Mike's Neighborhood

THE MORE THINGS CHANGE . . .

2009-11-05T08:02:00.003-05:00

So three years ago (not to the day, but damn close) I pulled my head out of the hole in the wall into which I'd rammed it and fell into a fitful sleep. Visions of Yadier "Fucking" Molina's home run teased my mind, but I managed to get a few hours.

And when I woke up I tried to convince myself that with three young studs in Wright, Reyes, and Beltran, the Mets would be all right.

And they were until about 150 games through the 2007 season.

Anyway, this past season they sent their entire starting lineup, 4/5 of the rotation, 2/3 of the front office, and 16.3 million of their fans onto the DL before limping in at an abysmal 70-92.

But all that is sorta ok in the big picture. It sucks, but what are you gonna do? That's not what has me so damn exorcised that I'm actually posting for the first time in about 6 months. No, you know what really, really, REALLY blows?

The FUCKING YANKEES just added another goddamn title to their gaudy total. To recap: Mets suck for the umpteenth time in my life. Yet again, they rode the wave, won ungatz, and now suck balls. By way of contrast, the Yankees won their 7th World Series of my lifetime.

I will now stick my head back in the Yadier "Fucking" Molina hole and not remove it til opening day.

THE BRIEFEST UPDATE YET

2009-10-17T09:58:00.001-04:00

I'm alive.

I'm well.

That is all.

YET ANOTHER BRIEF UPDATE

2009-07-24T07:31:00.004-04:00

Just popping in to say hello.

Still very busy with work, and the case remains interesting. Pretty exciting actually. Lots of action, lots of contentious exchanges with opposing counsel, lots of fantastic evidence piling up. Should continue to be both busy and good.

On the non-work front, Mrs. Mike and I will be celebrating 10 years of nuptials early next month. Hard to believe it's been a decade. Amazing.

Finally, as to the world beyond work and marriage, I'm aware of it in theory, but that's about it. Apparently some famous people died last month and this Obama fella seems to be in the news every day about something. Health care, All-Star games, staring at chick's asses, what have you.

Think the guy needs to take a short summer break if you ask me. For his sake as well as everyone else's.

Til the next update . . .

BRIEF UPDATE

2009-06-23T08:21:00.004-04:00

Yes, I'm alive and actually doing quite well. I've been VERY busy at work. In fact, this is the busiest stretch I've ever had, at this or any other job. 12, 14 hour days, every day, and I've been putting in quite a bit of time over the weekend as well.

I also don't see this changing any time soon as the schedule in the case I'm on is expedited and aggressive. Plus, a lot of traveling should be in my near (and mid-term, and distant) future.

That said, I'm really enjoying the work. Very exciting, lots of action, constant battling over this and that. It's tiring and often stressful, but at its core it's what I signed up for when I got into litigation. I'm starting to get to the point where I'm senior enough that the amount of real "lawyering" starts to balance all the busy work, the shit work, the hierarchical stuff, and all the hours. We'll see how it keeps going.

IRONY ALERT

2009-05-19T06:12:00.003-04:00

So a writer from the New York Times plagiarizes a blogger. Nice.

If this damages Dowd's career -- or somehow harms the Times -- it'll certainly give credence to the idea that blogging is bad for reporting. Heh, heh.

What I wanna know, of course, is did Dowd sneak into Marshall's mother's basement to steal his words, or did she access them some other way?

COUSIN TIMMY'S STRESS(-FREE) TEST

2009-05-08T07:04:00.003-04:00

I'm sure by now we've all heard that -- surprise, surprise, surprise! -- all the banks "passed" the so-called "Stress Tests." They passed, huh? Was it a gentleman's C? An over-inflated B+? Did they make the ~~Dean's~~ Treasury Secretary's list?

Anyhow, Yves at Naked Capitalism has a nice take-down of not only Treasury, but the fawning and shamelessly pro-bank reaction of our good friends in the mainstream press. Or as she put it, "[t]he unduly charitable coverage of the stress tests." Some highlights, starting with a few facts the NTY did not cover:

1. The fact quite a few of the banks negotiated their fundraising requirements down, calling the integrity of the process into question

2. No mention that the purpose of this exercise from the outset was to prove the banking system to be solvent. What kind of a test is that?

3. No mention that asset sales (the reason Citi was able to negotiate its fundraising down from $10 billion, and presumably others as well) are almost certain to be a non-starter.

The WSJ joined in on the self-serving fun as well:

The Wall Street Journal , in "How the Stress Tests Stopped the Market Bleeding," depicts Geithner, the Fed, and Obama as saviors of the market:
Mr. Geithner successfully beat back criticism that the examinations were a political ploy, leaving much of the number-crunching to the Federal Reserve. The stock market regained its footing as consumer confidence crept back. And several major banks reported unexpectedly strong earnings for the first quarter, boosting confidence about their long-term health.
[] the only critics Geithner "beat back" were some of the bankers themselves. The stock market regained its footing because it was oversold and Citi and Bank of America said they'd had a good January and February. The consumer confidence numbers are stronger in no small measure because stock market movements are included in the computation! In fact, in the Conference Board's release, the stock market rally was the single biggest contributor to the improvement in sentiment.

As to the press' breathless prattling that Wall St. has been saved from the dangers and horror of "nationalization" or receivership, Yves noted:

The illogic is breathtaking. It has now become conventional wisdom that a bankruptcy is the only way to straighten out GM, yet there is no realistic plan for getting the banking industry into a configuration that reduces systemic risk or end incentives for banks to gamble with their now explicit government backstop or a realistic plan to clean up the bad assets (we do not believe the PPIP will succeed). Receivership for the weakest banks is a far better approach for taxpayers and the economy, yet the Journal is touting the line that what is best for incumbent bank management is surely best for America.

Finally, she observed that many of the real villains escaped notice, as usual:

And the other big shortcoming is that the securities and derivatives exposures at the big capital markets players (Citi, BofA, JP Morgan) were given the short shrift.

Nothing new here, huh?

Check out the whole piece. It'll put some of this in better perspective.

Have a nice weekend.

TOUGH WEEK FOR BURT REYNOLDS

2009-05-06T06:42:00.003-04:00

First Pontiac, and now Dom DeLuise. As that first link makes clear, Pontiac had some strong pop culture connections: the GTO, Knight Rider's Kit, and of course, Burt's black Trans-Am from Smokey & the Bandit. And, as some of you may recall, that's a car I talked about right here a little over two years ago.

Those ubiquitous mid-70's through mid-80's memories. We even owned an '84 Grand Prix.

And, of course, who seemed to be Burt's sidekick in many of his iconic movies (but not Smokey & the Bandit)? Dom DeLuise. DeLuise sits in my memories through two separate comedy franchises of my youth: the Burt Crew, with its fast cars and hot chicks and blooper outtakes as the credits roled. And also Mel Brooks. DeLuise seemed to be in every Mel Brooks movie. The obnoxious gay director at the end of Blazing Saddles. The hideous emperor, dispatching with food & lives in History of the World, Part I. Pizza the Hut in Space Balls. He was even in Silent Movie, right?

The franchise that made the black Trans Am, and the fat guy who made me laugh in Burt Reynold's movies. Both gone in the same week. The older you get, the more the icons of your youth pass along.

At least the memories remain.

THE INSIDERS' INNER SANCTUM

2009-05-04T06:49:00.005-04:00

Yves has a solid take on the continuing special relationship between Goldman Sachs and . . . well, everyone in power. A highlight or two:

The "all animals are created equal, but some are more equal than others" logic appears to operate in full force as far as Goldman is concerned. Violations of normal rules of conduct are not merely tolerated, but are asserted to be acceptable.

Now admittedly, the latest news tidbit, of former Goldman co-chairman Steven Friedman staying on as chairman of the New York Fed after Goldman became a bank holding company, isn't as troubling as when current Goldman chief Lloyd Blankfein was the only Wall Street denizen to meet with Hank Paulson when the Treasury was deciding what to do about AIG. Readers may recall that Goldman had the biggest exposure to AIG and thus had the most to benefit from a course of action that would be generous to counterparties (who had chosen of their own cognizance to enter into contracts with the big insurer).

What is disturbing [] is the moral blindness of too many of the key actors, namely Friedman himself and some Fed officials.

* * *
It's bad enough that Friedman owned Goldman shares while involved in policy discussions that would affect the bank. The fact that he went and bought more shares is breathtaking. Of course, this shows a huge deficiency in Fed procedures. Directors should be barred from trading stocks in any institution regulated by the Fed. While it is technically not inside information (you need to be an insider of the company in question, that is, have a fiduciary duty to its shareholders), it certainly raises the specter of trading on privileged information.

It would be a scandal if someone on the FOMC were to be found to be trading interest rate futures. Being party to discussions about regulatory policy (as in having advance knowledge of how things are likely to play out) means one similarly has advance knowledge of facts that investors would find important.

* * *
Recall that in the waning days of the Bush Administration, it wasn't clear how bank friendly the new Administration would be. Even thought Geithner was Treasury secretary designate, there was some discussion in the press as to the divergent views within the Obama economic policy team, and whether that would create creative friction or conflict. Conflict (or having Volcker, who is not a fan of innovative finance, have a strong voice) could have kept bank valuations at bay.

Thus while Goldman's stock was arguably cheap, cheap stocks can get cheaper. One of the important inputs to the wisdom of going long would be knowing how bank friendly the new Administration's policies would be. To think that Friedman didn't have some insight into that question by virtue of his advantaged position is naive.

Check out the whole piece. Another factoid in a continuing, and sadly consistent, story.

THE OUTSIDERS

2009-05-01T06:50:00.005-04:00

Too exhausted to post this morning, but check out this piece in Salon, titled "The Prophets Of Doom" (H/T Ritholtz), discussing 14 folks who've been the biggest critics of Obama's outrageous economic policies. I would imagine no small portion of these folks also tee'd off on Bush, so that should tell you that this ain't necessarily a partisan group.

A few clowns in the mix -- Michele Bachmann & Jim Cramer, notably -- and I'm certainly no fan of that big phony, Paul Krugman, but otherwise, there are some strong entries here, including many that I've either linked to, or focused on: Ritholtz, Yves, Jim Rogers, William Black, Simon Johnson, Roubini. Check it out. At very least, it'll give you some names and links if you're looking for more more sources to learn what's really going on.

THIEVES, LIARS, AND THE LIARS WHO ENABLE THE THIEVES AND LIARS

2009-04-30T06:45:00.004-04:00

Yesterday I noticed that a couple folks writing under the by-line, "AP Business Writer," headed an article under this gushing lede: "The Fed confirmed what Wall Street has already concluded: The recession is starting to ease." And in support of this bold statement they cited the fact that the Fed observed that the state of economic decline "appears to be somewhat slower."

Hmmm.

Now I'm not looking to defend the FMOC, but in looking at the Fed's announcement yesterday, I ain't really seeing the optimism that our glorious financial press seems so desperate to see:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

Now, I'm the first to posit that any Fed optimism in the face of what's really happening is irresponsible and ludicrous. But it just amazes me how desperately the mainstream financial press wants to paint a rosy picture that justifies ever more money seeping away from saving, in order to shunt it over to Wall St. and debt-financed consumerism. And as we know, this gilding of a wilting flower seems to work: Wall St. rallied yesterday.

Anyway, apart from the press' foolishness and the Fed's cheerleading (or is it the other way around), let's take a look at the substance of what the FOMC said yesterday:

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Maybe I should have characterized this as part of the "cheerleading" section, because I'm not seeing anything here that makes sense. Inflation (and they're talking about price inflation, since they've already inflated the money supply) will remain subdued . . . because the economy is retracting. The same economy that's slowing down more slowly than before. Ok (I guess). So the Fed will keep rates low . . . to promote price stability? Huh?

I think we can translate this as, "More money coming!" Why? Because that's what central banks do. They inflate. But, of course, the Fed says there won't be any "inflation," meaning price inflation. Ostensibly because it can just sop up all that money by selling its assets back into the economy when prices start to rise. And as we've addressed here before, what will it sell back, since the composition of the Fed balance sheet gets more and more questionable as time goes on. Well, let's look at what it says:

to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.

Hmmmmm. Let's do the math, shall we? $1.45 trillion of agency mortage-backed securities and agency debt. And who are these "agencies," you might ask? Oh, just Fannie Mae and Freddie Mac and those sorts of bankrupt governmentally-supported entities. And a mere $0.3 trillion worth of treasuries. They ain't too solid an investment either, but at least there's some tradition there of purchasers.

But all-in-all, I ask the same question I always ask: who the fuck is gonna buy $1.45 trillion worth of shit? In addition to all the shit that's already parked on the Fed's balance sheet? And if your answer is "no one," or "not many folks" or "hell, I dunno," please remember that any un-repurchased shit will remain on the Fed's balance sheet. Which means that $1.45 trillion worth of newly-printed Federal Reserve Notes (those would be the unsecured debt instruments the Fed issues, known to most of us as "Dollars") remain in the general economy.

Which will raise prices somewhere, sometime. Food? Medical care? Rent? Fuel? Take a guess, spin the spinner. But the spinner will stop somewhere.

And let me then ask the other question I often ask? Does anyone in power have a clue what he's doing? If not, how do they keep their jobs? If so, how do they stay out of prison?

More debt, more fiat currency, more lies and double-speak. Yet we're supposed to believe that good times are just around the corner. If only so.

IF A SENATOR SWITCHED PARTIES IN THE WOODS AND NO ONE CARED WOULD IT MAKE A DIFFERENCE?

2009-04-29T07:24:00.005-04:00

I've been swamped, crushed, buried, and overwhelmed at work lately. But I have a job, so trust me, I ain't complaining. I'm also a bit numbed by the constant barrage of lies and stupidity of Obama's Crack (-smoking) Economic Team. Add to that living within a couple miles of the United States' swine flu ground zero, and I'm at a bit of a loss to rev up my usual outrage & commentary.

And then along comes the news that Arlen Spector is switching parties! "Yea," the hopeful masses shout, "we is saved!" Apparently the fact that the Dems -- who already have a sizable Senate majority yet have done nothing of consequence except shovel money to the world's largest banks, and send the exhausted troops from Iraq over to Afghanistan -- may now have a non-Constitutionally-significant super-majority of 60 is gonna save us from cynical leadership, cronyism, and incompetence.

Well, count me among those who couldn't give a shit. First of all, note the word "may" above. Unless Al Franken final wins his never-ending election battle against Norm Coleman, it'll be 59. And that also assumes no Dem goes over to the GOP.

It also ignores the fact that because of weak leadership (looking at you, Harry), cynical party policies (looking at you, Barry), and a crew of 59 clumsy, foolish, & self-serving legislators (looking at you, Mo, Curly, & Larry), the Dems haven't been able to accomplish a damn thing.

Why the hell does anyone suddenly assume that because the Dems can defeat the GOPers threatened (but not to my knowledge, never implemented) filibusters, they will? Because Snarlin' Arlen is suddenly on-board they're gonna grow a pair? Now they'll fight? Hmmm.

And most importantly, assuming this exciting super-majority leads to a spate of affirmative legislation, so what? I repeat what I've said over-and-over: it doesn't matter. There's been no substantive change of policy from the last administration to this one, and no change in legislative direction since the election of 2006. And there won't be, whether we have 59 Dem Senators, or 60 or 75 or 100. The follow the money. Their masters. The real policy-makers. And that ain;t us, folks.

Before peole get their panties in a twist, let me say, yes, there are a few subtle distinctions between the parties. Similarly, a rabid crocodile and a polar bear with a bad case of jock itch are different. One will maul you while the other spins around and rends your flesh from your bones. They. Are. Different.

But they're both pretty undesirable outcomes, no? This Arlen Spector switch-a-roo means nothing. Well . . . almost nothing.

Because Spector is up for re-election in 2010. In a country that voted Dem in 2006, and elected a Dem prez in 2008. In a state that went for Obama last November. Perhaps this move does mean something.

(Cross-posted at Agitprop)

ICEBERGS AHEAD

2009-04-28T06:46:00.004-04:00

Check out this short post from iStockAnalyst (H/T Ritholtz) about the composition of the Fed's balance sheet, as discussed here last week. A highlight or two:

[A]ll of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone “Poof.”
Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.

The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.
What do I mean? Well, take a look at this April 26, 2007, Federal Reserve Statistical Release. Table 2, the Consolidated Statement of Condition of All Federal Reserve Banks, shows the breakdown of the Fed’s assets back then. You’ll see that the Fed banks listed total assets of $883.5 billion at the time. The lion’s share of those assets — $787.1 billion, or 89 percent — were “AAA” quality U.S. Treasury bills, notes, and bonds. There were a few other assorted line items (gold, bank premises, etc.) … but that’s about it.

Now compare that two-year old balance sheet, to this multi-headed hydra of a balance sheet that came out a few days ago. The equivalent table (number 9) shows that total Fed assets have exploded to $2.19 TRILLION. And those plain-vanilla, risk-free Treasuries? They make up just $526.1 billion, or 24 percent, of Fed assets!

The Fed now also owns more than $355 billion of mortgage backed securities and $61 billion in debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Term auction credit comes to $455.8 billion. Those are short-term loans against just about anything and everything — from auto loans and credit card receivables to Brady Bonds and CMBS.
The Fed is also holding $238 billion in commercial paper as part of an October 2008 program to help corporations fund short-term debt obligations.
And it has $111 billion in so-called “other loans.” This all-purpose category includes loans made to primary dealers ($12.9 billion), bailout baby AIG ($45.1 billion), and loans made as part of the Fed’s Term Asset-Backed Securities Loan Facility ($5.1 billion).
Finally, the Fed has lent money to so-called “Maiden Lane” LLCs that acquired dodgy asset portfolios as part of the Bear Stearns and AIG bailouts. The grand total there comes to $72 billion.
* * *
I recommend you consider buying some gold and dump the heck out of any long-term U.S. bonds. Because some day, the trashing of the Fed’s balance sheet is going to matter, and in a potentially huge way.

Not sure there's much I can add to that.

ECONOMIC DISEASE CONTROL

2009-04-28T06:22:00.004-04:00

I thought "the Swine Flu" was a description of the day Geithner, Summers, and Bernanke resigned their positions and left town.

(Cross-posted at Agitprop.)

ONE DOLLAR IS WORTH A THOUSAND WORDS

2009-04-27T07:37:00.003-04:00

Straight from the "Believe What They Do, Not What They Say" files, we get this dandy little nugget 'o news from Bloomberg (H/T Jesse): Insider Selling Jumps to Highest Level Since 2007. A highlight or two:

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

* * *
While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”

Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 institutional clients.

That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992, data going back more than 20 years show. That drop preceded a 2.4 percent slide in the S&P 500 in August 1992.

* * *
“They’re going to say, ‘Thank you very much,’ and move on to cash or something else,” said David W. James, who helps manage about $2 billion at James Investment Research Inc. in Xenia, Ohio. “This is not a situation that suggests to us we’re seeing an economic recovery.”

Bottom line about the bottom line: when Wall St. Insiders who possess more information than you have (and possess a bit more money too) suddenly start selling everything that's not nailed down, it really doesn't matter whether they or their D.C. shills tell us recovery is on the way, does it?

Follow the money, not the words. It'll tell you all you need to know about where this is heading.

NEW HAPPENINGS

2009-04-25T11:12:00.004-04:00

Long time Neighborhood reader & commenter, Comandante Agi has questionably (and foolishly, methinks) asked none other than yours' truly to join the ranks of posters at his recently re-taken-over blog, Agitprop.

In my shameless quest to be read by at least a dozen-and-a-half people stupid, bored, or lonely enough to actually pay attention to what I say, I accepted his invitation. Of course.

(I thought it over for all of . . . about 3 seconds. Which is as fast as my brain could process it.)

Anyhow, my loyalties will remain to the Neighborhood, and the small-but-steady core of readers I've maintained here. Therefore, what I suspect I'll do is cross-post a couple of pieces each week. I'll still try to post daily here (the key word, as always, being "try"), but perhaps I'll throw one or two of the better ones up over there.

At any rate, swing over there and check out what the others have to say. I've known Agi for a while now, and he and I have long seen eye-to-eye on our non-Republican, non-Democratic, independant brand of skepticism (if not cynicism) when it comes to the political arena. Libertarian? Anarchist? Who knows? Why label?

And Agi has a nice absurdish sense of humor that I've always liked.

So there you have it. Nothing new here, something new elsewhere. We'll see how it goes.

THE FLOOD IS COMING (AKA, BUILD YOUR ARK WHILE THE LAND IS STILL DRY)

2009-04-24T07:08:00.009-04:00

This Bloomberg piece (H/T Ritholtz) highlights a very important issue: the changing (read: declining) composition of the Federal Reserve's balance sheet. The ostensible gist of the story is revolting enough, dealing as it does with the true state of what the Fed took on last year when it brokered the Bear Stears-JPMorgan Chase deal -- mostly California & Florida-based mortage holdings. But taking it to a deeper level, it makes us focus on a far-greater problem: the fact that the Fed has not only doubled the size of its balance sheet, but that much of this expansion has come in the form not of U.S. Treasuries, but with the very "toxic assets" that we've come to know as a root cause of the financial downturn. A few highlights, then I'll try to sum it up at the end:

The Federal Reserve released its most detailed breakdown to date on the types of assets it accepted from Bear Stearns Cos. a year ago and the cause of losses on the portfolio. The biggest losses in the $25.7 billion portfolio of Bear Stearns assets as of the end of last year came from commercial and residential mortgages, according to a report released by the Fed in Washington today. The central bank agreed in March 2008 to buy the assets so JPMorgan Chase & Co. would acquire Bear Stearns and avert the investment bank’s bankruptcy.
* * *
The Fed wrote down the value of former Bear Stearns commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said today. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.

“It’s just the tip of the iceberg when it comes to losses in the commercial real estate market,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. Lenders “were over-optimistic about tenant occupancy rates and rents,” he said.

The emergency action to prevent the collapse of Bear Stearns started the Fed on an unprecedented path, which has led the central bank to more than double the size of its balance sheet. Bernanke has overseen an expansion of its efforts to include financing corporate debt, lending to securities dealers and the commitment to buy hundreds of billions of dollars of mortgage securities and Treasuries.
* * *

Today’s releases from the Fed also included information on its holdings of assets accepted from AIG, which reflect less of a change because of the shorter period that the central bank has owned the portfolios. The AIG rescue dated from September. Maiden Lane II LLC, formed to buy residential mortgage-backed securities from AIG, included subprime-loan assets valued at $10.8 billion and “Alt-A” or adjustable-rate loans valued at $5.23 billion as of Dec. 31. Maiden Lane III LLC was formed to buy from AIG collateralized debt obligations linked with residential and commercial mortgage securities. One-third of the $26.7 billion of CDOs in the portfolio have ratings below investment grade, the Fed report showed today.

AIG said last month that Societe Generale of France and Deutsche Bank AG of Germany led a group of 20 foreign and U.S. banks that received $22.4 billion in collateral payments after the Fed’s rescue.

Also in September, the Fed declined to rescue Lehman Brothers Holdings Inc., saying the firm lacked acceptable collateral for it to justify extraordinary aid.

Remember, by the way, that Geithner was involved in this decision. I'm not saying we should have rescued Lehman in exchange for its worthless assets. We shouldn't have. I just wonder what rationale existed to justify saving certain banks and institutions (with strong ties to Goldman Sachs & JPMorgan Chase) while letting others die. Anyhow, back to the piece:

The Bear Stearns holdings show new detail on the type of assets that JPMorgan didn’t want to accept as part of its takeover of Bear Stearns. The total amount of losses on the Bear Stearns holdings was previously disclosed by the Fed in January. The Fed said its commercial-mortgage loans had principal of $8.5 billion at the end of December, compared with the “fair value” assessment of $5.6 billion, indicating an assumption that about 35 percent of the debt won’t be paid back.

Keep in mind, that this article focuses on one very small part of the increase in the Feds balance sheet. There are hundreds of billions more.

The Fed has nothing to back its Federal Reserve Notes (what we call "dollar bills") except the full faith and credit of the United States government. And the United States government is deeply in debt, unable to pay its bills or its creditors unless it borrows ever more money. The world knows this, of course, which is why foreign governments -- like China -- have been buying far less US debt lately.

So where will the Treasury get the money to pay its bills and creditors? From the Federal Reserve of course! And where will the Fed get the money to lend to the Treasury? From thin air of course!

Now we begin to get deeper into the soup. Because traditionally, what does the Fed do to sop up all that newly-printed money it injected into the economic stream? In other words, how does it prevent this monetary inflation (known, simply, as "inflation" by economists I respect) from translating into general price inflation? How does it curb this massive increase in the adjusted monetary base (aka, the Fed's balance sheet)? Well, under normal circumstances it would unload from its balance sheet, selling the treasuries it has purchased back into the economy . . . thereby re-absorbing those newly-printed dollars.

But now folks, we come to Hamlet's proverbial "rub." Because -- based on the realities of April 2009 -- who the hell is gonna buy those treasuries? The very same treasuries the Fed had to buy because no one else wants them. Will the Chinese buy treasuries from the Fed that they wouldn't buy from the Treasury? They prefer Bernanke's well-trimmed beard to Timmy's shifty eyes? No.

And, even more importantly, over the last six or eight months, the Fed has already printed -- and given to the largest banks and Wall St. institutions -- enormous amounts of money . . . in exchange for all the garbage now parked on its own balance sheet. How on earth can it sop up that money? Who will buy back all the shit assets and toxic loans that caused the entire debacle in the first place?

This, folks, is the big question. The biggest we have. Because the very frightening bottom line is that the banks -- the banks who have received billions if not trillions in governmental largesse -- are sitting on a lot of money. And when they start lending it out -- and they will, because that's the only way they make money, other than via bailouts -- there's gonna be a lot of money flooding the economy. Flooding an economy in serious trouble, with decreased demand, low employment, high debt, bad credit ratings, and lots of fear.

Meaning prices will skyrocket. For all the things that we must spend that new money on: food, fuel, medical care, rent, insurance. The cost of living will become unmanageable ovenight.

And the Fed will be powerless to do anything about it, because it will have nothing of value to sell to remove that flood of money from the general economy.

Price inflation is coming, it's just a matter of when. Protect yourself . . . any way you know how.

YET ANOTHER VOICE JOINS THE CHORUS

2009-04-23T07:51:00.005-04:00

In the continuing phenomenon of "Everyone except the Obama administration and it's committed core of true believers realizes that the Geithner/Summers/Bernanke economic plan is criminal," we now get a cogent analysis of the whole AIG debacle in . . . a football column.

Yes, that's right. Gregg Easterbrook takes a short detour in one of his typically long (and somewhat tedious) Tuedsay Morning Quarterback columns to explain, clearly and comprehensively, how the AIG "deal" was a disgrace from start to finish. I advise you to skip the column in full, and I'm going to re-print the entire "essay" within the column here:

[I]n February, after Barack Obama said he would act decisively to stop executives of bailed-out firms from receiving bonuses, TMQ cautioned, "If the new president stakes some of his prestige on what seems like a dramatic decision and it turns out a year later that CEOs easily evaded the seeming 'limits' and stuffed their pockets with tax money anyway, Obama will seem an ineffectual leader." It didn't take a year -- only a month! In mid-March, the No. 1 news item was tax-subsidized bonuses to the very executives who screwed up AIG. Obama said from the White House he was "deeply outraged." Speaker of the House Nancy Pelosi said she was taken by surprise and called for an investigation. Treasury Secretary Tim Geithner declared he had just absolutely no way on Earth of knowing the bonuses were coming. Wait -- they could all have read about the planned AIG bonuses in November in a football column. Anyone paying attention to the business pages knew in November 2008 that tax-subsidized bonuses for AIG were coming. Yet no national leader paused from the Washington ritual of round-the-clock self-promotion to do anything. When in March the AIG payouts were announced, Federal Reserve chair Ben Bernanke told "60 Minutes" he was "full of anger" about the bonuses. Bernanke was the one who, in the fall of 2008, decided to hand AIG up to $172 billion in taxpayers' money without imposing any accountability or conditions. This was a much worse business decision than anything any AIG executive did.
Beyond the irresponsibility with which Washington's Democrats and Republicans alike are mishandling taxpayers' money, my worry about Obama continues -- if he keeps theatrically denouncing tax-subsidized bonuses, yet does not actually do anything, he's going to make himself into an ineffectual leader.
What's the next AIG bonus scandal coming? The company's CEO, Edward Liddy, told Congress he is pure because he is "not getting a bonus and is only drawing $1 a year in salary." This is the classic statement that is literally true but intended to deceive. Liddy is likely to receive a "special bonus" from AIG in 2010. How do I know this insider fact? Because months ago, AIG announced it! Liddy claimed he found paying bonuses to AIG managers "distasteful" but had to honor bonus clauses in their contracts because "honoring contracts is at the heart of what we do in the insurance business." Liddy may be saying that because his contract calls for a "special bonus," and he wants to make sure he gets the money! If, after the AIG bonus hullabaloo goes right up to the White House level, the CEO of AIG stuffs his pockets with a taxpayer-subsidized bonus in 2010, Obama will look like a phony.
About the sanctity of contracts: For years, AIG raked in rich profits by signing contracts promising, in return for a fee, to make good any losses on securities defaults. Last fall many mortgage-backed securities defaulted -- and AIG refused to make good. The company would not honor its contracts, instead insisting taxpayers cover the losses. "Honoring contracts is at the heart of what we do" -- this AIG fib would be amusing if it weren't being used to expropriate money from average Americans. When AIG owed money to others, the company ignored the contracts it signed. When contracts could be used to justify taxpayer money to AIG executives, well then, we must honor the sanctity of the contract!
Now about AIG's small outrage ($165 million in bonuses) and its large outrage ($172 billion in taxpayer subsidies). White House economic adviser Lawrence Summers called the bonuses "outrageous" but then said they must be paid because AIG "has entered into a binding contract requiring the payments, and we are not a country where binding contracts get abrogated willy-nilly." Not only had AIG already shown itself eager to abrogate contracts willy-nilly, think of the situation in the fall of 2008, when AIG was days away from insolvency. Liddy could have put his senior staff on a conference call and said, "I know you have contracts promising bonuses. But if we go out of business you not only will never see those bonuses, you will lose your jobs, salary and benefits. I offer a compromise in which you keep your jobs and salary but forgo the bonuses. Do you want that, or nothing? Choose now." This is how smart business people run organizations -- it's called negotiating. Instead AIG's CEO took no action on the bonuses, then turned to taxpayers to cover his ineptitude.
On the big outrage, of the $172 billion taxpayer-funded giveaway, we now know much of it used to cover credit-default swap debts AIG refused to honor. Large amounts went to foreign banks, such as Deutsche Bank and Societe Generale of France. AIG simply handed over payment in full, without negotiating. When AIG was days from insolvency, it should have said to Deutsche Bank and others, "If we go bankrupt, you will stand in line with all the other creditors at the bankruptcy court and be lucky to get 10 cents on the dollar. Would you accept 50 cents on the dollar to settle instead?" Negotiating with creditors to avert bankruptcy is a standard business tactic; General Motors and Chrysler have been doing this for the past few months. As the Wall Street Journal recently reported, a year ago Merrill Lynch was owed credit-default swap payments by an insurer called XL Capital, and after negotiations, Merrill accepted 13 cents on the dollar.
But instead of negotiating a reduction of debt, AIG simply immediately handed over full value. After all, the money was coming from taxpayers' pockets, and when has anyone cared how much taxpayer money is wasted? Goldman Sachs was the largest single recipient of AIG's paid-in-full taxpayer-funded gift, receiving $13 billion. Merry Christmas! And now we learn that Liddy owns at least $3 million worth of Goldman Sachs stock -- whose price was shored up by the paid-in-full taxpayer gift. AIG's tax-funded gift to Goldman Sachs couldn't possibly have had anything to do with Liddy's stock, could it? The worst sin is that the Washington muckety-mucks running the tax-money giveaway team did not require AIG to negotiate down its counter-party obligations. Bernanke and Henry Paulson, who approved AIG's actions last fall, deserve to be run out of town on a rail for their irresponsibility in management of public funds. Meanwhile, can anyone imagine that if a French or Germany insurer owed money to an American bank, that the French or German governments would ever pay one single centime or pfennig, let alone cover the entire debt immediately?
AIG fiasco note No. 1: Treasury Secretary Geithner, who has taken Paulson's place on the giveaway team, said the AIG bonuses were justified because AIG "cannot retain the best and the brightest" without paying bonuses. Geithner and everyone at the Treasury Department have a personal self-interest in the notion that money managers should be paid huge bonuses even for screwing up. Treasury officials (and Summers) come from jobs in which they were paid millions of dollars a year for giving financial advice, and want to return to such jobs; it is critical to their own pocketbooks to maintain the illusion that executives on Wall Street and in banking are super-brilliant geniuses who deserve millions under all circumstances. Anyway, the phrase "the best and the brightest," the title of David Halberstam's great 1972 book, is derisive. The treasury secretary should know enough about the recent history of the United States to know what "the best and the brightest" means.

AIG fiasco note No. 2: Here is AIG's 2007 annual report, in which the company declares of its financial products division, "AIG believes any losses that are realized over time on the super senior credit default swap portfolio … will not be material to AIG's overall financial condition." Important false financial statements in annual reports often are viewed as securities fraud. Yet while former Enron executives are in jail, AIG executives keep rolling like pigs in taxpayers' money.

AIG fiasco note No. 3: How does the $58 billion in AIG funds given as a gift from American taxpayers to foreign banks compare with stimulus spending that will benefit American taxpayers? There is $28 billion in the stimulus bill for road and bridge construction and repair.

Easterbrook's a smart guy. He's well-educated and well-read. But nonetheless, as he points out, he wrote this in a football column. He points out that he knows these seemingly fascinating facts because they're public, and have been since last fall. It's the same reason a know-nothing like me has been aware of this stuff since last fall. Because it was never hidden, and anyone who wants to know about it can, and will.

Add Easterbrook's piece to all the respected economists and on-line commentators that have weighed in (negatively) about Obama's economic plan, and it really makes me wonder: what will it take for a savvy politician like Obama to hear the grumblings and pitch his insider interests aside in favor of political expediency. I suspect it will come when one of two "types" join the fray: a "left" voice, like Olbermann or Stewart; or a truly "mainstream" voice like Letterman or Brian Williams or Anderson Cooper.

I wonder if that time is coming. Because if it's not coming soon, I don't think it ever will. And short of that, Obama may not wish to annoy his Wall Street Masters by firing their chosen Insiders. I think if at least one (if not two) of the Geithner/Summers/Bernanke triumverite survives the next three months we've crossed the Rubicon for good. One of them must go by July 4th.

AT WHAT POINT DOES RESPECTABLE CRITICISM TIP THINGS?

2009-04-22T06:36:00.004-04:00

According to Reuters, Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, is speaking up against the continued policy of "Too Big To Fail." This is pretty remarkable for a central banker, and I think it demonstrates the continuing folly of the Geithner/Summers/Bernanke plans. Hoenig spoke out in March about this, but his comments yesterday were direct and unfiltered:

The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just "too big to fail." I do not. Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations

* * *
Actions that strive to protect our largest institutions from failure [such as Geithner's indication that none of the 19 largest banks will fail the so-called "stress tests," see below] risk prolonging the crisis and increasing its cost. Of particular concern to me is the fact that the financial support provided to firms considered "too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds. These "too big to fail" institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge.

Bravo. This guy is a voting member of the Federal Open Market Committee (the group primarily responsible for setting interest rates, and therefore monetary policy). Will we see some revolt within the Federal Reserve regarding Bernanke's lunacy? I have my doubts, but a wave of discontent is flooding over the Geithner/Summers/Bernanke policy from respected, mainstream quarters. It's too late to turn back the clock on what we've done over the last 8 months (and 25 years), but maybe we can stop some of the madness from continuing.

Anyway, what is the latest lunacy (hard to keep track)? As reported yesterday, Timmy's so-called "stress tests" will be more difficult for regional banks . . . meaning the tests will be easier for the national banking titans like Goldman Sachs and JP MorganChase. Check this out:

The federal bank stress tests rate the individual loans held by big regional banks as riskier than the complex troubled assets held by the industry titans, according to a Federal Reserve document obtained by The Associated Press. That approach could threaten some major regional banks while making the national banks appear in better shape when the government releases the results of the tests next month.

* * *
Under one scenario, the tests assume banks will see "no further losses" on the complex securities, according to the document obtained by AP. By contrast, it estimates that individual loans will lose up to 20 percent of their value. Regional banks are holding more individual loans and fewer of the securities Wall Street giants specialize in — complex derivatives backed by huge pools of mortgage-backed loans and other debt.

Every time a "respected" economist or a central banker speaks out against the Obama Administration's shenanigans, I suspect we get a step closer to stopping this trainwreck. maybe I'm wrong, but I'll hold out some sort of hope that maturity, sanity, and responsibility will win in the end. Again, it's too late to save a deeply corrupted system, but it may prevent utter ruin. We'll see.

SET UP THE GRANDSTANDS ON CAPITOL HILL

2009-04-21T06:17:00.007-04:00

We've hearing a lot about "Stress Tests." Well, Timmy faces a congressionally-appointed panel today, and I fear that beyond the usual grandstanding, the questioning won't be too stressful. Yup, Geithner will testify before the Congressional Oversight Panel today, following the release of Inspector General Neil Barofsky's 250-page quarterly report to Congress in which he actually concludes that Geithner's idiotic private-public partnership favors private investors and creates "potential unfairness to the taxpayer."

The "Congressional Oversight Panel." Mandated under the TARP! Tough stuff, huh? Let's see, who are the members appointed by legislative luminaries Pelosi, Boehner, McConnell, and Reid:

Richard Neiman (Pelosi's Appointee) -- The Superintendant of Banks for the State of New York. A life-long . . . banker! Including a stint at . . . Citigroup.
Jeb Hensarling (Boehner's Appointee) -- Republican Congressman from Texas. Yee-haw. He'll step on those bankers . . . except that he served under Phil Gramm, architect (along with ~~Rick~~ Robert Rubin and Larry Summers among others) of the repeal of Glass-Steagal and other moves designed to allow the Insiders to take ownership of the country. He's also a member of both the House Budget and Financial Services Committees. The latter headed by Barney Frank, who's proven to be the banks biggest enabler through this debacle. In fairness, Hensarling led the effort to oppose the initial Paulson bailout.
Elizabeth Warren (Reid's Appointee) -- She's the chirperson of the committee, and I actually like plenty of what she's done through the years.
John Sununu (McConnell's Appointee) -- Former GOP Senator. Currently on the board of a Bank of New York subsidiary. BofNY received TARP funds. How is this not a conflict of interest? Oh that's right, it's Congress. No one cares if there are conflicts of interest.
Damon Silvers (Chosen by Pelosi & Reid after "consulation" with McConnell & Boehner) -- General Counsel for the AFL-CIO and member of the advisory boards of various accounting standards groups. You know, the ones who dig such a bang-up job over the last few years.

And there you have it, the crackerjack team in charge of making sure the TARP doesn't loot every cent of the U.S. Treasury. And I think the PPIP comes into play somewhere under their watch as well. Gee, we're in good hands, huh?

I mean, don't get me wrong, with this report in their hands, and public outrage stewing, there'll be lot's of speechifying and many superficially tough questions, but I strongly doubt anyone will dare ask Geithner why the hell he's doing what he is, or probing beneath the surface as to who he, Summers, and Obama are actually answering to.

(And don't expect a word about the Federal Reserve's role in any of this.)

Nonetheless, Barofsky joins the ranks of every respectable economist in pillorying the PPIP:

* creates "potential unfairness to the taxpayer"
* "The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives"
* Treasury should set tough conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at taxpayer expense.

* Treasury should disclose the owners of all private equity stakes in a public-private fund.

* Fund managers should have "investor-screening" procedures to prevent asset purchase transactions from being used for money laundering.
* Treasury not allow the use of Federal Reserve loans "unless significant mitigating measures are included to address these dangers."

In other words, Congress, through it's "Oversight Board," has the gun and it has the ammo. Yet I doubt it fires. We'll see.

THE LANGUAGE OF THE INSIDERS (OF THE INNER PARTY?)

2009-04-20T07:12:00.004-04:00

Get your Newspeak/Doublethink translation helmets on, folks. This one's gonna make your brains hurt (and then it'll get your blood boiling). The Financial Times reports (H/T Yves) that according to a senior Obama administration official:

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest.

Do me a favor and read that one more time. You see what I see? The banks "will be allowed" to repay the money we doled out to keep them afloat in the wake of their endless irresponsible and fraudulent moves over the past decade. And then there's the other loaded phrase in there: only if paying back those "loans" is deemed to be "in the national economic interest," by some unnamed tester of the "move."

Wow. In other words, the Crack(pot) Economic Team of Timmy, Benny, Larry & friends will determine unilaterally whether the Insiders they propped up the first time around have to pay back what they owe. If they determine it's in the nation's economic interest. But after the events of the last year, don't we already know what they define as "in the national economic interest"?

There's more here:

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.” His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds.

Oh, where to begin? First of all, it makes complete sense that the Administration-that-talks-big-but-does-nothing would use the words of the big banks. I'm sure Goldman & Morgan are just clamoring, champing at the proverbial bit, to please, please, PLEASE be allowed to give back all the money they've received. If only the meanies in the government would let them.

Then, look at the language this "senior official" used: "good for the system." "We want the system to have enough capital." What system is this, I ask? The system that 99.99% of us toil under, or the system that has looted the U.S. Treasury? Small detail, hate to belabor it. Anyway, moving along:

The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable.” Second, to not create “incentives for more deleveraging which would deepen the recession.” Third, to make sure the system had enough capital to “provide credit to support the recovery.”

Look at all that linguistic gobbledeegook. Take out all the double talk and you're left with this: Geithner & Summers will make the banks pay back the money when they decide it's right. And if they decide the time isn't right, then it isn't. Move along.

There's nothing more at work here. And finally:

The debate over the respective funding needs of stronger and weaker banks comes as the Obama administration confronts deep political resistance to any further authorisation of federal funds to bail out the sector. On Sunday, Rahm Emanuel, Mr Obama’s chief of staff, told ABC that while some of the country’s biggest banks “are going to need resources,” the administration would not need to obtain more funding from Congress.

Exactly. So whattaya do? Let them keep the "loans" they're just dying to repay.

SIMPLE IDEAS TO SIMPLIFY A COMPLICATED MESS

2009-04-20T06:40:00.003-04:00

Nasim Taleb, author of The Black Swan, has a short article in the Financial Times (you may need to register -- for free -- to view the article if you've already hit their link a few times lately) listing ten principles that will leave us less susceptible to unexpected phenomena that have the ability to mess up the economy. Or as he says, to create a "world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news. "

As is often the case with something worth reading, there's nothing terribly profound here, and nothing that we haven't seen over-and-over the past few months. But that doesn't change the fact that it's good to see it spelled out succinctly and clearly. The article in full (H/T Ritholtz):

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative.” Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

I'm going to jump in very quickly here. This last point is very important. In the wake of the mess, we hear endless prattling about the need for "more regulation." We don't need "more regulation." We need consistently-applied, correctly-implemented regulation. Simple, easy-to-understand, very limited rules that everyone has to live by. And a complete elimination of all the institutionalized favors and incentives that a very small cadre of banks & bankers receive at everyone else's expense. I know I'm being idealistic, but this whole post is about how things should be, as opposed to business-as-usual. Anyhow, back to Taleb:

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
In other words, a place more resistant to black swans.

As always, I don't necessarily agree with all his suggestions, most notably No. 6 and a few of his other ideas about "banning" certain investment vehicles. I still believe that in a world where the system ceased to be rigged in favor of those who peddle these exotic securitizations -- in other words, where they fully bear the risk of their financial ambitions -- we would all be ok, wild ideas or not.

But overall, there's an awful lot of sense in these 10 simple ideas.

ALL YOU NEED IS HOPE (AND IF WE DON'T HAVE ANY, MAYBE WE CAN JUST GO INTO DEBT AND BORROW SOME)

2009-04-18T10:34:00.005-04:00

This is great (H/T Ritholtz)

BLOGIVERSARY, EPISODE THREE

2009-04-18T09:56:00.004-04:00

Yes, indeed, you read that correctly. Today marks three years since I started blogging. Here's where I said hello to the blogosphere. It's interesting to look back to April 18, 2007, where I celebrated the end of year one, noting that I had just started my then-new job and how I wasn't sure how things would change. And as many of you may recall, of course, things did change drastically, as I noted last April 18, the only post of the entire month! On that sad day I observed that in Year One I posted 560 times, versus only 94 times in year two. I was not being falsely dramatic was I said that I wasn't sure what Year Three would bring.

Well, as those of reading are aware, the financial crisis and the government's response has really reinvigorated me in a way I couldn't have foreseen. 134 posts in Year Three. Lately I've even gone back to posting daily. We'll have to see how that continues; work is set to get very busy again.

Anyhow, I want to express how thankful I am that a regular core of readers actually comes by every day to see what I have to say, often taking part in what has become an exceptionally enlightening give-and-take in the comments. Here's to one more year.

And, as a side note, I see that on Day Three of Year One (April 20, 2006), I had my first post about the economy, banking, interest rates, inflation, and that sort of thing. Only two comments to that one. And one was mine.

FROM WALL ST. TO PENNSYLVANIA AVE . . . AND BACK AGAIN (AKA, THE N.Y.-D.C. SHUTTLE)

2009-04-17T06:57:00.004-04:00

As seen in this piece from Bloomberg, Nobel Prize winning economist Joseph Stiglitz joins the growing ranks of mainstream voices criticizing Obama's handling of the economic crisis, along with a sharp attack on his economic team. (H/T Yves). What little I know about Stiglitz doesn't leave me among his supporters (and it's worth noting that he seems to have a personal grudge against Loathsome Larry Summers), but what he says sure has resonance. A highlight or two:

All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent."

* * *
The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses. “You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders.”
* * *

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses. “The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks. “We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Might as well read the rest of the article, though I repeat that I don't agree with at least half of what he says. Nonetheless, I wanted to note that yet another generally-respected voice weighs in against Obama's economic team & its policies, and still nothing changes.

No one likes or supports the current economic policies except the Wall St. Masters and their servants in D.C., yet they continue unabated. With the deeply-conflicted core of individuals making the same rotton decisions over-and-over again. It's exactly the same arrogant combination of “we know best, shut your mouth” and “yeah, well what are you gonna do about it” that we saw from the Bush Administration for 8 years.

The field of “battle” switched from Iraq to Wall St., but the game is the same. A constant reminder of who runs the show . . . and who doesn't. I only hope that with every day that passes, one more person joins the ranks of those who see what's happening. It's our only hope, and even that may not be enough.

WHAT IF THEY GAVE A TEA BAG PARTY AND NO ONE CAME (PUN INTENDED)

2009-04-16T06:05:00.005-04:00

Not much time to post this morning. Interestingly (or not), on this two year anniversary of my starting date at my "new" firm, I have a presentation to conduct this morning, and I have to get my ass into work earlier than usual. Cool stuff actually, but no time to crank out a full-blown post.

That said, the Cunning Realist has a post this morning that perfectly encapsulates how I feel about the whole tea bagging phenomenon.

{Snicker & giggle break. You got it all out of your systems? Ok, me too. Now back to it}

I have more than a little sympathy -- in theory -- for protests against taxes & wasteful spending, let alone the unconscionable bailouts. I also like to see someone, anyone, holding His Holiness' feet to the fire a bit. That's democracy in action, and I dig it.

But as the Cunning Realist so accurately points out, where the fuck were these people the last 8 years?!?! And why the hell should we listen to a word they're saying now? When even the least cynical among us knows its just a rotten, GOP political stunt, all about electioneering, with nothing to do with any forward-looking policy.

I guess I hope the tea baggers keep doing what they're doing, but deep down I wish a real protest movement started to form. And as long as these Soldiers-of-Newt keep dominating the headlines with their latest grandstanding version of "America, Fuck Yeah," won't that just block the light of the sun from shining on what's really going on? On who's really running the show? What needs to be done to fix a rotten-to-the-core systemic problem?

I assume the crowd here will be pretty heavily anti-tea bagging (and I will stop snickering about that in . . . ohhhh, let's say 3 years), but I'd love to hear folks' thoughts beyond the usual Olbermann-Maddow out-of-hand dismissiveness.