Category: Finance

Sitdown Strike Update

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Ian Walsh of FDL notes that the entire situation with the Republic Windows sit-down strike was likely triggered by the $350 billion stimulus package. Basically, following the receipt of bailout money, banks like Bank of America, which had a $50 million line of credit out to the manufacturer, decided that it made sense to hoard cash so that they could buy other banks, so they cut off Republic Windows, which proceeded to collapse like broccoli cooked in a British boarding school kitchen.

It’s amazing how much damage Hank Paulson and His Evil Minions™ have been doing to the country.

Interestingly enough, it now appears that there is some push-back, with Barack Obama supporting the strikers:

“When it comes to the situation here in Chicago with the workers who are asking for their benefits and payments they have earned, I think they are absolutely right,” Obama said Sunday at a news conference announcing his new Veterans Affairs director. “What’s happening to them is reflective of what’s happening across this economy.

Additionally, Illinois Governor Rod Blagojevich has ordered all Illinois agencies to stop doing business with Bank of America.

In 1936-7, the workers in Flint had to contend with National Guardsmen and police trying to evict them.

In 2008, not so much.

Yet More Bad Ideas from the Pension Sector

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Well, it appears that those companies that still have traditional pension plans want Congress to give them a waiver so that they do not have to make contributions during this downturn.

They think that it will be too much of a burden, and it may force them to cancel these plans altogether.

Hmmmm….It seems that this problem started when they went with highly aggressive investment plans in order to minimize their contributions, and then they got caught in the dotcom bubble…..And after that, they wanted more liberal rules so it wouldn’t be a burden.

Basically, they are saying that they don’t want to buy when the market is down….which is half of the classic investment goal “buy low and sell high” as I understand it….So they are asking for permission to piss their money down the drain with a poor investment policy.

Note that GM, has largely moved out of equities, and so were largely insulated from the downturn….I would also note that this strategy also reduces the costs of managing the funds.

Is it just me, or has every “innovation” in pensions and pension funds over the last 30 years had the effect of actually decreasing return on investment.

That’s kind of like the rest of the financial sector: You get sold a bill of goods by an investment bank, and they get lost of fees, and you get the hole in the doughnut.

So, It Appears that We Have the First Catfight of the New Administration

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Timothy Geithner, U.S. Treasury Secretary nominee, is seeking to dump dump Sheila Bair as Federal Deposit Insurance Corp. (FDIC) Chairman.

Normally, I would think that this is a good thing, as she was appointed by George W. Bush, but she has been remarkably honest and competent, working on behalf of homeowners rather than investors, and by publically debunking the myth that the meltdown is was caused by the Community Reinvestment Act caused the meltdown, said myth being Republican speak for, “It’s all the fault of the n*gg*rs.”

So, while Geithner has been mute on the people brought in by Henry Paulson to (mis)manage the bailout, he wants her gone ASAP, which raises the obvious question, “Why this target in such a target rich environment?”

After all Hank Paulson and His Evil Minions™ all seem to be white dudes who are either bald or have shaved heads, and so are easily identified.

Well, the answer seems to be small and petty:

Geithner, president of the Federal Reserve Bank of New York, has argued Bair isn’t a team player and is too focused on protecting her agency rather than the financial system as a whole, according to two congressional officials and a person familiar with his thinking. Bair has battled with Geithner and fellow regulators over aid to Citigroup Inc. and other emergency actions, making her enemies in the Bush administration.

“The idea of having an independent actor on the stage with you who might not be singing the same tune can make you nervous,” said Wayne Abernathy, a former Treasury official who is now executive vice president with the American Bankers Association in Washington. “They recognize that she’s a very independent person.”

It isn’t clear that Obama would ask Bair to step down. Such a move would be fraught with political risk for the new administration, especially on Capitol Hill, where Bair’s campaign to rework mortgages for struggling homeowners has won respect from top lawmakers, including Senate Banking Committee Chairman Christopher Dodd and Barney Frank, his counterpart in the House.

Not a team player, when the team is the hole in the head gang, is a recommendation, not a condemnation.

It seems that Greithner, who has spent his entire career being second fiddle to someone, is offended by the fact that she has different opinions, and she is, well, more correct on these issues than any of the other players, including Mr. Greithner.

Basically, it sounds like we have someone who expects sycophancy from people who are nominally under his authority, in this case FDIC Chair to Secretary of the Treasury, because that has been what he does.

But maybe I’m over analyzing the psychology of the situation, and Barney Frank’s assesment, that it’s No Girls Allowed’ on the bailout team is accurate.

I’m not sure if Bair should be fired, but it is clear that she is the best of the lot on the job today, and based on the complaints that I have heard, which have generally come from Wall Street finance types, she may even be competent and conscientious.

I Think that Someone is Stuck in a Do Loop

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Because it looks like Treasury’s latest plan is to lower mortgage rates to 4.5% for new home buyers, to stop the slide in home prices.

First, you can’t re-inflate the bubble…The speculative frenzy that was at its core is over.

Second, why would someone buy a house at 4.5%, when whoever you sell the house to 20 or 30 years later would buy at a more normal rate, driving the price down.

Basically, it’s an attempt to get people to knowingly buy overpriced homes.

Does it come with a kick me sign for buyers to wear on their back?

Fundamentally Corrupt

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Well, some good news for municipalities, Stnadard and Poors (S&P) has upgraded their debt significantly, which should lower their borrowing costs.

This is not a recognition of economic changes, after there is no one who is safer to loan to than they were a year ago, and the municipalities in question have seen the basic metric of credit worthiness, things like “unreserved general fund balance” and “debt per capita” have actually headed in the wrong direction.

What has happened is two things:

  • The monoliner insurance companies who used to rent their credit ratings to municipalities, at taxpayer expense, are effectively defunct.
  • People have noticed that government bonds have been routinely rated lower than commercial ones based on the same criteria, and are looking at investigations and/or regulations of the ratings agencies.

What has been going on for years is that the ratings agencies have systematically underrated state and municipal debt, because it’s how their buddies with the monoliner insurers got business.

It’s why I suggest that the current financial system may need to be amputated.

Well, at Least the New York Post Is Calling Rubin a Crook

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They are saying that Citi was at the center of a “Ponzi Scheme”, and yes, they are using the term “ponzi scheme” to describe the interlocking network impenetrably complex investment vehicles that has Citi in a government bailout:

Director Rubin and ousted CEO Prince – and their lieutenants over the past five years – are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.

I’m not sure how much of this is the Post’s predilection for hysterical screaming headlines, and how much is because Bob Rubin is a former senior Clintion official, but I agree with them: former Treasury Secretary Robert Ruben is a crook.*

The mainstream media is, of course, much too polite to say something like that about a titan of banking, though Jonathan Weil in the Bloomberg OP/ED that he is extremely concerned about the lack of transparency regarding what toxic investments that Citicorp is writing down.

At the center of this whole mess, at every stage, is Robert Rubin, either in the front, or in the room, and while some argue that the problem is systemic, so is poverty and deprivation breeding crime, this should not stop us from either imprisoning Robert Rubin or the guy who boosted your stereo.

*I would also note that current Treasury Secretary Henry “Hank” Paulson is a bigger crook.

Quote of the Day

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The ever entertaining Barney Frank:

“I’m a great fan of the president-elect, but I think it’s probably the case that he’s going to have to be more assertive than he’s been,” Frank said, addressing the Consumer Federation of America’s annual financial services conference. “And I know what he says is ‘Well, we only have one president at a time. My problem is, at a time of great crisis and [massive] mortgage foreclosures. … I am afraid that overstates the number of presidents.”

(emphasis mine)

I need to clean my screen now.

Senior Citi Executives Accused of Insider Trading

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Please, just throw all of them, particularly Bob Rubin, in Jail, because enough is enough:

An investor lawsuit contends that Citigroup Inc insiders, including senior counselor and former U.S. Treasury Secretary Robert Rubin, sold more than $150 million of their own shares at inflated prices while concealing the bank’s true financial health.

Rubin has to be front and center in all this, because he’s….well, he’s front and center in all this.

Every time you see a problem, his name crops up, either as a financial actor or a political one, and yes, criminalizing this sort of revolving door would be a very good thing.

In order to show real accountability, those who knew, or should have known, and with the stock dumping it is clearly the former, and were in a position to do something about this, need to be punished.

Governor Patterson, Appoint Elliot Spitzer to Replace Hillary Clinton

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It does a number of good things, the first is that he would clearly be a placeholder, and so we can allow the voters select a replacement in a special election in 2010.

The second is that Elliot Spitzer really understands the current financial mess, and how the current prescription, which involves even more bank consolidation, is just plain wrong.

His point is that if financial institutions are too big to fail, they are too big not to be broken up:

Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government. To do so could risk the nimbleness we want from economic actors.

The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

Stupid Federal Reserve Tricks

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I have, on a number of occasions mentioned that the Fed has a habit eliminating statistics that might show them in a less than stellar light, so we have them dropping M3 from their reports, for example.

Well, we have another case of this now, with the Cleveland Federal Reserve ceasing the publication of their TIPS spread derived inflation expectations.

OK, so what is a, “TIPS spread derived inflation expectations?”

Well, the TIPS are, “Treasury Inflation Protected Securities”, basically bonds, with a twist, and the twist is that the principal is indexed to the consumer price index, so over the life of the instrument, you have interest and principal, your original investment returned to you.

They are set up so that the bond stars with an index of 1, and can never go below 1.

The spread derives inflation expectations are a measure of the difference in price between new 5 year TIPS and 5 year old 10 year tips.

Assuming that they pay the same interest, you would assume that they would be identical. In both cases you pay your money, and you get all your money back, plus interest, after 5 years, right?

Wrong.

This is wrong, because after 5 years, those 10 year bonds are at an index of 1.2 or so, while the new bonds are at an index of 1.0, which means that if you have deflation, the 10 year bonds can drop back to some number between 1.2 and 1.0, while the 5 year bond will, under those circumstances, stay at 1.0.

In the event of flat prices, or inflation, they are identical.

So, the 10 year bond with 5 years left is somewhat riskier, because you can lose up to 20% through deflation.

So the question is, what do people who buy these bonds think of this risk?

If they think the risk is small, then the price difference (spread) between the two bonds in the open market will be small, and if they think that the risk is large, the spread will be larger.

So, the market has increasingly been saying that they have high deflationary expectations, which translates to “Depression” for the rest of us, and the Federal Reserve Bank of Cleveland finds this inconvenient, so they will stop publishing the data.

It’s Become a Much Less Friendly World for Secret Bank Accounts

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I don’t know who found pictures of Lichtenstein’s royal family engaged in unnatural acts with a sheep, because, they have announced that they have, “agreed a landmark deal with the U.S. to drop bank secrecy in cases of tax evasion and could make similar concessions in the European Union.”

They now have to show evidence of likely tax evasion, as opposed to proving that there is deliberate tax fraud, which, you know, you generally cant without having access to the accounts in the first place.

You are going to see a whole bunch of people paying back taxes soon.

I Don’t Wish That This Was Still England,

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But I do wish that we had their banking regulators:

Banks will face huge fines if they do not treat their customers fairly, under a crackdown to be announced by the Government today.

Ministers have decided to turn the voluntary code of practice operated by the banks into a legally-binding one, amid mounting concern that they are flouting their own rules during the credit crunch. The move follows claims that small businesses and individual customers have had the terms and conditions of their loans and overdrafts changed overnight by their banks.

Economics Update

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First, Calculated Risk’s Credit Crisis Indicators are either flat or down, and the 3 month treasure note is still at 0.005%, which means that people basically put their cash in a mattress, so that is how freaked investors are, and how much they look for a safe haven.

Of course, what with the Bank of England cutting its rate by 100 basis points to 2%, it’s not like there is a whole bunch out there that is going to generate decent return anyway.

The weekly jobless claims posted a surprise drop, but continuing claims rose to a 26 year high.

Additionally, we have factory orders falling by the most in 8 years, which is completely unsurprising, as factories do not order much if consumers are not buying, and we are seeing double digit drops in buying this holiday season.

Considering that demand for commodities is falling with the economy, it’s not a surprise that oil has fallen to less than $44/bbl, and retail gasoline price has falls below $1.80/gallon.

Illiquid

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Remember how I said that it was the scariest word in finance?

Well, now that Harvard is trying to get its endowment out of some private-equity stakes, we are seeing illiquidity in these markets:

A push by the richest U.S. universities to unload their stakes in private-equity funds is flooding the market, driving down prices for the world’s best- known buyout firms.

Investors led by Harvard University, which manages the largest U.S. endowment at $36.9 billion, may increase so-called secondary sales of private-equity funds to more than $100 billion during the next year, overwhelming available pools of capital. Interests in funds managed by KKR & Co., Madison Dearborn LLC and Terra Firma Capital Partners Ltd. all are being offered at discounts of at least 50 percent, according to people familiar with the sales

(emphasis mine)

Illiquid: You have assets, but no buyers, so those assets are worthless, or near worthless. This is what Greenspan’s “financial innovation” have gotten us.

More Money to Steal

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It looks like Hank Paulson and His Evil Minions™ and his evil minions have are considering they need to steal the second half the $700 billion in bailout money:

U.S. Treasury Secretary Henry Paulson is debating whether to ask Congress for the second installment of the $700 billion bailout package, concerned about competing demands for the funds and a potentially hostile reaction from lawmakers.

This is an easy one for members of Congress.

Paulson is incompetent and corrupt, choosing to serve his friends over the nation, and doing even that incompetently.

The UK is Not My Country

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And I don’t want it to be my country, and I don’t want to be….Take the Royal Family….please!

That being said, I really wish that we had their banking regulators:

Credit card giants have been given two weeks to agree to stop charging exorbitant rates to borrowers or risk losing their operating licences.

Ministers said they were giving Britain’s major lenders one last chance to prove they were not profiteering from the downturn. The ultimatum was delivered at a four-hour Whitehall summit called after The Independent disclosed some credit card and store card providers had raised interest rates – in some cases to 30 per cent – even though the cost of borrowing had fallen.

Perhaps we can trade them Hank Paulson and Ben Bernanke, for a few dozen Trident Missiles and future considerations?

Economics Update

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First, we have some developments on the other side of the pond, with the Australian Central Bank lowering its rates by 100 basis points (1%), the most since 1991, and a major Russian investment bank is calling for a 20% depreciation of the Ruble, to boost exports.

It might be a good idea, depending on how export dependent the Russian economy is. It would boost local and export oriented industries.

On more general metrics of the credit crunch, Calculated Risk’s credit crisis indicators show little progress, and the fact that the rates on Treasuries have fallen off a cliff, with people getting virtually nothing (0.05%) for 3 months T-Bills, 2.68% on 10 year notes (a near record), and 3.17% for a 30 year note (a record).

Basically, this means that investors are paying the government to hold their money safe for them.

For what it’s worth, people are not trusting anything, including much in the way of US and European sovereign debt, with the cost of swaps to insure that debt skyrocketing.

In energy, we have OPEC deferring a production cut, and so oil is now firmly below $50/bbl, and retail gasoline falling to $1.812/gal, a price I never thought that I would see again, and the 76th straight daily drop.

Meanwhile, the the dollar has weakened though there is downward pressure on the Yuan from rumors that the Chinese will actively move to push the value down to boost their economy.