Category: regulation

Economics Update

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Well, it’s a bank holiday, so it’s a little bit slow, but the fact that American Express is filing to become a bank holding company, so that it can take part in the Federal Reserve’s sh&%pile for cash program.

My guess would be that they are seeing their default rate going up, and that they can’t find anyone to buy the debt.

In retail, General Growth Properties, the 2nd largest mall operator in the US, said that it may file for bankruptcy protection, and National Wholesale Liquidators filed for bankruptcy.

In other impending bankruptcies, option ARM lender Downey Savings and Loan just said in it’s 10Q that it cannot see a way to avoid being taken over by the Office of Thrift Supervision.

Most of the interest rate indicators were unavailable today because of the holiday, but the LIBOR (the L stands for London) was down a bit again today.

Also from that little island off the coast of France, retail and home sales are heading south quickly there too.

The joys of Anglo-Saxon capitalism, I guess.

In any case, there is no joy in Mudville, if by Mudville you mean the real estate market, so Fannie Mae and Freddie Mac have instituted a new program to modify mortgages to minimize foreclosures.

I still think that bankruptcy changes are the best solution here.

In any case, the impending recession drove oil to a 19 month low, and drove the dollar up, as people tend to flee to the dollar in bad times.

Falling oil is also absolutely killing the Ruble, which appears to be on the brink a devaluation.

Hank Paulson Needs to Go to Jail

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Well, we already know that Hank Paulson is a big fan of large Wall Street banks taking over their smaller brethren, and now it appears that he broke the law to provide an additional subsidy for bank M&A activity.

Specifically, he “reinterpreted” an obscure section of the tax code, by tax code, I mean law as written by Congress, not regulations issued by the IRS, Section 382, which limits the amount of prior losses you can write down when you take over a company:

More than a dozen tax lawyers interviewed for this story — including several representing banks that stand to reap billions from the change — said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to “carry out the purposes of this section.”

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.

(emphasis mine)

This is something that Hank Paulson and His Evil Minions&trade have been lobbying to get for years, and anyone who is not a paid shill of the bank is saying that this was illegal.

He broke the law, and he knowingly did so.

You can talk all you want about criminalizing official behavior, but his behavior is plainly criminal.

The Question is, What are They Covering Up

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The Bloomberg News has filed suit in federal court to require the Federal Reserve to disclose the securities received in what I call it’s sh^%pile for cash program.

The Fed is claiming that it’s, “confidential commercial information,” which is (my guess) lawyer speak for worthless garbage.

The Bloomberg followup story notes that, “The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression,” which is a pretty damn good reason for some openness here.

You have to remember that these programs have created new and not fully understood markets, and that the programs in question are directing money toward entities whose business model is to use information asymmetries to generate profits.

A lack of transferency is not the fox running the hen house, it’s Colonel Sanders running the hen house.

F.C.C. Approves Unlicensed Use of White Space

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Basically unused over the air TV channels, and the technology has been shown to be feasible, so the F.C.C. voted unanimously to approve the change.

Basically, it means that anyone who makes a device that works properly, basically senses and avoids around the spectrum, can use it.

Things like device certification and the specific regulations still have to be devised though.

This is good news, as the old TV channels give significant advances relative to WiFi in range, penetration, and bandwith.

The broadcasters oppose this, because, quoting a friend in the biz:

1) NIMBY.

2) Bad precedent for broadcasters. They have made everybody believe they OWN this spectrum. Now they don’t.

3) [David] Rehr, who assumed control of the NAB in 2005 after Eddie Fritz retired, has not managed to get a single major policy win. After losing badly on XM-Sirius, he desperately needs a win to avoid getting the boot.

The wireless microphone industry opposes this too, but for a different reason, they already use the spectrum illegally and don’t want a change.

I’ve worked on installations of mission critical military equipment, though, in deference to the some comments that I got, it was not hand held, it was vehicle mounted.

Arrest Hank Paulson Now

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First, Hank Paulson pays twice market value for bank shares in the bailout package, and now we find out that the recipients of the Tresury dole will be spending lavishly on dividends

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury’s investment over the initial three-year term.

Paulson knows this, and he has the power to stop this, and he is not.

I we can’t find a law he broke explicitly, declare him an enemy combatant, and send him to Gitmo, because he’s done more damage to the US in the past 8 weeks than Osama bin Laden has done in his entire life.

Fairy Tales are Better Than Having Enough Bullets

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Well, The Daily Telegraph tells a little tale, titled, “Porsche and VW share row: how Germany got revenge on the hedge fund locusts,” and it is a happy, happy story.

You see the evil trolls, believing that the general downturn in the world economy would adversely impact profit numbers at Volkswagen, had shorted the stock heavily, to the tune of 12% of all shares in the company, but the princess, Porsche had quietly arranged to increase its equity stake in VW from 42.6% to 74.1%.

The German state of Lower Saxony owned 20.1% of the outstanding shares.

Well, 74.1%+20.1% gives you 94.2% of all shares outstanding, and so the short selling trolls had to fill their 12% from the remaining 5.8%, and fell upon each other, bidding VW shares up to unforeseen heights, from €210 to well over €1000, causing billions of dollars in losses for the trolls, and Porsche made a paper profit (they will never realize this money, because they aren’t selling) of £100 billion.

The trolls rent their garments and cried to the king (Bafin, Germany’s financial regulator), but the king would have none of it:

So should we lose any sleep over the fact that hedge funds have lost their shirts, or should we all indulge in a spot of schadenfreude? The answer, as we should know after months of financial turmoil, is that we are all, ultimately, likely to be losers.

The princess, Porsche, manages to trick the trolls, hedge funds, and lives happily ever after.

Another Lie By Hank Paulson

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Joe Nocera of the New York Times had a source get him access to a a JPMorgan Chase conference call, and what he heard was disappointing, though not surprising.

It appears that the bank has absolutely no intention to expand lending, even after receiving $25 billion from the Treasury.

Instead, they see their path forward as being more merger and acquisition action:

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

(emphasis mine)

So Paulson lied to Congress, and he’s not leaning on banks to make loans again.

When Mr. Nocera says, “I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods,” doesn’t know the half of it.

I Don’t Think that the Pentagon Has Enough Bullets

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More on Hank Paulson’s bailing out my peeps program:

The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson’s transaction, the taxpayers were taken for a ride–a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public’s money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

Just lovely.

Can we throw him in jail, hopefully sooner rather than later.

AIG’s Finances Beginning to Raise Serious Questions

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Independent analysts are smelling something fishy:

American International Group is rapidly running through $123 billion in emergency lending provided by the U.S. Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

Do I have to quote Inspector Renault from Casablanca?

They’ve already blown through $90 billion of their $123 billion loan, and there simply are not enough posh retreats in the world to generate a burn rate that fast.

It’s less than reassuring that they still haven’t said where that money has gone.

There are stories of conflicts within the insurance giant, and people who gave warnings being shunted to the side.

Expect more of this from the Hank Paulson, “Bail out my Buddies” plan.

Why David Frum is Crapping his Pants

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So, David Frum just wrote an article in the Washington Post throwing John McCain’s presidential bid overboard, suggesting that all Republican Party efforts should be directed towards the Congress, particularly the Senate, so as to prevent a filibuster proof majority.

He notes, correctly, that the RNC is the only place where the ‘Phants are raising good money, and that they are wasting it on his doomed campaign.

He’s concerned about how a “conservative free” management of the financial meltdown will be handled, and he wrings his hands over the, “fierce new anger among many liberal Democrats,” by which he means that their refrain is, “Thank you sir, can I have another.”

But then, he gets to the bit where he actually really gives a damn:

Unchecked, this angry new wing of the Democratic Party will seek to stifle opposition by changing the rules of the political game. Some will want to silence conservative talk radio by tightening regulation of the airwaves via the misleadingly named “fairness doctrine”; others may seek to police the activities of right-leaning think tanks by a stricter interpretation of what is tax-deductible and what is not.

(emphasis mine)

Between punditry on fox, and his think-tank gigs, he is afraid that he will actually have to work for a living.

I guess that trumps ideology for him.

I incorporated a 501(c)3 tax exempt org, it was, and is, a completely bogus registration, though it is technically legal and in accordance with all laws and regulations. (no names here, I don’t want do give them grief*) It puts on SF conventions, and running a SF convention should not get tax exempt status, with deductible contributions (In truth, it went 501(c)3 for the cheap mailing rates anyway).

Neither should the right wing pundit full employment welfare programs, like the AEI, where David Frum works. They are playthings of rich people who never had to work for their money, and want to manipulate public policy for their benefit.

They are not charities, they are lobbying organizations.

*And I don’t want to give them anything else. Any contact between me and this organization is very bad for me, which I suppose is more of a reflection on me than it is on them.

Economics Update

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Well, the Federal Reserve cut the federal funds rate by 50 basis points (½%) as expected.

the Bank of China cut its rates too, for the 34d time in 6 weeks.

In response, the dollar dropped the most since 1998, (this article says since 1985) which is what is supposed to happen when you cut rates, people go elsewhere looking for higher rates of return.

Unfortunately, driving down the dollar is probably all it did. Below a certain level, the difference between the rate set and 0% (giving money away) becomes pretty immaterial, and I think that we are pretty close on this. That’s what my oft repeated phrase, “pushing on a string” means.

I would also note that the falling dollar pushed oil prices higher, which I’ll qualify, so as not to invoke the wrath of Dean Baker, since oil is dollar denominated, a falling dollar does not do anything directly, but it does effect the positions taken by traders in the oil futures market.

In any case, the monoliner insurers are back in the news, with Ambac wanting a capital infusion from the government, but MBIA saying that the money should instead go to assets that they insure. New York State Insurance Commissioner Eric Dinallo agrees with Ambac.

I think that MBIA’s proposal is a bigger bailout, since it means that they have less to pay on the sh^%pile without giving an ownership stake to the feds.

In any case, it looks like the Treasury and the FDIC are working to do MBIA’s bidding, with more signs of plans to buy bad mortgages.

BTW, here is a story to follow, the SEC is looking at tightening rules on credit rating agencies. The story I linked to has 2 ‘graphs, but when the details start coming out, this will be important.

The systemic failure of the ratings agencies is at the core of much of this problem.

Speaking of failures, the Treasury just bought $125 billion in stock in the big boys:

The report showed that the payments included $25 billion each to Citigroup Inc. (C, Fortune 500), JPMorgan Chase & Co. (JPM, Fortune 500) and Wells Fargo & Co. (WFC, Fortune 500) Bank of America Corp. (BAC, Fortune 500) received $15 billion andMerrill Lynch & Co. (MER, Fortune 500), which is being acquired by Bank of America, got $10 billion. Bank of New York Mellon (BK, Fortune 500) received $3 billion and State Street Corp. (STT, Fortune 500) of Boston got $2 billion.

Really about the only good news that I’ve heard today is New York GA Andrew Cuomo getting medieval on senior bank management:

NEW YORK (Reuters) – New York Attorney General Andrew Cuomo, who negotiated executive payment clawbacks by American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) as it received a taxpayer bailout, warned nine banks receiving government money on Wednesday that using the funds for bonus payments may be illegal under state law.

….

“Specifically, corporate expenditures and payments, made in the absence of fair consideration of undercapitalized firms, may well violate NY Debtor and Creditor Law 274, which deems such payments illegal fraudulent conveyances,” Cuomo’s letter said.

Obama really needs to give this guy a senior post if he’ll take it.

The Greenspan Putz

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No, it’s not a typographical error, it’s a great play on the concept of, “The Greenspan Put“

The indispensable Barry Ritholtz of The Big Picture found an article of that title by Alan Kohler:

The Greenspan putz

…

As Alan Greenspan said in his testimony to Congress last night: “With … home prices rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, (mortgage securities) were wrongly viewed as a ‘steal’.”

Unsophisticated investors didn’t stand a chance.

Now the “steal” is going to work the other way. Mortgage securities vehicles everywhere are being liquidated because their risk is being repriced – in most cases dramatically, to the point where investors don’t want their money in them at all.

….

I am amused, though I would disagree with the characterization. A putz has a head.

This has been another episode of Yiddish vocabulary.

OK, Is This a Sign of the Apocalypse?

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Republican Florida Governor Charlie Crist just extended early voting hours in Florida, from 8 hours a day, and 8 across the weekend, to 12 hours.

I’m not sure why he did it, I’ve heard reports of the McCain campaign saying that this will kill them in Florida.

I think that after hearing the 50th story about folks waiting for hours at early voting stations, Governor Crist either decided that lengthening the hours was the right thing to do, or he realized that there was significant political blowback from this.