Category: Finance

Proof that the British Banker “Supertax” is the Right Thing

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Boris Johnson, Mayor of London, and perhaps the stupidest man in England, has come out against the proposal:

Boris Johnson threw down the gauntlet to shadow chancellor George Osborne today, urging him to rule out extending the supertax on bonuses.

The Mayor is seeking reassurances that Gordon Brown’s tax would not be imposed by a Tory government. The showdown comes after Mr Johnson claimed that up to 9,000 bankers could leave London to escape paying.

Mr Osborne has said he does not oppose the tax, and the Conservatives have not ruled out imposing it again if they win the general election.

If the Tories come out against the tax, they may very well snatch defeat from the jaws of victory.

On a more utilitarian note, when a rich banker leaves for Switzerland (only Switzerland does not want them either) it means that that 2500 square foot penthouse flat in London becomes 4, or 5 more modest flats, increasing the supplies of housing, and drives down rents, making London a better place for the Londoners.

The rich bankers, and the expat tax dodgers who live in London in very large numbers, don’t make London better, they make it worse: They push out the middle class, and productive industry.

The Culture at the Fed is Broken

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Charles Plosser, president of the Philadelphia Federal Reserve Bank, is now on record saying that the Federal Reserve should raise interest rates before there is any meaningful recovery in employment:

Federal Reserve policy makers must raise the benchmark interest rate “well before” unemployment falls to an acceptable level in order to keep inflation in check, Fed Bank of Philadelphia President Charles Plosser said.

Plosser forecast the economy will expand 3 percent to 3.5 percent this year and next, faster than the 2.75 percent that he sees as the underlying potential pace. As growth pushes up market interest rates, the Fed’s target for overnight lending among banks should also rise “as long as inflation is near its desired level and inflation expectations are well-anchored,” he said today in a speech in Philadelphia.

I would note that Ben Bernanke has made statements in the same vein: that notwithstanding the charge to the central bank to both control inflation and maintain full employment, the second part means nothing.

Note that Plosser is not a regular voting member of the Federal Open Market Committee (FOMC), though he will get his turn to vote next year.

I lay a lot of this at the feet of Paul Volker (I bet you expected me to say, “Alan ‘Bubbles’ Greenspan”) because he is the modern standard carrier for a Fed chairman: He created the worst recession in 40 years in 1979-81 in order to wring inflation out of the economy.

He was probably right then, though I think that a lot of the inflation was caused by increases in commodity (oil) prices, but now we have Federal Reserve staff who see this, and want to repeat the disastrous tightening of money that caused the 1937 recession.

This is non-sensical, and this, along with the Fed’s repeated role as protector of large investment firms (that one is Alan ‘Bubbles’ Greenspan’s fault) are why reform, and significant turnover, in the management of the Federal Reserve is essential.

Economics Update

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Decline in job openings since 2007
h/t Zero Hedge

The US trade deficit grew by 9.7% in November, largely on the recent run up in oil prices.

The National Federation of Independent Business’s small business optimism index fell for the 2nd straight month in December, indicating that the small business segment is still not ready to start hiring.

In central bank land, the yield on 30-year treasuries fell again, indicating an expectation that rates would remain low, while in China, the central bank raised the reserve requirement for banks by 50 basis points.

In energy, oil continues to fall on the promise of warmer weather.

In currency, the dollar rose, both on investor jitters, and on the Federal Reserve Bank of Philadelphia President being a complete moron and talking up rate hikes. (more on this later)

It’s Official: New York Fed Subpoenaed By House

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Following revelations that the Federal Reserve Bank of New York instructed AIG not to do full disclosure of its swap deals with the big banks, the chairman of the House Oversight and Government Reform Committee, Edolphus Towns, has formally subpoenaed the Federal Reserve Bank of New York for information relating to the AIG bailout. (Town’s statement is here.)

What is rather surprising is the level of arrogance involved in the bank’s response, where they say that, “We will work with the committee to provide relevant information as appropriate.”

No, that’s not how it works: When you get a subpoena, you don’t provide information that you deem “relevant” or appropriate, you turn over what they are demanding. That’s the definition of a subpoena, and so you turn over what is demanded.

The folks at Zero hedge have the full text of the subpoena:

All documents in the possession, custody, or control of the Federal Reserve Bank of New York, relating to AIG credit default swap counterparty payments, the decision to compensate AIGs credit default swap counterparties at par, and public disclosure of the counterparty payments, including:

  • Emails, phone logs, and meeting notes of the following people: Timothy Geithner, Stephen Friedman, Thomas Baxter, and Sarah Dahlgren;
  • Term sheets, including drafts, relating to AIG’s payments to its CDS counterparties; and
  • Emails, phone logs, and meeting notes relating to public disclosure of AIG’s payments to its CDS counterparties, including disclosure to the SEC.

(emphasis mine)

I think (hope) that Geithner is screwed. This specifically includes Geithner’s emails and phone logs as well.

If they disclose, he gets shown to be hip deep in a possibly illegal bailout, or completely incompetent, and if they stonewall, he has no credibility.

Unfortunately, I see Geithner’s trajectory mirroring that of Rumsfeld: He only gets fired only after a disastrous mid-term election.

A Good Start

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He’ll have to pay a fee.


He won’t

The proposal recently mooted by the Obama Administration, to levy a fee on financial institutions in order to recover TARP funds (see also here) seems like a good start.

But between Mssrs. Summers and Geithner, along with the DINO back-bencher pukes on the House Banking Committee, you can be sure that it will be so full of loopholes that the only banks that might have to pay anything will be the mom-and-pop banks who’ve done all the right thing.

Note also that this makes no mention of recouping the facilities that the Federal Reserve has offered, which have gone largely to the very large banks, and banks that have former Federal Reserve board members working for them.

The problem is that people are either:

  1. Bought and paid for, or
  2. Deluded enough to think that the big bankers are essential to the functioning of the American economy.

What really needs to be done is:

  1. These folks, and the industry needs to be convinced to leave the country.
  2. Predator drones armed with Hellfire missiles are used to take them out like other terrorists.

Now there’s a recruiting slogan for the USAF: Join up and blow up a banker.

First Foreclosure???? WTF????

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It appears that Dubai just had its first foreclosure:

Dubai’s housing rout sent prices down 52 percent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.

Until now.

Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.

People have been driving their cars to the airport and fleeing, they’ve been throwing people in Debtors’ Prisons, and they just had their 1st foreclosure?

Any relationship between Dubai, and by extension the UAE, and perhaps most of the petro-Kleptocracies to a modern financial or court system is purely coincidental.

I’d also note that any lender that claims that only 3% of its mortgages in Dubai are in default is lying.

Economics Update

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Slow news day, with the only non-energy/currency news being that non-foreclosure U.S. Mortgage Delinquencies 9.8% in November, a 5.5% increase over October, and a 21% increase year over year.

In the old reliables of energy and currency, we see gasoline prices back in the news, the the price of a gallon of regular unleaded approaching $3.00, though crude oil fell on forecasts of warmer weather in the US and Europe.

In currency, the dollar fell to a 3 week low, largely on the expectation of continued low rates, as well as indications of a recovery, and higher interest rates, in China.

Not Enough Bullets

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This business will get out of control. It will get out of control and we’ll be lucky to live through it.

Cue Freddie Dalton Thompson from The Hunt for Red OctoberThe New York Times on banker compensation in these tough times:

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

It’s going to get out of control, as in some tea-bagging nut with a gun out of control, and I know that I won’t be sitting on the jury, because I could not bring myself to vote to convict.

Best Prediction for 2010

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Bruce Krasting, retired finance guy, makes his predictions, and while most are pretty safe, thinks like ‘Phants pick up seats, but Dems retain majorities, and Boeing delivers a pitifully small number of Dreamliners, one is completely off the wall, and I mean that in a good way:

  • Tim Geithner will resign as Treasury Secretary. Sheila Bair will replace him.

My inclination on reading this was to go all Poppy Bush, and say, “Not gonna happen,” but based on recent events, I need to add a qualifier, and say, “Not gonna happen before November 2,” the day of the general election.

I think that Barack Obama really believes that Geithner and Summers are the best people for the job, and he believes that the American people believe this too, and it’s going to take a big clue stick, something like House Speaker David Boehner, to convince him otherwise.

I tend to agree that a change in party control is unlikely, but I think that there will be significant losses by the Dems, on the order of 30-35 seats, which will put the House in the 1981-83 dynamic, where the Democrats nominally controlled the house, but the Republicans could always peel away enough Dems to get their way.

Paul Krugman Destroys the Fannie/Freddie CRA Myth

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Paul Krugman looks at both home and commercial real estate, and notices that they had a virtually identical trajectory.

So the bubble in commercial real estate, where Fannie and Freddie do not lend, and where the Commercial Reinvestment Act held no sway, had just the same sort of bubble.

From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.

While I agree that the graph shows that government involvement in the US residential real estate market did not produce the crisis, I do think that the bubble was an artifact of excessively lax lending standards and excessively low interest rates, and these were an artifact of government policy, at least if you consider the actions of then Federal Reserve Board, and its Chairman Alan “Bubbles” Greenspan to be government acts.

Economics Update

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Deleveraging: The recession continues until it’s done
h/t Calculated Risk


H/t Calculated Risk

Well, the NFP came out, and the non-farm payroll fell by 85,000, and unemployment (U3) remained at 10%, which kind of gives the lie to all those forecasts that predicted an increase.

On bright spot, however, was that “November payrolls were revised to show the economy actually added 4,000 jobs rather than losing 11,000,” so the 22 month losing streak is broken….Kind of. (BLS link)

Consumer spending is not bouncing back either, as US consumer credit fell by $17.5 billion, a new record, indicating that consumers are continuing to deleverage and pay down their debts, taking us yet further into the paradox of thrift.

The fact that US office vacancies hit 17 pct, a 15-year high, reinforces the idea that things are still not turning around, though a surprise increase in wholesale inventories weighs in on the other side of the ledger.

Treasuries rose. and the dollar fell on the jobs report, as investors fled the dollar, and ran to treasuries, because of concerns about the strength of the recovery.

Of more concern is the fact that oil still rose after the abysmal NFP report, which implies that the new stable level for oil prices is above $80/bbl, which would have the effect of further crippling any recovery.

Little Timothy Geithner has Been a Bad, Bad, Boy

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Bloomberg is reporting that the New York Bank of the Federal Reserve instructed AIG not to make disclosures that SEC regulators were demanding regarding their payouts on swap contracts (The New York Times has more, including copies of the emails in questions, which I’ve posted below.):

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

Now, I take anything from Darrell Issa with a grain of salt, he’s a liar, and one of the rather more corrupt Republican members of Congress, but seeing as how House Banking Committee Chairman Barney Frank is saying that this is “Troubling,” and he wants hearings, and both Edolphus Towns, Chairman, and Elijah Cummings, member, of the House Oversight and Government Reform Committee, have been screaming about getting a hearing about this, it seems that Frank may get his wish.

The big deal here is that the NY Fed took over negotiations, and paid off AIG’s swaps at 100¢ on the dollar, which is pretty much unheard of, and at the time that this information was being suppressed, Geithner was already the nominee to be Secretary of the Treasury:

This episode suggests that the NY Fed – and Geithner, then a nominee for Secretary of the Treasury – were worried about any political fallout from the swap payments. When the details were released months later (and after Geithner was confirmed as Treasury Secretary), critics alleged that Geithner had failed to negotiate a better deal for the swap payments with the Wall Street firms.

They perpetuated a fraud upon the American public and on Congress, because little Timmy wanted to be SecTreas.

The New York Fed is now saying that Geithner was uninvolved in the decision to suppress this information, but it’s a no-win situation.

Geithner was front and center in making sure that the swaps were paid off at face value, so the attempt to suppress the date was either because he was covering his own ass., or because he was incompetent and uninvolved, and the Fed bureaucracy bailed him out because they saw him as being the Fed’s Bitch*.

FWIW, I think that this was all part of the campaign by the bureaucracy of the Fed to make Geithner Secretary of the Treasury, though Felix Salmon has a point when he says that the completely over the top culture of secrecy at the central bank was has always been a flaw in the culture of the institution: Independence does not equal secrecy, though the Fed always has seen it that way.

David Dayen at FDL makes the cogent point that even if the payouts were legal, it appears that the cover-up was not legal.

The real problem, as Barry Ritholtz so ably notes, is as follows:

Between Summers and Geithner, it appears that President Obama has made the exact same mistake that one George W. Bush did: Instead of filling his administration’s most important posts with his own people, he reached back to prior admins (Cheney, Rumsfeld, etc) and loaded up on incompetent retreads.

(emphasis mine)

One thing is certain though, that the case for auditing the Federal Reserve has been made much stronger by the most recent scandal.

*A good bet, since the history shows that Timothy Geithner has been the bitch of anything remotely close to a bank or a brokerage his entire career.

Emails reproduced after break:

E-mails from N.Y. Fed to A.I.G. to Not Disclose Counterparty Payments

Krugman Just Called Ben Bernanke a Wanker

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In his New York Times blog.

It was pretty polite, but it was also rather firm:

Here’s the story of two metro areas, Los Angeles (which has run out of room to sprawl) and Atlanta, the ultimate Sprawl City:

Huge bubble in LA; nothing in Atlanta. Looking at the national data was deeply misleading.

So here’s one of the charts from Bernanke’s paper at the meetings:

Yep, he’s using average US housing prices as a bubble indicator. This wouldn’t matter if the division between Flatland and the Zoned Zone was comparable across the advanced world, but it isn’t: other advanced countries lack sprawling metros comparable to Atlanta or Houston. So we aren’t learning much from this comparison.

And the whole thing suggests that the Fed hasn’t learned much about how to identify housing bubbles.

(emphasis mine)

Meow! I whole heartedly approve.

More Ass Covering by the Fed

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We are now getting whispers that the Federal Reserve is planning to get tough with the banks:

If the Fed chairman’s speech didn’t worry investors, his timing is interesting. Ben Bernanake now flies to Switzerland for a meeting with the world’s other central bankers.

Saturday’s invitation from the Bank of International Settlements specifically questions whether banks—using cheap money—are returning to the aggressive behavior that prevailed during the pre-crisis period.

What we will see is a lot of fake toughness, because Bernanke is trying to do everything that he can to kill the Fed audit bill.

Economics Update

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first time unemployment claims rose slightly this week, up 1,000 to 434,000, down from the 490,000 at this time last year, and the 4 week average fell to 450,250.

I would note that this number needs to be below about 400K before non-farm payroll increases, and if the December numbers show an increase in NFP, it’s seasonal adjustment bull sh$#.

The numbers are better, but it’s still, “better in a not getting worse as fast,” way.

That being said, retail sales surprised on the upside, with December sales up 3% over the 2008 numbers, though still down by about 2-3% FROM 2007.

We also had some big news in central bank land, with China’s central bank raising its benchmark rate, with 3-month bills increasing to 1.3684%, up 4.04 basis points (0.0404%) from the rate that it had maintained for the past 4 months.

It indicates that they will be tightening on the money supply, which could get interesting, because much of the Chinese stock market is smoke and mirrors. Additionally, it may be a first step in allowing the Yuan to drift higher, as higher returns make the currency more attractive.

On the less surprising side of stupid central bank tricks, the Bank of England left both rates and policy unchanged, which means that they are still printing money hand over fist.

Also, Treasurys fell slightly, though I think that this is concern regarding the NFP payroll data.

Energy and currency surprised. The surprise increase in Chinese rates would normally presage an increase in oil prices, because there is the assumption that there is additional demand that is being tamped down, and the dollar down, because the Yuan becomes more attractive, but in fact, oil fell slightly, to below $ 83/bbl, though that might be profit taking, and the dollar rose fairly sharply.

A Very Good Idea

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The FDIC is looking to use a formula for its insurance fees that is driven by banker pay:

U.S. regulators are set to consider a plan that would tie the amount banks pay for deposit insurance to the riskiness of the institutions’ pay structures, a source familiar with the matter said Thursday.

Under the proposal to be considered next week by the board of the Federal Deposit Insurance Corp, banks that base compensation on solid performance metrics and include measures such as “clawbacks” would pay less for deposit insurance, the source said, speaking anonymously because the proposal has not yet been released.

Banks with riskier schemes that reward short-term gains would have to pay higher fees.

This is a good start, but it’s too easy for the bankers to game, and gaming financial contracts is what bankers do.

Set the fee based on total remuneration of the highest paid person at the bank, including bonuses.

For each multiple of the President of the United State’s salary ($400K) raise the insurance fee by 1 basis point (0.01%).

If your highest paid guy gets $4 million in a year, the surcharge is a manageable 0.1%, if he gets $40 million a year, it’s 1%, if it’s $70,324,352, which is what Lloyd Blankfein received in 2007, then it is 1¾%.

That should cut down on banker bonuses.

Hell, make it a payroll tax, and apply it to businesses across the board. It would cut down on overpaid athletes too.

Icelandic President Vetoes Bailout to British Investors

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The Icelandic people literally came out with torches

After receiving a petition containing signatures from almost ¼ of the registered voters in Iceland, Iceland’s President Ólafur Ragnar Grímsson vetoed the bailout bill. It appears that the original version, which would saddle every man, woman, and child in Iceland with a debt of €12,000, about $17,000.

The original bill which passed contained a provision allowing for renegotiation on any unpaid amount after 2024, but the British and Dutch threw a fit over that, so, like the debt slaves that they are on the way to becoming, the government promptly caved, and the Althingi passed a bill without any real prospect of ever getting the bankers’ boots off of their necks.

It has the effect of requiring the bill to be passed by referendum, which is an uphill road, when you consider the fact that 62,000 people out of a population of about 320,000 just signed a petition asking for a veto.

The President notes in his official statement, (PDF) that he believes that it is the right of the people to make such a decision:

It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. Under the Constitution, which was passed on the foundation of the Republic in 1944, and which over 90% of the nation approved in a referendum, the power which formerly rested with the Althingi and the King was transferred to the people. It is then the responsibility of the President of the Republic to ensure that the nation can exercise this right.

In the comments of Calculated Risk.s post on the matter, a commenter nailed the absurdity of the deal for the Icelandic people:

They lose their IMF bailout money I think.

Am I right that the proposed IMF bailout is about $6 billion? And the bill from Britain is apparently for 3.4 billion pounds, or about $5.5 billion?

Funny coincidence, that.

Yes, funny that: Because a bunch of people invested in the Internet branches of a local bank, accounts that had were never guaranteed by the Icelandic government, because of the high amount of interest paid, the Icelandic people are supposed to take a loan from the IMF to pay off the people who made risky investments to get high returns.

High returns=high risk. This is not even investing 101, it’s investing, “remedial classes, because you spent high school stoned.”

The investors knew what they were getting into.

Basically, this is the US paying AIG counterparties, but in an amount that comes to ½ of GDP.

Basically, the deal with Iceland was as follows: put your population in debt slavery, and in return, you get, an IMF loan to pay the morons who invested in a dodgy bank.

Then, the IMF will demand that Iceland:

  • Dismantle its social safety net
  • Sell off its fishing rights, which is the major productive industry in Iceland, to foreigners who will rape the fisheries.
  • Fire public employees.
  • Privatize energy, water, and other utilities, so that foreigners can buy it and rape the citizenry.

In return, Iceland’s debt might not get downgraded to junk status.

I’m with Felix Salmon on standing up to bullies:

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits. If you thought the cod wars were bad, this is much worse.

(emphasis mine)

One of the flaws in the current finance system is that requirement that people be made whole when they chase high returns. It creates moral hazard, which leads to more stupidity.

Rinse, lather, repeat.