Gee, you mean that after receiving $350 billion of no strings attachec money, the banks are still lending less to businesses and homebuyers?
Shocked.
Well, I guess the lede is that the Federal Reserve is cutting its 2009 economic forecast….Reality has a way of doing that.
Real estate is ugly today, with housing starts and applications for building permits falling to record lows, which is not surprising as it’s clear that there is a significant overhang in inventory.
That overhang in inventory is why builder sentiment is at the staggering number 9, with 50 being neutral.
It’s not pessimism, it’s sanity.
We did get another jump in mortgage applications, but that’s just a refi surge when the numbers go below 5%.
We also saw a record slide in GDP for OECD nations in Q4 of 2008.
On the brighter side, I’m not in the Ukraine, where industrial output shrank by 34.1%, which is return to the stone age type numbers.
We also have record lows from Taiwan’s central bank, which cut its benchmark rate to 1.25%.
We also have some insurance news, including our friends the monoliner bond insurers.
First, we have MBIA splitting itself. It’s separating its municipal bond insurance from its mortgage backed securities interests, which is likely a good thing in the long run, though S&P downgraded them from AA to BBB+, which, while not junk bond status, is rather too close to junk bond status for comfort.
Additionally, Moodys cut ratings mortgage insurers MGIC, Radian, Republic, and Genwort.
We are actually seeing some indications that the price drops in commodities are dropping, most notably the Baltic Dry Index of shipping costs has doubled recently, which indicates more cargo, particularly in terms of raw material.
Obama’s housing rescue plan appears to have strengthened the dollar, and driven oil up today.
This is a good read on why credit default swaps are destroying our financial system.
The money quote:
These are deliberate flaws built into the game that include the lack of a central counterparty, no effective limit on dealer leverage and a schizophrenic pricing methodology that has nothing to do with the several different types of underlying risk contained in these contracts. It is a market designed by and for the seller, to the disadvantage of the buyer. But CDS may also be thought of as a poker game where the dealers have few chips on the table.
It comes down to excessive leverage, and the author, Christopher Whalen, is rather more of an optimist than I am about the outcome and how soon the mess will be straightened out.
Yes, Alan “Bubbles” Greenspan is now saying that bank nationalization deprivitization is likely the least bad solution to the banking crisis:
In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.
”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
This from a close friend, and acolyte of, Ayn Rand.
Hint to Geithner and Summers, when Alan fracking Greenspan says it’s time to nationalize, it’s time to nationalize.
Well now we have an idea as to why Geithner’s unveiling of the stimulus package sucked. According to the Washington Post, a few days before the scheduled announcement date, Geithner discovered that the plan would not work, and he had to change it.
He wanted to do his “bad bank” thing, but, as people have been saying for weeks, if you pay fair value, the banks are insolvent, and if you pay enough to keep them afloat, then you waste trillions of taxpayer dollars.
So, now we have the public-private partnership and “stress tests”.
The question is whether he made this choice because he realized that he wrong, or if it was because he knew that he couldn’t sell the bad bank.
Given Geithner’s history, his last job was as an employees of those investment banks, I believe that he still wants to bail out the banks with no cost, but he hasn’t been able to figure out a way to sell it.
Bill Moyers has an interview with former IMF chief economist Simon Johnson, and he says that we need to break the oligarchs who got us into this situation, just like the IMF did with 3rd world nations. (video and transcript at link)
I agree with Mr. Johnson on nationalization pre-privatization, and I do not believe that Timothy Geithner will do this.
His career has been made as a protege of people like Lawrence Summers and Robert Rubin, and so he is joined at the hip to Wall Street.
To get a perspective on just how bad the auto industry is hurting right now, look at this graph from Calculated Risk.
It’s monthly the total auto fleet in the united states divided by auto sales, which gives you the turnover rate, basically a measure of how long it would take to replace every car on the road right now.
It’s gone from 10 years to 23.9 years, meaning that if this were baseline sales, the average age of the auto fleet would reach 29.9 years.
It’s clear that something, either auto sales, or the number of cars on the road, or both, will have to give, but this is just nuts.
It’s not surprising then that unions for GM subsidiaries in Europe want the car maker to spin-off of Opel and Saab. They know that they are viable, but that they will be sacrificed by the folks in Detroit.
So, while all this is going on, GM and Chrysler have to make their pitches for their recovery plan today, in order to get federal money.
At this point, there is only one thing that I know, any bailout should make Cerberus pay. The private equity firm that now owns Chrysler were looking for a quick flip on their investment, and they are unwilling to put any skin in the game.
As a first step, Cerberus must open its books to regulators.
So, after taking billions of dollars of money from the treasury, and trillions from the Federal Reserve’s sh%$pile for cash program, we now discover that they are overcharging for federally guaranteed loans:
Since the Federal Deposit Insurance Corp. started guaranteeing debt in November, banks have charged clients, including themselves, more than $375 million in fees on $154 billion of deals in the U.S., according to data compiled by Bloomberg. Pittsburgh-based PNC Financial Services Group Inc., which received $7.6 billion from the U.S. Treasury, paid Citigroup and JPMorgan Chase & Co. 30 basis points, or $6 million, in December to sell FDIC-backed notes due in three-and- a-half years. A month later, JPMorgan and two other banks charged Freddie Mac 7.5 basis points for a similar offering.
(emphasis mine)
Also, the bailed out banks continue to maintain lavish offices, complete with office staff, for their recently ousted CEOs:
Looking for Charles O. “Chuck” Prince, ousted 15 months ago as Citigroup Inc.’s chief executive officer? Just call his extension at the bank, which still pays for his office and secretary in Midtown Manhattan.
Former Citigroup investment-banking head Michael Klein also has a free office and secretary after receiving a $34.3 million exit package when he quit in July 2008. John Reed, 70, who hasn’t worked at the bank since he resigned as co-CEO in 2000 with a $5 million parting bonus, is entitled to an office and secretary for as long as he wants.
Sanford I. “Sandy” Weill, who retired as chairman in 2006, is ending a 10-year consulting contract with the bank in April after just three years. The agreement gave him millions of dollars in perks, including an office, car and driver and use of company aircraft, which he gave up in February.
Sure as hell beats working for a living, I guess.
It appears to me that we have our own oligarchs in the United States, and we need to deal with them appropriately.
Unfortunately, I can’t find Vladimir Putin on my speed dial.
There appears to be a lot of discussion on the blogosphere right now about how the filibuster.
Some are calling for outright abolition, and some are calling for significant changes in the rules governing the filibuster.
I made a graph of cloture motions (Data from the Senate web site), and it speaks volumes.
The first thing to notice is that cloture votes did not break double digits until the 1971-1972 session.
I it was at some point in the 1970s (I’m unable to find it on “the Google”, but it was at some point in the 1970s*), that people no longer had to talk to filibuster: It became a courtesy, not a rule, just the magnanimity of the Majority Leader that if a cloture vote failed, the legislation was pulled.
In addition, the requirements for the filibuster where changed in 1975 from 2/3 of those present and voting to 60% of all Senators in good standing (hence the issues with Kennedy having to show up on the stimulus).
There are a number of problems:
This is further complicated by the fact that there are times where we want the minority to be able to obstruct the majority.
vote. (*cough* Janice Rogers Brown *cough*)†
So, what do we do about a process that has created the disgusting spectacle of a man with a brain tumor, another one having to rush home from his mother’s funeral to break the filibuster, and Republicans admitting paying off the losing candidate in order to tie up the appointment of a Senator in court.
My opinion is that we start by enforcing the rules as they actually exist, and not accord the minority power that they do not have.
Courtesy is a two way street, and the abuse of the filibuster shuts that down.
Make them talk, and let them go hoarse, and have to stay in the Senate.
What’s more with CSPAN covering Congress, the spectacle of Senators talking for hours and days will not only be broadcast locally on cable, it will find its way to Leno, and Letterman, and Jon Stewart, and they will look like complete tools.
If it’s that important, they will still talk. If it isn’t, they will STFU.
As to actual rules changes, that is a difficult thing to do, at least until one side or the other breaks 60 Senators, but I would suggest that the 60% be retained, but that it be of the votes cast, which means that those who support the filibuster need to stay in order to thwart it.
*Another reason to hate the decade, along with Disco, Polyester leisure suits, and pet rocks.
†F%$# you, gang of 14.
Well, it appears that the final version of the stimulus bill has restrictions on executive compensation, no “compensation incentives that encourage senior managers ‘to take unnecessary and excessive risks that threaten the value of a company, no golden parachutes for senior management, “claw back” provisions to get money back from executives when they enrich themselves at taxpayer expense, and require (nonbinding) “say on pay” votes of the shareholders.
Sounds good, but it turns out that Congress gave the Treasury a year to draw up the regulations, and I’m sure that former Federal Reserve Bank of New York President, and general Wall Street butt boy, Timothy Geithner (as well as Larry Summers) will make absolutely sure to take the full 365 days, all the while lobbying for a relaxation of the law.
Oh to live in the UK, where the Conservative Party is calling for a bonus limit of £2,000 (about $2800) for all bank employees.
Yep, the Tories….The party of Margaret Thatcher….Is calling for bonus limits.
I am not surprised that H1B visas are being used to undercut wages of citizens and green card holders, but I am shocked that we are seeing raids and indictments on employers who engage in this practice.
Even more surprising is the fact that the prosecutors appear to be unloading some big guns against these folks:
The arrests were carried out by federal, state and local agents working in Iowa, California, Massachusetts, Texas, Pennsylvania, Kentucky and New Jersey. The government’s action “is the result of an extensive, ongoing investigation into suspected H-1B visa fraud, mail fraud and conspiracy,” said Matthew Whitaker, the U.S. attorney for the Southern District of Iowa, in a statement. The investigation was dubbed Operation Pacific Vision.
(emphasis mine)
So we are seeing both arrests and felony indictments.
It appears that the investigation centers on the borker (temp firm) Vision Systems, who placed people in high cost areas like New Jersey, but used the prevailing wage of its headquarters in Iowa.
It’s a start. Better would be an H1B application fee high enough that it would remove the economic incentive.
There are 2 more failed banks:
Pinnacle Bank of Oregon, Beaverton, OR
Corn Belt Bank and Trust Company, Pittsfield, IL
This is in addition to the Sherman County Bank, Loup City, Nebraska and the Riverside Bank of the Gulf Coast, Cape Coral, FL, who made the list before I closed down on Friday.
The trend is unsettling.
Well, GDP in the Euro Zone fell by 1.5% in the 4rth quarter, and 1.2% from the 4th quarter of 2007.
The quarterly drop is the largest in 13 years, and the year over year drop is the first recorded ever…..One of the joys of integrating your economy is that you integrate your recessions.
It’s no wonder that OPEC’s predictions for world oil consumption have been slashed again, though interestingly enough, oil is up today, by the largest amount this year, largely on the expectation that the stimulus bill will pass.
In real estate, the New York Federal Reserve is continuing its aggressive policy of buying from the sh$% pile, purchasing another $23.2 billion in agency mortgage-backed securities this week, for a total of $114.96 billion.
There is an interesting bit here though, this quote, “The Fed has also said it may soon begin modifying mortgages it owns within the assets it owns.”
Somehow I figure that this is part of a much bigger story, only I don’t know what it is yet.
Also we have Citi and J.P. Morgan Chase Agreeing to a foreclosure moratorium, and I think that this might be a part of the rest of that story. Specifically, I think that they are worried about Geithner’s “Stress Test,” and they are doing this because they are hoping for goodwill from regulators.
Finally, the dollar is down today, for the same reason that oil is up. The stimulus package looks like a light at the end of the tunnel, and so the “flight to safety” moderated a bit.
This is interesting. It seems that Timothy Geithner’s announcement of a bank rescue plan sent big name banks into full panic mode, because it looks like Goldman Sachs held an emergency meeting, which included, “20 of the firm’s biggest hedge fund and private equity clients from around the country,” as well as, “representatives of KKR, Fortress Investment Group , Bain Capital, Perry Capital, Capital Research, Putnam and Citadel.”
While Goldman claims that it was a regular meeting, CNBC’s report seems to indicate that this was not the case:
Goldman sachs says the meeting was planned well in advance. But people who attended tell CNBC that they received the invitation after the speech and decided to attend because of the speech. Goldman Sachs initially denied that the meeting, hosted by co-presidents John Winkelried and Gary Cohn, took place.
(emphasis mine)
Where I think the reporter did not go deep enough is to accept the line from the participants that this meeting was primarily about concerns that the plan is not coming together quickly enough.
That isn’t the sort of thing that has you call an emergency meeting. Something has them spooked.
My guess is that they are afraid that Geithner’s “stress testing”, which is a deep accounting analysis of their balance sheets, will show one, or more of the major banks (probably most of them) to be insolvent, and then the government will have no choice but to seize them.
I have this image of something resembling a meeting of Bond villains.
I think that we’ve all seen the video (below) where Rep. Paul Kanjorski (D-PA) said on CSPAN that there was a run on the money markets, and we were hours away from a complete meltdown of the financial system.
The money quote, if you don’t want to watch the vid, is, “If they had not done that, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.”
The New York Post, the right wing flagship of Rupert Murdoch’s media empire, and there are no on the record sources, though there is a cool graphic with Marlon Brando from Apocalypse Now (right).*
So, not only is the story completely based on anonymous sources, but there are no other contemporaneous reports of this happening.
Enter Felix Salmon of Portfolio.com, who looks at the underlying data, and finds out that it never happened. There was no massive run on the banks.
There were a lot of redemptions to the tune of tens of billions of dollars a day, not trillions per hour.
So, how did this bit of disinformation get out, and why did it get out to a paper not known for financial reporting in the financial capital of the world?
Inquiring minds want to know.
*As a purveyor of news, the New York Post sucks, but I do like their headlines and the way that they spice up their graphics.
Barry Righoltz’s book Bailout Nation has been dropped by McGraw Hill, largely because he refused to soft pedal the ratings agencies role in the financial crisis, and McGraw Hill owns the largest of the ratings firms, Standard & Poors.
They claimed stylistic issues with his first description, which called the ratings agencies, “Pimps to the fixed-income fund managers’ Johns,” which to my mind is a fairly accurate description. (He did come out with an alternate chapter, which, while slightly milder in language, was even more damning, because it was more extensively sourced)
As Mr. Ritholtz himself notes, “The problems came not from Legal, but from Corporate within McGH. Legal had not even finished reviewing the manuscript at this time.“
If you wonder why newspapers and magazines are “dying”, it’s because of crap like this, where conglomerates allow other corporate issues to water down their content.
It looks like executive pay caps in the stimulus will be dropped because the so-called fiscal hawks think that they will cost too much:
Unfortunately, [Representative Brad] Sherman told me that he believes the executive compensation limits added to the Senate’s stimulus are going to get removed during conference talks with the House. The reason: a new Congressional Budget Office estimate that the pay caps will cost the government $10.8 billion in lost tax revenue over the next 10 years.
“The plan is to take out the executive compensation provisions … and blame the Republicans for setting out the level [of $800 billion]” for the final version of the stimulus, Sherman said.
It appears that the lawsuits filed against the Federal Reserve by various news orgs, and the constant complaints in Congress about the opacity of the organization have led to getBen Bernanke to begins ‘Thorough Review’ of the information that it provides to the public.
The translation of this is, “I need to kill this, so I’ll do a study, and after a few years, no one will remember.
First, some context here, even before Geithner’s plan, we should note that the taxpayer exposure in all this is, “$9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages,” or about $30,000 for every man woman and child in the US.
For what Geithner is proposing, we are looking at as much as another $2 trillion.
By comparison, the 2006 US GDP was a bit over $13 trillion, so all of this is a serious chunk of change.
The short version of his plan is that he wants to go with the bad bank, with a fig-leaf of subsidies to bring in “private” money, so my report of the CNBC story was wrong:
Officials said the plan was fashioned after a spirited internal debate that pitted Mr. Geithner against some of the president’s top political hands.
Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.
They also worry that any reaction could make it difficult to win Congressional approval for more bank rescue money, which the administration could need in coming months.
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.
So it’s more welfare for fat cat bankers, in this case backstopped by, “The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors.”
Nemo at self-evident does the numbers on how this will screw the taxpayers, and I cannot do better than his numbers:
If the Plan involves convincing private equity firms to take “first loss” position on the assets they purchase, and merely limits their downside with some form of insurance, does that make it a good deal for the taxpayer?
Well, let’s see. Suppose some insolvent bank, like Citigroup or Bank of America, has 10 mortgages or MBSes or CDOs. Now, nobody knows what any of these things is worth. Most of them are worth nothing, but some of them are probably worth something, depending on who defaults on what. Suppose, just for the sake of example, that each of these toxic assets has a 10% chance of being worth $100 and a 90% chance of being worth zero.
Obviously, a rational investor would pay at most $100 for the entire pool of 10 assets, or 10 cents on the dollar.
Now, suppose the D.C. branch of Goldman Sachs the U.S. Treasury comes along and offers to insure every one of these investments to the tune of $45 for any private equity firm who purchases the entire pool for $50/asset. In other words, the private equity firm is in “first loss” position on each asset to the tune of $5, while Team Timmay is on the hook for the remaining $45.
Since one of the assets is probably worth $100 and the other nine are probably worth zero, the private equity firm expects to make $50 on one and lose only $5 on each of the remaining nine, for an expected profit of $5 on their $500 investment. (Which they can lever up via the Fed, if the NYT is to be believed. Not to mention that this is just an illustrative example…)
Meanwhile, the taxpayers expect to pay insurance to the tune of $45 * 9 = $405. Thus, despite private equity being in “first loss” position, the most likely result is for the private firm to profit even as the taxpayers get hosed.
Change units to trillions, rinse, lather, repeat.
Now, it appears that Geithner plans to set up some sort of triage, he is calling it a “stress test”, to ensure that banks are strong enough to be a part of the program.
I’ll believe it’s something more than a cute phrase when they seize Citi as insolvent and start a serious criminal investigation of Geithner’s protege Robert Rubin, because the former is insolvent, and the latter is a crook.
I still say that the best solution is seizing insolvent banks, and breaking up the rest so that they are “small enough to fail.”
This has epic fail written all over it.
Well, in terms of the stuff I put here, there was very little today. My guess is that everyone is waiting on Timothy “Eddie Haskell” Geithner’s bank bailout plan.
We do have a rumor on the plan though, and it’s that Geithner has dropped the federally funded bad bank, and instead any disposal of the financial dioxin out there will be handled by encouraging private money to drain the cesspool, which, when I last checked, was paying about 35¢ on the dollar for the top tranches of this.
Good luck with that.
He was supposed to release it today, but he put it off a day, which pushed the dollar down and it also pushed oil down, despite OPEC talking about more supply cuts.
I will post a bit about Nancy Pelosi’s scary graph.