That’s what the Federal Reserve and the US Treasury have committed to spending to bailout the banks
That’s roughly 90% the GDP of the US.
We could give everyone healthcare for about 5½ years with that money, but we are bailing out rich corrupt idiots instead.
So, we have the inflation numbers for May, and the CPI was up 0.1% over April, and down 1.3% year over year, the biggest price decline since April, 1950.
The deflation would have been worse, but for the ramp up in retail gasoline prices, which continues on its tear, with prices having risen for 50 straight days.
In the mean time, banking is getting interesting, with S&P cutting ratings on 18 major banks, including Wells Fargo, Capital One, BB&T.
Additionally, you have credit default swaps (CDS) have shown their largest 3 day in over 3 months, which indicates that there is a belief that the risks of default on corporate bonds is getting worse.
The fact that treasuries have staged a mini-rally, with prices up and yields down, is either a measure of concern about corporate bonds, or relief about the low inflation numbers, I’m not sure which.
Real estate is full of mixed signals. Mortgage applications fell to a 7 month low, largely on the relatively high interest rates, but mortgage bond yields have been falling for a week, which would point toward lower rates in the future.
The low inflation is perceived, to be a good marker for recovery, which pushed the dollar down, because of less demand for the $US safe haven.
Oil is getting just plain flaky. It finished the day up, to $71.03/bbl, though it dropped like a stone earlier in the day following news that gasoline stockpiles rose by 3.4 million bbl this week.
I’m not certain where oil is going, but the recent volatility seems to indicate that it is going somewhere in the near term, probably up.
So the details of Obama’s regulatory plans for finance are leaking out, and the picture is not good.
The New York Times makes a big deal about how all the stake-holders were brought in and given a voice:
President Obama’s plan to reshape financial regulation, which he will unveil on Wednesday, is the product of weeks of meetings among government officials, financial experts, lawmakers, industry executives and lobbyists, many of whom were invited to help the White House draft the proposal.
…
In the last two weeks alone, the administration has heard from top executives from Goldman Sachs, MetLife, Allstate, JPMorgan Chase, Credit Suisse, Citigroup, Barclays, UBS, Deutsche Bank, Morgan Stanley, Travelers, Prudential and Wells Fargo, among others. Administration officials also discussed the president’s plan with the top lobbyists at major financial trade associations in Washington.
So we ave the wrong and incompetent (financial experts), and the criminal and corrupt (industry executives and lobbyists) brought into the big tent in order to make one big happy family on the legislation.
As a result, they get very little right, they just rearrange the deck chairs, giving the Federal Reserve, the least accountable and most culpable of the banking regulators an expanded role, and create a “council of regulators,” which will serve to do nothing. It will be where meaningful regulation goes to die.
We already have a model for regulation that works: Roosevelt’s regulatory regime set up during the Depression.
It worked until the mid-1970s when Jimmy Carter started, and Ronald Reagan pushed to excess regulation.
About the only rule you need to add to all that is the rule that any new financial instrument is illegal until approved by a regulatory agency.
People may complain that this curtails “innovation,” but “innovation” is what got us here.
It’s a day for mixed economic news, with credit card defaults rise hitting a record in May, which obviously bodes ill for consumer spending
On less personal metrics, Los Angeles and Long Beach port traffic was up over April, though it was still down year over year, and housing starts and housing permits jumped though much of this activity may simply be builders trying to beat the $8000 first time home buyer tax credit before it expires at the end of November.
Additionally, it looks like the financial markets are moving toward some instability, as the VIX, an index of market volatility, has moved above 30, which indicates a bumpy ride, and possibly a correction, in the markets.
Inflation is muted on both sides of the Atlantic, with last with wholesale prices inflation hitting only 0.2% in May, and inflation in the Euro Zone posting a 0% rate.
Meanwhile, continued comments by Russia about moving to an alternative reserve currency to the dollar pushed the dollar down, and that, along with the housing numbers, drove crude oil up for most of the day, though it settled down $0.15/bbl, basically treading water.
[late update]
US industrial output fell 1.1% in May, and the capacity utilization rate fell to 68.3%, the lowest number since records started being kept in 1967.
Well, if you are looking for “green shoots”, the New York Fed Empire State Manufacturing Survey is not one of them, they got worse (see picture).
Additionally, the NAHB Builder Confidence fell a bit in June, from 16 to 15, with 50 being neutral, so that remains awful.
When one considers that delinquencies on commercial mortgage backed securities broke 2%, this is a state of mind that accurately reflects the reality out there.
Still, another measure of consumer confidence, this one from the University of Michigan, , which is marginally better, but still well below the 10 year average of 88.2.
We also have two relatively well known business have filed for bankruptcy reorganization, Six Flags amusement parks and the Extended Stay hotel chain.
Meanwhile, in Ireland, deflation has hit an annual rate of -4.7%, which is not surprising. There are a lot fewer dollars (Euros) chasing goods there, now that their bubble has popped.
Still, it appears that foreign investors are more confident about the future on a global level, as they have cut back on purchases of long term US securities, as the flight to safety slowed/reversed.
Meanwhile, we are starting to see some inflation from the recovery in oil prices, with import prices rising 1.3%, largely on oil, though they are down by 17.6% (!) year over year.
This has driven the price of retail gasoline up again, and are now up 63% for the year, though crude oil fell today.
The dollar was up, largely on statements by Russia that it should remain the world’s reserve currency.
The Wall Street Journal has the story of how a bunch of the large investment banks got burned investing in “sure fire” credit default swaps. (paid subscription required)
You get a copy of the article here.
This kind of crap is why naked credit default swaps should be banned.
This ain’t nothing but a bunco game, straight out of the Mel Brooks movie, and Broadway musical, The Producers.
Some quotes from the article, and my comments:
The trade, by Amherst Holdings of Austin, Texas, was particularly galling to the big banks because it turned what they believed was a sure-fire profit into a loss.
(all emphasis in quotes mine)
If the profit is “sure fire” it means that someone is engaging in deceptive activity.
Privately held Amherst says it acted in good faith trying to limit losses for clients, who had sold credit-default swaps on the securities. “We wouldn’t jeopardize our business and reputation by entering into an opportunistic trade knowing what the outcome would be,” said Amherst’s chief executive, Sean Dobson.
This is a shot across the bow of the banks on the other side, since this is exactly what the big investment banks intended.
So far the latest dust-up has been all words, in part, bankers say, because they are wary of attracting more regulatory scrutiny at a time when lawmakers are planning major reforms in the largely unregulated derivatives markets, long lucrative for banks. While the banks’ combined losses from the trade were in the tens of millions of dollars — modest by recent standards — they are the buzz of Wall Street as firms try to prevent a repeat of the episode.
Ban naked CDS contracts, and it will not repeat.
Traders can buy credit-default swaps on securities they don’t own. At one point, at least $130 million of bets had been made on the performance of around $27 million in securities, according to a person familiar with the matter.
This is the part where credit default swaps, called a “naked” CDS in industry parlance, become a 3 card Monte game, and not insurance.
This kind of shit happens, and when things fall apart, you end up with AIG owing 40 or 50 times the value of the asset in insurance payouts.
This is why, 263 years ago, parliament passed the Marine Insurance Act of 1746, which required that anyone wanting an insurance payout demonstrate an interest in the continued existence of the property.
We have known for over 2½ centuries, since the South Sea Bubble, that this sort of insurance is dangerous and does nothing but create opportunities to game the system.
The frightening part here is that this scam is completely legal
Here is how it works:
OK, it doesn’t actually involve underpants, but still.
It’s been a busy, and a not particularly fortunate, few days for the Federal Reserve.
Basically, as a result of the increasing doubts in it as an institution, it has been forced to reveal more and more about what it does, and how it performs, and it’s not pretty.
Each disclosure, raises more doubts, which makes various people in government doubt which creates a demand for more disclosures, which raises more doubts….rinse, lather, repeat.
First, we have a report from the Fed that they lost $5.3 billion in alleged investments in Bear Stearns and AIG that were a part of the rescue packages for the investment bank and insurance firm, which were supposed to be simple guarantees that weren’t supposed to be needed.
Then we have the Fed revealing details on it’s $1+ trillion lending program to financial institutions to the Congress, and the response from Senator Bernie Sanders (I-VT) is, “completely insufficient,” and demanding to know what the central bank is doing with the taxpayer’s money.
That sort of push-back against the Fed would have been unthinkable just 2 years ago, and it’s one reason why they have walked away from asking Congress to grant them the power to sell their own debt.
They know that any request for additional power right now would be viewed as a turd in a punchbowl.
Finally, we have reports that the Federal Reserve ordered Ken Lewis and Bank of America to conceal material facts from their shareholders, which is securities fraud, so the House Oversight and Government Reform Committee issuing a subpoena for the relevant documents.
So now between the testimony of BOA CEO Ken Lewis, recently released emails, and an internal memo confirming this.
It is therefore not surprising that they are hiring a high power Washington lobbyist to plead their case with Congress.
I think that there are some areas, such as managing monetary policy in order to control inflation, where there is some justification for insulating the decision making process from democracy, but the role of the Fed has expanded under Volker and (particularly) Greenspan, and has moved into areas where oversight by the Legislative, Executive, and Judicial branches really is necessary.
This is wack. CNBC interviews Barney Frank, and tries to make a bunch of right wing talking points about how the shareholder shouldn’t have any authority in a company, and then they shout him down when they don’t like the answers that he gives, so Frank terminates the interview.
We had the latest jobless report come out, and it’s another mixed bag, with the initial claims falling by 24K to 601,000, and the 4 week moving average fell to 621,750, but continuing claims rose again to another record, 6.82 million.
We also have mixed news on retail sales, with a ½% increase month over month, but a 10.8% decrease year over year, and a lot of the increase was driven by more expensive retail gasoline, which, by the way, was up again today, to $2.632/gal.
And real estate is not looking good, with foreclosures hitting the 3rd highest on record, and
mortgage rates rising sharply, to nearly 6%.
Additionally we have, despite the recent stock rally, Americans’ wealth falling $1.3 so far in 2009.
Additionally, international trade is still in the doldrums, with China’s exports in may down 26.4% year over year.
On the brighter side, Treasury yields fell, indicating that the upward pressure on interest rates may be abating.
In any case, it looks like oil will continue heading up, a prices closing at $72.68/bbl, though it was above $73 earlier in the day, largely on the IEA’s upwardly revised estimates of world demand.
In currency, the dollar fells on what were seen to be positive jobs and sales data, which reduced safe-haven demand.
Well, we are seeing some more signs of increasing rates, with the 10-year Treasury hitting 4%, the highest level since October of last year.
It could mean that fewer investors are fleeing to the safety of treasuries, or it could mean that the monetary expansion is finally hitting interest rates (see pic).
My money is on the former, but that doesn’t stop rising mortgage rates from pushing down the volume of home loan applications.
In international trade, the US trade deficit rose, not because of additional imports, but because of fewer exports. International trade remains at rather low levels.
We have some good news from the Federal Reserve, in a 2nd derivative kind of way, with their so-called Beige Book showing that the pace of the decline is slacking off somewhat.
We also have some good news from the UK, with UK industrial output rising for the first time since February of last year, up 0.3%, though it is still down 12.3% year over year.
Gordon Brown’s aggressive approach to the downturn may be showing some fruit.
We actually had a lot of action in the currency market today, with both Russia and Brazil making large buys of IMF bonds, so as to diversify away from US Treasuries.
For Russia, that may just be grandstanding, but for Brazil, it’s a significant move.
In any case, it drove the dollar down for most of the day, though it finished up at the end of trading.
In energy, oil rose on falling stockpiles, and wholesale gasoline futures rose about $2/gal for the first time since October.
So they are trading an explicit guarantee with an implicit guarantee, and in exchange, they get to overpay themselves again.
The Congressional Oversight Panel (COP) chaired by Elizabeth Warren is saying that the stress tests were incomplete, too optimistic as to economic condistions, and too opaque
Opacity seems to be the Obama model on everything from the economy, to torture, to crimes by Bush and His Evil Minions&trade.
So, it seems that after much in the way of government bailout money, and the fact that much of their voting equity is now government owned, the FDIC is looking at ousting Citi CEO Vikram Pandit.
There is one problem though, evidence of excessive spending on his lavish offices, his pay, and his bonuses is not enough to convince Timothy “Eddie Haskell” Geithner that a management change is justified, so he’s digging his heels in to keep Pandit as running, and mismanaging, Citigroup.
The first reform we need is to make sure that senior political officials who make policy aren’t just the big bank’s towel boys, and this ain’t happening.
And in my own backyard, no less.
We now have confirmation that a number of banks, most notably Wells Fargo, specifically and disproportionately targeted blacks for high interest subprime mortgages:
As she describes it, Beth Jacobson and her fellow loan officers at Wells Fargo Bank “rode the stagecoach from hell” for a decade, systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.
These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.
Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”
I don’t know what bothers me more, that this happened, or that I am so unsurprised that this happened.
And it ain’t just Wells.
I think that the lede for today is the fact that two of the most prominent indicators of consumer distress, consumer credit card delinquency and consumer bankruptcy filings are up 11% and 37% year over year respectively.
These “green shoots” are all about the bankers, not about the real economy, or real people.
What’s more, indicators of the economy that are independent of investment banking, things like, the American Trucking Association Tonnage Index and the AAR’s reports on rail volume (same link), continue their downward trend.
The so-called “green shoots” are things like the Conference Board’s Employment Trends Index, which improved for the first time in 16 months:
The Conference Board Employment Trends Index (ETI)™ saw a small uptick in May. The index now stands at 89.9, increasing 0.2 percent from the revised April figure of 89.7, and down 20 percent from a year ago.
So, a 1 months uptick of less than 0.3% is a promising sign (100=1996), even though it’s still down 29% year over year, and 1996 was a great year only by the standards of the Bush economy.
Meanwhile, in international finance, downgraded the Celtic Kitten, Ireland from AA+ to AA, because Ireland, the Baltics, and much of the rest of the new EU members have experienced growth driven more by speculative flows rather than real economic development.
In energy, retail gasoline was up again this week, that’s about 27% in the past month and a half, to $2.613/gal, though oil was down slightly, largely on a stronger dollar.
Bank of Lincolnwood, Lincolnwood, IL, which makes 37 for the year.
Additionally, we have an update on Silverton Bank of Atlanta, Georgia. This large, “Bank of Banks,” has been unable to find a buyer, so they are going to have to wind it down, at considerable taxpayer expense:
The U.S. Federal Deposit Insurance Corp said Friday that it would wind down Silverton Bank, a failed Atlanta bank that regulators seized last month, and sell its assets instead of trying to sell it as a whole.
Today, we get the unemployment rate (U3). It rose from 8.9% to 9.4%, a ½% rise.
Ouch.
By way of context, you can look at the BLS alternate measures table, and U6, which is probably closest to the figures used during the depression, though it still under counts relative to the older metric, rose from 15.8% to 16.4%.
Ugly number.
Of course, the press is reporting that the decrease in non-farm payrolls was less than expected, -345,000 as opposed to their projection of something in the -500K range.
Additionally, part of the increase in unemployment is workers becoming undiscouraged and actively looking for work, though the U6 number indicates that there was still an upward revision despite that.
Still, it appears that bondholders are betting on a recovery, they are bidding up the rates on treasuries, which is also driving up mortgage rates.
There is an argument between economists as to whether this is inflation concerns, or whether people have simply stopped fleeing headlong to the safety of US Government securities.
I’m with the latter school, but you can decide for yourselves.
As to where the economy is headed, I’d bet with the insiders and banks and such, and
insider sales as reported to the SEC are going up, implying that they are expecting worse for their firms.
Still, the jobs report drove both the dollar and oil up today.
Specifically, the so called “legacy loan program” has been “indefinitely postponed”.
Remember that in Treasury-speak, “legacy” is the word for toxic, and the program, which was to be run by the FDIC, could not get the banks to sell the loans.
According to FDIC chairman Sheila Bair, “Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” which actually makes no sense.
If they can sell the assets at a higher price because of federal guarantees, and the federal guarantees amounted to a subsidy of over 50%, which meant much higher prices than they would get otherwise, they would, except for one little thing:
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
(emphasis mine)
The translation here is that if they sold their pieces of the big sh%$ pile, even with the government subsidy, they would lose so much water that it would be impossible not to recognize that the institutions were insolvent.
Basically, because of the dishonestly optimistic “stress tests,” and the banks strong-arming a change in mark to market rules by the Federal Accounting Standards Board, they can now, once again, hold this on their books at fictitious values, and so can pretend to be solvent, and go back to overpaying their incompetent senior executives.
Heck of a job, Timmy.
The Securities and Exchange Comission has charged the former CEO of Countrywide Mortgage, Angelo Mozilo, with securities fraud for insider trading.
Basically, he, former COO, David Sambol, and former CFO, Eric Sieracki, are accused of misleading investors about how crappy their lending standards were until they dumped their own stock.
This is not a criminal proceeding, but one hopes that it moves to that.
We have good news on the jobs front, with both new and continuing claims claims falling this week.
Continuing claims fell by 15K to 6,740,000, the first time that they have fallen since January 3.
We also have the rather Dickensian named Challenger Gray & Christmas reporting that corporate layoff plans fell in May.
Meanwhile, the consumer economy continues in the doldrums, with MasterCard announcing that consumer spending continues to fall, though not as quickly as earlier in the year, and the retail chain’s monthly sales reports missing expectations, though the 800 pound evil gorilla in the room, Wal Mart, has stopped reporting monthly sales figures.
Mortgage rates are continuing their climb, with the rate for a 30 year fixed mortgage hitting a 6 month high.
On the other side of the pond, both the European Central Bank and the Bank of England left their benchmark rates unchanged, which drove the dollar down, because there had been some expectation of a rate cut priced in.
Meanwhile, in energy, Goldman-Sachs predicted higher oil prices later this year, which, along with the employment data, pushed the price of oil up.
