Mark Ames notes that it looks like the banks, knowing that he would be in a position to exert significant authority over them after a new administration came in, bought him off ahead of time by investing in start-up companies where he was on the board only because of his expected future political clout.
This has been his history during his entire career, and the revolving door keeps turning.
There are proposals out there to require that derivatives be traded in open regulated markets, and banks are cranking up the lobbying machine to kill this. (Also here and here)
The reason is that it will cost them a lot of money:
Potentially billions of dollars in revenue is at stake. An effort earlier this decade to improve transparency in the corporate-bond market ended up cutting bank fees by more than $1 billion in a year, according to some studies.
For CDS and other complex financial instruments, I would put the low end of savings at tens of billions of dollars a year.
How does transparency save costs for the buyers and sellers, and cost the banks money?
Well, if you have an asset nominally worth $100, a bank would list it for sale for their customer at, say $99, and list the price to buyers at $101, which means that the bank collect $2 on each transaction.
In an public market, where these spreads would be known, buyers and sellers pursue the lowest spread, so it would be closer to $99.90 and $100.10 respectively, and that’s money out of their pockets that could be spent on whores and cocaine.
Needless to say, the banks don’t want this, so they are rolling out all sorts of voluntary measures to increase transparency, which would be observed only in the breach once the moves to regulate fade into memory.
Well, the ADP payroll estimate is out, and they are estimating a drop of 532,000 in non-farm payrolls, which is better than last month, but is still in major league suckage territory.
The Institute for Supply Management’s index of non-manufacturing businesses is in the same boat, which covers the services sector, is still declining, but not quite as badly.
So, things are getting worse less quickly, not getting better.
Meanwhile in the junction of banking and real estate, S&P has downgraded 59 prime Residential Mortgage Backed Securities (RMBS) to D, which, according to the Wiki, means, “Bankruptcy or lasting inability to make payments most likely.”
With all this going on in mortgages, it is not surprising that we are seeing higher rates and fewer mortgage applications.
Well, at least we are not in Latvia, whose government was unable to sell debt today….That’s right, we aren’t talking about paying more interest than anticipated, no one would buy their debt.
Mean while, the news of reduced demand and a surge in inventory drove oil down, while the dismal economic news drove the dollar higher, as investor looked for safe havens.
My guess is that the trend in the dollar is down, and it will be firmly ensconced somewhere weaker than $1.50:€1.00 by year’s end
Option ARMS, NegAm, and other forms or risky, exotic loans are making a comeback as 30 year fixed loan rates.
It’s amazing how quickly some lessons are unlearned.
They will be replaced by Cisco and Travelers.
Interestingly enough, Travelers was owned by Citi until spun off a few years ago.
Strange times, indeed.
I am referring, of course, to the sad fortunes of Harvard University’s endowment, which I have blogged on a number of occasions.
Well, Felix Salmon notes that , something which I noted in December, though, to be fair, I never thought that it would get to this point, he said, quoting Mr. Salmon:
Richard Bradley reports:
Harvard has already halted the hiring of junior faculty and announced an early retirement program for tenured professors, and for the first time ever is considering laying off tenured professors.
And why might Harvard be laying off tenured professors? Because it’s down to its last $25 billion, of course. Bradley adds a bit to what we know about Harvard’s financial mismanagement:
According to the university’s 2008 financial report, in the next 10 years it must pay various private investors some $11 billion in capital commitments. Where will that money come from if, as seems likely, endowment growth over those years is minimal or nonexistent, and alumni’s own strained budgets limit their generosity?
So, the question here is where Harvard will go with all of this.
Obviously, hitting up alumni for more money is a given. That’s what they do normally.
The real question is whether they will either move to a less aggressive, and less risky strategy, which will provide lower, but more stable, returns and greater liquidity, or whether they will go whole hog into more private equity deals, betting on a rebound which will lift them out of their problem?
Human nature being what it is, I’m going to guess that they go with the latter, because doubling down on failure is basic human nature.
*Yes, I spent a lot of time on this title, and get your mind out of the gutter!
It looks like the banks are at it again, in this case, Associated Banc-Corp, which received $525 million in TARP funds, and its former President and CEO, Lisa Binder, who arranged a $1.65 million payout upon her resignation, they just dressed it up as a “non-compete” agreement.
Grrrr…
When I last wrote about PBGC head Charles Millard, who a large portion of the agency’s trust fund, and put it in the stock market just before the crash, I thought that it was just another case of another incompetent ideologue.
I was wrong. It’s Bush and His Evil Minions™ style corruption, baby!
The House Education and Labor Committee is now investigating his contacts with the investment banks that actually bought the stock, and generated over $100 million in fees.
So, they called Millard to testify, and he repeatedly invoked the 5th.
Sounds to me like he was throwing business their way in exchange for the possibility of a lucrative job offer.
Remember when I was talking about economic journamalism on durable goods orders?
Well Bloomberg gets the story right, with U.S. Economy: Durable-Goods Orders Hover Near Lowest Since 1996, but Reuters (U.S. April durable goods orders post biggest gain in 16 months), and CNBC (Durable Goods in Surprise Jump; Jobless Claims Dip), both get it very, very wrong.
Let’s roll the Bloomberg story for what is going on:
Orders rose 1.9 percent in April after a 2.1 percent drop in March that was more than twice as large as previously estimated, the Commerce Department said in Washington. Meanwhile, the Labor Department said 6.79 million people are collecting jobless benefits, and another report showed new-home sales were lower than forecast in April.
(emphasis mine)
OK, this looks like a 1.9% bump, which is a significant bump, but Bloomberg covered this as low numbers.
Why is this correct, and Reuters and CNBC wrong?
That phrase, “more than twice as large as previously estimated,” is why it is wrong.
As Reuters notes a few ‘graphs down:
However, March orders were revised sharply lower, falling 2.1 percent from the previously reported 0.8 percent decline.
So, we are comparing initial estimates for April with revised numbers for March.
If you were to compare apples to apples, you would have 1.9%-2.1%-(-0.8%), or 1.9%-2.1%+0.8%, or a growth of 0.6% comparing apples to apples.
In fact, you get a lot of this out of the government statistic machine, and it’s faithfully echoed by the press.
You have a number that is an improvement over the last month’s (revised) numbers, and it’s really good news…..And then, a few weeks later it’s revised down, and the new figures for the next month come out, and they look really good compared to the downwardly revised previous figures.
Rinse, lather, repeat.
The inspector general has issued a report, and we now know that the OTS approved or directed banks to backdate captital contributions in order to make the institutions that they regulated appear in better shape than they were.
And now these jokers are letting leveraged buyout experts buy into small community banks, despite the best efforts of the FDIC and the Federal Reserve has closed, allowing.
There is talk of regulatory fixes, and one is to prevent banks from forum shopping, so that agencies compete in this way to get more money from fees.
Doing away with the OTS would be a good start.
It looks like some of the larger bondholders have blinked, and have agreed to a slightled debt for equity swap.
Even so, GM’s bankruptcy now seems a foregone conclusion.
It’s the Credit Default Swap doing this. There are too many players out there who bought the debt cheap along with an under-priced CDS to hedge the risk, and so have no incentive not to burn the house down.
Still, all this has GM playing the turd in the punchbowl in Europe, where it
made a surprise demand for an additional €300 million payment on the sale of its Opel division, and at this point, the Germans are beginning to suspect that the US Treasury is trying to pull this money from Germany to the US:
German leaders expressed frustration with the United States Treasury, citing inadequate guarantees that European assets would be protected from the likely bankruptcy filing in American courts and that German money would be used only for Opel.
There is also the issue that EU regulators are looking to see if the loan guarantees offered are an illegal state subsidy.
Meanwhile, Ford’s former parts division, Visteon, and Metaldyne have both filed for bankruptcy, and I think that this likely going to get worse, not better.
Remember the PPIP program, where the US government is going to subsidize the purchase of financial toxic waste in an attempt to clear out banks’ balance sheets?
Well, Sheilah Bair just said that banks will not be allowed to purchase their own toxic assets, which is a good thing, as it it turns the program into little more than a corrupt subsidy program to shake down the taxpayer…..Make than an even more corrupt subsidy program to shake down the taxpayer.
If you had told me 18 months ago that the most responsible member of Obama’s economic team would be a Bush holdover, I would have wanted whatever it was that you were smoking.
H/T Calculated Risk.
A profile of Brooksley Born, who ran the CFTC, and warned of the risks that unregulated derivatives posed in the market, has a profile in the Washington Post, which calls her the, “Cassandra of the Derivatives Crisis”.
I’ve related this story before, but this anecdote just shows how completely delusional Mssrs. Greenspan, Rubin, and Summers were:
Born’s baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan — routinely hailed as a “genius,” the “maestro,” the “Oracle” — wanted her to come over for lunch.
Greenspan had an unusual take on market fraud, Born recounted: “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”
This made no sense to her. She’d spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market.
“After all,” Born said, looking back, “I’m a lawyer, and I think the existence of fraud prohibitions is critically important.”
But Greenspan was insistent, she said.
Finally, he said, “Well, Brooksley, I guess you and I will never agree about fraud.” (Greenspan did not respond to requests for comment. Daniel Waldman and Michael Greenberger, both top aides of Born’s, were briefed on the lunch at the time and independently confirmed Born’s recollection of the conversation.)
(emphasis mine)
Seriously, this is beyond ideological. This is quite literally completely detached from reality, and Alan Greenspan was viewed as a genius of unparalleled proportion at that time.
So, it looks like the ratings agencies are beginning to do their job.
Of course, this is at absolutely the worst possible time for the economy, because it means that Standard & Poor’s is considering downgrading a large portion of the best quality commercial mortgage backed securities (CMBS):
As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.
(emphasis mine)
This, among other news, is driving rates up on CMBS, though rising rates on treasuries, despite the best efforts of the Fed to hold rates down are a contributing factor.
Basically, people believe that we will be seeing higher interest rates in the near future, which drives rates up, particularly longer term rates, which is why the spread between the 2-year and the 10-year treasury have hit a new record.
It’s why mortgage rates are on the rise, driving down new mortgage applications.
In other banking news, the FDIC’s problem bank list is now more than 300, the highest number in fifteen years.
Meanwhile in energy and currency, oil is up on Saudi statements that the world economy can “handle” $75-$80/bbl oil, and the dollar rose on concerns about bad housing data.
Well, it’s been about a month, so it’s time for another update on Zimbabwe.
Basically, things are still screwed up, and it’s all thanks to little Bobby Mugabe.
While, the IMF is offering technical assistance to the government again, most of the potential donor nations are unwilling to provide aid until the see evidence that the government has gotten it’s sh%$ together.
The lofty phrase used is, a “Commitment to economic stabilization, restoration of the rule of law, respect for property and human rights, and freedom of expression,” but it basically comes down to the fact that everything that ZANU-PF touches becomes a miasma of corruption and incompetence.
What they are really saying is that Reserve Bank of Zimbabwe governor Gideon Gono has got to go, after creating the hyperinflation that made multi-trillion $Z banknotes necessary, and also the stealing from private accounts.
Finance minister Finance minister Tendai Biti has accused the RBZ of operating illegally, and he’s probably right.
Meanwhile Gono has complained to Prime Minister Morgan Tsvangirai about the “attacks” against him.
Dude, in any sane world, a the word to describe a central banker who engineered a 516,000,000,000,000,000% inflation rate, prices doubling every 2 days or so, would be unemployed.
Just be glad that they are not trying to throw you in gaol…Yet.
Gono is where he is because he is a ZANU-PF loyalist who manages to create enough money to keep the ZANU-PF cabal satisfied.
This has led various aid agencies to take measures to avoid the government, and government agencies when distributing aid.
The MDC has called for his removal, see here and here, and have called for international intervention to remove him, see here, here, here, and here.
This has, of course, upset the delicate sensibilities of ZANU-PF officials, and Mugabe has dug his heels in on this too, probably because he needs him to, “pay the entourage.”
What a damn mess.
Well, it looks like GM could not get enough of the bond holders to agree to the deal. The deadline passed without the requisite 90% buy-in.
My guess is that a lot of the speculators who purchased this debt at around 10¢ on the dollar had already purchased Credit Default Swaps (CDS) on the face value, so they had no incentive to settle.
This is yet another example of how the complex derivatives and swaps system is broken.
The UAW has been far more accommodating, with the CAW cutting a deal in the great white north, and the UAW cutting a deal down here, which I guess is the great uninsured south.
Meanwhile, the Obama administration apparently already has the bankruptcy “i”s dotted and “t”s crossed, so we may see a filing sooner, rather than later.
It looks like the new GM will be 70% government owned, though there are many sources saying that they will take no role in how the company is run.
This is bullsh#@….Not the government ownership, but the constant assertion that when the taxpayer buys a company, that they should have no voice whatsoever in how that company is run.
Government ownership should have 2 goals:
The idea that the government should have no say in things like, location of manufacture, executive compensation, etc. when the taxpayer owns the firm is simply stupid ideological crap.
Meanwhile, there are a number of bids for GM’s Opel division, and Fiat is by no means the front-runner there.
Props to Margaret Chadbourn at Bloomberg, who sees a change in policy and recognizes its significance.
Specifically, she notes that the FDIC will be assessing an emergency assesment on banks in order to shore up their insurance fund, and she sees a real change in policy:
U.S. banks will pay an emergency fee based on their assets to rebuild the Federal Deposit Insurance Corp.’s reserves, putting a greater burden on large banks to replenish the fund amid the fastest pace of failures since 1994.
The FDIC voted 4-1 today to impose a fee of 5 cents per $100 of assets, excluding Tier 1 capital, backing away from a proposal of 20 cents per $100 of insured deposits. Local bankers said the fee on deposits could erase more than half their 2009 earnings. The fee will rebuild the fund that started the year at $18.9 billion, the lowest since 1994’s first quarter.
(emphasis mine)
Fees have traditionally been assessed on deposits, not assets, but the problems with bank failures, particularly among the giant banks are dodgy asset problems, so it serves to hit the big banks harder, who are less well capitalized on the basis of deposits.
It adds cost to risk, and it is a significant, and I hope permanent, change.
And we got two more bank failures, Citizens National Bank Macomb, IL, and Strategic Capital Bank, Champaign, IL.
When added to the failure of BankUnited on Thursday, this makesz 36 banks having failed this year, or about a 90 bank failure a year pace.
So, the bank failures come later today, it’s Friday, but Calculated Risk’s Credit Crisis Indicators are generally positive, though it appears that there are a lot of bears on Treasuries, with the 10-Year note falling sharply.
Then, we have a return of the monoliner insurers, with Moody’s looking at cutting ratings on a whole passel of them.
Meanwhile, all the concern about treasuries and the USD pushed the dollar down today, which in turn pushed oil above $61/bbl.
On the brighter side, this led OPEC to decide against a production cut.
Effective for reporting periods after November 15 of this year, the Federal Accounting Standards Board (FASB) is requiring that the assets of Qualifying Special Purpose Entities (QSPEs) be reported “on the books”.
Yes, I know your first question, “Can I have that translated please?”
The quick translation is that these are “off balance sheet entities,” which are used to conceal losses and risk.
Here is a snapshot:
Lenders recorded profits before the U.S. subprime mortgage market collapsed in 2007 by selling pooled loans to off-balance- sheet trusts, which repackaged the pools into mortgage-backed securities. Banks then sold those securities to other off- balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating mortgages.
As to the next obvious question, “What does this all mean?”, it means that significant losses and risks which, until now, have not been a part of many financial institutions reporting, will be reported, and significant losses will result.
How much?
Well, the article says about $900 billion, but my guess is that this is low, because one is always shocked when one turns over a rock.
