Category: Finance

Economics Update (a Day Late)

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ABI Graph Pr0n H/t Calculated Risk

The index of leading economic indicators rose 0.6% in August, the 5th straight month, which implies very strongly that the recession ended in July or August.

I don’t really see this as a “recovery for the rest of us.” Even the most optimistic forecasters see a slow recovery in unemployment, and real-estate, which took us down in the first place, looks like it will do so again, this time on the commercial (CRE) side too.

We are seeing mortgage delinquencies hitting 7.58%, up from 7.32% in July and a new record, and AIA’s Architectural Billings Index fell in August, which indicates that future activity is trending down in 9-12 months.

Additionally, the YoY price of CRE fell 27%, and rents are down too, everywhere.

Rents are falling at near rates not seen in nearly a ¼ cedntury on some of the most prestigious streets, 5th and Madison Avenues in New York, the Champs-Elysees in Paris, London’s New Bond Street, and Causeway Bay in Hong Kong,

This is a real problem because the mortgages on these properties are typically 5 years, and if the owner is under water at the end of their loan, they default, because they cannot rollover into a new loan.

Unlike a home loan, the owner cannot just sit tight.

It appears that the currency and the energy markets are concerned about this too, with Oil falling on demand concerns, and the dollar rising as investors look to a safe haven.

Remember When I Said “First Comes the Denial”?

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Here, when I noted that the FHA was flat out denying that increased write-downs on loans would require a bailout?

My response was:

Next should come a statement of health, then a statement of robust health (or some synonym), and then comes the bailout.

Well, here we are, and the FHA is admitting that it will fall below the cash reserves required by legislation, but they are denying that it will require that they increase the fees that they charge on the loans, or that they get a bailout.

Instead they are planning to announce, “Several measures that should help the reserves rebound quickly.”

Yeah….Right, like that will work, though their decision to require future property valuations conform with the Home Valuation Code of Conduct (HVCC), will go a long way toward fixing what continues to be a broken system where realtors whipsaw the appraisers, as the FHA is pretty close to the only game in town right now.

H/t Calculated Risk.

They Can’t Do Any Worse Than the Banks

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Noted bond blogger Accrued Interest has penned an analysis where he says that, “Having the Govt. Mandate Pay Packages is a Stomach Churning Concept.”

While I agree that the idea of the government determining pay rates in a private industry is worrisome, there are a couple of important things to note:

  • It ain’t a private industry, it’s owned by the government. With the amount of money that the taxpayer has shoveled into the banking system, both through direct payments, Federal Reserve facilities, and the bailout of AIG, these institutions are as free market as the Tennessee Valley Authority.
  • How could the government do any worse than the banks?

Yes, there is that first sphincter tightening moment when you read the lede, but then you realize that the alternative is handing those chimpanzees in the banking industry an M-2 .50 caliber machine gun and a couple of belts of ammunition.

BTW, I would note that having a government office mandade pay is not my preferred solution.

My preferred solution would be through the tax code, because the government collects taxes pretty well, just ask Al Capone, along with some changes in shareholder rights laws:

  • Higher marginal tax rate, which makes the mega payouts less valuable
    • I’d like this additional money to go to an insurance fund to cover future bubbles, but if someone believes that this would happen, they have the political acumen of Little Orphan Annie.
  • Eliminate the deductiblity of wages above those of the President, plus an equal bonus
    • This also has the effect of taxing overpaying for prima donna athletes, which is a plus in my book
  • It is currently illegal for shareholders to hold binding votes on executive remuneration. Make it legal for shareholders to do so if they choose. I’d use the above Presidential wage line as a limit, since having shareholders voting on the salary of Willie the mail boy is nuts.
    • Note that I am not requiring requiring a binding shareholder vote, just allowing it.
  • I would also add a Tobin Tax on financial transactions on the order of ¼% on all financial transactions, which would serve to damp down some of the more destructive speculation and the massive front-running masquerading as “high frequency trading”.
    • I’d like to see this go to the above mentioned insurance fund, but the Little Orphan Annie comment still applies.

Note that, except for eliminating a specific prohibition on shareholder’s rights, these are all tax changes, and their administration, though not the politics of their being enacted, are simple and straightforward.

House Passes the Student Aid and Fiscal Responsibility Act (SAFRA)

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It passed on a 253-171 vote.

The bill ends the subsidies that the federal government provides to for profit institutions to make student loans, and has that same federal government make the loans.

As Gail Collins notes:

It would simplify the federally guaranteed loan system, save an estimated $87 billion over 10 years and use that money to increase aid to low-income students, improve community colleges and raise standards for early childhood education.

Let us stop here and recall how the current loan system works:

  1. Federal government provides private banks with capital.
  2. Federal government pays private banks a subsidy to lend that capital to students.
  3. Federal government guarantees said loans so the banks don’t have any risk.

And now, the proposed reform:

  1. The federal government makes the loans.

Wow. You really do wonder why nobody came up with this idea before.

If you need to know what is wrong with the Republicans, you need go no further than the idea that the Federal government should use taxpayer money to prop up big executive paychecks.

H/t Steve Benen.

Economics Update

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Retail Sales Chart Pr0n Courtesy of Calculated Risk

Well, Helicopter Ben Bernanke is now saying that, “recession is very likely over at this point,” in a speech at the Brookings Institution.”

This statement, along with the news that retail sales rose 2.7% in August, largely as a result of the Cash for Clunkers program, which actually had a lot more stimulative effect that I would have believed.

What’s more, since the engines of the “clunkers” are destroyed, by pouring abrasive in the motor oil, it means that these cars are gone, as opposed to working their way down the food chain in the used market.

We also have the Federal Reserve Bank of New York’s general economic index rising to 18.9, up from 12.1 in August, which gives us two straight months with the index above 0, meaning expansion.

German investor confidence has hit a 3-year high.

So, we have a passle of good news here.

That being said, we are still seeing easing by the central banks, with the Bank of England looking at cutting its rate on bank reserves, the rate that banks are paid to keep their reserves at the BoE, which will make lending a more attractive option for the banks.

We have seen the dollar fall, and the price of oil rise.

Is the Daily Telegraph for Real?

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The Daily Telegraph (UK) wringing its hands over a worrisome drop in the money supply, with bank loans falling at a 14% annual rate, and that M3 is falling at a 5% annual rate.

Anyone know the reliability of the Telegraph, because I’m a bit dubious of this assessment, because the Federal Reserve stopped reporting M3 in 2006., see the graph pr0n courtesy of Shadowstats.com.

The estimated figure looks like a significant drop off in M3, or at least the folks at Shadowstats best estimate of M3, but M2 is stable, and M1 is through the roof, so I’m not sure if all this gloom and doom reporting is warranted.

British financial journalism tends to be a bit more alarmist than that of the US, particularly in The Grauniad*, so I’m wondering how real this is.

*According to the Wiki, The Guardian, formerly the Manchester Guardian in the UK. It’s nicknamed the Grauniad because of its penchant for typographical errors, “The nickname The Grauniad for the paper originated with the satirical magazine Private Eye. It came about because of its reputation for frequent and sometimes unintentionally amusing typographical errors, hence the popular myth that the paper once misspelled its own name on the page one masthead as The Gaurdian, though many recall the more inventive The Grauniad.”

The Devil’s Dictionary — Financial Edition

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It’s very funny.

Unfortunately, it’s subscription only content for the WSJ, but if you go to this Google News link, you can read it there, because when you click through “the Google”, you bypass registration.

Here is a snippet:

BANK FAILURE, n. 1. A process by which towns across America are denuded of their feckless local bankers, paving a way into the market for feckless private-equity investors. 2. An increasingly common Twitter tag that spikes on Friday afternoons. See #bankfail, #wheresmymoney, #runitsthefdic.

Heh.

And Andy Cuomo is on the Case

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OK, we all know the story, Bank of America bought Merrill Lynch, but before the deal closed, they discovered that they had uncovered a toxic waste dump and bonus mill, not a brokerage, and when they tried to get out of it, the Treasury and the Fed leaned on them not to.

That much is clear. What is not clear is just how badly this is flubbed, how much pressure was put on BoA, and whether any laws were broken.

In any case, the SEC has been investigating this, and about 3 weeks ago, when presented with a settlement, Judge Jed Rakoff balked, saying that the settlement seemed not to make any sense: The fines were too low, and the conditions were too favorable to BoA:

U.S. District Judge Jed Rakoff in Manhattan said today that he wants a fuller explanation of the settlement by Sept. 9. He wants to know why the SEC accepted the bank’s claim that executives who issued a misleading statement relied on lawyers’ advice and why the agency didn’t press the bank to waive its attorney-client privilege to keep communications with counsel confidential.

Relying on lawyers’ advice can be a defense to a securities fraud lawsuit. At a trial, in order to invoke the defense, defendants must waive their attorney-client privilege, the SEC has said.

“This is puzzling,” Rakoff wrote in a four-page order today. “If the responsible officers of the Bank of America, in sworn testimony to the SEC, all stated that ‘they relied entirely on counsel,’ this would seem to be either a flat waiver of privilege or, if privilege is maintained, then entitled to no weight whatsoever, since the statement cannot be tested.”

So what the SEC has been doing is to say that they accept the claim of bad legal advice, but will not demand any proof by actually looking at this legal advice. IANAL, but this is just fracked, so he deferred it, and today, he has out right rejected the settlement.

And now we are starting to see weirdness, specifically the fact that Merrill’s general counsel was summarily fired 4 days after the deal closed. (also here).

We’re talking seriously, “He was immediately escorted from the building without being permitted to return to his office,” fired.

And now, Bank of America is refusing to waive privilege in order to get to the bottom of this, they are demanding to be let off without having any proof, and while the SEC is good with this, Andrew Cuomo is not.

He is now writing letters making it clear that anyone who attempts to suggest that it was bad legal advice, but refuses to supply legal memoranda will be subject to prosecution (also here):

I think that is legal speak for pulling out the hand cuffs, and saying talk now, co%$-suckers.

Bank of America is denying all wrong doing, of course, and the SEC continues to aggressively stonewall both Cuomo and Rakloff.

Maybe I’,m just a paranoid son of a bitch, but I think that there is something very big and very ugly under this rock.

Warning To Whistleblowers: If You Turn in Big Fish, We Will Destroy You

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Bradley Berkenfeld was the man who turned informant to reveal that Swiss Bank UBS was actively aiding and abetting fraudulent schemes to evade taxes.

He has now been sentenced to 40 months in a Federal prison, while folks like Igor Olenicoff, who hid hundreds of millions of dollars from the IRS are getting probation:

Birkenfeld got slammed because, for all the good he did, he didn’t tell on himself. So prosecutors sought a 30-month prison term for him, and a federal judge in Fort Lauderdale, Florida, ratcheted it up to 40 months at sentencing last week.

…

If you’re looking to ferret out waste, fraud and abuse, that notorious trio of government parasites, there is nothing like an insider.

That is why Congress has for years passed laws encouraging whistleblowers by offering job protection to government employees and a cut of any funds recovered because of their informing.

The Birkenfeld sentence stands as an insult to any claim that the government wants whistleblowers to step up. Fear of retaliation and career suicide make it hard enough to rat on your boss. Now you can add the possibility of prison time as payment for your effort.

…

Prosecutors better hope that Birkenfeld’s tips will last them a very long time. They shouldn’t expect more whistleblowers to show up any time soon.

The author of this article, Ann Woolner misses the point: This is not a bug, it’s a feature.

Prosecutors and judges have a long history of going after white collar whistle-blowers with jail time because they don’t want people to rat out rich people, who after all, are not like you and me, and should not be subject to the rule of law.

In eulogizing Dominick Dunne, Daily Beast correspondent Allan Dodds Frank sheds some light on this attitude:

He [Dunne] had a view that nonviolent crimes committed by the upper class were understandable, defensible, and often just part of what they do. Martha and Al were getting raw deals, he felt. In fact, white-collar crime was so commonplace and garden variety that he had no desire to cover the great corporate crooks of the era who had so little class.

(emphasis mine)

Not enough bullets.

Well, This Explains the Stock Market Bump

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I believe that I’ve mentioned this before, but what is going on here is that the Federal Reserve is printing money and giving it to bankers with instructions to buy stocks, in order to pump up the market.

There is a lot that is wrong with this, it’s the biggest pump and dump scheme in the history of ……Well……History is the immediate flaw that comes to mind, but this ignores the truly troubling aspect of these actions.

The scary part is that this is based in the heartfelt belief that the stock market really is the economy, and so by creating an artificial bump in stock prices, that you are creating a real bump in the real economy.

At it’s core, this is what is wrong here: The inability to see Wall Street and Main Street as separate items, and to recognize that Main Street is far more important.

When this peters out, and it will, we will be in a deeper hole than when we started.

Best Snark of the Day

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Actually, it was about 2 weeks ago, and I just stumbled across it.

Jack McHugh, upon discovering that Ben Bernanke was the victim of identity theft, (his wife’s purse was stolen, and the contents were used to forge his identity) had this thought:

To the criminal who actually stole Ms. Bernanke’s purse and is still at large, I offer this piece of advice. Before turning yourself in, do yourself and your country a favor by handing Mr. Bernanke’s identity information to someone like Paul Volcker. You’ll get a shorter sentence and your country will benefit. Speculation would be tamed, and long term inflation expectations would probably fall far enough to shrink the budget deficit by obviating the need for more bond purchases. If someone else must possess the Chairman’s identity, who other than Mr. Volcker would be more responsible in assuming it? We’ll need Volcker’s tough-mindedness to stare down Congress if we are to ever exit all these stimulus programs. It’s a shame that the Mr. Bernanke had his identity stolen last fall, but the tragedy is that someone didn’t steal Mr. Greenspan’s in the 1990’s.

Word!!!!

Why Is The Fed Freaking Out About Disclosure?

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Between the Bloomberg court case demanding FOIA Releases and Congressman Ron Paul’s increasingly popular legislative proposal to audit Federal Reserve programs, it is pretty clear that the Federal Reserve is in full panic mode.

Here are what I think are the likely motivations, in order of increasing plausibility:

Henry Blodget suggests that the Fed, and the banks are concerned that the release of this data will lead to a bank run, as it did with Reconstruction Finance Corporation (RFC) in early 1933.

They are not suggesting that any new problems will be revealed, but that the mere fact that banks have used Fed lending facilities will trigger a panic.

I find this unlikely, simply because there is deposit insurance now, and as such small depositors will no longer freak, as a result now, and the large players already know who is in bad shape, and everyone knows that everyone has availed themselves of these facilities.

It is clear that this is what the banks suggested in their filing on the Bloomberg case, that added transparency will lead to excessive rumors, which is, of course laughable. It is lack of transparency that fosters rumors, so find this argument unpersuasive.

Karl Denninger suggests a scenario, that I consider to be more likely, that the banks and the Federal Reserve have been lying through their teeth, and that the real state of affairs is truly awful, and upon discovery of a program of systemic lies and accounting tricks with the Federal Reserve at its core will cause institutions to implode, much as the discovery that Bear Stearns and Lehman Brothers were lying caused them to implode:

The problem The Fed has is that as the supposed “risk regulator” for the American Banking System it has absolutely refused to do its job of prudential regulation and still is. Instead of demanding that its member banks hold capital against all unsecured lending it has “blessed” models rather than markets. But at the same time it has declared “haircuts” against collateral that make clear that so-called “face value”, or “par”, is a farce.

The Fed is supporting institutionalized lying – that is, the intentional mis-marking of assets. If The Fed was an honest regulator and monitor of market risk it would insist that no bank carry an asset at a value materially higher than its “haircut” off par at the window. After all, the penalty rate for discount window use already discourages banks from coming there; the “haircuts” must (and I argue do) reflect what The Fed actually believes about the quality of these alleged “baskets” of asset classifications.

If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such “assets” at a higher value on their balance sheet?

(emphasis original))

Mr. Denninger calls this “Racketeering,” and an , “attempt to cover up outrageous and repeated failures to comply with US Securities laws,” I think that he is not far from the truth.

Another possibility that no one has mentioned, is that likelihood that in revealing this information, the Federal Reserve will be revealed to have lied to Congress, and possibly to the US Treasury, in some cases under oath, and that Bernanke does not want to be the target of a grand jury investigation.

Finally, Occam’s razor says that the most likely explanation is usually the simplest, and the fact is that transparency does not serve either the banks or the Federal Reserve.

For the banks, this money would be cast as more bailout, and there would be more pressure on restricting executive pay.

For the Fed, knowledge is power, and by becoming more transparent, the Fed will inevitably become less powerful, and any bureaucracy will fight this tooth and nail.

FWIW, my guess is that the last 3 likely all figure into this, that is the discovery of massive concealed losses, the worry about perjury charges, and simple bureaucratic imperative.

Economics Update (a Day Late)

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The University of Michigan survey showed an improvement in consumer sentiment, hitting 70.2, exceeding forecasts of 68.0.

In wholesale, inventories have fallen to a 3 year low, indicating that there is little push to restock, though wholesale sales actually rose.

In retail, the fact that video game sales fell for the 6th straight month is worrying: When consumers, specifically hard core video gamers, do not feel comfortable purchasing video games, they don’t feel comfortable purchasing anything.

Meanwhile across the pond(s), we have

Japan’s growth in Q2 being revised down to 2.3% from a 3.7% annualized rate, though domestic cargo volumes in Russian indicate a recovery is imminent there.

Meanwhile, in the folks with more petro-dollars than brains department, Dubai’s sovereign wealth fund, Istithmar World, has stopped making investments, probably because they are having problems covering their losses.

In real estate, repossessions dropped 12.7% in August, but foreclosure filings fell only 0.5% and the number of people defaulting.

My guess is that this is some of the banks out there are already overwhelmed with REOs and don’t want to acknowledge the bottom line hit, so they are letting things slide right now.

Oil falls below $70 on demand recovery doubts – Sep. 11, 2009:

Meanwhile crude oil finished the week below $70/bbl.

In currency, the dollar index, a basked of currencies against which the USD is measured, fell to a 1-year low, in the longest sting of losses in the index, 6 days, since March.

Finally, gold ended the day above $1000/ox (Troy), which might make for happy gold bugs, but I’m inclined to say that it is time to cash in and get Yen or Euro.

It’s Bank Failure Friday!!!!

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

  1. Corus Bank, N.A., Chicago, IL
  2. Brickwell Community Bank, Woodbury, MN
  3. Venture Bank, Lacey, WA

Note that with assets of $7 billion, Corus is a large bank failure, the 3rd largest bank failure of the year.

A lot of these smaller banks would be alive if Obama, Geithner, and Summers weren’t so determined to make the “to big to fail” zombies even bigger.

Full FDIC list

Zim Update

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Well, it’s been about a month, so it’s time for another update on what is happening in Zimbabwe.

The two biggest pieces of news are Robert Mugabe’s health, he is 85 years old, and there are officially denied rumors that he has gone to Qatar for prostate cancer treatment, and he has missed some significant meetings.

Additionally, we are beginning to see senior ZANU-PF members vying for position, with, for example, someone having put up the party youth group (I assume that this mean young adults) to call for the removal of John Nkomo and Joyce Mujuru from the party presidium.

We are also seeing the situation with the Chiadzwa diamond fields get out of hand,with a threat by the world Diamond Council to suspend Zimbabwe from the Kimberly Process certification, which would label one of their few sources of hard currency “blood diamonds,” though threat comes with a statement which immediately backtracks from the threat, though they are making noise about revisiting the issue in November.

The Parliament has also opened an investigation into the accusations of brutality, corruption, and slave labor, and the World Federation of Diamond Bourses has made a call for the prompt release of the Kimberly report.

The reason that this is significant is because it is a sign of loss of control by Mugabe. It’s fairly clear that he feels that he cannot give the order for the Zimbabwean military to stand down in Chiadzwa because it would eliminate one of the few remaining means that he has to bribe reward loyalists, and it is unclear if the army would obey if he were to give the order.

This is an indication that Mugabe is losing power within ZANU-PF as people look to his exit.

On a more prosaic level, it looks like Mugabe is trying to kill Tsvangerai again: He has had to sack somemembers of his security team for “misplacing” transport for a significant portion of his security detail, which left him ill-protected…..Then again, maybe I’m just a cynic.

Meanwhile, the Mutambara faction of the MDC appears to be in the process of self destructing, with conflicting claims as to who leads the MDC-M, reports that the party has split in 3 parts, 3 MDC-M MPs moving to join the MDC-T, and Mutambara being unable to convince an MP from his own party to step down and take an ambassadorship in order to allow deputy president Gibson Sibanda to keep his position on cabinet as Minister of State for National Healing and Reconciliation. (The constitution prohibits a cabinet post being held by someone not an MP for more than 3 months)

We had Zuma taking over for the completely useless and biased Mbeki as mediator, and while we got some strong language, such as Zuma calling Mugabe’s behavior in negotiations deviant, but the results, despite Tsvangerai’s pleas for action, have not gone beyond a SADC call for an extraordinary summit.

Most notably, you have the issues of Reserve Bank of Zimbabwe Governor Gideon Gono and Attorney General, Johannes Tomana, both tremendously corrupt and incompetent ZANU-PF loyalists, which means that the power of the purse and state violence (though both the police and military) remain firmly in the hands of Mugabe.

With the elimination of the $Z as a currency, this has reduced Gono’s power to pay off people, but he is once again attempting to reintroduce the local currency, though Finance Minister Tendai Biti is fighting him tooth and nail on this.

The harassment of MDC members of parliament continues, with police making trumped up arrests of opposition MPs.

It’s clearly an attempt to reduce the MDC majority in parliament, since once convicted, they can no longer serve, and so there would have to be by-elections.

The problem for the ZANU-PF with this strategy is that they are polling in the single digits, (also here).

ZANU-PF has proposed 5-year extension on the current 1-year freeze on elections, but the MDC has made it clear that it has no interest in such a proposal.

The 2nd of ZANU-PF is to make elections impossible, either by pleading poverty, or by refusing to staff the election board created by the unity government agreement.

Meanwhile, the IMF has issued $400 million in foreign currency reserves, which would be good news, except for the fact that Gideon Gono (remember him?) is insisting that he is in charge of disbursing all these funds.

I’d sooner have Bernie Madoff managing that money.