuring of the carmaker faces headwinds from an increasingly sceptical US Congress.

Under the current plan, the US government would cancel most or all of its existing debt in the company and invest in a “new” GM that could emerge from bankruptcy in the autumn, said a person close to the matter.

GM would receive tens of billions of dollars in new government money, probably in stages, to prop up its business at a time when car sales are threatening to be lower than the 10m annual rate at which GM says it can break even.

The person said that the government may keep a slice of debt in the “old” GM assets that are wound down in bankruptcy to retain leverage over the process.

GM, the largest US carmaker, is likely to file for bankruptcy protection even if 100 per cent of bondholders agree to a debt swap proposed by the company and the government, said people close to the company. An agreement looked unlikely on Friday, after a bondholder committee said it would reject the offer.

GM would aim to win bankruptcy court approval by July 1 for a plan to separate its good brands and assets into a viable company, which could then emerge from bankruptcy on a rolling basis. Officials have been cheered by the speed of Chrysler’s bankruptcy process, but hopes that GM can follow a rapid path through court are being dimmed by a building backlash from lawmakers. Some are claiming that creditors’ rights are being given short shrift while others complain about job cuts and the closure of dealerships.

A letter signed by 36 representatives was sent to President Barack Obama on Friday, asking him to slow down the process to allow for more consultation.

Dennis Kucinich, a Democratic representative, complained that taxpayers’ money was “being used to close dozens of US car manufacturing plants and thousands of dealerships, having the effect of putting perhaps millions of Americans out of work”.

Separately, the Senate commerce committee said it intended to ask carmakers’ chief executives to testify about plans to close dealerships.

As planning between the company and the government’s autos task-force continued, analysts noted that the amount of credit insurance written on GM’s debt made a filing seem inevitable.

GM on Friday said it had borrowed another $4bn from the Treasury, taking its total federal funding to $19.4bn, and expected to need $7.6bn more after June 1.

Shares of GM dropped by 25.5 per cent to close at $1.43.

[Demeter]

37. Chrysler Alleged to Have Acted in Bad Faith in Dealer Closings

http://www.nakedcapitalism.com/2009/05/chrysler-alleged-to-have-acted-in-bad.html

Having seen what Cerberus has done to one of its acquirees (New Page, a group of mills that produce coated paper), nothing should surprise me. But the way that Chrysler treated its dealers as stuffees, pressuring them take extra inventory and make extra investments in plant and facilities shortly before the dealerships were cancelled, is simply heinous. In addition, Chrysler is cutting all ties as of June 9. By contrast, GM is far more humane, allowing dealers to continue operating until 2010, but giving them the option of wrapping up sooner if they choose.

http://www.nytimes.com/2009/05/23/business/23dealers.html?_r=2&hp

Chrysler Dealers Make Case Against Closings

DETROIT — The calls from Chrysler officials were coming nearly every day, sometimes several times a day, right through the final weeks before the company filed for bankruptcy. And the message, said Robert Archer, who runs three Chrysler dealerships in the Houston area, was simple: Take more cars.

“They tell me, ‘The only way that we can survive is if you order cars, and Fiat and the government see money coming in,’ ” Mr. Archer said.

He acquiesced, he said, thinking he was doing his part to save the company. “I’m a team player and I don’t want them to go out of business, so I ordered a ton of cars.”

Then, a week ago, Chrysler told Mr. Archer, a dealer for three decades, that his three stores were among the 789 dealerships the company was eliminating as of June 9. Mr. Archer had 700 new vehicles and $1.7 million in new parts in stock when the letters arrived.

Now, Mr. Archer is among 330 dealers, calling themselves the Committee of Chrysler Affected Dealers, who are contesting the company’s action. Next week and on June 3, the bankruptcy judge handling Chrysler’s case will consider their objections.

Many of those fighting the hardest are dealers who recently spent huge amounts of money to stay in the company’s good graces, who sacrificed their own profits to help keep the company intact or who otherwise thought they had bent over backward to ensure that Chrysler could survive, only to learn that they were the ones who would not.

“I’m mad at myself for being duped all these years by them and going along with all of the things they wanted me to do,” said Homer Cutrubus, a Chrysler dealer in Utah since 1969. “If I treated my customers like Chrysler treated me, I wouldn’t have any business.”

............................

Chrysler is not buying back any inventory, including the vehicles and parts that dealers say they never wanted and bought only under pressure. And the entire process, which gives them only until June 9 to liquidate everything, is far from fair, they contend.

The company’s actions have bewildered William Coulter, a dealer in Phoenix. Several years ago, Mr. Coulter spent $2.7 million to buy out a competitor because Chrysler wanted him to sell all three of its brands. More recently, he paid $3.5 million for 12 acres of land in a more upscale, fast-growing suburb. Chrysler approved the relocation, but Mr. Coulter had to delay moving because the recession had cut deeply into sales.

“All the local people were telling us we had nothing to worry about,” he said. “We were pretty confident, having invested all this money. And after making all these investments, I don’t have a choice.”

Chrysler said 89 percent of the dealers being cut sell more used vehicles than new ones and are, therefore, expected to keep selling and servicing used vehicles. It said 44 percent of the dealers being cut also sell a competing manufacturer’s vehicles at the same store, something it does not like.

In Panama City, Fla., Buzz Leonard Chrysler Jeep used to also sell cars from Mazda and Mitsubishi. But the owner, Gerald Spitler, dropped the Mazda franchise a year ago and in February he paid $200,000 to give up Mitsubishi, even though it did decent sales, to show that he was fully committed to Chrysler. Right before Chrysler filed for bankruptcy, he said he tried to help the company by taking on 25 new vehicles, when he needed only 10.

“I was told several times that I was doing all the right things and that going forward I was going to be one of their guys,” Mr. Spitler said. “I thought I was right on track with them. I thought this was going to be fun.”

On May 14, Mr. Spitler learned that his efforts were wasted, while the Dodge dealer across the street, which also sells Lincoln, Mercury and Hyundai, would survive. Mr. Spitler plans to keep Buzz Leonard open to sell used vehicles, but he had to lay off 20 of his 45 employees. Banks that he has worked with to finance sales have dropped him because he no longer has a new-car franchise.

“It doesn’t make any sense,” he said. “You can’t expect us to unwind businesses we’ve had for years and years in weeks. They expect us to vanish.”

[Demeter]

39. "Where are we going?" -- McCoy

* "Where they went." -- Kirk

* "What if they went nowhere?" -- McCoy

* "Then this will be your big chance to get away from it all." -- Kirk

[Demeter]

49. Companies face higher hedging costs

http://www.ft.com/cms/s/0/047df01e-43dd-11de-a9be-00144feabdc0.html?nclick_check=1

By Aline van Duyn and Francesco Guerrera in New York

Published: May 18 2009 22:35 | Last updated: May 18 2009 22:35

Companies using trillions of dollars of derivatives contracts to hedge interest rate, currency and commodity price risks could face higher costs under the proposed overhaul of US rules on derivatives, industry officials say.

Derivatives are widely used by the world’s biggest companies to manage all kinds of financial risks. Most of these hedging activities are done between companies and banks in the over-the-counter market.

Tim Geithner, US Treasury secretary, last week unveiled sweeping reforms, including a proposal to require clearing of all standardised derivatives through regulated central counterparties. Another proposal calls for making derivatives dealers and “other firms” – which may include non-financial companies – subject to capital charges against their positions.

Industry bodies say the reforms would lead to higher collateral costs. In order to buy or sell derivatives, companies usually have to put up collateral to cover any potential payments.

The collateral is often set against credit lines that the companies have with banks or is offset against assets. This means that companies – unlike bank users of derivatives – do not usually have to put up cash as collateral. The proposed changes might require them to hand over cash instead.

“Highly rated companies with bank credit lines are not posting liquid collateral for derivatives,” said John Herrick, principal at Treasury Strategies, which advises companies on corporate treasury management. He added: “Companies are going to resist that like crazy.”

David Hirschmann, a senior vice-president at the US Chambers of Commerce, said he had heard from a number of the trade group’s members who had concerns over the application of the rules and the requirements to post collateral.

Of the $396,000bn face value of interest rate derivatives contracts outstanding at the end of June 2008, $38,000bn of these were with “non-financial customers”, according to the Bank of International Settlements.

“A lot of large and medium-sized manufacturers rely on over-the-counter derivatives to manage their risks,” said Dorothy Coleman, vice-president of tax and domestic economic policy at the National Association of Manufacturers.

The Geithner proposals still have to be approved by Congress.

[Demeter]

50. James Lull, Ponzi Scammer, Drives Truck Off Cliff The Day Of His Sentencing

http://www.honoluluadvertiser.com/article/20090515/NEWS01/905150366

A former Kaua'i mortgage broker who admitted to defrauding more than 50 people out of $30 million drove his truck off a cliff into a ravine in Washington state, killing himself yesterday, the day he was due in federal court in Honolulu for sentencing, according to law enforcement officials.

[Demeter]

51. Debunking The Notion Of Too Big To Fail

"http://www.youtube.com/v/LBdZV4Fvs20&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&feature=player_embedded&fs=1

http://www.ritholtz.com/blog/2009/05/debunking-the-notion-of-too-big-to-fail/

[Demeter]

52. Notes From Another Credit Card Crisis By SUKI KIM

http://www.nytimes.com/2009/05/18/opinion/18kim.html?ref=opinion


AS President Obama stages a populist campaign against credit card companies’ predatory practices, the United States Senate is working on new regulations to protect card holders. Meanwhile, Americans’ credit card debt has risen to the point where it now tops $960 billion. And with the economy in a downswing, it’s hard to see how the debt can ever be paid back.

If it’s any consolation, South Koreans have been there, done that and come out alive — if just barely.

In 1999, after the Asian financial crisis, the South Korean government encouraged banks to issue credit cards to as many people as possible as a way to increase consumer spending (as well as to make it easier to collect taxes, which had been harder to monitor in a predominantly cash economy).

Hong Kwon-heui, a columnist for Dong-A Ilbo, a South Korean newspaper, recalled how, in the early 2000s, the streets of Seoul were littered with credit card vendors. Sitting in a Starbucks facing Sejong Avenue, he told me, “They were literally handing them out to college students, to the unemployed, to anyone who had time to fill out an application.” He said, “The country was force-feeding its people debts.”

South Koreans became hooked on plastic so dizzyingly fast that by 2003 they owned on average four credit cards each and their collective debts amounted to about $100 billion.

The cards had an additional allure as a status symbol, because previously in South Korea only the elite had them. “When I used credit cards, I somehow felt that others regarded me highly and that gave me confidence — and I forgot that I needed to pay it all back later,” said Kang Hee-yun, an office worker in her mid-40s, who eventually had to resort to “card kiting,” the trick of using one card to repay the debt on another.

The bill soon came due for many South Koreans. In 2003, a 34-year-old housewife harassed by creditors leapt to her death from her high-rise apartment after pushing out her three children. Families unraveled as their breadwinners lost their savings. A sudden surge in crime and prostitution led South Koreans to bemoan their “bankrupted society.” Finally, after millions had defaulted on payments, the government stepped in to help bail out LG Card, then the country’s largest issuer.

“The excess was similar to what’s happening with the American housing market today,” recalled Song Ji-hoon, a Rolex-wearing lawyer in his mid-30s who worked on behalf of one of the credit card companies. “Koreans wanted fancy cars, bigger TVs — although there was no real money to buy them — much the way those Americans thought that they could own houses with nothing but loans. Of course, in both instances, banks got greedy extending credits and mortgages to people who couldn’t pay back.”

It’s true that South Korea’s economic path bears little resemblance to America’s. In the 1960s, the South Korean government had nationalized the banks and divided the country’s resources among a handful of companies, including Samsung, Hyundai and LG. These family-owned conglomerates, known as the chaebol, dominated the economy.

In the early 2000s, the credit card divisions of Samsung and LG, trailed by Hyundai, competed fiercely in the new market.

Even today, despite the efforts of previous presidential administrations to decrease the power of the chaebol, it is still not unusual for a South Korean to wake up in a Samsung-made bed in a Samsung-built apartment, eat Samsung-manufactured food and drive a Samsung car to the office of a Samsung-affiliated company. Back in the early 2000s, a Samsung credit card, or one issued by Hyundai or LG, would have been another such extension. The chaebol had become the face of Korea, both domestically and abroad, and when their credit card divisions faltered in 2003, the South Korean government had little choice but to step in and ease social unrest by forgiving individual debts. The move was criticized by some as a return to the old ways of keeping the chaebol afloat.

Still, the government’s bailout worked. Although unemployment and personal bankruptcy rates remained high for a while, the worst was soon over. The credit card companies instituted stricter rules for issuing cards, and consumer spending plummeted briefly.

The real hangover can be seen in a shift in buying habits. Before the mass use of credit cards, Koreans had been big savers. In a culture where family members are expected to help one another financially, they put money away for everything. They also joined private money-pooling groups called “gye,” which allocate money for everything from children’s school and weddings to the celebration of a parent’s 60th birthday. In 1998, the household savings rate was 25 percent. By 2007, it had fallen to 2.5 percent.

South Korea managed to weather the storm, albeit with no shortage of heartbreak. Today Seoul’s neon-lighted streets burst with credit-card friendly shops — but high household debt has depressed spending. Some habits are hard to break.

Finishing his cappuccino, Mr. Hong, the newspaper columnist, opened his wallet to show me his cards. Not as many as he once had. One came with free passes to cultural events, another offered discounted loans. The third, well he couldn’t recall which perks it offered — save for comfort.

Suki Kim is the author of “The Interpreter,” a novel.

[Demeter]

54. A tale of two banking crises: Japan and Korea

http://brontecapital.blogspot.com/2009/05/tale-of-two-banking-crises-japan-and.html

Economics may be a “science” but it lacks controlled experiments. Especially in macroeconomics you can’t repeat an experiment with one variable changed and see how the single variable changes the outcome. Economists have lots of statistical tools to deal with this – but those make the discipline either incomprehensible or diabolically boring.

But every now and again people throw up a controlled experiment – two situations that are very similar and differ markedly only in one major element. Yet strangely these situations seem under-studied.

What I want to do here is give a stylised version of Japanese and Korean economic history and how it pertains to the banking crisis both countries had. My knowledge of this however comes the way much of my stuff comes – from the history of the banks backwards. So I am sure to offend people with deep understandings of the political/economic history and I welcome someone telling me I am just wrong.

First however I need a stylised history of Japan starting with the arrival of Commodore Perry’s black ships in 1853.

Before Perry Japan was almost autarkic. There was a relatively weak central government and about 300 “han” – being relatively strong feudally controlled districts. The emperor did not effectively speak for Japan when Perry came in, guns blazing.

The Meiji Restoration changed this. Japan was reformed as a centrally controlled empire – with a ruling oligarchy ruling through the Emperor who claimed dominion over all of Japan. The “han” were combined to form (75?) prefectures with a governor appointed centrally.

The view of the new oligarchs was that Japan would get rich through (a) industrialisation and (b) unequal trade treaties to match the unequal treaties imposed on Japan by Perry et al. To this end they invaded Korea and started the military industrialisation that ended eventually with World War 2. There were major wars in Korea and against an expansionist Tsarist Russia (especially 1904-1905).

Ok – that is your 143 word history of Japan from Perry to World War 2. Like any 143 word history it will leave out important stuff. I just want to focus on how this foreign policy adventurism was financed.

Financing Japanese expansionism - and that financial system until today

Firstly it is simply not possible to expand heavy industrialisation of the type required by an early 20th Century military-industrial state without massive internal savings. Those steel mills had to be funded. And so they set up the infrastructure to do it.

Central to this was a pattern of “educating” (the cynical might say brainwashing) young girls into believing that their life would be happy if they had considerable savings in the form of cash balances at the bank (or post office). Japanese wives often save very hard – and are often insistent on it. The people I know who have married Japanese women confirm this expectation survives to this day.

Having saved at a bank (and for that matter also purchased life insurance from an insurance company loosely associated with the bank) the financial institutions had plenty of lendable funds.

The financial institutions by-and-large did not lend these funds to the household sector. Indeed lending to the household sector was mostly discouraged and was the business of very seedy loan sharks. To this day Japan has a relatively undeveloped credit card infrastructure with very high fees. These high fees are a throwback to the unwillingness of the institutions to lend to households.

Japanese banks instead lent to tied industry – particularly heavy industry. It was steel mills, the companies that built power plants, the big machine tool makers. Many of the companies exist today and include Fuji Heavy Industries, Kawasaki Heavy Industries and other giants such as Toshiba. Most of these super-heavy industrials were tied to the banks (and vertically integrated) called Zaibatsu.

Now steel is a commodity which has wild swings in its price. Maybe not as ordinarily wild as the last five years – but still very large swings. And these steel mills were highly indebted to their tied banks. Which meant that they could go bust.

And as expected the Japanese authorities had a solution – which is they deliberately cartelized the steel industry and used the cartel (and import restrictions) to raise prices to a level sufficient to ensure the heavy industry in question could service its debt.

The formula was thus (a) encourage huge levels of saving hence (b) allow for large debt funded heavy industrial growth. To ensure it works financially (c) allow enough government intervention to ensure everyone’s solvency.

When the Americans occupied Japan their first agenda was to dismantle the Zaibatsu. They were (in the words of Douglas McArthur) “the moneybags of militarism”.

Like many post WW2 agendas that agenda was dumped in the Cold War. The owners of the Zaibatsu were separated from their assets and some cross shareholdings were unwound – but the institution survived – and the Zaibatsu (now renamed Keiretsu) remained the central organising structure of Japan. Dismantling Japan’s industrial structure did not make sense in the face of the Korean War. The pre-war Zaibatsu had more concentrated ownership than post-war Keiretsu.

The point is that it was the similar structure before and after the war – and it allowed massive industrialisation twice – admittedly the second time for peaceful purposes.

Now the system began to break down. Firstly by 1985 steel was not the important industry that it had been in 1950 or 1920. Indeed almost everywhere you looked heavy industry became less important relative to other industrialisation. By the 1980s pretty well everywhere in the world tended to look on such heavy industries as “dinosaurs”. This was a problem for Japanese banks because they had lent huge sums to these industries guaranteed by the willingness of the State to allow cartelisation. You can’t successfully cartelise a collapsed industry.

Still the state was resourceful. Originally (believe it or not) they opposed the formation of Sony – because they did not know how to cartelize a transistor industry. Fifteen years later the UK Prime Minister French Prime Minister President would refer to his Japanese counterpart as “that transistor salesman” and he was not using hyperbole. Still the companies coming out of new Japan – technology driven mostly – did not require the capital that Japan had in plentiful supply. If you look at the companies coming out of Kyoto (Japan’s Silicon Valley) they include such wonders as Nintendo – companies which supply huge deposits to banks – not demand huge funds from them.

The banks however still had plenty of Yen, and they lent it where they were next most willing – to landholders. The lending was legion and legendary – with golf clubs being the most famous example of excess.

Another place of excessive lending was to people consolidating (or leveraging up) the property portfolios of department stores. Think what Bill Ackman plans to do to Target being done to the entire country – and at very high starting valuations.

Meanwhile the industrial companies became zombies. I have attached 20 year balance sheets for a few of them here and here. These companies had huge debts backed by dinosaur industry structures. They looked like they would never repay their debts – but because they were so intertwined with the banks the banks never shut them down. As long as interest rates stayed near zero the banks did not need to collect their money back from them. As long as they made token payments they could be deemed to be current. There was not even a cash drain at the banks at low rates. The rapid improvement in the zombie-industrial balance sheets in the past five years was the massive boom in heavy industrial commodities (eg steel, parts for power stations etc). Even the zombies could come alive again… only to return to living dead status again quite rapidly with this recession.

Anyway – an aside here. Real Japan watchers don’t refer to the banks as zombies. They refer to the industrial companies as zombies. (Although most of the Western blogosphere does.)

Most of the banks had plenty of lendable funds and a willingness to lend them. They did not have the customers – and the biggest, oldest and most venerable of Japanese companies were zombies. So were the golf courses, department stores and other levered land holders. I get really rather annoyed when people talk of zombie banks in Japan – it shows a lack of basic background in Nihon.

Note how this crisis ended.

1). The bank made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).

2). The loans could not be repaid.

3). The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.

4). The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.

5). Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings. Everything was just rolled.

6). Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people). The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.

7). The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system.

Now lets look at Korea.

Korea was occupied by Japan until the end of WW2. They chose to industrialise in the pattern they understood – a Japanese pattern. For Keiretsu substitute Chaebol and you have the idea. The Chaebol were private heavy industrial conglomerates tied to financial institutions and with intense government support.

And the Chaebol suffered the same fate (slow irrelevance of heavy industry) as the Japanese heavy companies except they were called to account and many of them failed.

The reason is the different banking structure. Korea started its Chaebol industrialisation later than Japan – and the one multi-generational part of the formula (educating young women that they should save and save and save) was just not done as well. This is a multi-generational process.

The result is that the Korean banks – unlike their Japanese counterparts – were short funds. Endless funding at zero interest rates was simply not possible. Given that the banks eventually collapsed – with many becoming government property and with the government winding up as the largest shareholder in almost all banks. This was a spectacular crash – as opposed to a slow-burn malaise. Chaebol failed. In some instances their founders were imprisoned. The strongest Chaebol is the one most associated with new industries (Samsung). It survived and prospered – but others did not.

Korea had a much worse recession than Japan. Vastly worse. Japan was just low growth for a very long time. By contrast the Korean economy crashed and burned. But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap. It bounced.

It is my contention that the main difference between the Korean and Japanese crashes (and Korea’s case recoveries) was the funding of the banks. In this view Korea’s was so sharp because the banks simply ran out of money – and that caused massive liquidations across the economy – systemic failures.

The recovery was also sharp because the systemic failure meant that businesses that shouldn’t have failed (because they were profitable worthwhile businesses) got into deep distress. Real companies died not because they deserved to die but because the system in crisis killed them. There was a case for bailing out those companies – and the rapid recovery told you this was something systematic – not business specific. The massive upward movement in the stock market at the end of the crisis was the secondary proof that good businesses were killed. It was also probably the best investment opportunity globally in the last twenty years.

The economic decline in Japan was so gradual and so sustained precisely because there was no systemic failure and no reason to reallocate resources from bad businesses to good businesses. Zombie companies could exist for decades – and there was no renewal. A little bit of failure would have been a good thing – creative destruction. And the survival of bad businesses in Japan is part of the reason the stock market never bounced there. No investment opportunities.

Policy question: how do you ensure the creative destruction without putting the good bits of the real economy to the sword?

Investment question: what bits of the USA (and the rest of the world) will wind up looking like Korea and providing the best investment opportunity in two decades? And what bits will look depressed for two decades before going into a bit of a decline?

[Demeter]

55. That's Enough for Saturday

See you after noon. Do go ahead and annotate with Star Trek trivia or economic nuggets, if you're taking a break between the barbecue and the beach.

[Ghost Dog]

56. Let's be realistic?

Today we find ourselves faced with major growing unemployment; falling wages and via inflation and ever lower purchasing power. Most major banks and brokerage houses are insolvent. Finances at the state and local levels are a mess. 20% of banks showed losses in the first quarter. If the 19 big banks passed the stress test why do they need taxpayers loans. 20% of homeowners owe more on their homes than they are worth and this number could easily double. Many pension plans will be insolvent when we again test Dow 6,600. It will be much worse when we hit 3,800 to 4,200. Are you ready to give the FDIC $500 billion to bail out the banks? Where will the funds come from for business expansion and recovery if banks are reluctant to lend? Foreclosures are more than 40% of home sales. There are $100 billion in commercial mortgages that cannot or won’t be refinanced. Banks do not want more illiquid assets.

...

Anyone who believes the market rally of the past ten weeks is going to extend further upward we believe is mistaken. We are 35% off the bottom and there is no good news. In fact, it is worsening in spite of the fact that consumer confidence has risen because Wall Street, Fed, Treasury and selected elitists tell us the bottom is in and things will soon improve. V-shaped rallies always have to retest their lows. The next visit to 6,600 Dow will see panic selling and any further rally would be sold into by those sufficiently troubled by still being down 35% to 50%. Don’t forget as well that more and more prime mortgages are going into foreclosure due to the worsening economy and loss of good paying jobs. Then there is the enormous overhang of ALT-A and Option-ARM resets, which will accelerate as the year moves on. These residential and commercial loan problems, as we have said before, won’t end until 2012. Any hope of a recovery during the next 8 years is wishful thinking. The fundamentals of the previous two stock market bubbles and the real estate bubble have been broken and it will take years for the markets and the economy to adjust. Just because things are not as bad as expected doesn’t mean they are good.

/.. http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Depressed_America_No_Longer_The_Safe_Harbor_It_Was_For_Investment

Note, this from an otherwise quite bigoted-sounding rightist, or what I suppose would be called a (Ron Paul-style) 'libertarian'.

[Demeter]

57. We Call Them Ferengi, In This Thread. See Above Post

[Demeter]

58. Alternately, See This Cartoon!

http://www.cartoonbank.com/product_details.asp?sitetype=1&sid=129587&did=4&utm_campaign=CartoonOfTheDay&utm_medium=RSS-Feed&utm_source=RSS-Feed

[burf]

59. Good morning Ghost Dog

It appears, in these parts realism has gone out the window. I was called into work at a local cooperative this weekend when the manager was worried they would need additional help. We sell gas, some groceries, animal feed, and propane. We are located in the heart of the lakes region in West Central MN. There are over 1000 lakes within a 100 mile radius of this rural area small town.

I guess the best description for yesterday was the place was NUTS. The town was crawling with people and they were spending. Last night before closing a bunch of the locals stopped by. Jim the real estate agent said his phone was ringing off the hook and he had multiple showings. Most folks were just looking but at least there was traffic. One of the gals who is a cashier at the Walmart in the neighboring bigger town said the place was crazy all day. Carol who works at the local hardware/farm supply also said it was busy there. One of the bartenders from the local watering hole said business was booming.

Much of this I suppose can be attributed to the long holiday weekend and that we are having the first really decent weather after a horrendous winter. But I wonder how much can be credited to Obamanomics and what will turn out to be the re inflating of the credit bubble. The mood of the folks I talked to was things will be picking up.

One thing about our president is the guy can make a good speech, From my vantage point, it looks as though people are buying what he is selling. We will see.

[Ghost Dog]

60. Thanks for the observations, burf. Strong psycholological factors at work,

by the looks of it.

Are the optimists/wishful-thinkers imbibing this mood from TV? Other sources? The real world?

[DemReadingDU]

61. Mostly, it is due to the 3-day weekend and nice hot weather.

No one seems to care about the 'real world', that can wait until Tuesday.

[Demeter]

64. William Black Uses the "F" Word A Lot

http://www.nakedcapitalism.com/2009/05/william-black-uses-f-word-lot.html

William Black, in a lecture in Iceland, discusses how the role of fraud in the financial crisis has been virtually ignored when he contends it was a major factor, and is also overlooked in the regulation of financial institutions. He also argues that standard econometric models produces the worst possible when a financial bubble is growing.



The lecture comes in two videos, Part 1 and Part 2. Enjoy!

http://larahanna.blog.is/blog/larahanna/video/7955/

http://larahanna.blog.is/blog/larahanna/video/7956/

Topics: Legal, Regulations and regulators, The dismal science

[Demeter]

67. Now That I Have a chance to Watch These Videos, I Cannot Recommend Them Enough!

[Demeter]

65. Japanese Housewives Back in the Game? By Claus Vistesen

http://japanjapan.blogspot.com/2009/05/japanese-housewives-back-in-game.html

I am sure all investors, analysts, and commentators have been tracking a wide range of indicators to gauge whether the shoots of green would continue to spark or whether it was merely a blip on the way down. Clearly, this has been and is a little more than a blip I think and for my own part, decisive evidence came today that things might have changed. I am of course talking about the Bloomberg report (also here) that Japanese housewives are once again making their presence felt in currency markets playing the carry wheel.

Individual investors in Japan increased bets to the most in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.

Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said. “Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

Now, I have had my eyes on the Japanese housewives on more than one occasion (especially here) because I think that the tendency of Japanese retail investors to scour the global economy for yield runs a bit deeper than a simple carry trade play. Well, it is of course a carry trade but the underlying impetus for Japanese retail investors to act as they do also has something to do with a decline in home bias due to a low domestic interest rate environment as a result of demographics and subsequent sluggish domestic demand. The point is simply that one of the only ways Japan can achieve sustained is to mobilize its large stock of savings and, more importantly, to mobilize it abroad (e.g. through the purchase of samurais) in order to get the yield which is not obtainable in the domestic capital markets.

In the current environment of financial crises, great depressions, and credit crunches Ms Watanabe et al. have of course, in line with most other risky asset punters, been pulling back their fangs. However, with the recent narrative of green shoots and second derivatives it was also always going to be the question of when, if at all, carry trading would return as per function of declining volatility and appreciation of risky assets. As I have suggested lately, tentative signs have emerged that carry trading activity has slowly been coming back.

Now, it can be debated whether the apparent return of the Japanese housewives to the carry trough represents evidence of a solidification of the green shoots or, as a friend suggested to me, a contrarian indicator that things will soon hit the fan again. This particular friend of mine is an investor, so you are probably better off listening to him than me. There is also the small question of the targets for Ms. Watanabe's allure in the form of the usual, OECD, suspects such as the Kiwi, the Aussie, and the Euro.


http://2.bp.blogspot.com/_vhPkPUN2aT8/SgsS72Y9lVI/AAAAAAAABJI/fhYqXE3uQ1k/s320/carry+trade.jpg?__SQUARESPACE_CACHEVERSION=1242243375770

Looking at the chart to the right the recent three months which have been marked heavily by the green shoots discouse, it is quite obvious to see that the JPY has depreciated accross the board against the usual suspects. It is difficult to say whether MS. Watanabe has had a hand in this, but more interestingly is also the fundamental question of where the carry trade activity is going to be conducted in the future?

Specifically, it will be interesting to see whether there is going to be a change in the game whereby the OECD economies currently engaged in QE and with subsequent credible commitments by the central bank to keep rates low become funding for a carry trade to exploit the potentially "low volatility" growth (yield) in places such as India, Brazil and Turkey. Clearly, the BOJ has the mother of all credible commitments here in the sense that nominal interest rates have hardly budged the zero bound for more than a decade even in the midst of booms. This last point need careful watching I think as well as of course we might as well get another bout of volatility which could fold the, after all, fragile green shoots.

So, it does indeed seem as if the Japanese housewives are back in the game, but another fundamental question is whether the housewives ever left the game. This is to say that we need to look at structural long term outflows as well as more short term punting in order to really understand the what drives MS Watanabe and her fellow Japanese retail investors.

[Demeter]

66. Chinese Banks Are Not Good Students

http://chinesepolitics.blogspot.com/

Peter Goodman, whose columns are always concise and well informed, wrote yet another stinging critique of American banks entitled “Lessons the Teacher Forgot.” The basic argument of the piece is that US banks increasingly behaved like Chinese banks, which were supposed to learn market discipline from their teachers. His observations of Chinese banks were also quite on-point:

In effect, American banks operated not unlike the Chinese banks they were supposed to modernize. They extracted profits by following a variation of the principle long pursued by their Chinese counterparts: lend without hesitation while extracting your cut, confident that the government is on the hook for the losses.


In China, ventures may be spectacularly unprofitable, yet enrich everyone lucky enough to get a piece. Developers, for example, construct vacant office buildings as an excuse to borrow from state banks. They rake off a cut for themselves, pay bribes to the party officials who deliver the land and reward bank functionaries with sumptuous banquets and trips to Macao. Soon enough, the trophy skyscraper descends into financial disaster, but the developers, bankers and party officials have already extracted their riches, and for long afterward they will still enjoy them.



As an illustration, there was an interesting exchange between Baogang executive and CBRC official at the Lujiazui Conference recently. Basically, Xu Lejiang argued that the government is doing too much to keeping steel firms alive (Baogang was forced to buy up many firms, for example) and that some steel firms should be allowed to go bankrupt. Banks then should be prepared to “foot the bill.” There is a wonderful sense of irony here because Baogang has benefited from billions upon billions in preferential loans from banks. Anyway, a CBRC official in audience responded by saying that “as a banking regulator, I most fear the phrase ‘banks footing the bill’.”

As Goodman points out, the reality is that thousands of Chinese firms are being kept alive by the banks and government policies now. The difference between the US and China is that the US government could not have ordered the Feds to intervene to save these financial institutions before the crisis, whereas the main job of the PBOC and CBRC is to prevent a major financial crisis. Of course, they do some monitoring, but when financial institutions become insolvent, they have shown perfect willingness to print money to bail them out to preempt a system-wide crisis. So, this signals to all financial firms and state-related conglomerates that the center is there to bail them out, setting off a frenzy of borrowing and bond issuance. Over time, massive debt is issued on the basis of empty office buildings, under-utilized infrastructure, stock market speculations….etc. I am not sure how this all will end…..

[CatholicEdHead]

68. BoA Bailout money goes to fund NASCAR race in the fall

Yep, business as usual at Bank of America. We give them Billions in bail-out money and they are still sponsoring a NASCAR race in the fall.

http://www.lowesmotorspeedway.com/schedules/superspeedway/nascar_banking_500/

Nothing against NASCAR here, but just very poor taste by Bank of America.

[Demeter]

69. US Dollar Skids to New Lows, Expect it to Continue By Jennifer Shotts

http://www.informationclearinghouse.info/article22691.htm


May 22, 2009 "The Examiner" -- The mighty US dollar has posted prolific losses against many major currencies that began back in March but have kicked into high gear the past two weeks. This week so far, the dollar has fallen 4% against the British pound reaching a new low for 2009, 3% against the euro and Japanese yen, and also against the Canadian dollar. With major price levels being broken, many banks are reevaluating year end predictions for the euro vs. the dollar to reach $1.50 or higher. Is this going to be the new trend of 2009, dollar's death spiral? Here's some reasons why many say its time to chuck the buck:

1. The US Federal Reserve is printing money faster than you can shake a stick at. It is called quantitative easing and it ain't pretty. It is the US government's last resort to somehow kick start this economy and it is very controversial. The turn in the dollar's rise occurred in March when the US announced it would purchase US treasuries to the tune of $300bn. Since then they continue on the same track, announcing on Wednesday that they will consider additional asset purchases as long as necessary to drag the US out of this economic quagmire. Meanwhile, the dollar will continue to devalue against all major currencies as long as the US continues this policy.

2. Russia has recently made the Euro its reserve currency, over the dollar. Other countries like China and Brazil have been hinting at doing the same. A lack of enthusiasm for the US currency has many global leaders calling for a new reserve currency or a basket of currencies to take over for the dollar.

3. With the recession and slow economic recovery, the Fed cannot raise interest rates. The dollar will likely continue its fall until the US is able to raise interest rates again, which most economists agree will not be able to happen until possibly in 2010. The question remains: how will the dollar's weakness play out against the other major currencies since this is a global economic meltdown, affecting all countries and currencies? Will the dollar be the weakest since, so far, the US has been much more aggressive with its quantitative easing measures?

4. This week investors are beginning to question the dollar's status as a "safe haven", looking to other avenues like gold. On Thursday the price of gold reached $955/oz up $16, and up $25 so far this week. Standard and Poor's rating agency warned the UK of a possible downgrading of its AAA status due to its incredibly high debt to GDP ratio, which it said may near 100%. This caused alarm that the US may be next. Though most agree that the US's debt ratio is nothing compared to that of the UK or of Japan, which is at 110%, still S&P is expecting the US ratio to reach 77% in the coming years.

The dollar has been the instrument of choice the past 8 months, a safe haven for investors, and surprising some at its apparent strength while stocks slid during the crisis. If in fact the dollar has lost its luster, where will investors look when risk aversion returns? For forex trend traders, this is a dream come true. For overseas exporters, not so much. The dollar index reached 80.40 today, 79.00 is the next major support, below that the all time low at 74.60.

[Demeter]

70. Are Investors in the US and Abroad Losing Faith in the Dollar?

http://features.csmonitor.com/politics/2009/05/22/are-investors-in-the-us-and-abroad-losing-faith-in-the-dollar/

By Mark Trumbull
Staff writer

May 22, 2009 "CSM" -- A down trend in the US dollar is putting new focus on a longstanding concern — that the world’s greatest borrowing nation may be growing less creditworthy.

This week, the dollar has reached new lows against the euro for 2009, and it has also fallen sharply against some other major currencies.

It’s a puzzle. Suddenly, investors have less faith in the greenback, even as the outlook for the American economy appears to be brightening.

Many forces drive currencies up and down, but one factor that could be weighing on the dollar is the risk that decades of debt — by both households, businesses, and the government — are causing foreign investors to look on the dollar as a more risky asset to hold...




Threat of a credit downgrade

For the federal government in particular, the threat of a credit downgrade has grown in the past year. Federal support has helped to calm financial-market panic, but the result has been new obligations for already stretched taxpayers. Banks, mortgage giants, insurance firms, and automakers have all gotten bailouts. Now some lawmakers are considering whether Congress should step in to help California out of its budget mess.

With big costs for healthcare programs also looming, some financial forecasters see the threat of big declines for the dollar.

“It’s not only the foreigners buying US assets one has to be concerned about,” mutual fund manager Axel Merk wrote in a commentary Thursday. “If the trust of Americans erodes in the US dollar, that flight could have rather severe implications.”

Don’t “print money”

Mr. Merk, who manages the Merk Hard Currency Fund, says that central banks should pull back “from trying to boost economies by printing money to finance government spending.”

For ordinary investors, funds such as Merk’s are one way to diversify into non-dollar investments. (Exchange-traded funds also offer a stake in single currencies such as the euro.)

Some financial experts say the simplest approach for global diversification is for people to own world stock mutual funds as well as US ones. Foreign stocks may do well, moreover, even if Armageddon scenarios for the dollar don’t come to pass.

For now, many forces in the economy are deflationary, not inflationary. Longer term, strong US economic growth could support the dollar, as long as fiscal and monetary policies are also sound.

[Demeter]

71. Credit Default Swaps; The poison in the system By Mike Whitney

http://www.informationclearinghouse.info/article22697.htm


May 24, 2009 "Information Clearing House" --In a little more than a decade, Credit Default Swaps (CDS) have ballooned into a multi-billion dollar industry which has changed the fundamental character of the financial system and increased systemic risk by many orders of magnitude. CDS, which were originally created to reduce potential losses from defaulting bonds, has turned into a cash cow for the big banks, generating mega-profits on what amounts to nothing more than legalized gambling. In the case of insurance giant AIG, losses from CDS transactions has already cost the American people $150 billion, and yet there still has been no serious effort in Congress to ban them once and for all. Even worse, CDS is the root-cause of systemic risk which connects hundreds of financial institutions together in a lethal daisy-chain that threatens to crash the entire system if one of the main players goes under.

CDS contracts are not cleared on a centralized exchange nor are they government regulated. That means that no one really knows whether issuers of CDS can pay off potential claims or not. It's a Ponzi-insurance racket of the first order. AIG is a good example of a company that gamed the system and then walked away with millions for its efforts. They sold more CDS than they could cover and then--when the debts started piling up around their eyeballs--they trundled off to the Fed for a multi-billion dollar bailout. Fed chief Bernanke later said that he was furious over the AIG's fiasco, but it didn't stop him from shoveling the losses onto the public ledger and making the taxpayer the guarantor for all AIG's bad bets. Keep in mind, that AIG was selling paper that had zero capital backing, an activity is tantamount to counterfeiting. Still, no one has been indicted or prosecuted in the affair. Defrauding clients and then sticking it to Joe sixpack has become de rigueur on Wall Street.

CDS have spider-webbed their way into every corner of the financial system lashing-together banks and other financial institutions in a way that if one defaults the others go down too. This is what's really meant by "too big to fail"; a euphemism which refers to the tangle of counterparty deals which has been allowed to spread--regardless of the risk--so that a handful of banksters can rake in obscene profits. CDS has become the bank cartel's golden goose; a no-risk revenue-generating locomotive that accelerates the transfer of public wealth to high-stakes speculators. If it wasn't for the turbo-charged profits from derivatives transactions, many of the banks would have already gone belly up.

From Dr. Ellen Brown:

"Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default...

In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined."
("Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour", Dr. Ellen Brown, globalresearch.ca)

The numbers boggle the mind, but they are real just the same, as are the losses, which will be eventually shifted onto the taxpayer. That much is certain.

Treasury Secretary Geithner has recently sounded the alarm for more regulation, but it's just another public relations stunt. Geithner is an industry rep whose sole qualification for the job as Treasury Secretary is his unwavering loyalty to the banking establishment. He has no intention of increasing oversight or tightening supervision. All the blather about change is just his way of mollifying the public while he tries to sabotage congressional efforts to re-regulate the derivatives market. In the next few weeks, Geithner will probably roll out a whole new product-line of reforms accompanied with the usual claptrap about free markets, innovation and "protecting the public's interest". It's all fakery; just more tedious sleight-of-hand carried out by agents of the banking industry working from inside the administration. Fortunately, sad sack Geithner is the world's worst pitchman, which means that every word he utters will be parsed by scores of bloggers trying to figure out what he really means. That will make it especially hard to for him to pull the wool over the public's eyes again.

Swaps originated in the 1980s as a way for financial institutions to hedge against the risk of sudden price movements or interest rate fluctuations. But derivatives trading took an ugly turn after congress passed the Clinton-era Commodity Futures Modernization Act of 2000. The bill triggered a sea-change in the way that CDS were used. Industry sharpies figured out how to expand leverage via complex instruments balanced on smaller and smaller morsels of capital. It's all about maximizing profits with borrowed money. CDS provided the perfect vehicle; after all, with no regulators, it's impossible to know who's got enough money to pay off claims. Besides, gambling on the creditworthiness of bonds for which one has no "insurable interest" can be fun; like taking out an insurance policy on a rivals home and waiting for it to burn down. This is the perverted logic of Wall Street, where every disaster ("credit event") turns into a fortune.

Cleaning up the financial system doesn't require a complete ban on CDS. There is a solution to this mess, and it's not complicated. There needs to be strict regulatory oversight of all issuers of CDS to make sure they are sufficiently capitalized, and there needs to be a central clearing-platform for all trades. That's it. (Note: There are serious questions about the IntercontinentalExchange, or ICE, due to its close connection to the banks) Geithner is trying to torpedo the nascent reform-effort by proposing bogus fixes that preserve the banks monopoly on the derivatives issuance. He's the banks main water-carrier. Now we can see why the financial industry is consistently the largest contributor of any group to political campaigns. They need friends in high places so they can continue their scams without interruption.

"Too big to fail" is a snappy PR slogan, but it's largely a myth. No financial institution is too big for the government to take into conservatorship; to put the bad assets up for auction, replace the management and restructure the debt. It's been done before and it can be done again without damaging the broader system. The real problem is separating healthy financial institutions from insolvent ones now that the whole system is stitched together in a complex net of counterparty deals. Credit default swaps form the bulk of those counterparty transactions, which makes them the main source of systemic risk. To fix the problem, current contracts must be either unwound or allowed to lapse, while new contracts must be traded on a central clearinghouse where regulators can decide whether sellers are adequately capitalized or not. The Fed's solution--underwriting the entire financial system to prevent another Lehman Bros. fiasco---doesn't address the fundamental problem; it just puts more pressure on the dollar which is already beginning to buckle. The question now is whether Congress will pull their heads out of the sand long enough to do the people's work and pass the laws that will re-regulate the system. There is a remedy, but it requires action, and fast. Without course-correction, the prospect of a derivatives meltdown gets bigger by the day.

[DemReadingDU]

87. This is an excellent article

Crewleader posted it in the Economy forum
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x64953


From the link...
In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined."



I've seen an estimate as large as 800 trillion to 1200 trillion. That's 1.2 quadrillion. This bubble is going to collapse the world.
;(

[Demeter]

72. True Fraud in Credit Requires a Master(Card)! Technically diabolical

Securitization: Advanta and the Fiction of True-Sale

http://www.ritholtz.com/blog/2009/05/securitization-advanta-and-the-fiction-of-true-sale/

Below is a comment by LSU Professor Joseph Mason and Eric Higgins on the evolving situation in the securitization market. While the folks at the Fed and Treasury pretend that they can breathe life back into the private label securitization market, the legal underpinnings of this OTC market are disintegrating under the weight of mounting losses and falling cash flow. –

Advanta and the Fiction of True-Sale

Joseph R. Mason and Eric J. Higgins†

On Monday, May 11, 2009, Advanta Corp. announced that their credit-card securitization trust would go into early amortization and that they will shut down all of the accounts in the trust. What the casual observer (and most regulators) missed is that this announcement is also endemic of the problems at the heart of securitization: the “true-sale” classification from which securitizations obtain their off-balance sheet treatment.

A company like Advanta issues credit-cards through its banking subsidiary (Advanta Bank). These credit card receivables are then sold into a trust (Advanta Business Card Master Trust). The trust then sells the cash flows from those receivables to investors. This trust is created as a truly-sold bankruptcy remote entity from Advanta Bank and Advanta Corp., allowing Advanta to treat the sale of credit-card receivables as off-balance sheet for regulatory and accounting purposes. Technically, Advanta Corp. has no liability for the assets that are sold into the trust and must not provide any recourse to the assets. This means that if those assets deteriorate in value, it is the problem of the trust investors, not Advanta.

The problem with the arrangement is that it has always been a complete fiction. Such was clearly pointed out in Advanta’s earnings call of April 30, 2009, where management first announced it was concerned about the performance of the credit-card trust. Management stated that they were worried that the trust might go into “early amortization, ” meaning the trust would cease to exist and would immediately begin to pay out all available credit-card receivables to investors in the trust.

Nonetheless, management said that, “… the Company has tools at its disposal which the Company believes will prevent early amortization if used. Management stated that the Company expects to use those tools unless it develops a plan that would better maximize capital and liquidity.” Back up a minute. The trust is supposed to be a separate entity from Advanta Corp. So Advanta is helping to bail out an unrelated entity with investor funds? That doesn’t make sense.

How can Advanta Corp. prevent early amortization without violating “true-sale” accounting? The truth is that they can’t. Providing recourse has historically been taken as implying that the receivables are assets of Advanta Corp. and should appear on their balance sheet. Since providing recourse directly is not allowed, companies like Advanta make statements like those above in order to give the market a sense that there is an implicit recourse guarantee.

Of course, the problem with implicit guarantees is that they are not legally binding. To see this consider Advanta’s May 11, 2009 announcement of the early amortization of their credit-card trust, where Advanta specifically says, “The securitization trust’s notes are obligations of the trust and not of any Advana entity.” What a difference a few days make. On April 30, 2009, management was going to save the securitization trust. On May 11, 2009, management is running away from the trust as fast as they can. Hence, when it is expeditious, firms can ignore true sale provisions and as soon as things get rough true sale provisions protect them.

This problem is not new. A study by Higgins and Mason (Journal of Banking and Finance 2004) looked at recourse provided by credit-card issuers in the mid-1990s. Higgins and Mason found evidence of 17 instances of recourse provided over the 1991-2001 time period that were specifically announced by the parent company. These recourse events helped support 89 separate credit-card securitizations that had a combined value of $35.4 billion.

During the study period, every one of those recourse events violated regulatory rules, but were carried out with a blessing from the regulators despite having recognized the problems of implicit recourse. The OCC published its first warnings on implicit recourse in 1996 and in 2002, the OCC, the Federal Reserve, and the Office of Thrift Supervision issued a joint guidance on implicit recourse in securitizations. The guidance identified specific acts of recourse that would violate true-sale accounting and should force the parent company to recognize the securitized assets on their balance sheet, including specifically the options considered by Advanta.

Since regulators have chosen to ignore implicit recourse, it has become institutionalized industry-wide. In their announcement regarding the downgrading of Advanta’s debt Fitch noted, “…early amortization would occur in the absence of intervention from Advanta within the next month. Intervention could come in the form of charge-off sales, a yield supplement account, or receivable discounting, as seen recently at other large card issuers.” Among those options, receivables discounting is specifically mentioned in the 2002 joint guidance as a prohibited recourse event that would force a parent company to take the securitized assets back on their balance sheets.

Moreover, such a statement means that Fitch – who rates asset-backed securities for a living – admits that they are, in part, basing their ratings on the expectation of implicit recourse being provided even though implicit recourse is : 1) a violation of true sale and 2) not contractually guaranteed.

The problem is that since recourse is not guaranteed, firms can choose to provide recourse when it is expedient and choose not to otherwise. Indeed, that is part of the story of the credit crisis, where mortgage issuers supported pool performance up until roughly mid-2007, when the pools were left to stand on their own. Because securitizations are off-balance sheet, banks can provide that support without holding capital against the activity, ostensibly because they can choose to put the risk to securitized investors if they wish to do so, which no going concern business will ever actually do. Hence, the saying on Wall Street is “the only securitization without recourse is the firm’s last.”

That capital, however, serves as a cushion against declining asset values and provides security to the government’s safety net (deposit insurance). In the run-up to the credit crisis, therefore, banks had too much managed leverage from securitization and not enough capital to provide the recourse that has historically been the sole means of support for troubled assets. As is usually the case, taxpayers are picking up the tab.

The solution is simple. Regulators simply need to enforce their existing rules. If a bank is selling assets with recourse, the bank has to hold capital against those assets as if they are on-balance sheet. Securitization is simple leverage. Securitization allows banks to borrow against their assets and increase their returns. None of this is rocket science. Given the lack of interest, however, it may take a few more failures to get meaningful regulatory changes.

[Demeter]

73. That Freshman Course Won’t Be Quite the Same (Economics 101)

WARNING: Author is a Bushbot apologist!

http://www.nytimes.com/2009/05/24/business/economy/24view.html?_r=1&ref=business

By N. GREGORY MANKIW

MY day job is teaching introductory economics to about 700 Harvard undergraduates a year. Lately, when people hear that, they often ask how the economic crisis is changing what’s offered in a freshman course.

They’re usually disappointed with my first answer: not as much as you might think. Events have been changing so quickly that we teachers are having trouble keeping up. Syllabuses are often planned months in advance, and textbooks are revised only every few years.

But there is another, more fundamental reason: Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.

Nonetheless, the teaching of basic economics will need to change in some subtle ways in response to recent events. Here are four:

THE ROLE OF FINANCIAL INSTITUTIONS
THE EFFECTS OF LEVERAGE
THE LIMITS OF MONETARY POLICY
THE CHALLENGE OF FORECASTING


(SO GREG, WHERE ARE THE CHAPTERS ON THE MANY FACES OF FRAUD, AND THE CONSEQUENCES OF DEREGULATION? IS THAT SAVED FOR THE MBA PROGRAM?)

[Demeter]

74. REALLY Bad Joke Courtesy of Yves Smith

One afternoon an investment banker was riding in his limousine when he saw two men along the roadside eating grass. Disturbed, he ordered his driver to stop and he got out to investigate.

He asked one man, "Why are you eating grass?"

"We don't have any money for food," the poor man replied. "We have to eat grass."

"Well, then, you can come with me to my house and I'll feed you," the banker said.

"But sir, I have a wife and two children with me. They are over there, under that tree."

"Bring them along," the banker replied.

Turning to the other poor man he stated, "You come with us, also."

The second man, in a pitiful voice, then said, "But sir, I also have a wife and SIX children with me!

"Bring them all, as well," the banker answered.

They all entered the car, which was no easy task, even for a car as large as the limousine was.

Once underway, one of the poor fellows turned to the banker and said, "Sir, you are too kind."

"Thank you for taking all of us with you."

The banker replied, "Glad to do it. You'll really love my place. The grass is almost a foot high."

[Demeter]

75. "Own to Rent" Taking Place in Phoenix

http://www.nakedcapitalism.com/2009/05/own-to-rent-taking-place-in-phoenix.html

In 2007, Dean Baker proposed an idea he called "own to rent", in which homeowners facing foreclosure would be given the option of staying in their home indefinitely, provided they paid market rent. The notion was that stressed families would be spared the cost and disruption of moving if they were indeed viable renters (a big deal for kids in school). It would also save the bank the cost of foreclosure and the expense of maintaining a home and readying it for sale.

Critics argued it was a terrible idea, that banks would come out worse, and that the former owners would make lousy tenant (it appears not to have occurred to them that the now-tenants probably have improvements they made, giving them more attachment to the house than a typical rental).

Well, this obviously stupid idea is taking place full bore in Phoenix, as entrepreneurs find owners facing foreclosure and offer to buy the home if they remain as tenants. That says the economics are at least tantamount to the banks offering the same deal directly. However, in fairness, investors look negatively at banks that carry a lot of REO (real estate owned) so a bank would have to do a great deal of investor education to operate a similar program (and imagine what it would take to get investors in a securitized vehicle to sign off on this approach). And the other reason an idea like this has attracted such a following in Phoenix is a unique combination of a particularly distressed real estate market and a big influx of investment funds. But if other markets continue to swoon,the Phoenix model may become common.

From the New York Times:

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own....

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses....

In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.

One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. “Our lender talked a pretty picture,” Mrs. Aguilar said bitterly.

When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.

Still, their feelings are mixed. “It’s not our house anymore; it’s someone else’s,” said Mrs. Aguilar, who works for the state welfare department.

For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. “This type of deal is absolutely not available in Canada,” said Jarrett Zielinski, a CBI executive. “No city here has fallen by 50 percent, the way Phoenix has.”


However, there is a possible fly in the ointment:

Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.

“If Phoenix loses population,” Mr. Jarvis says, “then buying houses here is a bad bet.”


Phoenix is geographically dispersed and requires heavy duty air conditioning for a chunk of the year. Will the city lose appeal when energy prices rise?

[Hugin]

83. There are problems with "Own to Rent" elsewhere, too.

For instance, where I live there are (fortunately) still some very strict (and enforced) laws requiring the landlord to perform (and pay for) many of the maintenance issues of property ownership. The 'owner' is responsible for making sure the property is habitable and that the basic features of the dwelling are fixed and remain fixed. That would include; a leaky roof, plumbing, electric service, air conditioning (evap coolers) etc.

The renters aren't obligated to do or pay for real-estate maintenance. This is one reason I sold a patio-home ten or so years ago. I thought about renting it out, but, one destructive tenant and/or the fact that it was an older building and I was looking at paying to have someone live there.

There is the option of having a 'property management company' as a middle-man, but, after having lived in a managed rental during most of my college years and seeing the maintenance level they provide. Bare minimum... and hearing stories about how many of the companies keep the properties limping along while taking most of the proceeds from any rent collected. I decided this wasn't an option I wanted to pursue. I was pretty confident that once the building had reached a certain level of destruction and negligence the PMC would back out leaving me to pay to bring it back up to standards or tear the damn thing down. (Which I've heard happens to owners in these deals quite frequently.)

From what I've seen, California and probably Arizona don't have these sort of Owner Maintenance laws or at least they aren't as strict. A friend of mine was renting in CA a couple of years ago and the Owner of the property was desperate to keep them in the building. My friend said everything was broken garage door opener, refrigerator, plumbing, toilets, roof... even the door knobs were falling off. The renter/friend said if some of it were fixed they'd stay there. But, due to the fact most of the rent was going toward the Owner's mortgage on the property the Owner couldn't afford to do any maintenance. So, my friend moved out.

Sad to say, Own to Rent looks to me to be another pump and dump scheme.

[Demeter]

84. Morning! It's Hard Being a Landlord

and it's hard having one. The rent-to-own has the advantage that people can stay put where they've been at home, and still feel that they have a chance to recoup. I'm sure the rental agreement hands all the maintenance to the tenant/former owner.

[DemReadingDU]

76. OBAMA:Well, we are out of money now.

President Barack H. Obama
Host:Steve Scully
Tape Date:Friday, May 22, 2009


SCULLY:Yet, it all takes money. You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA:Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything. That's the wrong option.

I think the right option is to say, where are the game changers, the investments that we can make now that are going to reduce costs, even if they don't reduce them this year or next year, but 10 years from now or 20 years from now, we are going to see substantially lower costs.

And if one of the very promising areas that we saw was these insurance companies, drug companies, hospitals, all these stakeholders coming together, committing to me that they would reduce costs by 1.5 percent per year.

If we do that, it seems like small number, we end up saving $2 trillion. $2 trillion, which not only can help deal with our deficit and our long-term debt, but a lot of those savings can go back into the pockets of American consumers in the form of lower premiums. That's what we are driving for.

Full Transcript and video at link
http://theautomaticearth.blogspot.com/2009/05/may-24-2009-well-we-are-out-of-money.html

[Hawkowl]

77. No wonder the $ is falling

When the President of the United States announces to the world that we are out of money now. I'm beginning to think that Obama is not a smart man. Perhaps he's just been extraordinarily lucky and his luck appears to be running out faster than the fed can print money.

Reducing health care costs by 1.5% per year?!? Doesn't he actually read the fine print? It was an agreement to reduce health care cost INCREASES by 1.5% per year.

I'm getting a very bad feeling about this administration. If they fuck this up, we will have Ron Paul as President in 2012.

[Demeter]

78. He Certainly Displays No Economic Savvy

and his recent stance on Constitutional law is troubling to me, too.

[DemReadingDU]

79. Compared to Bush, Obama is a great speaker

He appears to be well liked wherever he goes, which is good for our status in countries around the world. But perception only fools people for awhile, then reality catches up. I'm getting concerned when all those people (thousands, millions?) get laid off from Chrysler and GM dealers and factories, what is Obama going to say to them. Those people know the economy is bad, no green shoots for them.

[Demeter]

82. "We are out of money." Barack Obama May 23, 2009

http://jessescrossroadscafe.blogspot.com/

Obama openly says what anyone with common sense has known for quite some time: the US is broke, and will not be able to honor in full its financial and fiduciary obligations.

The question remains how the US restructures that debt and how big a haircut the debt holders will take as a part of it.

20%? 30%? More like upwards of 50% at least in real terms.

And who are these debt holders?

Anyone who has Treasury debt obligations and financial assets, from the Long Bond to the US Dollar, and financial assets guaranteed by the Federal Reserve and the Treasury.

Technically the debt will be serviced and the interest paid according to the terms of the agreements, with devalued US dollars.

The process will continue until the debt is restructured and the dollar is replaced with a new dollar. This may take some years.

Oh, don't worry too much. There will be spin and qualifications piled upon this admission, most likely before the markets open in Asia on Monday. But this trial balloon of admission is how you start breaking the bad news to people unwilling and ill prepared to receive it.

But regardless of what is said, we are now in the endgame for a credit bubble of historic proportion.

..................................

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there... If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation."


There is enough money if the Fed can run the printing presses fast enough. That is the whole point. The bet is that people will continue to accept it in return for real goods and services, pretending that it has the same marginal value without regard to how much the Fed creates.

The method is to look good by attempting to make most of the competing forms of currency and stores of wealth look equally bad.

...................................

It is incomprehensible that any informed economist does not understand this difference between deflationary deleveraging and a cyclical recession.

And if they do, how could they possibly justify giving trillions of capital to the banks to support them in their excess so that they might freely make loans again, when it was their reckless lending and speculation that brought us to this point?

And the economists also know full well that the real cure lies in devaluing the currency and restoring the balance sheet of the individual households through an increase in the median wage and the debt relief of bankruptcy.

There must be reform, a change in the system that spawned these repeated bubbles and epoch malinvestment.

......................



Didn't you just know they would spill it over a long holiday weekend?

Don't be too concerned, there will be more spin and denials after this trial balloon has been floated, and life will go on.

"Oh, that's not what Obama meant. He means we have a problem but there are the means and the time to address and repair it before it becomes too great."

People have an enormous capacity for delusion bordering on selective amnesia. Go back and read the posts on this blog starting in September 2008. Then reflect on what has been said recently on Wall Street and you will see what we mean.

We are now in the endgame of an historic credit bubble that will result in a currency crisis of epic proportions.

[DemReadingDU]

88. Spin, spin, nothing to worry about

Don't want to cause any panic on this holiday weekend or thru the summer. Reality will be catching up to most of us soon enough. As things deteriorate, I'm thinking the government will be last to collapse. They will do anything and everything to keep it going. I'm not worried, yet, about my short term Treasury Bills.

[Dr.Phool]

80. The trouble with tribbles. And computers.

Good morning. I haven't been around much this week. Just logging on briefly from my laptop occasionally. I've spent the last few days building a new 'puter, since mine got fried by a bolt of lightning Monday morning. It cooked my printer, and the next door neighbors big screen also, but nothing else.

I ordered a bare-bones kit from CompUSA, and when it arrived, the motherboard was DOA. So I ordered another. But, technology upgrades cursed me again, as my older IDE hard drive and DVD burner were incompatible with the newer SATA interface. So, I found a IDE-SATA converter, which looks like it works like a charm. And after a few master-slave relationship problems, and some idiot (yours truly) did something supposedly impossible, and installed half the memory in backwards, I got everything humming perfect by yesterday evening.

At which point our phone and internet service went out. At which point my every loyal, Chief Adviser, The Fudd, forced me to drink a large pitcher of margarita's. Even Spock would see the logic. If you can't work, drink.

So, beam me up Scottie. We can make it back by Happy Hour!

:argh: :argh:

:mad: :mad:

:crazy: :silly: :crazy: :crazy:

:toast: :beer: :beer: :toast: :toast:

:hangover: :hangover:

:party: :toast: :beer: :party:


edit: spelling with a hangover.

[DemReadingDU]

81. Congratulations, a new computer!

and they are supposed to be so easy to get the components working together nowadays. Humpff. Trial and error. But it's great you can enjoy the holiday today!


A couple years ago, we had a lightening strike, really really close to our house, appx 4am, and it was LOUD!

It took out our microwave, printer, DVD player, cable internet, and left a discoloration on every TV. Also took out the wireless router, and the interface card (only $25) in the computer. Thankfully, the computer was ok. It was spared by the surge protector.

Several neighbors also reported losing some of their appliances, but we're all fortunate the lightening didn't strike any of our houses.

[Demeter]

85. Mounting sadness behind the happy headlines By Tony Jackson

http://www.ft.com/cms/s/0/9ec405a4-4875-11de-8870-00144feabdc0.html

Published: May 24 2009 16:34 | Last updated: May 24 2009 17:04

One of the driving forces in economics, according to Robert Shiller of Yale, is the story we tell ourselves. We create happy versions of life in the boom times and sad ones in the bust.

It might be said the story is the product of events. But the process is circular. Events drive the story, the story drives our behaviour and our behaviour drives events.

Franklin Roosevelt grasped the point when he told the American people in 1933 that the only thing they had to fear was fear itself. So what is the story today?

On the face of it, a happy one. Equity markets are flying – most of the time, anyway. Investors are hurling billions of new money at the banks, including the most moribund ones.

The world’s fund managers, according to the latest Merrill Lynch survey, are positively bubbling. Their expectations for global growth and corporate earnings are at a five-year high, having been in the pits at Christmas. That mood is shared by the general public, in the US at any rate. Consider the University of Michigan’s survey of consumer sentiment, which asks people how they see things going over the next five years.

The reading hit a low last summer – though not as low as in the two oil shocks of 1973 and 1979, or even the recession of 1990. Since then it has rebounded very nearly to its long-run average.

That is striking on two counts. First, at the risk of seeming cynical, there is no reason to suppose the general public’s instincts are less trustworthy here than those of investment professionals. Second, it is the mood and therefore the behaviour of the general public that matters above all.

As Prof Shiller put it in a lecture at the London School of Economics last week, the central question now is whether we just got our confidence back. If so, logic suggests our problems should disappear.

Prof Shiller is not sure about that, nor am I. It strikes me the feel-good story could be modified by events, in the usual circular way. Equally important, there are other less cheerful stories running alongside it.

On the first point, it is instructive that the US popular mood should have started to revive as long ago as July. For it was not until September that most of the really big stuff happened: the collapse of Lehman Brothers, AIG and Washington Mutual.

On the other hand, it was already clear by July that the US government was going to bail out Fannie Mae and Freddie Mac. So it seems the public had already judged – correctly, on the showing so far – that the government would go to any lengths to shore up the system.

But there are other things which, though foreseeable in principle, could turn out unexpectedly grievous in practice. It seems clear that unemployment will worsen from here, the only question being by how much.

As to house prices, further evidence produced by Prof Shiller – an expert on the subject – reminds us of how far we are in unknown territory. The fall to date is without precedent. But so was the previous rise. In 1990, US house prices were in real terms roughly where they had been a century earlier. Then they almost doubled to the peak.

The picture in the UK is uncannily similar. Prof Shiller shows a chart comparing house prices in London and Los Angeles in the boom and bust. They are almost identical, with the grim proviso that UK prices have yet to fall nearly as far.

Fairness and corruption

That said, let us turn to some of the other stories around. A central part of
Prof Shiller’s thesis, as set out in his recent book Animal Spirits, is that
people’s mood and behaviour is affected by certain constants, of which we may focus on two: fairness and corruption.

The issue of fairness, particularly in respect of chief executive pay, is scarcely new. But it is when things go wrong that perceived unfairness makes people angry, and thus has consequences.

Two examples. First, in the US, the Securities and Exchange Commission has finally proposed that investors should be allowed to nominate directors. The chief investment officer of Calpers, a leading US institution, commented: “The credit debacle represents a massive failure of oversight.”

Second, Shell has had its directors’ pay package voted down. The oil company had missed targets that would have triggered bonuses, but proposed to pay them anyway.

Add to this the furore over abuse of the expenses system by UK Members of Parliament, and we get the impression of a much angrier and unhappier story than the headlines might suggest. Conceivably, we are past the worst. But it does not quite feel like it.

[Demeter]

86. The (almost) $2.5 trillionaire …Brad Setser

http://blogs.cfr.org/setser/2009/05/24/the-almost-25-trillionaire/

SEE GRAPHS AT LINK

The world’s sovereign wealth funds almost certainly have less money than is commonly thought. And China almost certainly has even more money than is commonly thought — or at least more money than is commonly reported.

That is the conclusion I have reached after spending a fair amount of time looking at China’s data, and nearly as much time trying to understand the (incomplete) data from the Gulf. The data from China’s 2008 net international investment position — English data through 2007 here (link in article) — certainly didn’t prompt me to change my mind.

If China’s own reporting is to believed, China’s state likely has about $2.4 trillion in foreign assets — setting the CIC aside. $1.946 trillion in formal reserves. $252 billion in portfolio debt (likely held primarily by the state banks, though some may be stuffed in other accounts). And $186 billion in a mysterious line item that corresponds with the banks dollar reserve requirement and the PBoC’s other foreign assets (see below). Add in the CIC (which likely has another $50-100b in assets scattered across various balance of payments categories) and China’s net international investment position (NIIP ) data suggests that China’s investment in the world — even excluding FDI by Chinese state firms — is now close to $2.5 trillion.


That is a bit higher than I estimated. Data in China’s NIIP — just looking at the cateogies that capture formal reserves and the state banks and thus excluding any additional assets held by the CIC — suggests that China’s state has foreign assets of around $2.384 trillion at the end of 2008. That is more than the $2.261 trillion I found by adding up China’s reported foreign exchange reserves, the PBoC’s other foreign assets and the reported foreign portfolio investments of China’s state banks. The gap in entirely due to the fact that Chinese holdings of portfolio debt in China’s net international investment position ($252b) far exceed the portfolio investments of the state banks that the PBoC reports on its website ($131b).

The change in the reported stock of foreign investment in China’s NIIP also is interesting. Remember that the euro’s rise in 2006 and 2007 pushed the reported value of China’s reserves up, and the euro’s fall in 2008 pushed the total value of China’s reserves down — so the 2006 and 2007 numbers will tend to overstate the true growth in China’s reserves and the 2008 number understates the true growth in China’s reserves.* No matter. In 2006, “private” Chinese investors clearly bought a lot of portfolio debt (the orange bar). In 2007 and 2008, other investment “other” rose rapidly — a function of the rise in the banks reserve requirement (see the blue bar). Other investment is balance of payments speak for bank flows. And even setting the banks reserve requirement aside, China’s net position in the international banking system improved in 2008 (see the pink bar). I suspect that reflects the CIC’s deposits in the international banking system.



When I tried to match up the data I use in my monthly tracking to the data in the annual NIIP (focusing only on the categories that match up — which means that I set aside the CIC), the data lines up reasonably well for all years other than 2006. That was the year when private Chinese investors bought a ton of foreign debt — way more than shows up in the state banks’ foreign currency balance sheet.


That doesn’t worry me too much though, as I have long suspected that the data series I was using understated China’s accumulation of foreign assets in 2006.

The NIIP data also makes a few other things clear.

One, over the last three years, China’s reported reserves have significantly understated the increase in the foreign portfolio of China’s state, at least if China’s state banks are considered part of China’s state. In 2006, purchases of foreign debt securities topped $100b. In 2007, “other, other” — read the dollar deposits of the state banks — rose by about $100b. And in 2008, the ongoing rise in the reserve requirement and the CIC’s various foreign assets likely added another $100b or so to the total.

Two, outward Chinese FDI is still small relative to Chinese reserve growth, and the increase in China’s hidden reserves. The roughly $50b that Chinese firms invested in the rest of the world in 2008 is still smaller relative to the increase $500b that China’s government put into its reserves and other foreign assets — a total that rises after adjusting for transfers to the CIC and valuation changes that make the y/y change in reported holdings an inaccurate measure of the flows. A world where all the increase in China’s foreign assets was channeled through Chinese state firms would look quite different than today’s world.

Three, the rise in China’s foreign assets (counting China’s reserves, its “private” purchases of foreign portfolio debt and the bank reserve requirement) has far outstripped the rise in China’s foreign debts (defined as Chinese debt securities held abroad and bank claims on China). China really didn’t need to run its reserves and hidden reserves up to close to $2.5 trillion for prudential reasons.



China’s foreign assets went from around $500 billion in 2003 to around $2.5 trillion in 2008. That is a stunning increase.

MORE AT LINK

[CatholicEdHead]

89. Oil slips to around $61 ahead of OPEC meeting as investors mull economic outlook

http://www.startribune.com/business/45979972.html

Oil prices fell to around $61 a barrel Monday as investors eyed an OPEC meeting this week and weighed evidence of a global economic recovery.

Trading was light because U.S. markets are closed Monday for Memorial Day.

Benchmark crude for July delivery was down 62 cents to $61.05 a barrel by mid-afternoon in Europe in electronic trading on the New York Mercantile Exchange. On Friday, the contract rose 62 cents to settle at $61.67.

In London, Brent prices fell 72 cents to $60.06 a barrel on the ICE Futures exchange.

[CatholicEdHead]

90. Bank of America Revises 64,000 Loans After Pact With States

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPPh1_faHRH0&refer=home

May 25 (Bloomberg) -- Bank of America Corp., the largest U.S. bank, modified more than 64,000 home loans for borrowers between December and March after settling charges over predatory lending in an agreement with 42 states.

The modifications will save borrowers $823.5 million in principal and interest, according to a summary report provided to Bloomberg News today by bank spokesman Dan Frahm. The lender has offered to modify loans with lower interest rates for 100,300 borrowers, the report said.

Bank of America in July acquired Countrywide Financial Corp., formerly the largest U.S. home lender, for $2.5 billion to complement its leading positions in bank deposits and credit- card lending. Countrywide’s lending practices prompted investigations by attorneys general in California, Florida and other states, leading to an October settlement in which Bank of America agreed to modifications that could save 390,000 borrowers as much as $8.4 billion.

Bank of America cited surging demand for mortgage loan refinancings for helping offset higher credit costs during the first quarter, when the bank reported a $4.25 billion profit. “Our mortgage business is on fire, in a positive sense,” Chief Executive Officer Kenneth Lewis said in May 8 interview.
....

[CatholicEdHead]

91. GM Opel Decision Due ‘Middle of Week,’ Merkel Says (Update4)

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahbxDUA_KOs8&refer=home



May 25 (Bloomberg) -- Chancellor Angela Merkel’s government aims to make a decision on a preferred bidder for General Motors Corp.’s Opel unit in Germany by the middle of this week as GM prepares for a probable June 1 bankruptcy.

Merkel spoke by telephone with Russian Prime Minister Vladimir Putin on May 23 and met yesterday with Magna International Inc. Co-Chief Executive Officer Siegfried Wolf and Chairman Frank Stronach, according to Ulrich Wilhelm, chief government spokesman in Berlin. Merkel will meet Fiat SpA CEO Sergio Marchionne in the “first half” of the week, he said.

“You can expect the need for decisions to reach a kind of climax around mid-week,” Merkel told reporters in Berlin.

Opel, based in Ruesselsheim near Frankfurt, has said it needs 3.3 billion euros ($4.6 billion) in state aid to survive. German Economy Minister Karl Theodor zu Guttenberg said in a May 23 interview that he wasn’t persuaded by offers from Italy’s Fiat, financial investor RHJ International SA and Canadian car- parts maker Magna, which aims to join Russian partner OAO Sberbank in the deal.
...

[architect359]

92. So say we all...

Sorry to mix worlds, but that phrase seemed appropriate after reading Demeter's OP.

[CatholicEdHead]

93. Maybe we can have a Battlestar Gallactica WEE in future weeks

[KoKo]

94. Thanks Demeter and Others for the "Weekend Galactica".....

It beat the weekend sports and barbeque's for worth reading. If only someone would invent "voice download" so we could listen on our I-Pods or some other way to all this info...

It will come...in the future...

[Demeter]

95. The Naked Capitalism Articles are all available in sound, I Believe

Go to the original link and see!

[KoKo]

97. Doesn't beat YOUR Commentary, though....just saying...

Your posts and and Ozy's and the Marketeers and newer folks are the biggest DU Treasure... Just Saying.

[Demeter]

98. Thank You! We Do Try to Liven Up the Dull Dismal Science

[Demeter]

96. Since I never Saw It, You'll Have to Do the Annotating

How about next weekend? I haven't anything planned, and I'm too wiped after the barbecue to do any.