Category: Finance

Warren Buffett Subpoenaed

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He was invited to speak before the Financial Crisis Inquiry Commission, and politely declined, so now he has been subpoenaed to testify:

When Warren Buffett testifies before the Financial Crisis Inquiry Commission next Wednesday, it will be because he was subpoenaed. If you don’t know how a subpoena works, this one begins with capital letters, “YOU ARE HEREBY COMMANDED to appear and give testimony.”

As Buffett characterizes it, “This is an offer you can’t refuse.”

………

But ah, it was. Buffett could by then see the likely end of this argument. But he was also determined to stick to his belief that the “private interview,” followed by hearings, would neither be beneficial to anyone nor a good use of his time. So Buffett told Cohen in a phone call that he would not be volunteering to testify — and if that meant a subpoena was in the cards, let it happen.

The subpoena — that command in capital letters — came on May 25. But the continuing, urgent wish of the commission to avoid coercion was contained in an accompanying letter, also dated May 25, that “respectfully” requested Buffett’s testimony at a hearing on June 2 in New York City.

My guess is that the net effect here is that the board won’t get its private interview, and so won’t know what he intends to say until he testifies in public, which might make for some good theater.

On a more salient legal note, now that Buffet has been compelled to testify, he can say anything, and not be held liable for those statements, since it is compelled testimony, which might make it even better theater.

Personally, I think that Buffet should bring the Geico Gecko with him. (Buffet owns Geico)

Economics Update (Friday Morning Edition)

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Click for full size

Home sales up, but prices are down


And inventory is rising again

Yes, I know, I haven’t been posting this regularly.

Yesterday’s miss was due to thunderstorms.

In any case, yesterday was jobless Thursday, and initial unemployment claims fell slightly, by 16,000 to 460,000, which was worse than expected, with the 4 week moving average rising slightly, and continuing claims fell, though, as I frequently note, people who move from continuing claims to emergency claims fall out of that number.

We also now know that mass layoffs rose in April.

additionally, we are seeing more of that whole “paradox of thrift” thing, with personal income rising, but spending remaining flat, which implies that an increase in consumers buying crap that they really don’t need won’t be our economic salvation.

Also note that the US GDP in the 1st quarter was revised downward, to an annual growth rate of 3% from 3.2%.

I think that he Obama’s already anemic stimulus package is running out of steam.

In real estate, the flight from the Euro has pushed the 30-year fixed mortgage rate to a record low, which, along with the recently expired home buyer tax credit, drove existing home sales higher, though inventories are increasing as well, and prices are falling once again, which implies that a resurgence in the housing bubble won’t be our economic salvation..

In terms of more general metrics, the consumer confidence index rose slightly, as did the Chicago Fed Activity Index, and the Chicago Fed Midwest Manufacturing Index.

I just wish that the PTB were as concerned about 9.9% unemployment as they are about a twitch in the DJIA that ran for about an hour.

Credit Where Credit is Due

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The White House has come out against letting auto dealers cheat their customers.

To quote the first few ‘graphs of the official statement:

Later this afternoon, the Senate will vote on a motion to instruct conferees on the Brownback Amendment. That basically means members of the Senate will cast a nonbinding vote on whether or not they think the House and Senate conferees should consider carving out a loophole for auto dealers that make auto loans from the financial reform bill.

The President has been clear on this issue, repeatedly urging members of the Senate to fight efforts of the special interests and their lobbyists to weaken consumer protections. The fact is, auto dealer-lending is an $850 billion industry, which is larger than the entire credit card industry and they make nearly 80 percent of the automobile loans in our country.

Is there any question that these lenders should be subject to the same standards as any local or community bank that provides loans?

This is the right thing to do.

More, “Looking Forward, Not Backward,” from the Obama DoJ

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There will be no criminal prosecutions of the people who created the clusterf%$# that took down AIG:

Federal prosecutors will not bring criminal charges against current and former American International Group Inc. executives for their role surrounding financial contracts that nearly brought down the insurer about two years ago, according to people familiar with the matter.

The decision brings to a close a criminal investigation that, while mostly under wraps, was widely followed. The September 2008 bailout of AIG was one of the biggest and most shocking of the financial crisis, as trading by a noninsurance unit brought down one of the most iconic financial companies world-wide.

The probe focused on Joseph Cassano, who headed a London-based unit of AIG called Financial Products, people familiar with the matter have said. Other executives at the unit, Andrew Forster and Tom Athan, also were targets of the investigation, these people said.

Seriously, at this point, we should be referring anything with the slightest possibility of conviction to a grand jury for indictment.

Anything else encourages more wrongdoing by the Wall Street boys, much in the same way that Obama’s policy of not prosecuting torturer, but pursuing the whistle-blowers encouraging more torture.

It’s Bank Failure Friday!!!!

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And here they are, ordered, and numbered for the year so far.

  1. Pinehurst Bank, St. Paul, MN

Full FDIC list

So it appears that the rapid pace of closures may be moderating somewhat.

And here are the credit union closings:

  1. Convent Federal Credit Union, New York, NY

Note that this credit union has nothing to do with Nuns, it was served members of the Convent Avenue Baptist Church.

It’s a tiny institution, with fewer than 300 members.

Full NCUA list

So, here is the graph pr0n with trendline (FDIC only):

Economics Update

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This is not an expanding home market
H/t Calculated Risk

Well, so much for green shoots, it’s jobless Thursday, and new claims rose by 25K this week to 471,000, with the 4 week moving average rising by 3K to 453,500, though the continuing claims number fell by 40K to 4,630,000.

It should be noted that the continuing claims number does not count those on emergency UI, like yours truly.

Additionally, it should be noted that the Conference Board’s Index of Leading Economic Indicators posted its 1st drop since March 2009. It should be noted that this is a volatile metric, and a folks who know economics generally want at least 3 months up or down before they declare a trend.

Additionally, real estate is looking dicey.

We have, “One in 7 US homeowners late paying or in foreclosure,” actually 14.01%, in the 1st quarter of the year, with 10% of home owners late 90+ days, and the AIA’s Architecture Billings Index shows continued contraction in April, though this indicator for future commercial construction is did improve in comparison to March.

Additionally, mortgage purchase applications fell to a 13 year low, even as low rates kick-started the demand for refinancing.

Note that this is despite near record low mortgage rates.

We are also seeing continuing erosion in the prices of commercial property.

On the plus side, the Philadelphia Bank of the Federal Reserve’s Manufacturing Activity Index rose in May, and Japan’s economy grew faster than expected.

On the inflation side, the CPI fell by 0.1% in April, and the core rate, which excludes food and energy, has risen .9% over the past 12 months, which is actually worrying, as it indicates a risk of a deflationary spiral/lost decade.

Cloture Successful on Financial Reform

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Cantwell of Washington and Feingold of Wisconsin continued to vote against cloture, but Republicans Olympia J. Snowe and Susan Collins of Maine, and as well as Scott Brown of Massachusetts, who voted against cloture yesterday, voted for cloture, and with Harry Reid switching his vote, it means that the debate has been ended on the bill, and it can proceed to a vote.

It’s better than the status quo, but still crappy, which is what Barack Obama would call “post partisan,” I guess.

11 Seconds?

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The New York Times has an article about high frequency traders, and how they handled the Flash Crash.

It appears that they might have made it worse, because a lot of them just sold everything and shut down their computers when the market drop started.

That’s not a big deal, that’s what happens when you are in the middle of a panic, even one that only lasts about 15 minutes.

What shocks me is this:

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.

(emphasis mine)

I don’t know what is more disturbing, the fact that these guys are buying and selling stocks 5½ times a minute, or the fact that they always make money.

Either they are front-running, they have access to inside information, or they are a Ponzi scheme, just like Bernie Madoff, and my guess is that it’s the former. High frequency trading makes its money by seeing large trades, and then using shortcuts to buy before the buy, or sell before the sale.

I thought that this was illegal, and if it is not, then it should be.

Some speculation is unavoidable in any system where you have open investment, but there have to be limits.

H/t The Big Picture, who believes that the claim is “bullsh%$”.

Cloture Fails on financial Reform

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The vote was 57-42 against cloture, with Democrats Maria Cantwell of Washington and Russ Feingold of Wisconsin voting against cloture,* and Republicans Olympia Snowe and Susan Collins, both of Maine, voted for cloture, with Specter not yet back in the Senate.

Cantwell and Feingold are right here: They have been refused a vote on a number of important amendments and other issues, most notably:

  • Allowing states to enforce their own usury laws, which means that credit card consumers would no longer have their interest rates driven by the laws of South Dakota and Delaware.
  • Putting the “Volcker Rule” into statute, forbidding banks from engaging in proprietary trading.
  • A restoration of the Glass Steagall separation between commercial and investment banking.
  • There are requirement that derivatives trade through public exchanges with public price discover is toothless.

It’s nice that some progressives have shown that they are willing to show teeth.

With Republicans coming to realize just how loathed Wall Street is, and realizing that Blanche Lincoln’s reelection driven decision to get rough on the banks has triggered a dynamic which makes the bill more extreme as time goes on, as opposed to the usual process of bills getting emasculated in the Senate.

Every day that goes by, it gets for any Republican and corporatist Democrat who is standing for reelection this year finds it harder and harder do do Wall Street’s bidding.

I think that after a few more days of delay, they’ll end up finding a way to break up the big banks.

*Harry Reid voted against cloture too, but that is so he can offer a motion to reconsider, allowing for revote.

Eu Passes Restrictions on Hedge Funds

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EU finance ministers have decided to require greater transparency and regulations of hedge funds, despite (also here):

EU finance ministers have agreed a common position on draft EU legislation on managers of hedge funds and other alternative investment firms, opening the door for negotiations with the European Parliament, the co-legislator.

The agreement on Tuesday (18 May) comes despite UK concerns that the Europe-wide law could negatively impact the British economy, with 80 percent of hedge funds currently located in London.

I would note that one of the myths here is that hedge funds and other highly speculative activities benefit the economy as a whole.

They don’t. They suck productive intellect and capital into purely speculative activities, and this makes everyone but the hedgies and bankers poorer.

The US has been fighting this tooth and nail, and claiming that this is protectionism in violation of WTO rules, but I agree with Yves at naked capitalism on what this is really about: “

Yves again. Did you catch that? Look at what the Europeans want: to regulate hedge and PE funds, as in prevent them from engaging in behavior proven to be dangerous (abuse leverage) and give investors more disclosure, and restrict firms that refuse to agree to play by those rules. That is hardly a radical agenda, yet Treasury Department is working in lockstep with the industry to defend its ability to operate with minimal constraints. And note that no one is mounting an argument that these businesses are socially productive and hurting them will hurt the economy because no such argument can be made credibly. Instead, an effort to impose “prudent regulation” is begin branded as “discrimination.” The problem is no one outside the industry will buy the argument. And Team Obama’s zealous defense of these firms again reveals how, despite its efforts to present a populist, pro-reform image, that it will never cross its best friends, the big financiers, in a serious way.

With members of Congress realizing that the political backlash from being easy on the banks completely overwhelming any amount of campaign donations that the finance industry can generate, which is why the Senate finance reform bill is getting better, it’s time for Barack and His Evil Minions™ to realize that their political future is connected to taking down the banks.

Germany Temporarily Bans the Naked CDS

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Notwithstanding Timothy “Eddie Haskell” Geithner’s whoring for the big banks support of so-called naked Credit Default Swaps, Germany’s Federal Financial Supervisory Authority has banned the sale of these insurance like instruments to people who do not have an interest in the continued existence of the insured property, as well as banning naked short sales of stocks, where you sell stocks that you have not borrowed:

The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).

In addition, BaFin has banned naked short sales in the following financial sector companies:

AAREAL BANK AG
ALLIANZ SE
COMMERZBANK AG
DEUTSCHE BANK AG
DEUTSCHE BÖRSE AG
DEUTSCHE POSTBANK AG
GENERALI Deutschland HOLDING AG
HANNOVER RÜCKVERSICHERUNG AG
MLP AG
MÜNCHENER RÜCKVERSICHERUNGS-GESELLSCHAFT AG
These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.

BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.

Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.

It’s a start, and I think that both the naked short and the naked CDS may very well be illegal throughout Europe in the next 6-12 months as a result.

Link in the original German.

(on edit)
My bad it appears that this ban is temporary lasting until March 31, 2011:

Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

Makes it less likely that this is part of a trend.

It’s Bank Failure Friday!!!!

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And here they are, ordered, and numbered for the year so far.

  1. Satilla Community Bank, St. Marys, GA
  2. New Liberty Bank, Plymouth, MI
  3. Southwest Community Bank, Springfield, MO
  4. Midwest Bank and Trust Company, Elmwood Park, MN

Full FDIC list

So, we have seen 4 bank failures in the past 2 weeks, which is pretty awful, but better than the 22 in the 3 weeks prior to that.

So, here is the graph pr0n with trendline (FDIC only):

When Life Resembles an Al Franken Funny Book…

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Specifically, Tom Harkin is proposing a an amendment to the finance reform bill to limit ATM fees to 50¢.

I approve of the idea, particularly because it’s an in-your-face to the free market worshippers, but I’m not sure if it is a good idea for the finance reform bill.

As to the Al Franken book in question, it was the book Why Not Me?

Hw wrote his (fictitious) successful quest for the presidency using populist anger over ATM fees.

Wanker of the Day

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William Jefferson “Bill” Clinton:

Former President Bill Clinton says it is “time to lower the rhetoric and talk about the facts,” in reference to the government’s scrutiny of Wall Street.

In an exclusive interview with Maria Bartiromo, Clinton noted that while many financial firms are being questioned by the Securities and Exchange Commission, he does not believe that Goldman Sachs or CEO Lloyd Blankfein did anything illegal, based on what he’s seeing.

You know, when your spouse is in the cabinet, it’s a good idea not to shoot your mouth like this, even if she is Secretary of state.

I always that he was a slimy corporatist prick who looked good only in comparison to the ratf%$#s who tried to impeach him.

I believe that my view is validated.

I Approve of this Filibuster Threat

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Byron Dorgan, who has not only been a strong advocate for financial reform, but predicted 15 years ago the clusterf%$# that would occur from Robert Rubin’s vision of finance, has proposed an amendment to the finance reform that would ban Naked (i.e. an insurance policy in which you bet on your neighbor‘s house burning down) Credit Default Swaps.

It appears now that the Senate leadership will not allow this amendment to be voted on, so the distinguished gentleman from North Dakota is threatening a filibuster:

In the Senate Democratic Caucus meeting today, Dorgan and other progressive senators pressed the leadership to allow their amendments to strengthen the bill to come to a vote. According to Dorgan, the leadership relented and said his amendment would be one of the ones to come to a vote.

But tonight, as Brian Beutler reports, when the list of amendments to be voted on was released, Dorgan’s was not among them. A frustrated Dorgan approached Dodd and Majority Leader Harry Reid on the floor this evening and told them he would filibuster financial reform if his amendment doesn’t get a vote. “I understand everybody thinks their amendment’s important, but the question of the unbelievable speculation in credit default swaps that have no insurable interest — if we can’t vote on something like that, given what we’ve seen in recent years, then it’s not really financial reform,” Dorgan told us.

I keep quoting the same article, which notes that specuilative insurance was recognized as a very bad thing 3264 years ago:

In 1746, Parliament passed the Marine Insurance Act, requiring anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property. Thus was born the insured-interest doctrine. The indemnity doctrine, which precludes a buyer from insuring property for more than it’s worth, soon followed. The point of these rules is to limit insurance contracts to trading existing risks and not to create new risks by giving buyers of insurance incentive to destroy property. The doctrines have been part of insurance law in both England and the United States (which in 1746 were colonies under English common law) ever since.

But the masters of the universe who nearly killed us all insist that they know better.

Well, they don’t and they should not be listened to, because their interest is purely in their creating ways for them to make money, and if they crash the financial system every 20 years, well, they’ve got theirs.

The reason that Dorgan is not getting his vote is because the reform is so transparently the right thing to do: Just ask the average voter if their neighbor, the creepy one who seems to have strange visitors, should be able to take out insurance on that average voter’s house, so that the creep gets paid when the voter’s house gets burnt down mysteriously.

They won’t allow the vote because the bankers do not want it, and because if it comes up for a vote, they will have to pass it, because it is so transparently the right thing to do.

It’s enough to make me root for the “medicine for chickens” lady to beat Harry Reid in his reelection bid.

I Love Me Some Viking Justice

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Much more satisfying than putting their photos on the urinals

Iceland, a tiny nation of only 317,593 souls has looked at its epic bank failures, and said, “Why yes, we do have to make a federal case out of this:

More than a year and a half after Iceland’s major banks failed, all but sinking the country’s economy, police have begun rounding up a number of top bankers while other former executives and owners face a two-billion-dollar lawsuit.

Since Iceland’s three largest banks — Kaupthing, Landsbanki and Glitnir — collapsed in late 2008, their former executives and owners have largely been living untroubled lives abroad.

But the publication last month of a parliamentary inquiry into the island nation’s profound financial and economic crisis signaled a turning of the tide, laying much of the blame for the downfall on the former bank heads who had taken “inappropriate loans from the banks” they worked for.

What a quaint and old fashioned idea. When people corruptly enrich themselves at your expense, investigate.

If you find that they broke the law, arrest them and try them.

I vote for going medieval on the bankers asses.

[on edit]

Perhaps the bankers should learn this old prayer, “A furore normannorum libera nos domine.”*

*From the fury of the Northmen deliver us, O Lord!

Economics Update (Early Afternoon, 1st Time This Week Edition)

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It’s jobless Thursday, and initial jobless claims fell from 448,000 to 444,000, though it should be noted that last week’s number of 448,000 was actually revised up from 444,000, meaning that the number is even flatter than the 4K change indicates.

That being said, the 4 week moving average fell by 9,000, which might indicate a slight trend downward in claims, if not for the fact that continuing claims rose, indicating that this may be less a matter of the economy picking up than it is a matter of employers simply running out of people to let go.

In terms of other metrics for the economy:

Consumer confidence, at least as surveyed by Investor’s Business Daily and TechnoMetrica Market Intelligence, has risen in May, from 48.7 from 48.4, though numbers below 50 indicate pessimism.

The National Federation of Independent Business’ optimism index rose to 90.6 in April from 86.8 in March, which is firmly in the class of, “better, but still pretty weak tea.”

In transport and trade, we have the trade deficit hitting a 15-month high, which, while normally not a good thing, is right now, because we are well into “paradox of thrift” territory.

Additionally, we have the always worthwhile Calculated risk reporting that Diesel fuel consumption fell slightly, and rail traffic rose slightly, in April.

In real estate, mortgage applications are up, but only because refinance is up, purchase applications are down, indicating that we are seeing people who are trying to lock in low rates on homes that they already own.

Finally, the Bank of England has decided to maintain its monetary policies, keeping its benchmark rate at ½% (effectively zero), and maintaining its quantitative easing via asset purchases.

The Incumbent Protection Racket in Action

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Remember when I said that Blanche Lincoln’s ambitious proposal to regulate banks was intended to fail?

I said that it was just a reelection ploy in a tight primary election.

Well, the US Senate is proving me right:

But they [Senate leadership, the Obama administration, etc.] may have gotten themselves stuck with it–at least for now. With their assent, the plan was authored by Sen. Blanche Lincoln (D-AR), who designed it to guard her left flank against a somewhat formidable primary challenge, and has been boasting of it on populist grounds for weeks. And that according to Republican and Democratic Senate sources, has led Democrats to quietly agree to postpone any changes they decide to make to her proposal until After this Tuesday’s election has passed, to avoid embarrassing her in front of voters.

(emphasis original)

Lincoln pushed it out of committee knowing that it would be shredded by the Senate leadership.

She just wanted someone else to be the villain, preferably on Wednesday, May 19, or a few days after that.

It Ain’t Just Goldman

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You are no doubt aware of the SEC, and criminal, investigations of Goldman Sachs misleading investors by selling them bad CDOs, and then betting against the instruments.*

Well, it appears that practice may have been more common than previously understood, because Morgan Stanley is under criminal investigation for similar activities. (see also here and here)

The CDOs in question were named after dead presidents, James Buchanan and Andrew Jackson were two of the names, but they appeared to have been referred to generally as “Dead Presidents.”

Seriously, these guys watched the movie Wall Street, and they though that Gordon Gecko was a Christ figure.

*Earlier posts on Goldman Sachs’ alleged misdeeds here, here, here, here, here, and here.