Category: Finance

Our Financial Crisis, Brought to You by the WTO

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There are a lot of people out there who think that free trade will always do all kinds of good things: It creates peace, it creates democracy, it keeps your daughter from dating the guy with the tattoos and piercings.

I’m not one of these people.

First, I think that we have yet to see an economy becoming a developed economy with a large middle class in a free trade environment, and second, I think that a bad free trade deal is worse than no, or a more limited, free trade deal.

Well it appears that on March 1, 1999, the United States signed onto a free trade deal that mandated the sort of reckless deregulation that has nearly destroyed out economy:

But the U.S. is not being sold out in a vacuum.

On March 1, 1999, countries accounting for more than 90 per cent of the global financial services market signed onto the World Trade Organization’s Financial Services Agreement (FSA). By signing the FSA, they committed to deregulate their financial markets.

For example, by signing the FSA, the U.S. agreed not to break up too big to fails. The U.S. also promised to repeal Glass-Steagall, and did so 8 months after signing the FSA.

Indeed, in signing the FSA and other WTO agreements, the U.S. has legally bound itself as follows:

  • No new regulation: The United States agreed to a “standstill provision” that requires that we not create new regulations (or reverse liberalization) for the list of financial services bound to comply with WTO rules. Given that the United States has made broad WTO financial services commitments – and thus is forbidden by this provision from imposing new regulations in these many areas – this provision seriously limits the policy [options] available to address the current crisis.
  • Removal of regulation: The United States even agreed to try to even eliminate domestic financial service regulatory policies that meet GATS [i.e. General Agreement on Trade in Services] rules, but that may still “adversely affect the ability of financial service suppliers of any other (WTO) Member to operate, compete, or enter” the market.
  • No bans on new financial service “products”: The United States is also bound to ensure that foreign financial service suppliers are permitted “to offer in its territory any new financial service,” a direct conflict with the various proposals to limit various risky investment instruments, such as certain types of derivatives.
  • Certain forms of regulation banned outright: The United States agreed that it would not set limits on the size, corporate form or other characteristics of foreign firms in the broad array of financial services it signed up to WTO strictures …
  • Treating foreign and domestic firms alike is not sufficient: The GATS market-access limits on U.S. domestic regulation apply in absolute terms; that is to say, even if a policy applies to domestic and foreign firms alike, if it goes beyond what WTO rules permit, it is forbidden. And, forms of regulation not outright banned by the market-access requirements must not inadvertently “modify the conditions of competition in favor of services or service suppliers” of the United States, even if they apply identically to foreign and domestic firms.

In other words, the problem isn’t just that Congress and the White House have sold out to the Wall Street giants.

The problem is also that the U.S. has signed WTO agreements that have given the keys to the too big to fails, and have neutered their regulators. Even if some politicians tried to stand up to Wall Street – or even if we “throw out all of the bums” currently in political roles – the U.S. would still be locked into the WTO’s scheme for helping the financial giants to grow ever bigger and to take ever-bigger and ever-riskier gambles.

Yet another reason to oppose the so-called “Doha” round, which promises to deregulate financial services even further.

What has gone on at the WTO is that it has been functioned as a prostitute for elements in our economy which do not produce tangible goods, finance, insurance, entertainment, patent holders, etc. at the expense of absolutely everything else in the economy.

It’s killing us.

Signs of the Apocalypse

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First, and most visibly, it’s the fact that the New Orleans Saints are now the world champions, having won the Super Bowl.

Secondly is that fact that David Stockman, one of the young Turks at the core of the “Reagan revolution,” he was Budget Director during Reagan’s first term, is arguing that the government should tax the financial sector to shrink its size:

While supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too.

Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick — a levy of only 0.15 percent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.

Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated Treasury bonds and housing agency securities in less than a year. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.

Stockman is suggesting that people who he saw in the 1980s as the epitome of the heroes in Ayn Rand’s fiction should be taxed with the explicit aim of shrinking their size, because the business they do does not serve the public good.

This is a refutation of the “Objectivist” philosophy at the core of much of Mr. Stockman’s public life, which saw the glorification of greed as a force for good, and a legitimate basis for public policy decisions.

Why People Hate Bankers

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Because their systems are patently unfair.

Case in point, AIG, which is owned by the US government, gave retention bonuses to employees who no longer work there:

A substantial number of AIG’s Financial Products employees set to get some $195 million in retention payments no longer work with the bailed out insurer, sources familiar with the matter said on Wednesday.

It’s clear that such behavior not only does not serve society, but it does not serve the share holders or the company.

This is a crooked game, and it needs to be shut down.

I’m going long on pitchforks and torches.

Dodd Says that Financial Reform Has Stalled

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I’m shocked, shocked to find that gambling is going on here!

There is probably an element of truth to Chris Dodd’s claim that he cannot come to an agreement with Senate Republicans on financial reform:

The chairman of the Senate banking committee said Friday that efforts to reach a bipartisan consensus on sweeping legislation to overhaul the nation’s financial regulatory system had “reached an impasse,” but he said he intends to move forward even without Republican support.

For the second time since November, talks have stalled between Sen. Christopher J. Dodd (D-Conn.) said ranking Republican Sen. Richard Shelby (Ala.). Both men have expressed interest in reaching a consensus on a wide-ranging bill that would revamp regulation of the financial services industry. But after months of negotiation, they have yet to overcome a key hurdle: the proposed creation of a consumer protection regulator to focus on mortgages, credit cards and other such financial products.

The part that is suspicious, and the reason that I’m inclined to believe that he has lost interest in reform now that he is no longer running for reelection, is that he is going all Claude Rains on the fact that Republicans are not negotiating in good faith.

We’ve seen this phenomenon over and over again: Republicans do not negotiate in good faith until you have something that would kill them politically to vote against.

First you jam them up, then you twist their arm, and then maybe, just maybe, they will agree to be cooperative as you move their head toward the toilet bowl.

Blankfein Buys a Clue

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Well, it appears that he is a bit less arrogant than his ilk, as Goldman Sachs CEO Lloyd Blankfein year bonus was just $9 million, with none of it in cash, a far cry from the reports of $100 million:

Goldman Sachs stunned many in the Wall Street community Friday by awarding chief executive Lloyd Blankfein $9 million as his year-end bonus, far less than many were anticipating, and none of it in cash.

It was in restricted stock.

My guess is that there are some back channel deals, and the whole idea of a “just $9 million” being an exercise in frugality is odd, but he recognizes that there is a very real problem, and he is taking actions to immunize himself, as well as the vampire squid,* from some of the treats of regulatory and legislative action, so credit where is due.

My guess would be is that he got some security and buy-out guarantees that are worth a lot more, in exchange, but those are crafted so as not to show up headline.

Additionally, this may be a big “f%$# you” to his competitors, who now have to explain why they got bigger bonuses with less performance.

*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.

Just in Case You are Wondering

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Lazard HQ, Let’s bring pitch forks and torches,
30 Rockefeller Center, New York City, NY

Well, one of the older investment banks out there, Lazard Ltd. formed in 1848, just declared a profit in the 4th quarter.

Wait, no, they didn’t they had a loss.

Why did they have a loss? Because they decided that they had to issue yet another round of indefensible bonuses to their staff:

What should have been a profitable quarter a Lazard Ltd. turned into a surprising loss due to the investment bank paying its people big bonuses.

The firm doled out $616 million in compensation and benefits to about 2,300 employees last quarter, or more than triple the amount handed out in the same period in 2008. It was a consequence, Lazard said, of a decision to pay more bonuses in cash and accelerate some deferred cash awards from a prior year. But so great was the firm’s generosity that compensation costs overwhelmed quarterly revenues and resulted in a net loss of about $55 million for the fourth quarter. The charges also almost wiped out full-year profits.

Lazard Chief Executive Kenneth Jacobs, who took over from the late Bruce Wasserstein last fall, argued that he had no choice but to pay his people to protect and build the franchise. Lazard was one of the few major Wall Street firms to avoid government bailout assistance.

“[Our compensation policies] should enhance our competitiveness and drive shareholder value,” Mr. Jacobs said, in a prepared statement. “Our goal is to grow annual compensation expense at a slower rate than revenues.

(emphasis mine)

Note the comment about shareholder value. Lazard has been publicly held since 2005, but what the f%$#, just screw the share holders.

BTW, their goal, “to grow annual compensation expense at a slower rate than revenues,” that means that their goal is to make a profit …………… some day …………… in the indeterminate future …………… because compensation is pretty much their only expense, ex- renting some office space, and pay a few licensing fees.

They are spending over ½ million an employee:

For all of 2009, Lazard had $11 million in earnings, down sharply from the prior year’s $196 million. Total compensation costs for all of 2009 were a little over $1.3 billion, or an average $565,000 per employee.

Mr. Jacobs’ remarks about pay come a day after Morgan Stanley CEO James Gorman promised to rein in compensation this year at his firm. At Morgan Stanley, compensation ate up 62% of revenues last year. At Lazard, it was 72%. Typically, half of Wall Street revenues go out in compensation.

So, under the normal and customary rules, half the gross revenue, you know, before expenses goes to an already overpaid staff, but it’s not enough for the vampire squids smaller cousins.

Congress needs to change laws to allow shareholders to truly hold managers accountable.

I’m also wondering if shareholders have grounds for a suit here, since it’s pretty clear that management is ignoring them, and the well being of the company, in its decisions.

Oh Crap.

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The Federal Reserve has announced that it is terminating its Term Asset-Backed Securities Loan Facility (TALF) at the end of March.

Basically, the Fed buys bonds secured by loans at sub market rates, in order to keep interest rates low.

Well, now that this program is starting to wind down, we are starting to just how much rates will climb when government support is withdrawn, and it ain’t pretty:

The end of a Federal Reserve program that helped unlock credit markets is spurring sales of asset- backed bonds with relative yields five times wider than on debt secured by car loans.

The expiration of the Fed’s Term Asset-Backed Securities Loan Facility is driving companies to sell bonds tied to loans that would otherwise require higher yields. Borrowers are offering bonds backed by subprime auto loans, mortgage-servicing payments and assets that have proved hard to sell after the worst credit seizure since the Great Depression.

They are talking about auto loans, where the spread (It’s not clear, but I think that this is in comparison to treasuries) for TALF instruments is 0.35% and for non-TALF it is 1.75%.

If the end of the TALF results in anything like a 1% increase in mortgage rates, home sales fall off the cliff again, and they fall hard, because for the same payment, you have about 11% less in home prices, and people buy houses on the basis of monthly payment, not price.

Andrew Cuomo Sues Ken Lewis and Bank of America for Fraud

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Now that the SEC has settled with Bank of America over its misrepresentations, New York State Attorney General Andrew Cuomo is going after the bank for the same thing:

Former Bank of America Corp. Chief Executive Officer Kenneth Lewis was sued by New York Attorney General Andrew Cuomo for defrauding investors and the government when buying Merrill Lynch & Co. The bank agreed to pay $150 million to settle a related lawsuit by U.S. regulators.

Cuomo also sued the bank’s former chief financial officer Joe Price and the bank itself for not disclosing about $16 billion in losses Merrill had incurred before it was bought by Bank of America in an effort to get the merger approved. Afterwards, Lewis demanded government bailout funds, Cuomo said.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a telephone press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Of note is the fact that Bank of America performed its due diligence on Merrill Lynch in only 25 yours, which, along with their firing of their general counsel when he suggested that there might be issues, does appear to indicate that something stinks here.

Another bit of weirdness is that while BoA had intended to buy a brokerage for some time, it wasn’t Merrill, at the board meeting in which the proposal was mooted, most of the board members thought that they would be purchasing Lehman:

When Bank of America Corp.’s board met to approve the acquisition of an investment bank on Sept. 15, 2008, members thought they were going to buy Lehman Brothers Holdings Inc., not Merrill Lynch & Co., according to New York Attorney General Andrew Cuomo.

The bank bought Merrill after examining its books for just 25 hours, Cuomo claimed. Shareholders approved the deal Dec. 5, 2008. The acquisition closed Jan. 1, 2009, after Merrill losses had increased by billions of dollars, a change the bank didn’t disclose before the shareholder vote, Cuomo said.

“It’s the way we approved acquisitions that ticks me off the most!!!” director Chad Gifford later wrote in an e-mail about the last-minute switch, according to a securities-fraud complaint Cuomo filed today in New York against the bank, former Chief Executive Officer Kenneth Lewis and ex-Chief Financial Officer Joe Price over their handling of the Merrill deal.

E-mails and written notes that were gathered by Cuomo for his investigation of the matter show personal reactions of executives as they learned of Merrill’s rising losses, which reached $16 billion before taxes by December 2008. They also show Merrill kept Price informed of the losses as they grew, yet he resisted pressure from his lawyers to disclose them to shareholders.

“Read and weep,” wrote Bank of America accounting officer Neil Cotty to Price on Nov. 4, 2008, when Merrill’s financial reporting unit forwarded preliminary October results with a loss of $6 billion. The merger documents had already gone out to shareholders. Five days later, the October loss was put at $7.5 billion before taxes.

I think that this was a deliberate scheme to get some more taxpayer money to do the deal, and I hope that Cuomo goes where the SEC did not, and throws Ken Lewis’ sorry ass in jail.

H/t Huffpo for the full complaint (90 pages, scrollable PDF window) after the break.


BoA_Complaint –

Whiskey Tango Forxtot?

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Warren Buffet’s Berkshire Hathaway has had its long-term counterparty credit rating cut from AAA to AA-plus.

They don’t like his purchase of the BNSF railroad:

Counterparty credit ratings reflect how well a company can meet its financial obligations with customers, trading partners or other parties.

“We believe that the railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity, and that investment risk with sizable concentrations remains very high,” S&P said in a statement.

The rating downgrade came on the same day that Berkshire announced a bond sale of up to $8 billion to help pay for the Burlington acquisition.

You see, if Buffet buys insurance companies, good, but if he buys companies whose business which involve something tangible, that’s bad, I guess.

It’s clear that rail is in a growth curve. Oil is permanently above $50/bbl (consider my poor track record on this), and there are signs that fees to over the road truckers will reduce the subsidies given to that industry.

But all S&P sees is money being spent on big iron, and they do not like this.

OK, Count Me Disappointed

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I’ve generally been supportive of Chris Dodd. I think that he has been good on civil rights, particularly in his pushing back against torture and the PATRIOT act.

Additionally, I think that he was hung out to dry by Obama and Geithner over AIG.

Further, he was remarkably refreshing about why he dropped out of the Senate race.

That being said, his behavior on the Consumer Financial Protection Agency (CFPA) earlier, and now his opposition to the weak “Volker” banking reforms, has gotten me wholeheartedly agreeing with Barry Righoltz’s assesment of his behavior: “

Thus, Dodd proves that the only thing more corrupt than a congressperson whoring for a campaign donations to get re-elected congressperson not seeking re-election, whoring for a job.

See also here and here.

Economics Update (a Day Late)

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Busy day yesterday, both good and bad, so this is short.

First, we have the personal bankruptcy numbers dropped 10% from December to January, but are up 15% year over year, and the American Bankruptcy Institute expects 2010 BK levels to be higher than 2009.

In real estate, pending sales of existing homes rose slightly in December, but the percentage of homes remaining vacant rose in the 4thquarter.

Real estate is not going to lead us out of the recession, and absent cram-down legislation, government action is not going to help.

Economics Update

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Well, we had mixed signals, with factory activity rising faster than expected and construction spending falling faster than expected.

As to what you follow, I’ll go with disposable personal income and personal consumption expenditures, where spending went up less than income, increasing the savings rate, meaning that the consumer is still well into the “paradox of thrift”, and as The Big Picture observes, most of the increase in personal income is from government stimulus spending, but Obama has decided to go all 1937 on the budget. (Separate post for the budget)

Meanwhile in central bank/bond finance land, the Obama’s budget, along with the industrial growth reading pushed bond prices down, and yields up.

Meanwhile, in Oz, the Reserve Bank of Australia kept its benchmark rate at 3.75%, it had been expected to raise the rate to 4%, and so its currency took a hit.

Meanwhile in currency and energy, the ISM’s index of national factory activity drove both oil and the dollar up.

What Krugman Said

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So says the Shrill One, and so say we all:

Put it this way: if our financial system is so high-strung, so manic-depressive, that low rates for a few years can inflate a monstrous bubble, while a few discouraging words from high officials can send them into a tailspin, this doesn’t make the case that policy must walk on eggshells, forgoing any attempt to fight prolonged unemployment. Instead, it makes the case for much, much stronger financial regulation.

I would only add that one of the metrics that should be used in financial regulation is proportion of GDP. There must be a conscious effort by regulators to keep the financial industry from becoming the tail that wags the dog of our economy.

Whiskey Tango Foxtrot?!?!?!? I Agree With Ben Stein?!?!?!

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I must be wrong.

But Ben Stein, the most overrated intellect in America is saying that Goldman Sachs has been ripping off its clients, and that it is wrong:

That is, it, Goldman, has a legal duty to not take advantage of the people to whom it acts as a fiduciary. It also has that duty because of the way it presents itself to the world — with all of its leaders’ talk about the Goldman Sachs “culture”. They don’t present that culture as the value system of Louis “Lepkele” Buchalter of Murder, Incorporated or of Meyer Lansky or Bugsy Segal or The Purple Gang. They sell the company as a prestige house with solid, client-driven values. If they act to betray that trust, it’s illegal.

Either something is profoundly wrong with the universe, or Matt Taibbi and I are wrong about the squid.

I’ll go with the universe hiccuping.

I guess that Ben Stein gets to be right once a millennium, but don’t ask me when he was right in the 1900s.

It’s Bank Failure Friday!!!!

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

  1. First National Bank of Georgia, Carrolton, GA
  2. Florida Community Bank, Immokalee, FL
  3. Marshall Bank, N.A., Hallock, MN
  4. Community Bank and Trust, Cornelia
  5. First Regional Bank, Los Angeles, CA
  6. American Marine Bank, Bainbridge Island, Wa

Full FDIC list

BTW, here it is in chart with a handy, dandy least-squares trend line:

[on edit]: Updated with late failure in Washington State and tweaked graph for readability.

Economics Update

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H/t Calculated Risk

It’s what Atrios calls “Jobless Thursday”, and while the number of people filing for initial unemployment claims fell, it was less than forecast, claims fell t0 470,000, not the estimate of 450,000, the 4 week moving average rose, and the number of continuing claims fell by 57,000 to 4.6 million.

On a brighter side (above link) orders for durable goods did rise in December, as did orders for capital goods, and while the Federal Reserve Bank of Chicago’s economic activity index of fell in December, the 3-month moving average rose.

Personally, I tend to place more credence in the transportation based indices, and so the fact that the Baltic Dry Index, an index of shipping costs, fell to a 3 month low, to be the thing that I would hold onto, which makes me bearish ………… Then again, I’m always bearish.

Since I missed the economics update yesterday, I should note that the Federal Reserve Open Market Committee kept its benchmark Fed Funds rate 0.25%, effectively 0%, and while their statement was significantly more upbeat than last time, they are still signaling that the rates will remain low for some time.

Meanwhile, in real estate, Freddie Mac issued a report showing that mortgage delinquencies jumped in December, and new-home sales fell again in December, in yet another indication that the recent activity was an artifact of the tax credit, as opposed to any real market turn around.

One interesting data point, again from Freddie, is that the ratio of people cashing out from their houses to those lowering balances or rates hit an all time low, meaning that people were refinancing to lower their payments, and not using their homes as an ATM.

In the long run, this is a good thing, but in the short run, it runs headlong into the paradox of thrift.

In the more general world of finance and banking, we are seeing skittishness about things like the Greek financial problems, and so there is a flight to quality, which has increased demand for US Treasuries, which has driven the rate on the 1-month treasury to a negative interest for the first time in 10 months, interestingly enough, the T-bill auctions seem to indicate that it’s Americans who are fleeing to quality, as the last auction had robust demand, but foreign buyers seemed to be backing off, at least the foreign central banks.

In consumer debt, credit card charge-offs fell a little in December, which indicates that people are a bit more able to pay off their debt, though the fact that Chase had a “payment holiday” may be a large reason for this.

In the old standards of energy and currency, crude oil fell slightly, while the dollar hit a 6½ month high against the Euro, largely on concerns that Greece will go the way of Ukraine, the Baltic States, or Iceland.

Of course, since Greece is in the Euro zone, when none of the other nations were, that is where it gets pretty hinky.

Full FOMC statement after the break:

Press Release
Federal Reserve Press Release

Release Date: January 27, 2010
For immediate release

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.