The amount of outright lawbreaking that the was ignored by regulators is likely to be staggering, and it should be investigated, and prosecuted, to the fullest extant of the law.
Author: Matthew G. Saroff
Remember What I Said About the Marine Insurance Act of 1746?
If not, see here, but once again, we are seeing the effects of ignoring this 346 year old lesson, because investors have made bets on the failure of bonds that they do not hold through Credit Default Swaps (CDS), and in so doing, look likely to be driving otherwise solvent companies into bankruptcy:
Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.
By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.
….
It was recognized centuries ago that you should not be allowed to use insurance to do this, because it leads to fraud and panics, but the free market mousketeers decided that that was old thinking, and that they had no need for no stinking insurance regulations.
Banning Voter Caging
Senator Sheldon Whitehouse (D-RI) has proposed a bill making it illegal, which is nice, but I don’t see the word “felony”.
In reviewing the full text of the bill it appears to be just a fine, though I guess a perjury prosecution could be possible too, if you can show truly malicious intent.
Overhauling Government Contracting
This is long overdue.
The free market mousketeers have been claiming for some time that outsourcing to the private sector gets better services for less, and that is a lie.
Obama’s order of a comprehensive review of government contracting processes, along with his directive that “inherently governmental” functions remain in government is a very good step.
Schadenfreude
Former Merrill execs invested in Madoff funds.
I know that it’s a mark of failure that I derive pleasure from these folks losses, and yet I derive pleasure from these folks losses.
Obama Health Care Plan: No Single Payer
So, Obama sets up a summit on health care reform, and invites everyone but advocates for single payer, and finally, when the screaming gets too loud, relents, and invites a hand full of them.
This does not bode will for his plan.
First, if he is not more ambitious in his initial proposal than his basic desires, it will be cut down to nothing in Congress, and second, the insurance companies are evil, and any plan that makes supporting their business model a central tenet is doomed to fail.
This is Depressing
Howard Dean is taking a “Senior Strategic Advisor” with lobbying house McKenna Long and Aldridge LLP.
Seriously, I’m surprised that he held out this long, but it’s clear that he won’t get the time of day from the Obama administration.
Well, he’s going to get a good salary out of this.
Economics Update
Busy day, so let’s start with the central banks: The Bank of England cuts rates by 50 basis points (½%), and is engaging in quantitative easing (printing money) in the form of buying £75 billion ($US 106 B), and the European cut its benchmark rate by 50 basis points to 1.5%, and is also looking at “further non-standard measures” (see quantitative easing).
Considering that the ECB has no charge except to manage inflation, this is extraordinary.
Unsurprisingly, the rates cuts have driven the dollar up.
As Brad Delong Notes, “It is overwhelmingly likely that the current downturn-in-progress will then surpass the united 1979-1982 downturn as the worst downturn since the Great Depression itself.“
In employment, first time jobless claims fell to 639,000, but the less volatile 4 week moving average rose to 641,750, the “highest since October 1982,” and productivity dropped 0.4% in Q4 of 2008.
Bumpy ride, folks.
On the brighter side Bonddad’s credit indicators show a thaw in lending over the past few months, and February retail sales beat expectations, though the numbers are still pretty bad.
In autos, GM is saying that there is “substantial doubt” about whether it can survive in an SEC filing, not a surprise, and implies Chapter 11, which further implies liquidation for Chrysler.
Mortgage rates rose last week.
Oil, meanwhile fell in response to the generally anemic economic news.
Cuomo Subpoenas Merrill Bonus Babies
They all got over $10 million in 2008, and now they will be forced to testify.
Cool.
Wishing that I Was German
Yes, that’s number 217 of the things that I never expected to say, but when I read that Angela Merkel’s governing coalition is looking to put statutory limits on executive pay, that is what I thought. When the conservatives in government argue that, in addition to encouraging bad behavior, “that growing wage disparities “pose a threat” to social cohesion,” I wonder why our policies are run by John Galt wannabes.
Karl Rove and Harriet Miers to Testify
They will testify under oath regarding the U.S. Attorney Firings, though it will be in closed session.
Here’s hoping for some leaks.
Rules Set for Mortgage Mods
This is separate from cram downs, but the new rules announced by Geithner should be complimentary.
It’s a series of carrots to induce banks to negotiate, but I’d much rather see more sticks, because the problem that we have right now comes from being too accommodating to banks.
Securities Trading Tax Goes Mainstream
I knew that there were some proposals kicking around, but the idea has become mainstream enough that New York Stock Eexchange CEO Duncan Niederauer has gone public with his opposition.
It appears that Rep. Peter DeFasio’s (D-0R-4) proposal for a ¼% transaction tax on stocks and derivatives, in part to fund the bailout of the banking industry.
It’s a very good idea. ¼% is inconsequential to long term investors, but to speculator types, such as day traders, it makes their business model, and the problems that they bring, much less sustainable.
It exists in most of the rest of the world, and (IIRC) existed in the US until some point in the 1960s, so it’s not the end of the world that these folks forsee, though it might cut down a bit on their commissions from churning clients investments.
Sudanese President Omar Hassan al-Bashir Indicted for Crimes Against Humanity by ICC
Good. It’s about bloody time.
Tauscher and the New Dems Water Down Cram Down Legislation
It’s still better than nothing, but Ellen Tauscher desperately needs to be primaried.
Economics Update
Scary Pic of the Day: Upcoming Mortgage Resets Courtesy of Dr. Housingbubble
ADP employment services has released its monthly report, and job cuts are way up with 697,000 jobs lost in February as compared to 614,000 jobs lost in January.
Note that the initial January figure was only 522,000, the the final February figures may very look even worse.
We also have the Institute for Supply Management February non-manufacturing numbers, and they are down from January’s already anemic figures, and the Federal Reserve’s business survey reporting “weaker conditions or declines” in 10 of the 12 regions.
In China, however, the purchasing managers’ index rose in February, to 49, which still shows contraction, but only barely, as 50 is neutral.
In real estate, we have mortgage demand falling last week, largely because borrowers are waiting to see what the Obama mortgage rescue plan is.
In commercial real estate, we have a secondary indicator, with office furniture sales falling sharply.
It’s no wonder that FDIC Chair Sheila Bair is warning that its insurance fund could be insolvent by years end.
Bank failures, ignoring the biggest ones, is on a pace to close 100 banks this year, as compared to the 27 in 2008 or the 3 in 2007.
We are seeing a spike in consumer bankruptcy filings, up 29% year over year in February.
The Chinese economic news drove oil higher, and bad economic news in Japan drove the dollar up.
Obama Starts Dialog With Medvedev on BMD
Barack Obama dispatched a letter to Dmitri Medvedev suggesting that the installations in the Czech Republic and Poland are not a done deal, and that if they can come to a meeting of the minds on Iran, this could be called off.
The installations have always been wrong headed, improperly located, and provocative,* so this is a bit of good news.
*I’ve always said that the provocative bit was a feature, not a bug. A bellicose and militaristic Russia benefits the ‘Phants and their defense contractor friends.
Cook County Commissioner Mike Quigley Wins Primary Rahm’s Old Seat
Here. Word is that he is the 2nd best guy running, after Tom Geoghegan.
He was endorsed by the Tribune, which is probably why he won.
He does not appear to be a part of Mayor Richie Daley’s machine, but I think that this will result in a primary challenge in 2010, not support of his opponent in the special general election.
Geithner and His Evil Minions&trade Go Back to the Bad Bank
Yep, it’s back to bad bank, only this time Geithner has created the fig leaf of private investors to cover up the fact that there will be gross overpayment.
The idea is the government would lend investors the money at sub market rates (ding, subsidy), for non recourse loans (ding, subsidy) to buy the big sh$#pile.
A non recourse loan is, “secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable,” so the if you buy a piece of the big sh$#pile, and it goes bad, you don’t have to pay the loan back.
As a mental exercise, let’s assume that you buy 10 CDOs for $1 million each, and the government loans you 90% of the money to do so. 9 of the 10 are worthless, and you thus lose $900,000.00, with the US government losing $8,100,000.00, but that the 10th, which you bought at 33¢ on the dollar, pays off in full, so your $1million purchase is worth $3,000,000.00, so you pay back the US government, leaving $2,100,000.00, and then split the proceeds, so you and Uncle Sam each get $1,050,000.00.
This means that you cleared $50K on a $1 million investment, and Geithner and His Evil Minions™ just lost $7,050,000.00 of taxpayer money.
Not great, but considering the fact that $10 million was put in, and $7 million of that was lost, it’s pretty good for you.
As Calculated Risk notes it’s another attempt to overpay for bad assets.
Update on the Santelli Story
So, Playboy pulled the posts, but it remains up at the Exiled, and Mssrs. Ames and Levine confirm pretty much every aspect of the story, though, to be fair, Rick Santelli has disavowed any involvement with any of the AstroTurf sites.
That being said, Santelli also canceled tomorrows appearance on The Daily Show, and is declining interviews, which is a polite way of saying, “That’s a fair cop, officer.”
I recommend that you read the whole article, if just for the delightful evisceration Megan McArdle’s attempted to refute a Freedomworks connection, despite the fact that she, you know, shares bodily fluids a man who was only recently running AstroTurf campaigns for Freedomworks, but finally even she is forced to admit that Freedomworks is hip deep in this:
Meanwhile, I’ve spoken with Brendan Steinhauser, the chap at FreedomWorks who has helped organize the tea parties. FreedomWorks has been, as far as I can tell, completely open about their interest in furthering the tea parties, which is not surprising because they’ve been completely open about opposing bailouts since before Obama took office. As Brendan describes it, he and FreedomWorks were calling for demonstrations against the stimulus even before it passed, but he got the teaparty idea from Michelle Malkin’s blog. FreedomWorks emailed its members and set up a website to encourage people to join in. This seems like pretty standard political organization tactics.
Ms. McArdle must thank her lucky stars every day for Amity Shlaes, because it’s only in comparison to Mrs. Lipsky that she does not come across as a complete tool.