Rolling Stone does not have it online, but you can find a copy of his latest, The Great American Bubble Machine in the Something Awful forums.
Basically, it’s a history of Goldman Sachs, and the intro says it all, “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again.”
I don’t think that we will fix the banking system until we take those MoFo’s down.
Because the FDIC had one more bank failure last night, Mirae Bank, Los Angeles, CA.
This makes 45 bank failures through the first half of the year.
And here they are, ordered, and numbered for the year so far.
Just wondering why so many of the bank failures have been in Georgia.
Generally, the news has been pretty good, with personal income rising and consumer confidence hitting the highest level in over a year.
Additionally, we are seeing more signs of a credit thaw, with the 3 month dollar LIBOR falling below 0.6%.
In energy, we have an offer of amnesty on the table in Nigeria, which has driven oil lower.
This has led to a decreased perception of risk, which, along with some statements by China’s central bank, drove the dollar down.
One wonders how bank failure Friday will shake out tonight.
First off, we have a row between Mugabe and Tsvangerai over the Bank of Zimbabwe Governor, Gideon Gono.
This is a non-trivial row, because the spectacularly corrupt Gono was the architect of Zimbabwe’s hyperinflation, and he did so in order to pay off the various ZANU-PF constituencies to support Mugabe.
It’s gotten heated enough that the (ZANU-PF member) military and security chiefs have said that his removal would be unacceptable.
Members of the MDC have approached the Southern African Development Community asking for an intervention, but non seems forthcoming.
The regional association of governments is sticking with precedent, and being generally useless, so the MDC is moving toward changing the law chartering the Zimbabwean central bank so as to reduce Gono’s authority.
Things are improving a bit though at least in economy, with inflation moderating, though the persecution of civil rights activists continues.
In mining, which will necessarily be a source of much needed foreign currency, you have the good and the bad
On the good side, you have Zimbabwe Zimbabwe moving to ban raw chromium ore exports, and insisting that it be smelted first, which will greatly increase the benefit to society, as there is 10x the profit post smelter. (as an aside, the US and EU have filed a case against against China for doing this at the WTO, because under neocolonialist WTO rules, poor countries are not supposed to develop industries based on their resources)
We also have some gold mines reopening.
On the down side, mines minister is still one of Mugabe’s cronies, which means that he is still on the EU’s sanction list, and was denied a visa to enter the UK, and all indications are that this was well justified, as civil rights violations at the mines seem to be pretty horrific.
Specifically it appears that the Zimbabwe army is using slave labor to operate diamond mines in the east of the country, as a way for Mugabe to continue to pay off the military for its support. (See also here)
We are starting to see some aid resuming to Zimbabwe, with Norway being among the first western nations to do so, though most nations are taking steps to ensure that the aid does not pass through government agencies, which are still compromised.
So, in testimony before the House Oversight Committee, he claims that the Federal Reserve acted with the “highest integrity” with regard to the BoA Merrill deal:
The Fed chairman said neither he nor any member of the Fed “instructed, or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch, including its losses, compensation packages or bonuses, or any other related matter.”
The disclosures “belong squarely with the company, and the Federal Reserve did not interfere in the company’s disclosure decisions,” he said.
Translation: I didn’t tell him to lie, but I said that if disclosures queer the deal, you are toast.
He testified against legislation allowing for audits of the Federal Reserve:
When asked about legislation that would allow for broad audits of the Fed by the Government Accountability Office, Bernanke said such powers would compromise the central bank’s independence and be “highly destructive to the stability of the financial system, the dollar and our national economic situation.” Maintaining independence on monetary policy is “critical,” he said.
I may not be one of those financial whiz kids, but when someone says, “No audits,” I think, “Serious waste, fraud, and abuse.”
We are seeing an increase in senior executives are dumping shares in their firms.
It’s a pretty good indication that the recent run-up in share prices was a dead cat bounce, perhaps driven by accounting tricks to maximize profit this quarter.
When, in response to efforts in the real estate and mortgage industry to reign in appraisal reform, he says that, “I am beginning to suspect that the Realtor’s association and the Mortgage Broker’s association are pro-fraud.”
Well, duh.
So the OMC of the Fed held its meeting, and left interest rates and purchases of debt unchanged, which basically means that they are still concerned about the recession, and not inflation, which they called “subdued”.
You can see the full statement here.
On a more general level, we have durable goods rose unexpectedly in May, primarily on increased aircraft sales, but new home sales unexpectedly decreased in May.
We have a further indication of weakness in real estate from the Architecture billings index, which was up only 1/10 point, and still indicates continued contraction.
Mortgage applications rose last week, but that week was hit hard by the higher interest rates at that time.
We also have an indication that it’s not just real-estate where banks will be hurting. The Moody’s Credit Card Index showed charge offs in excess of 10% for the first time ever, so in addition, to subprime, prime, and commercial real estate, expect to see big losses from credit cards.
Meanwhile, the Fed statement drove the dollar up, and oil down.
They don’t have the cash to make dividend payments, so they are no longer making payments, though, under the terms of the TARP they have 20 quarters, or 5 years (!) to defer interest payments without technically being in default.
The banks in question are Pacific Capital Bancorp, Seacoast Banking Corp, and Midwest Banc Holdings.
According to a GAO report, there are 17 banks that did not pay dividends in May, but they did not list names, so there is no knowing who the other 14 institutions are.
The Philadelphia Bank of the Federal Reserve has released its “state coincident indicators”, and 49 of 50 states showed contraction during the past quarter.
And another day, another S&P downgrades of residential mortgage backed securities. They review 101, and downgraded 93 of them.
Meanwhile, May existing home roes, but the year over number is still down, and median home prices have declined 16.7% year over year, so there is no incication that prices are falling.
Distressed home sales, foreclosures, short sales, etc., declined to only 33% (!) of sales from 45% (!!!) in April, so we are still well in vulture territory.
There looks to be downward pressure on interest rates, as treasurys have risen, pushing the yield down.
Not much in the way of “green shoots” in Europe, with both consumer spending in France and the a purchasing managers’ index in Germany falling.
Of course everyone is holding their breath about what the Federal Open Market Committee will do tomorrow, though the consensus is that they will not raise rates, which pushed the dollar lower.
The falling dollar, and unrest in Nigeria, drove oil up today/a>, it finished the session at just below $70/bbl.
It’s not just Goldman, it’s a systemic thing, but their role in the collapse of AIG:
Goldman Sachs Group Inc. and Societe Generale SA extracted about $11.4 billion from American International Group Inc. before the insurer’s collapse as the firms demanded to hold cash against losses on mortgage-linked securities, according to regulatory filings.
The problem with credit default swaps is that unlike short selling, which only effects a share price (though naked shorts should be banned, and the ban enforced), credit default swaps (CDS) can have the effect of bankrupting a company in a matter of hours, and frequently the holders of these securities have no interest in the survival of the underlying assets.
Yes, the masters of the universe are once again going to make obscenely huge bonuses to its senior staff:
Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.
Of course the very next paragraph seems to indicate that the nominal reason for these bonuses, retention of skilled staff, is not operative:
A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.
Lack of competition for business implies lack of competition for employees, but the bonuses keep going up.
On the top right, we have the reorganization of the various financial institutions.
Let’s zoom in a bit in the right hand side, and we see that Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS)will both be eliminated.
The elimination of the OTS is no surprise, apart perhaps from Greenspan’s Federal Reserve, it was the agency most complicit with the bubble.
That being said, the elimination of the OCC is a very good thing. The head of the office was appointed by George W. Bush in 2005, and has a 5 year term, which makes it rather difficult for Obama to get rid of him.
The problem is that the current Comptroller John C. Dugan, has been a roadblock on almost any sort of regulation.
He’s successfully gone to the Supreme Court to preempt state regulations, and he has been a major impediment in implementing even the tepid regulations that the Obama administration has proposed.
They are killing the office to get rid of him, and even if the change does not pass, it means that for the foreseeable future, there aren’t any banks that will take his instruction without some other agency confirming him.
They just cut Dugan off at the knees, and this action is both wise and well deserved.
This is across the pond, where the there has been a £1.15 billion default on bonds for 9 office buildings in downtown London.
The value of the properties has declined 50% from peak.
We will see a lot more of this in commercial real estate, particularly since most of the loans are relatively short term, typically about 5 years, and the note will come due, and there will be no opportunity to refinance, because the value of the property has fallen.
H/t Calculated Risk
It’s a pretty slow day, at least until the FDIC gets into the act this evening.
In any case Treasuries are up up slightly, which means that yields are down, which removes a potential upward pressure on interest rates.
BTW, when one refers to debt instruments issued by the US Department of the Treasury, are they “Treasuries”, or “Treasurys”? I’m not sure.
In the meantime, the idea that the consumer may be engaging in a longer term is bolstered by statements by the CEO Coldwell Banker, who notes that, “The more important ‘move-up’ buyers were absent,” from the market.
People are paying down debt in a big way, as opposed to up-sizing.
All we have left is currency and energy, and the dollar continued to weaken as investors looked more towards return and less toward safety, while both crude oil and wholesale gasoline fell sharply on reports of inventory growth.
Don’t expect to see this at the pump for a while, the AAA reports that retail gasoline was up again, which makes it the 51st day since it’s fallen.
Just look at an instrument called the reverse convertible.
It’s so corrupt that it boggles his mind:
In a reverse convertible, you give $100 to a bank for some period, like a year; it pays you a relatively high rate of interest, say 10%. The $100 is virtually invested (no one actually has to buy the stock) in some underlying stock, like Apple. If at the end of the period the stock is above a threshold, like $80, you get your $100 back; if it is below the threshold, you get the stock instead. (The terms can depend on whether the stock ever went below the threshold and where it is at the end of the period, which makes the deal worse for the investor, but that’s the basic idea.)
The simplest thing to compare this to is just buying the stock. Compared to buying the stock, there are three outcomes:
- The stock ends up below $80: In this case, the reverse convertible is slightly better, because you got the$10 in interest, which is probably more than the dividends you gave up.
- The stock ends up between $80 and $110: Again, the reverse convertible is better, because you got $110 (your principal plus interest); it’s a little better if the stock ends up close to $110, a lot better if the stock ends up at $81.*
- The stock ends up above $110: Here, you do anywhere from a little worse (if the stock ends at $111) to much, much, much worse (if the stock goes over $200).
And then he asks, with no small justification, “What the hell is the point of this product?”
This is why I think that a financial regime needs to be established with the idea that that which is not explicitly approved is prohibited, because the current regime, even under Obama’s updates, gives us this toxic waste.
And there is a lot of skepticism, particularly about expanding the Federal Reserve’s regulatory role, because, as Alan “Bubbles” demonstrated, you could end up with an incompetent lunatic running the most opaque organization in Washington, see here, here, here
They should be concerned. While insulation from oversight and public input might be a good thing when one manages the monetary system and has to create a recession to reign in inflation, it is not when you are talking about regulating agencies.
I think that this is something that Lawrence Summers wanted, because he believes that Obama will appoint him to succeed “Helicopter” Ben Bernanke, and he wants more authority at what he sees as his future position.
One thing that does concern me is that one of the biggest failures in this of failures, the corruption in the way ratings agencies like S&P and Moody’s operate, is largely untouched.
I’m unimpressed, but I agree with Paul Krugman when he says, “One thing I was concerned about was whether this consumer financial protection agency would be toothless , but the opposition of [a bank lobby group] makes me believe that it’s not such a bad idea after all,” when he talks about moving the regulation of consumer loans out of the Federal Reserve and move it to a dedicated consumer credit protection agency.
It’s too little, too timid, and too friendly to the forces that created this in the first place.
Well, I’ve missed a point on jobless claim numbers, which came out today, and showed increasing initial jobless claims, from 605,000 to 608,000, still into what Atrios calls “holy crap” territory, but that continuing claims fell from 6.74 million to 6.69 million.
I generally find continuing claims to be a better metric, but, as Susie Madrak notes, continuing claims do not count people whose benefits have been exhausted.
I’m not sure how to account for this in the data, but it is a factor.
On the other hand, we do have some unequivocally good news in the April vehicle miles driven statistics from the DOT for the first time in 20 months, which could be an indicator of a recovery, though gas prices nationally are about a buck cheaper, which may also be goosing the driving numbers.
We also have the index of leading economic indicators rising, a good sign, though the Philadelphia Fed’s Business Outlook Survey improved significantly, though it still shows contraction, so it’s an positive 2nd derivative.
It also looks like yesterday’s report of declining mortgage bond yields did predict today’s report of falling mortgage rates, with the 30 year fixed rate dropping 21 basis points (0.21%) to 5.38%, which should relieve some of the pressure on housing.
Still, with Midtown Manhattan office rents falling, down 28% year over year (!), the other show in real estate, the commercial side, is clearly dropping.
A note on the recent rise in interest rates, the real yield (interest -inflation) on 10 year treasuries is at a 15 year high, over 5%, which indicates that that inflation fears might be overblown.
The energy and currency markets have viewed today’s news as generally positive though, with oil rising, though Nigerian unrest contributed to this, and the dollar falling.
Because he will be testifying before the House Committee on Oversight and Government Reform as to whether or not he told Bank of America CEC Ken Lewis to break the law, and it appears to me that he has three options legally, admit to a felony, lie, or take the 5th, and if he takes the last route, Larry Summers is Chairman of the Fed before the July 4th weekend.
