Category: Finance

Economics Update

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The big news, the bail out, I’ve already discussed, though the fact that S&P has cut the ratings on 12 banks, Bank of America, Barclays Bank, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland, UBS, and Wells Fargo, is not what I would call small news.

In any case, it appears that oil is down to $33.87/bbl, and the dollar is up.

I think that the announcement of the auto bailout strengthened the dollar, and as to oil, the world economy is still seizing up.

Retail gas was up above$1.67/gal today, so I think that we have hit bottom there.

This is Some Sweet Schadenfreude

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As both my readers are no doubt aware, there is in the financial world a large number of assets for which no regular market exists.

Regulations call them “Level 3 Assets”, but I call them “The Big Sh&$pile”, a term that I stole from Atrios.

Normally this means that if you want to sell them, it’s a laborious process to find a buyer and set a price, which differs from “Level 1 Assets”, like stocks, where you can fire up your PC and trade them online.

These days it means that there are no buyers at all, for these Byzantinely complex instruments that the financial whiz kids created, so they are, for intents and purposes, worthless.

Well, it now looks like employees of Credit Suisse will be getting pieces of The Big Sh&$pile instead of cash for bonuses this year:

Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

Talk about just desserts.

Me, I would also use them for severance packages for “the most senior ranks” of employees too, but I like to twist the knife.

The Short Form

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No, I am not referring to the 1040A income tax short form, or the even shorter 1040EZ form. I am referring to the form required to apply for the Treasury Department’s TARP program, which is only two pages long.

So, now we know why we don’t want to release any more money to Hank Paulson or Neel “Cash & Carry” Neel Kashkari: They are not even applying the due diligence to these loans that Alt-A lenders applied to liar loans.

Auto Industry Update

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Just so you know, I am aware how scummy the auto manufacturers are, case in point:

GM is expanding its Mexican plants as it is asking for a bailout from the US government.

It appears that the Republican Party Apparachicks who operate Cerberus have decided to shut down all Chrysler plants at least until January 19. Additionally, they are instituting draconian new fees to dealers on unsold inventory:

Starting Jan. 1, Chrysler’s financing arm will impose large fees on dealers holding new cars and trucks that are unsold after more than 360 days, and will require the payment of all remaining balances on any used vehicles unsold after more than six months.

Some dealerships could incur charges totaling hundreds of thousands of dollars over the course of 2009 at a time when many are already losing money and battling to stay in business, according to dealers familiar with the plans.

The reason that they give is that:

Chrysler’s financing arm recently has warned dealers it may have to temporarily stop providing loans for dealers to stock vehicles on their lots because of a wave of withdrawals from a fund used to pay off those loans.

In a letter dated Dec. 12, Chrysler Financial Chief Executive Tom Gilman said dealers have been withdrawing up to $60 million a day from the fund. A copy of the letter was reviewed by The Wall Street Journal.

Dealers put their own money into the fund and use it to pay off loans that they take out to stock their lots with new vehicles. But since July, dealers have pulled $1.5 billion from the account on worries that Chrysler could go bankrupt.

They are not worried that Chrysler could go bankrupt, they are worried that flip and flee artist Cerberus, LLC will steal their money and that they will be left holding the bag, because that is how flip and flee artists work.

Additionally, GM has the Chevy Volt engine plant in Flint, MI on hold to conserve cash.

On the brighter side, it appears that GMAC is getting closer to being able to qualify as a bank holding company, which will allow them to get the bailouts from the Fed.

Economics Update

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The big news, the Fed basically giving up and lowering its rates to what is effectively zero, I just posted, but that’s not the only central bank news today.

The European Central Bank is considering cutting its overnight deposit rate, and the Bank of Japan is looking at ‘quantitative’ monetary easing, things like buying commercial paper outright.

I think that we may see the printing presses cranking up fairly soon, and as I’ve said before, this might not be a bad thing: inflating our way out of the housing crunch as a way to staunch the bleeding in the credit bubble. (I think I just violated some regulations on mixing metaphors, and the English Instructor Swat Team will come after me, red pencils blazing)

In any case, the Federal reserve cutting rates by ¾% has pushed the dollar down today and pushed treasury yields down to new lows.

That second one is part of the goal, the idea that lower yields will move people to more risky investments, but since people have already accepted negative yields, I’m not sure that it will make a difference.

In the mean time, those who worry about a deflationary spiral, are not relaxed folks today, with the CPI in the United States dropping by 1.9% (non-seasonably adjusted) and 1.7% (seasonably adjusted), the biggest drops since 1932 and 1947 respectively.

Anytime you hear an economic statistic, followed by, “since 1932,” it is not a good thing….I’m just saying…

Needless to say, this is hitting with real estate too, with housing construction starts falling 18.9% in November, to 625K, the lowest number since records started being kept on this in 1959.

Anytime you hear an economic statistic, followed by, “since 195,” or, “since records started being kept,” it is not a good thing either….I’m just saying…

In Southern California, one of the areas hardest hit by the housing bubble, prices are down 5% for October-November, and 35% from November last year.

I’ve seen a few stories about how selling is picking up in California, but this really is people scavenging foreclosures and oft-mentioned the dead cat bounce.

In energy, OPEC meeting opened with calls to cut production by 2 million bbl/day, which, along with the falling dollar and Fed rate cut, pushed oil up, but only by a bit less than a dollar.

Retail gasoline was up again today, but still has not moved more than a penny above its recent low.

Monetary Policy is Dead

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Alan Greenspan did most of the work, but Ben Bernanke finished it off.

They cut their rates by 75 basis points (¾%), so the interbank rate went from 1% to a range of 0%-¼%, the lowest level since the Fed started publishing the number in 1990, and the discount rate was cut from 1.25% to ½%.

What this means that is interest rates are close enough to 0% that there is no further lowering that will make a difference….Actually, I don’t think that this will make a difference

The Fed statement is below, it it does sound dire, even to someone like me, who doesn’t read the fish entrails that are FOMC statements:

Press Release
Federal Reserve Press Release

Release Date: December 16, 2008
For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

A Correction: Henry Blodget Did Not Get a A Haircut

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When I wrote that he invested with Madoff, I was referring to this article, which mentions both Blodget and Ezra Merkin in the same ‘graph, and got confused:

“I am shocked, as I know you are, by this fraud,” Merkin wrote. “As one of the largest investors in our fund, I have also suffered major losses from this catastrophe.” Analyst Henry Blodget wrote on his blog Friday that some savvy investors figured Madoff was up to something because his returns were so high.

I saw the name “Blodget”, and the phrase “major losses”, and tied the two together, when I should have read carefully, and realized that it applied to Mr. “Pubic Hair Wig” (look up Merkin).
Also, as much as it pains me to say, Blodget is correct in his analysis, that people were investing with him because they thought that he was cheating:

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn’t consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.

When one considers his numbers, this is true. While his victims are victims, they are also crooks, guilty of felony conspiracy, because they entered into this deal knowing that it was crooked.

Unfortunately, I don’t think that there is enough there to get a conviction from a jury, and even if you did, my guess would be that the judge would then dismiss any conviction, but a few show trials would be a good thing.

Yeah, Like That Whole Countrywide Thing is Working Out Sooooo Well!

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So, as a result of belt tightening operations Bank of America has laid20 senior executives, “including some longtime supporters of Chief Executive Officer Kenneth Lewis.”

To take out the tree, go after the roots first. Kenny boy, architect of the buyout of Countrywide Financial that has made BoA the target of suits by both states protecting mortgage holders and investors who hold Countrywide mortgaged backed securities, is on the way out.

Yet another “Master of the Universe” who thought that he could spin sh%$ into gold.

Not Enough Bullets: Disgraced Investment Bank CEO Edition

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In this case, former Merrill Lynch CEO Stan O’Neal, who just transferred complete ownership of his $20 million Park Avenue Co-Op to his wife, because he has been targeted in class action suits of disgruntled investors who claim that he misled them about Merrill’s exposure to toxic debt securities, and he wants to shield it from lawsuits.

If this is the case, this is a criminal conspiracy, and both he and his wife should be frog marched out of their swanky Park Avenue digs in handcuffs.

If they are getting a divorce, then there is no conspiracy, and they are just divvying up their life, and I hope he’s left with nothing but a pair of shoes.

Economics Update

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It’s Monday, so let’s start with real estate.

The first is this story on San Francisco real estate. It’s falling like a poleaxed steer, so both of the most desirable locations on both coasts are hit by the slump, which should come as no surprise.

Additionally, we have the NAHB reporting that builder confidence is staying at a record this month, which makes sense: If builders are not near suicidally depressed they are crazier than Rod Blagojevich.

Of course, it appears that Fitch ratings is actually crazier than Blago, or perhaps just dumber, because only now have they adjusted their ratings of Alt-A mortgage backed securities, which have been collapsing for at least 6 months.

In the rest of the economy, we have New York Federal Reserve’s Empire State Manufacturing Survey deteriorating significantly, which, considering the capital intensive nature of manufacturing, is probably why business bankruptcies are jumping, with 58,000 through the end of November, as compared with 43,000 for all of 2007.

Quick math says that we are looking about 61K for the year, or about a 40% increase.

Under these conditions, its inevitable that a flight to safety would drive 30-year US bonds to record low yields, below 3%.

In currencies, we have another devaluation of the ruble, and the dollar is at a 2 month low on the expectation of a Fed rate cut.

In energy, retail gasoline was down again, after yesterday’s bump that followed 86 days of decline, while oil fell about 2%, though it was above $50/bbl earlier today, and OPEC is saying that they are really serious about cutting production this time….Yeah sure.

It Seems that I am Not Alone

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Remember when I wrote that the arrests of Madoff and Dryer made me feel good, because at least they were going to jail for what they did?

Well, Frank Rich, who probably isn’t following Madoff and Dryer, just espressed what are largely the same feelings

But the entertainment is escapist only up to a point. What went down in the Land of Lincoln is just the reductio ad absurdum of an American era where both entitlement and corruption have been the calling cards of power. Blagojevich’s alleged crimes pale next to the larger scandals of Washington and Wall Street. Yet those who promoted and condoned the twin national catastrophes of reckless war in Iraq and reckless gambling in our markets have largely escaped the accountability that now seems to await the Chicago punk nabbed by the United States attorney, Patrick Fitzgerald.

We all want the Wall Street bankers, and Bush and His Evil Minions™, to go to jail.

In a best case scenario, they would end up like Richard Whitney, who spend his next 33 years working with his hands as a farmer, and not Michael Milken, who came out of stir still so wealthy that his children, and probably his grandchildren will never have to work an honest day in their lives.

Because It’s all a Scam, and They are All Well Dressed Crooks

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So, the Federal Reserve has refused to release any details about the participants in its various bailout plans:

The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

When you look at the recent financial scandals Madoff and Dryer, one question that keeps coming up is, “How could two guys, acting largely on their own, concoct such large criminal enterprises?”

Based on the Federal Reserve’s reticence in releasing even the most basic details of their 11 sh^%pile for cash programs, I would feel compelled to state that it is a distinct possibility that such corruption is not the exception, but the rule, and that they are terrified that an independent investigation will turn over enough rocks to completely destroy Wall Street, because they will run out of gullible idiots to sell their stuff to.

In any case, the court proceedings should be interesting.

Even a Stopped Clock: Federal Reserve Edition

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It appears that the Federal Reserve is considering major changes to the regulations regarding credit cards:

The Federal Reserve on Thursday will vote on sweeping reform of the credit card industry that would ban practices such as retroactively increasing interest rates at will [the so called universal default]and charging late fees when consumers are not given a reasonable amount of time to make payments.

They are likely to kick down the road a proposal to require the banks to provide opt-out to the confiscatory fees for “overdraft protection”, as both banks and consumer advocates see the current proposal as “flawed”.

Ecuador won’t pay foreign debt interest – CNN.com

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As I mentioned earlier, Ecuador has made assertions that much, if not all, of its foreign debt is illegal, claiming that the borrowing was made without proper authorizations and other irregularities.

Well, Ecuadorian President Rafael Correa is now saying that they won’t pay interest on $4 billion in foreign debt, for which they have paid $7 billion in interest since the 1980s with no appreciable paydown in the principal.

Of course, paying $7 billion in interest on $4 billion in debt sounds grim, but it’s only about 6% a year if you assume that the payments were made over 30 years.

By the same token, the infrastructure of international sovereign debt, most notably through the IMF and World Bank, is structured in such a way as to prevent any meaningful payback on those loans.

They require that the economy be restructured to allow extensive foreign ownership and the free flow of capital, and that the internal economy be placed secondary to the export economy.

This means that whenever there is a downturn, and there will always be a downturn, governments are forced to borrow to repay their loans, and the cycle continues.

Sheila Bair Starting to Get Glowing MSM Coverage

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So, the head of the FDIC is now starting to get laudatory coverage, the link is to CNN, just a week after Timothy Geithner leaked that he wanted her gone.

Needless to say, and the article points this out, her relationship with other regulators is very much like former CFTC chairman Brooksley Born, who correctly predicted the CDS train wreck, and was run out of town on a rail by Larry Summers. (Yeah, him again)

Also, we now know why Geithner wants her out:

And Bair is a mother bear about the FDIC. That has got her into hot water with the other regulators, who are more focused on stabilizing institutions like Citigroup and AIG. They didn’t like it when she reversed her position on a Citi-Wachovia merger in late September when Wells Fargo came in with a deal that alleviated the need for government help.

When Citi required a capital infusion last month, she stood firm about limiting the FDIC’s exposure, according to a person knowledgeable with the negotiations, and attached some conditions, for example requiring Citi to modify troubled mortgages along the lines of IndyMac’s program.

Her vigilance is less about ego than it is about protecting the FDIC and all that it stands for. Created by Congress in 1933 to restore public confidence in the nation’s banking system, the agency is funded not by the government but by fees from the bank whose deposits it insures. So it’s not a bottomless pit.

So, she appears to be the only one there who does not think that big banking are in fact a bunch of Ivy League educated geniuses who not only need to be bailed out, but she also disagrees that they should get a free ride on that bailout.

She objects to policies that puts the nation’s guarantees to depositors in jeopardy, and requires that the recipients do things that might cause short term damage to the balance sheet, and to their year end bonuses, but will benefit the companies and the nation in the long term.

Heresy!