The bill, along with the dumb-ass guns in national parks provision, just passed the House, and now goes to the White House for Obama’s signature.
Category: regulation
Economics Update
Well, let’s lead with a rather unique bit of news, the volume of the derivatives market fell for the first time ever in the last 6 months of 2008.
The outstanding contracts fell by 15% to $592 trillion dollars (!!), or about forty times the GDP of the United States, and 110% of the entire planet.
My guess is that people suddenly realized that they had absolutely no idea at all what the hell they were holding, and started to unwind, because they did not know who they could trust.
It’s the sort of story I like, so I put it first even though by all rights the fact that Japan’s GDP fell at a 15.2% annualized rate in the first quarter of this year.
That’s Eastern Europe imploding numbers.
Export driven economies like Japan’s are going to take a hit, which is why
Moody’s is warning on possible downgrades of Asian banks, specifically those in Korea, Malaysia, the Philippines, and Indonesia.
Still we have a couple of glimmers on real estate, with the Architecture Billings Index holding steady in April, indicating that there future building is at least taking a pause downward, and mortgage applications rose in response to low interest rates, though much of that is refi activity.
Of course, the commercial real estate market market is still heading down sharply, which is why the Federal Reserve has expanded the TALF to include commercial mortgage backed securities.
Ending with oil and the US dollar, oil finished above $60 for the first time since November, $62.04/bbl, and the dollar hit a 5-month low on more optimism about the world economy.
I don’t get that last bit. All I see is a dead cat bounce.
The Big Lies of 2009
- The Check is in the mail.
- It’s not about the money.
- This won’t hurt a bit.
- Honey, I won’t come in your mouth.
- I’ll respect you in the morning.
- Goldman, JPMorgan, Morgan Stanley will be paying back the TARP Money
Yes, they are….Only, there’s no mention of repaying the FDIC insured loans, and they are trying to weasel out from their obligations in the stock warrants that they issued to the US Government at the time they got the money, which could cost taxpayers billions of dollars.
I expect the Treasury to act in a way that benefits the banks at the expense of the taxpayers, since that’s what Geithner has been doing his whole career.
In any case, it appears that the Fed has set a timetable of around June 8 for a response, and there are restrictions on paying back the money, including another “stress test” and getting off the FDIC gravy train, because, of course, senior executives think that their own inflated paychecks are more important than the health and well being of their banks.
More Bank Failure Fridays Not On Friday
Well, there were no bank failures on last Friday, but we have the continuing saga of BankUnited, which regulators have called “critically undercapitalized”:
WL Ross & Co. and private-equity firms including Carlyle Group made a bid to buy BankUnited Financial Corp. assets provided they are put into receivership by the U.S. government, a person familiar with the matter said.
So it seems to me that it is time to put a fork in BankUnited, it’s done.
Senate Passes Credit Card Bill
It was an overwhelming vote, 90-5 in favor, which indicates that a lot of ‘Phant Senators got calls from outraged constituents.
It’s a bit weaker than the House version, and contains that dumb ass “guns in national parks” provision.
We’ll see what comes out of conference committee.
Still, this is not something that I expected to see in my lifetime.
An Idea So Good, that It Can’t Happen Here
But it appears that the EU is getting ready to give people the same basic rights with software as they have with other consumer products:
Software companies could be held responsible for the security and efficacy of their products, if a new European Commission consumer protection proposal becomes law.
Commissioners Viviane Reding and Meglena Kuneva have proposed that EU consumer protections for physical products be extended to software. The suggested change in the law is part of an EU action agenda put forward by the commissioners after identifying gaps in EU consumer protection rules.
This would invalidate the bullsh$# license provisions which say, “What, you expected this sh#$ to work? Your problem!”
It would, of course, put Microflaccid out of business.
The Fall of the House of Hank Greenberg
The Times of London has a very good account of what took down AIG, and it predates Joseph Cassano, the head of its Financial Products Unit, and it makes it clear that the insurance giant was on shaky ground, with the active participation of its founder Hank Greenberg, for at least a decade previous.
It also notes how Brooksley Born, who was purged by Fed Chairman Alan “Bubbles” Greenspan and Treasury Secretary Robert “Why am I not Under Indictment for Insider Trading” Rubin, knew about the problem, and that it was systemic, and tried to do something about it.
It’s a good read, and highly recommended.
Economics Update
Well, we have another expert on the economy saying that the so-called green shoots are not real, the Postmaster General of the United States, John Potter, is saying that mail volume continues to fall, and in these days of email, increasingly mail volume is driven by, and so is a a very good indicator of, the state of the mail order business.
On the other hand, the banks have continued loosening short term credit, with
the LIBOR dropping sharply again, indicating that bank to bank lending is getting healther, and the National Association of Homebuilder confidence index rose to 16 from 14, though with neutral being 50, this is a change from “end of the world bad” to “beins strapped in a chair and forced to watch the Ben Affleck Jennifer Lopez movie Gigli” bad.
It doesn’t help that the situation for the GSEs, Fannie and Freddie, is looking increasingly dire, with further losses into the tens, if not hundreds of billions forecast, and one wonders if at some point, a decision is made to wind them down, which would eliminate much of the available financing available for mortgages in the US.
I would also note that, with the big banks concentrating on buying up other banks, the fact that the smaller US look to need an additional $24 billion in capital does not bode well for the finance needs for much of our economy.
While we’re at it, let’s note that the real estate crash is now firmly hitting the higher end of the market, as people purchase those homes as “trade ups,” and they have run out of rubes people with sufficient equity in the old homes to do so.
And in the old standbys, energy and currency, rose by the most in a month, on concerns about Nigerian unrest, a fire at a refinery in Pennsylvania, and concerns about the start of the Summer driving season, while dollar rose on comments by the Japanese Finance Ministry that they needed to work to keep the Yen from appreciating too much.
Economics Update
Grim news out of Europe, with Euro zone GDP collapsing by 2.5% in the first quarter…That’s a quarterly decline, not a year over year decline, and largest decline for the Euro zone in at least 13 years. Before that there were no Euro zone statistics. (It should be noted that the YoY number is 4.6%, which is merely scary, as opposed to a terrifying double digit annual decline)
Not surprisingly, this pushed the dollar up relative to the Euro.
As bad as this was, it was even worse in Eastern Europe, because their recent growth was driven by exports and foreign investments looking for high returns, which are both gone.
Again using the quarterly numbers, Hungary -6.4%, Slovakia -5.4%, the Czech Republic -3.4, and Romania -6.4%.
A lot of this was driven by Germany’s contraction, which was among the largest in Western Europe, because they have a Hooverite as Chancellor, which was -3.8%, the biggest decline in Germany since the end of WWII.
Seriously we are talking end of the world numbers, he said, citing experts:
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath of God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling!
Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes…
Winston Zeddemore: The dead rising from the grave!
Dr. Peter Venkman: Human sacrifice, dogs and cats living together… mass hysteria!
Of course you have to go to Russia for a really scary number, -9.5% in the first quarter….Annualize that.
The news from the US was relatively mild, with the Empire State Manufacturing Survey showing only a modest decline. The index was up, but still below zero, so it still indicates contraction, and the Fed’s report on capacity utilization showed a marked decline.
We are still seeing the largest year over year decline in consumer prices since June 1955, but month to month indicates that there was no change, which eases deflationary concerns…A bit.
In banking, we are seeing further signs of easing with both the LIBOR and TED spread falling.
The easing of credit may be why the FDIC is walking away from its plan to guarantee 10 year bank bonds, though there are also indications of push-back from Treasury.
Meanwhile, the horrible GDP numbers from Europe, and the stronger dollar drove oil down, though retail gasoline is moving in the opposite direction, up 12% over the past 17 days.
Am I The Only Person Left Not Applying for TARP Money?
Because it’s beginning to feel like my geek days in high school*, when I though that I was the only virgin among the 1200+ students at Woodrow Wilson High School, because we have yet more people scrambling for TARP money.
First, we have major insurance companies getting major commitments of money:
The Treasury yesterday granted preliminary approval for some of the nation’s largest insurance companies to receive capital infusions under the government’s Troubled Assets Relief Program, Treasury spokesman Andrew Williams said.
Recipients are Hartford, Prudential, Allstate, Ameriprise, Lincoln National and Principal Financial Group, he said. The insurers notified yesterday are among hundreds of financial institutions in the pipeline “that are being reviewed and funded as appropriate on a rolling basis,” Williams said.
In addition we have YRC Worldwide, one of the largest trucking firms in the world, applying for bailout money to shore up its underfunded pension plan.
They are a big player, over 20%, in the “less-than-truckload” market, where loads amongst multiple customers are consolidated onto one truck.
How do I get my hands on some free money? I gotta start me a bank……I’ll pay myself just $500,000 a year, along with a $½ million bonus.
*I was more than just a geek. I wasn’t just a wargamer who played Dungeons and Dragons, but I founded the wargaming club at the school. I was the king of the geeks.
Talk About the Odd Couple
By which I mean Representative Ron Paul, Libertarian icon, and Senator Bernie Sanders, socialist are have both submitted bills calling for a full audit of the books of the Federal Reserve System, both the board, and the 12 regional banks.
I think that their motivations are different, Paul has long opposed the Fed because it sees it as an unwarranted intrusion by the government into the market, and Sanders sees it as being a tool of the big banks, but knowing what the Fed is doing would be a good thing, for everyone but Federal Reserve members.
Note that there is a general bipartisan consensus towards opening up the fed, as evidenced by the Senate’s passage of a bankruptcy reform bill with an amendment that expands oversight of the Federal Reserve.
I think that it’s clear that the role of the Fed in the current crisis shows that its role should be significantly restricted. I understand why there needs to be an institution which is insulated from political winds to manages monetary policy, but in their roles of bank regulator and bank rescuer, this “insulation”, is a level of opaqueness that does not serve society.
BankUnited It Looks Like Bank Failure Friday on Thursday
BankUnited is in trouble. Regulators have called “critically undercapitalized”, and so they are looking for a buyer.
Only one problem, it appears that the bidders are demanding that BankU be placed in receivership, i.e. taken over by the government and the common shareholders wiped out, before they buy into it.
This won’t be pretty.
Hank Paulson and His Evil Minions&trade Strong Armed the Banks into Taking TARP
And, BTW, Paulson’s Evil Minions™ include the then president of the Federal Reserve Bank of New York, one Timothy “Eddie Haskell” Geithner.
Judicial watch is a bunch of nuts right-wing, or maybe they are a bunch right-wing of squirrels who collect nuts, but every now and then amongst their nuts (FOIA requests) they turn up a gem, and this time, it appears to be a doozy.
Basically, they have the memos about the initial TARP, and it is clear from them that Hank Paulson told the banks that they had no choice about letting the US government buy equity in them(See also here and here):
“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed. If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance,” the document said, citing Paulson talking points.
One of the things of interest here (see the Scribd Window) is that Hank Paulson’s chief of staff did not know who the “big 9 banks” were….The Secretary of the Treasury‘s chief of staff did not know who the big 10 banks were?
Great googly moogly.
Treasury CEO Talking Points v1
Publish at Scribd or explore others:
Note that the Scribd link is from Market Ticker, who also notes that according to AIG President Edward Liddy, the Federal Reserve insisted that all Credit Default Swaps at 100¢ on the dollar (CSPAN video Link at about 2:25:00)
US Looking at New Regulations on Finance Industry
I find this hard to believe, coming as it does from Timothy “Regulatory Capture” Geithner, but we now have reports that the Treasury is looking at new regulations on bank executive compensation, with the appropriate squeals of protest from the pigs who get the pay and bonuses.
There is also a proposal to regulate derivative trading by requiring that most of them be traded on open and transparent markets, as opposed to the “black pools” in the shadow banking system.
Additionally they are looking to implement a reporting system on these trades based on the “Trace” system on bond prices, which halved the spreads between buy and sell prices that banks charged to purchasers by about ½.
Now, if they could only remember the lessons the Marine Insurance Act of 1746, and require that people who buy insurance, including swaps, must have a material interest in the underlying asset.
Unfortunately, Geithner, Summers, and Their Evil Minions™ still have their heart set on making the Federal Reserve the “systemic risk regulator, which is bad for a number of reasons:
- The Fed has been captured by Wall Street.
- There is no accountability at all, with its members appointed to very long terms by Congress, or by the banks themselves.
- The organization is opaque and secretive.
My guess is that these proposals are going to be half measures designed to forestall real change, but I’m a pessimist realist.
Credit Card Reform May Relax Rules for Retailers
Specifically, the bill in the Senate is likely to contain regulations that would relax the regulations on retailers for charging to use credit and debit cards:
The law allows merchants to charge less for using cash, but card companies’ contracts with retailers can make it difficult. Merchants say they’re required to post two prices on every product if they want to charge more for credit card use, and that the credit card price be more prominent. Retailers can face penalties if they don’t.
The legislation would allow discounts for debit cards and ban retaliation against retailers who charge less for transactions that don’t involve credit cards. [merchants and credit-card costs]
“The extra charges the establishment has to pay for the use of a credit card are kind of hidden inflaters in the cost of the product,” said Sen. Richard Durbin (D., Ill.), who is pushing the measure with Sen. Christopher Bond (R., Mo.).
Needless to say, the banks and other credit card issuers are aggressively lobbying against this.
Financial Innovations Did Not Create Capital
I’m Not Seeing Capital Growth (Blue Line)
And look over here, all those derivatives? They are not hitting the real world, they are just trading amongst themselves, and generating commissions, but, “it is a revealing indicator that the non financial companies for whom these products were prescribed did not themselves use them.” Imagine that.One of the alibis presented by those who created the current crisis in the financial system is that this innovation made capital more available, and hence increased economic growth.
So Adam S. Posen and Marc Hinterschweiger take a look at this theory, and they discover that there are no facts to back up this hypothesis:
….
But not every innovative product is safe, let alone productive. Unlike pharmaceuticals, aerospace, and a host of other technical fields, financial innovations have been allowed to proliferate unscrutinized and untested for safety or effectiveness. Yet the negative spillovers on the public at large from faulty financial engineering and toxic products have now been clearly demonstrated to be enormous. In particular, there is some solid evidence that the most recent batch of financial innovations was used in manners inconsistent with their labeling, and not only had terrible side effects, but did not even yield the advertised benefits.
….
Between 2003 and 2008, US gross fixed capital increased by about 25 percent, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300 percent, while derivatives held by the 25 largest US commercial banks rose by 170 percent.
The reality is that people were not aiding capital formation of the “real” economy, they were creating products that would best allow them to feather their own nests.
In other words, this world of innovation was actually an exercise in personal selfishness.
There is a word for this, capitalism, and the same capitalism that creates a hybrid car also gives us the crack dealer and the stock broker, and the crack dealer harms far fewer people.
Elections Have Consequences
Under Obama, the Justice Department is planning much more aggressive anti-trust enforcement (see also here and here)
About damn time.
Economics Update
It appears that the Fed’s best efforts to revive the housing market through low interest rates may be reaching their limits as mortgage rates and long term bonds climb higher.
Additionally, it appears that the Obama administration is seriously looking at winding down and liquidating Fannie Mae and Freddie Mac in the long term, which would generally push up mortgages issued after that point.
In the long run, I see this as a good thing. Home ownership as a goal in and of itself has driven much of the ills in our society whether it is the housing bubble, or the suburbanization of our society and out energy consumption levels,
In energy, oil fell on inventory growth, but that has not lowered retail gasoline prices, which are up 9% over the past 2 weeks.
In the mean time, the dollar and the Yen both rose, as the stock market decline pushed investors into safe havens.
Groundhog Day
Yawn, another day, another claim by the “healthier” of the big banks that they are going to repay the TARP money “any day now”.
Of course they are…..Really….Just as soon as they pay back the FDIC loans.
25-to-1 Leverage is Not a Healthy Bank
But that is the standard used by the US Department of the Treasury in the stress tests to define properly capitalized.
Great googly moogly.