The dual commercial/emergency band did not go well, but apart from that things went very well.
Harold feld (at link) will probably have more when available.
Category: regulation
Signs of the Apocalypse: I Agree With E. J. Dionne Jr.
New Jersey Entering Personal Mandate Health Insurance
We are moving towards some sort of single payer system in the US. Personally, I favor a NHS, but your milage may vary.
The reason that we are seeing personal mandates right now is because ERISA, passed in 1974, pretty much prohibits most other sorts of action.
The best short term solution is to remove the preemption clause of that law, because in addition to preventing meaningful healthcare reform, it provides a ‘get out of jail free’ card to the worst actors in the insurance business.
A Correction on Dean Baker’s Tax Proposal
I just had an email exchange with him, and he referred me to his (along with Robert Polli and Marc Schaberg) paper, Securities Transaction Taxes for U.S. Financial Markets, and he does in fact call for a sales tax on most securities.
ABSTRACT: This paper examines the viability of security transaction excise taxes (STETs) as one policy tool for promoting a more stable financial environment, specifically with respect to the U.S. economy. Contrary to a large recent critical literature, we show that a STET can be designed without creating large distortions between segments of the financial market. We also show that a modest STET for the U.S.—beginning with a 0.5 percent tax on equity trades and scaled appropriately for other financial instruments—would generate substantial new government revenues, on the order of $100 billion per year.
The link is to the abstract, and the whole paper is a 55 page double spaced PDF, which you need to read on paper, with a highlighting and a regular pen so you can take notes.
It’s not a light read, but it’s a good read.
On a more general level, I think that, given the current downturn, we will see a large expansion in taxes at all level, with things like internet download sales being taxed, and that we will see an aggressive pursuit of online and mail order sales taxe evasion too.
The state and local governments will have no choice.
Then again, considering my record on predictions, and the fact that the only formal training I ever had on economics was high school, where I did a presentation on microeconomics*, what the heck do I know.
*Microeconomics is a study of the economics of individual businesses, as opposed to entire economies. I prefer it, because the systems are not so huge and complex that cause and effect breaks down. Macro economics sometimes makes my head hurt.
Krugman Says Bailout In Evitable, We Need to Go Swedish
I think that it is likely that a taxpayer funded bailout would be the only viable option, as Paul Krugman says in his NY Times OP/ED. He also notes that while the whether to bail out is settled, the how is not:
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.
If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.
As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.
In his NYT blog, he also notes that when one looks at financial meltdowns, the Swedes handled it best, with the handling of their financial problems in the early 1990s”.
He points us to Justin Fox of Time, who in turn quotes Merrill Lynch Economist David Rosenberg from his “morning call notes” (sorry, can’t find a link, any hints?):
The Japanese credit crisis is usually cited as the benchmark for what not to do. But few cite Sweden’s crisis as a template on what might actually work. … the Swedish authorities realized early on that a banking crisis cannot be resolved until the problem is properly defined. That means assessing who the “bad” and “good” houses of issues are and be willing to allow the “bad houses” to fail (as an aside, “good houses” do not necessarily imply “big” houses).
… Sweden established a Bank Support Authority to undertake “reality testing” on the loan books of Sweden’s largest banks and had a “board of valuation” experts go in and value the assets on the books of all the lenders. Call it invasive if you will, but then again, the government was doing the work that market players could not or would not do – value the collateral and do it quickly. This is similar to what Barney Frank is proposing in the US mortgage sector today. …
It should also be noted that it was Sweden’s equivalent of the US Treasury, and not the central bank, that played the primary role in this crisis management stage (though the Riksbank maintained an accommodative monetary stance and lowered interest rates right through to December 1993, more than a year after the markets had bottomed). And, it obviously required the heavy hand of government intervention; there are solid grounds for this when there is market failure in the private sector, in this case, insufficient information regarding the quality of financial sector balance sheets. …
I would add that my post on Dean Baker’s proposal of a stock transaction tax, along with my suggestion that it more generally cover financial instruments (here) is both a good way to cover the budget hit and a good way to discourage excessive arbitrage.
Dean Baker Has a Great Idea, But it Needs to go Further
Dean Baker suggests that we implement a stock transfer tax. He mentions that the UK has a stock transfer tax of 0.25%, and London is second only to New Work as one of the great financial capitols of the world.
He notes that it would generate $150 billion/year in revenue.
While I agree, I do not think that this goes far enough. It should apply to all financial transactions, stocks, bonds, derivatives, hedging, futures, etc.
I would have an exception for initial purchase, but not resale, of government bonds, but that’s it.
In addition to generating a lot of revenue, it also makes increasing level of arbitrage increasingly more expensive, which is also a good thing.
Economics Update
It’s late, and I’m lazy, so basically, it’s Bear Stearns, the dollar hits a record low vs the Euro and a Dollar sinks to near 13-year low vs. yen – Mar. 17, 2008, and the cost of a barrel of oil is bouncing around like a frog on a hot plate.
Tomorrow, when the Fed meets, will be really interesting.
Republican Congressional Staffers Should be Drowned at Birth
Witnesses were called to testify before the House Financial Services Subcommittee on Consumer Credit regarding changes to the terms of their credit cards for what appear to be completely arbitrary reasons, and the Republicans on the committee demanded that they sign releases allowing the credit card companies to release their complete credit records on any public forum.
My question is why the Republicans were given veto power over witnesses. They are no longer in the majority.
The answer appears to be that they would have:
Their removal, however, was more the result of political gamesmanship than it was a legitimate legal move. That is, the Democrats could have attempted to seat the consumer panel even without the members signing the waivers. But, according to a Democratic staffer familiar with the dance, the Republicans, in that case, would have presented a number of procedural roadblocks that would have stalled the hearing indefinitely. Rather than waste the entire morning fighting endless motions to adjourn, Democratic committee leaders Barney Frank (Mass.) and Carolyn Maloney (N.Y.) decided to scrap the first panel and salvage some of the hearing.
I think that a better understanding of Republicans, that they have no interest in the legislative process, and thus should be accorded no courtesies whatsoever, is needed.
The Waivers read as follows:
I hereby authorize Chase Credit Card Services to publicly discuss my Chase credit card account(s) in connection with the March 13, 2008 and April, 2008 credit card hearings by the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit.
Translated, this means that if they thought it was “in connection with the March 13, 2008 and April, 2008 credit card hearings by the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit, they could release their account numbers, SSNs, mother’s maiden names, and passwords for online access.
The End is Nigh, One of My Predictions Has Come True
Yep, it’s the end of the world, I got a prediction right. On August 2, 2007, I predicted that, “Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale”.
I never get my predictions right. I look at my predictions on the HD-DVD/Blu-Ray fight.
So, after the Fed lends Bear Stearns $200 billion, JP Morgan buys Bear for 236 million, and they look to be ditching off the risk on the Federal Reserve:
Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”
Normally, when I say the end is nigh, I’m joking. I’m not joking now, and it has nothing to do with whether or not I got a prediction right.
It has to do with the fact that in Asia, where it’s Monday already, markets imploded. The Nikkei the Hang Seng have so far fallen by more than 4%, and the Korea Composite Stock Price Index by more more than 3%.
What’s more, on this side of the international dateline, the Fed cut the discount rate by 25 basis points, from 3.5% to 3.25%:
The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.
That was done on Sunday. When the last time that you’ve heard of the Fed doing anything on a weekend, much less a Sunday.
People are now talking about this in terms of being 1929 bad, not 1970s bad:
Wall Street fears for next Great Depression
….One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed’s emergency funding procedure was first used in the Depression and has rarely been used since.
….
In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”
I think that they are very nearly right on this, at least for the US.
Unlike during the great depression, the US is no longer an exporter of oil, nor does it have the most vibrant and advanced manufacturing base in the world.
It may be bad world wide, but it’s going to be hideous here.
Bear Stearns, I May Have Gotten a Prediction Right
On August 2 of last year, I said that within a year, Bear Stearns would cease to function as an independent entity.
I’m not right yet, but I don’t see how I won’t be right in the next 5 months.
Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.
Mayor: What do you mean, “biblical”?
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!
And it would seem, that I actually get a prediction right, which is another sign of the apocalypse.
Just yesterday, the Bear Stearns CEO said that there were no liquidity issues, but today, JPMorgan Chase and the New York Fed have gotten together to bail them out.
Basically, the Fed can’t bail out Bear Stearns, it’s out of its authority, but it can guarantee JP Morgan’s loans to the embattled investment bank, which it did.
Actually, a closer reading makes it even more extraordinary. The Fed directly lent money to Bear Stearns, using an authority last used in the 1960s, which required a vote of the Fed’s Board of Governors.
Typically, the Fed is only supposed to lend to banks, and Bear is not a bank, but an investment house.
As to the statements of the CEO yesterday, I would call them a bald faced lie, but I don’t have a Harvard MBA, so I don’t know the fancy term for blowing smoke up everyone’s ass.
Of interest is some potential insider trading, specifically, someone traded 55,000 Bear Stearns puts Tuesday. (A “Put Option” is basically a bet that the stock will decline in value.)
One of the results of all of this is that money has been fleeing to Treasuries, or fleeing the US entirely, with the dollar down.
One of the things you have to understand is that Bear Stearns is a pretty small player in all this, with a market capitalization of “only” about $15 billion dollars, and we’ve got the markets jumping out windows.
Bush Personally Intervened to Poison National Parks
Yes, the Avignon President is busy making the air we breath unsafe for humans and other living things:
The Environmental Protection Agency weakened one part of its new limits on smog-forming ozone after an unusual last-minute intervention by President Bush, according to documents released by the EPA.
EPA officials initially tried to set a lower seasonal limit on ozone to protect wildlife, parks and farmland, as required under the law. While their proposal was less restrictive than what the EPA’s scientific advisers had proposed, Bush overruled EPA officials and on Tuesday ordered the agency to increase the limit, according to the documents.
“It is unprecedented and an unlawful act of political interference for the president personally to override a decision that the Clean Air Act leaves exclusively to EPA’s expert scientific judgment,” said John Walke, clean-air director for the Natural Resources Defense Council.
This is more than just bad policy. His actions are also against the statute.
Really, just despicable.
The Bush Administration Punts on the Mortgage Debacle
According to Forbes, it’s “tighter standards”, but by the standards of any thinking human being, it’s a big wet tongue kiss on the mouth of the bad players in this drama.
The only substantive proposal is better licensing of mortgage brokers, the rest is voluntary, and it’s clear that Paulson, and the rest of Bush’s cronies, are not interested in reform when they say, “The objective here is to get the balance right — regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”
Let me explain this in very simple terms, the so-called “innovation” that Paulson is looking to preserve, is deception, complexity, fraud, self dealing, and general corruption.
These “innovations” did not make housing less expensive, or easier to get. They caused housing inflation, and threatened the stability of our housing market, banking system, and society.
This so-called innovation is not something we need to protect. We need to put a stake through it’s black heart.
Senator Looking at Lavish Lifestyles of Televangelists
The thing that the media will cover, of course, is the expensive cars, private jets, and so on that many of these “prosperity preachers” have.
There is actually a very real issue here. Churches, unlike every other 501(c)3 tax exempt organization, is not required to file a publicly accessible 990 form.
I incorporated a 501(c)3 tax exempt organization and chase the paperwork through the IRS in 1990 as a non-lawyer, Arisia.
When I was involved in running it, gross revenues were less than $50,000/year, and now it’s probably less than $200K/year.
For any church, considering building, maintenance, salaries and benefits for, preacher, secretary, education director, and janitor, you are well above $500K on anything but the tiniest church.
It’s too expensive for them, but it’s not too expensive for us.
They object to form 990s because they do not want their parishioners to know that they are wasting their money on their own inflated lifestyles.
Check out the Trinity Foundation a Christian reform organization that has been talking about this for years.
Clinton and Obama Split Over Florida and Michigan – New York Times
There seems to be a divergence of opinion on what to do do with Florida and Michigan between the campaigns.
Basically, the preferred solution for the Clinton Campaign is to seat them as is, with a revote being second, while the Obama Campaign, favors (in no particular order), not seating the delegates, splitting the delegates 50/50, or holding a caucus.
Not surprising, they both chose alternatives which they believe benefit them most.
A mail revote is eminently doable, and has the advantage of keeping the troublemaker Republicans in Michigan who vote for the weakest candidate, because mail only goes to registered Democrats.
The time frame is doable too. 3 weeks to get the money, 3 weeks to do the printing and mailing.
Total costs would likely be in the high single digit million dollar range.
There is only one that I find truly offensive, and it’s not refusing the delegates seating. After all, rules are rules, and the legislators in FL and MI knew what they were getting into when they voted for this.*
It’s the 50/50 split. The idea behind this, and the person putting this forward is Chris Dodd, not the Obama campaign, is that the will of the voter does not matter (that is that the 50/50 vote split means), but that the political movers and shakers get to hobnob as delegates at the convention.
It means no democracy, but lots of corrupt patronage.
*Truth be told, I have a little sympathy for the Florida Legislators. They had the date move attached to paper trails on ballots, which needs to be done in a state like Florida.
Independent Appraisers May Cost Home Buyers More
Andrew Cuomo cut a deal with the GSE’s to require independent appraisers, and since the GSE’s buy up and resell about 70% of the mortgages out there, this is thankfully going to become the norm.
CNN Money is now warning that independent appraisers will end up increasing mortgage fees, particularly since now each lender needs a separate appraisal.
The financial press is very big on showing these costs, but they are still far less than the costs that are currently being incurred by all of us as a result of the housing bubble.
Local and State Governments Call for Changes in Bond Rating System
One of the peculiarities of bond rating is that state and local bonds are typically rated much lower for a given level of risk than those of private entities, which requires that they purchase bond insurance.
This is the still lucrative core of the now almost insolvent monoline insurers business.
A number of public officials have expressed their concerns to the rating agencies:
On March 4, Bill Lockyer, the treasurer of California, sent a five-page letter to Moody’s Investors Service, Standard & Poor’s Corp. and Fitch Ratings asking for justice.
`”State and local governments almost never default on the bonds they issue,” the letter says. “The safety of municipal bonds is grounded in a fundamental fact: a city or state simply is not going to go out of business during the life of its bond issue.”
The letter was signed by 14 other state and local officials, including Michael Murphy of Washington, Michael Fitzgerald of Iowa and Patrick Born, the chief financial officer of Minneapolis. I mention these three in particular because they are public finance veterans who really understand the business.
Maybe every one shouldn’t be rated AAA, the letter asserts. Just most of them.
They are absolutely right.
As the system stands now, most state and local governments have to buy insurance in order to get an AAA rating, but the risk of default is minuscule compared to commercial AAA bonds.
Bush Political HUD Staffers Too Stupid for Email
You may have heard of HUD Secretary Alphonso Jackson.
He was the one who said in a public speech, that he would not make grants to Democrats.
Well, it now appears that he cut off funding to the Philadelphia Housing Authority because they refused to give a vacant lot to a friend of his.
The housing authority sued, and their email records have been introduced into evidence, and it’s ugly*.
After Philadelphia’s housing director refused a demand by President Bush’s housing secretary to transfer a piece of city property to a business friend, two top political appointees at the department exchanged e-mails discussing the pain they could cause the Philadelphia director.
“Would you like me to make his life less happy? If so, how?” Orlando J. Cabrera, then-assistant secretary at the U.S. Department of Housing and Urban Development, wrote about Philadelphia housing director Carl R. Greene.
“Take away all of his Federal dollars?” responded Kim Kendrick, an assistant secretary who oversaw accessible housing. She typed symbols for a smiley-face, “:-D,” at the end of her January 2007 note.
Cabrera wrote back a few minutes later: “Let me look into that possibility.”
*I don’t just mean ugly, I mean ugly even by the standards of the Bush administration, which is makes this AMC Pacer ugly.
Really, Really, Really Bad Ideas, Maryland Edition
The Legislature is looking at changing the law to allow for profit debt counseling services to operate in MD.
The change is being driven by Columbia based AscendOne Corp.:
AscendOne’s business practices are being reviewed by attorneys general in Maryland and several states, government sources briefed on the investigations said. The sources asked to remain anonymous because the investigations are ongoing.
We have an industry with a reputation for dishonesty and fraud. One where the business is exploding because of the requirement for credit counseling under the new clusterf*** US bankruptcy law, so at the behest of one of the dubious actors in this dishonest industry, the legislature is looking at making things even worse.
Sounds like business as usual in Annapolis.
Economics Update
Oil has hit another new high, driven largely by the Dollar hitting a new low, though there has been some recovery since the Federal Reserve has agreed to issue at least another $200 billion, this time using mortgage backed securities, aka “Worthless Garbage”, as collateral.
I’m not sure that this will make a difference in the strength of the Dollar. It now appears that the United Arab Emirates is seriously considering dumping their dollar peg, which is clearly a step towards Euro denominated oil.
In today’s episode of really bad policy, it appears that Congress is moving toward privatizing profits and socializing losses in real estate, by expanding the loans that FHA insurance covers. Yep, this will work so well, like it did for MBIA and Ambac.
In more general investment news, Bear Stearns is tanking on concerns that it lacks sufficient liquidity to cover potential margin calls. It probably does not help that Moody’s has downgraded Bear Stearns Alt-A mortgage backed securities, more than half of those issued from 2005 through 2007. Ouch.
Subprime’s favorite whipping boy, Countrywide is going down like Elliot Spitzer’s hooker, the Bank of America offer is now a 32% premium, as versus a 9% premium 2 weeks ago, so people are thinking that BoA will just walk away.
In the world of Real Estate Investment Trusts (REITs), we have had downgraded price targets on three Mortgage REITs.
What took them so long.
Finally, in things that make you say, Whiskey Tango Foxtrot, we have a report that, 20% of Silicon Valley startups cannot get to their working cash, because they invested it in Auction Rate Securities to get better rates of return, and that market is completely frozen.
Monsanto Wants to Ban “rBST Free” Labels
Monsanto has created an astroturf group that is lobbying to prohibit rBST and BGH free labels. They argue that it is “too confusing to consumers”.
I understand that Monsanto wants to market its industrial waste as widely as possible, but I object to their attempt to keep me, and the rest of the general public in the dark about it.
This is not confusing at all. I don’t their crap in my kid’s milk. Period, full stop.