Category: regulation

Banks Exposure to Risky Derivatives Surges

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So the latest regulatory filings show that the big 5 banks exposure to risky financial instruments has exploded, which means that their potential losses have exploded, and so the possibility of being insolvent has increased.

I’m particularly concerned about when the lines cross, which is JPMorgan, and Citi, though it probably applies to Bank of America too, because this graph does not include the derivatives and other financial time bombs that it acquired when it bought Merrill Lynch.

Of course, Geithner and Summers just think that these assets are “artificially” depressed, and so the banks really are solvent…..Tools.

GAO Report Savages Future Combat System

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Seriously, the report is brutal:

Advocates of restructuring or cutting back on FCS will find ammunition in the draft report. In it, GAO asserts that FCS is “unlikely to be executed” for the $159 billion the Army says it will cost, a source said, citing the draft.

Moreover, and perhaps more relevant to the current decision-making within the Pentagon, GAO states that the Army has already spent 60 percent of its FCS development funds even though “the most expensive activities remain to be done before the production decision” in 2013.

GAO contends that the funding situation will deteriorate for FCS as the program’s costs will likely grow at the same time as competition for federal funds tightens, a source said.

The report also cites what it calls “actual immaturity” in the program, according to sources. Calling the network performance “largely unproven,” GAO says the Army has failed to convincingly demonstrate that FCS designs will meet their requirements, a source told ITA.

I am completely not shocked at this. I worked on the program, and it was over ambitious, and managed under the now discredited Lead System Integrator (LSI) concept, which been universally unsuccessful.

It’s no surprise that this whole program has turned into a clusterf^%$.

Stating the Blatantly Obvious: Defense Procurement Edition

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Finally, we are now seeing procurement experts suggesting that cost be made a formal requirement on major procurement programs, the technical term is Key Performance Parameter (KPP), to which I would add schedule.

Among other things, this would mean that going over budget at all would be grounds for termination for cause (no money) as opposed to a termination for convenience (cost plus).

I would in fact suggest that cost and schedule be made “super-requirements,” and that other requirements would be subordinate to them.

What this would mean is that we would not procure immature technologies, and that the costs would be known at the start of a program, which would prevent the 20+ year F-22/JSF type hideously expensive procurement debacles.

What the Smart Economists Say

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Former Federal Reserve Chairman Paul Volker is saying that we need to go back to separate investment and commercial banks, a return to something very much like Glass-Steagall, which Phil Gramm and His Evil Minions™ got repealed at the turn of the century.

In the not-fed-chair-but-a-Nobel division, we have Myron Scholes saying that “blow up or burn” over-the-counter derivative trading markets if we are serious about fixing the financial crisis:

The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today at a panel discussion at New York University’s Stern School of Business. Participants need a way to exit transactions and get a “fresh start,” he said.

The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”

Alan “Bubbles” Greenspan must be turning over in his grave, or maybe he’s turning over in Ayn Rand’s grave, where he resides until the sun sets.

Paul Krugman Is Freaking Out

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Specifically, he is freaking out over the “let them eat cake” policies of Mssrs. Geithner and Summers with regard to the insolvent banking giants:

….Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

He is referring, of course to Geithner’s insistence that the big sh%$pile has an “artificially depressed value”, and Ben Bernanke’s denial of zombie financial institutions, including AIG (!).

These, quite honestly delusional preconceptions have a very real cost, as the Nobel prize winning economist notes:

But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

(emphasis mine)

Personally, I lay even more of this at the feet of Lawrence Summers than I do either Geithner or Bernanke: He was one of the most vociferous free-market mousketeers, and his professional life has been marked by failure and misery left in his wake.

Of course, Summers will come out of this clean, as he has mastered the art of failing up even more than Dick Cheney.

Because Timothy Geithner is a Loser

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So, Annette Nazareth and Caroline Atkinson, have withdrawn their names from consideration for positions working in the department of the Treasury, and we have blame placed on Senate delays, and the Obama Administration’s thoroughly anal retentive vetting process.

I have no doubt that both of these issues figure prominently in some of the difficulties in staffing, though Obama is actually well ahead of the pace of recent transitions, but I think that there is another factor.

I think that a number of people out there believe that Timothy Geithner, and be extension, Lawrence Summers, simply don’t get it with the banking crisis, and that they are wrong, and that they will continue to refuse to recognize the reality that a number of the gargantuan banks in the US are simply insolvent, and so they are refusing to do the sane thing, and put them in receivership. (or pre-privatization, nationalization, or whatever the frack you want to call it)

Simply put, they recognize that in the next 6-18 months, there is a real possibility that working with Timothy Geithner on their resume will look like working with Hank Paulson, and in any case, they want no part of a policy that they see as an train wreck.

Economics Update

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Scary Pix Courtesy of Barron’s Econoday

So the unemployment rate jumped ½% in February, from 7.6% to 8.1%. and 651,000 jobs were lost.

Additionally, U6, the broadest measure of un and under employment is at 14.8%, and note that U6 is the statistic closest to the 20+% unemployment rates recorded in the great depression.
….
Delightful.

If that weren’t bad enough, 20% of all mortgaged properties are under water, and something around 1 in 9 mortgages are either in foreclosure or delinquent, so any turn around in residential real estate is are greatly exaggerated.

It also looks like the FDIC is asking Congress to lend it $500 billion, because its insurance fund is depleted.

We do have Baltic Dry Index, a measure of the demand for cargo shipping, one piece of good news, in that the just hit its highest level this year, which indicates more international trade.

Meanwhile, the jump in unemployment has driven the dollar down, and oil up.

Remember What I Said About the Marine Insurance Act of 1746?

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If not, see here, but once again, we are seeing the effects of ignoring this 346 year old lesson, because investors have made bets on the failure of bonds that they do not hold through Credit Default Swaps (CDS), and in so doing, look likely to be driving otherwise solvent companies into bankruptcy:

Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.

By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.

….

It was recognized centuries ago that you should not be allowed to use insurance to do this, because it leads to fraud and panics, but the free market mousketeers decided that that was old thinking, and that they had no need for no stinking insurance regulations.

Obama Health Care Plan: No Single Payer

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So, Obama sets up a summit on health care reform, and invites everyone but advocates for single payer, and finally, when the screaming gets too loud, relents, and invites a hand full of them.

This does not bode will for his plan.

First, if he is not more ambitious in his initial proposal than his basic desires, it will be cut down to nothing in Congress, and second, the insurance companies are evil, and any plan that makes supporting their business model a central tenet is doomed to fail.

Economics Update

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Busy day, so let’s start with the central banks: The Bank of England cuts rates by 50 basis points (½%), and is engaging in quantitative easing (printing money) in the form of buying £75 billion ($US 106 B), and the European cut its benchmark rate by 50 basis points to 1.5%, and is also looking at “further non-standard measures” (see quantitative easing).

Considering that the ECB has no charge except to manage inflation, this is extraordinary.

Unsurprisingly, the rates cuts have driven the dollar up.

As Brad Delong Notes, “It is overwhelmingly likely that the current downturn-in-progress will then surpass the united 1979-1982 downturn as the worst downturn since the Great Depression itself.“

In employment, first time jobless claims fell to 639,000, but the less volatile 4 week moving average rose to 641,750, the “highest since October 1982,” and productivity dropped 0.4% in Q4 of 2008.

Bumpy ride, folks.

On the brighter side Bonddad’s credit indicators show a thaw in lending over the past few months, and February retail sales beat expectations, though the numbers are still pretty bad.

In autos, GM is saying that there is “substantial doubt” about whether it can survive in an SEC filing, not a surprise, and implies Chapter 11, which further implies liquidation for Chrysler.

Mortgage rates rose last week.

Oil, meanwhile fell in response to the generally anemic economic news.

Wishing that I Was German

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Yes, that’s number 217 of the things that I never expected to say, but when I read that Angela Merkel’s governing coalition is looking to put statutory limits on executive pay, that is what I thought. When the conservatives in government argue that, in addition to encouraging bad behavior, “that growing wage disparities “pose a threat” to social cohesion,” I wonder why our policies are run by John Galt wannabes.

Securities Trading Tax Goes Mainstream

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I knew that there were some proposals kicking around, but the idea has become mainstream enough that New York Stock Eexchange CEO Duncan Niederauer has gone public with his opposition.

It appears that Rep. Peter DeFasio’s (D-0R-4) proposal for a ¼% transaction tax on stocks and derivatives, in part to fund the bailout of the banking industry.

It’s a very good idea. ¼% is inconsequential to long term investors, but to speculator types, such as day traders, it makes their business model, and the problems that they bring, much less sustainable.

It exists in most of the rest of the world, and (IIRC) existed in the US until some point in the 1960s, so it’s not the end of the world that these folks forsee, though it might cut down a bit on their commissions from churning clients investments.

Economics Update

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Scary Pic of the Day: Upcoming Mortgage Resets Courtesy of Dr. Housingbubble

ADP employment services has released its monthly report, and job cuts are way up with 697,000 jobs lost in February as compared to 614,000 jobs lost in January.

Note that the initial January figure was only 522,000, the the final February figures may very look even worse.

We also have the Institute for Supply Management February non-manufacturing numbers, and they are down from January’s already anemic figures, and the Federal Reserve’s business survey reporting “weaker conditions or declines” in 10 of the 12 regions.

In China, however, the purchasing managers’ index rose in February, to 49, which still shows contraction, but only barely, as 50 is neutral.

In real estate, we have mortgage demand falling last week, largely because borrowers are waiting to see what the Obama mortgage rescue plan is.

In commercial real estate, we have a secondary indicator, with office furniture sales falling sharply.

It’s no wonder that FDIC Chair Sheila Bair is warning that its insurance fund could be insolvent by years end.

Bank failures, ignoring the biggest ones, is on a pace to close 100 banks this year, as compared to the 27 in 2008 or the 3 in 2007.

We are seeing a spike in consumer bankruptcy filings, up 29% year over year in February.

The Chinese economic news drove oil higher, and bad economic news in Japan drove the dollar up.