Econ 2009

[only_human]

Originally Posted by AES

This caught my attention. Forgive me if this has previously been brought to light. But, after all, we're paying for it.

http://www.thenation.com/doc/20090420/hayes

This is a howling outrage and I wonder why the MSM still have not picked it up.
(google search )link:http://www.thenation.com/doc/20090420/hayes finds only 4 external sites linking to that thenation.com page. The actuality of the kind of gaming the system that this article talks about indicates a larger problem yet; businesses will seek out money regardless of the funding intent - anything else would be a disservice to the bottom line and shareholders; generally no other direct obligations exist.

Web articles on this:
(Google)View all web results for alternative-fuel-tax-credit paper mills

News articles:
Google News date sorted search on "alternative-fuel tax credit" paper mills

Added: I now notice that the WSJ picked up on this.
The Great Paper Caper
"Government offers subsidy. Company takes it. Left-wing writer suffers crisis of faith."
This article strikes an iconoclastic pose and raises the issue of naivete in beliefs that free market capitalistic business would be engaged in anything other than making a profit.

Is he just now figuring out that corporate executives exploit opportunities to make a profit? Any free-marketeer could have told him that. Leftist economic theory is even more wrongheaded than we thought if it relies on the assumption that private-sector actors will behave in public-spirited ways.

Or perhaps his surprise is not that corporations "exploit" opportunities but that they do so in "ingenious" ways. His faith in governmental competence may be unshakable, but his illusions about private-sector incompetence have been shattered.

Also note the subtle extra twist of a zinger on the issue of competence.

[ewmayer]

only_human, thanks for the links ... lends new meaning to "papering over a problem".

Germany Offers to Buy Out Hypo Real Estate: A deal for the troubled mortgage lender would be the country’s first bank nationalization since the 1930s.

The government has sought to avoid a takeover of Hypo with no compensation for shareholders. Germany has not nationalized a bank since the 1930s, and the government’s efforts to control Hypo have raised fears of state interference in the economy. Finance Minister Peer Steinbrück has said that as a “systematically relevant” institution, with a crucial role in the housing finance market, Hypo Real Estate cannot be allowed to fail.

My Comment: I don't get why the German government seems to think letting shareholders take an "investing in the stock market carries risks" haircut has anything to do with Hypo continuing to do business under the umbrella of nationalization or receivership. Who is your chief constituency here - the German taxpayer and housing market, or Hypo shareholders? If you ask me, it all seems rather Hypo-critical.


Goldman Sachs May Sell Shares to Repay U.S. Government Funds, WSJ Reports: Goldman Sachs Group Inc. is considering a multibillion dollar share sale to help repay a $10 billion government loan, the Wall Street Journal reported, citing people familiar with the matter.

Goldman Sachs stock has surged 47 percent this year after plunging 61 percent in 2008 amid the worst financial crisis since the Great Depression. Chief Executive Officer Lloyd Blankfein, who said last week that the past year has been “deeply humbling” for the banking industry, is due to report the company’s first-quarter earnings on April 14.

The company may sell about $5 billion in stock if it returns the government’s $10 billion in Troubled Asset Relief Program money, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a note to investors March 27.

Banks including Goldman Sachs, which received its money as part of the first round of the program, are chafing under increased scrutiny that accompanied the bailout funds, as public outrage over bonuses and executive perks intensifies.

...Goldman Sachs, with $111 billion in cash and liquid securities, has fared better than rivals amid the crisis sparked by the meltdown of the U.S. mortgage market, the Journal said.

Once the most profitable firm on Wall Street, Goldman Sachs converted into a bank holding company in September.

My Comment: Seems at least one firm has been following the surefire 12-step program I outlined above to quickly turn TARP into gold ... the connection between profits and "bank holding company" in the last sentence has to do with the fact that a company regulated as a BHC is not allowed the kinds of extreme financial leverage (often 30:1 or more during the recent Peak Fiscal Insanity) that non-bank institutions are. Of course government-sponsored "special entities" such as Fannie and Freddie are allowed leverage exceeding 50:1, which is just nuts, and one reason the eventual bailout cost of the GSEs will likely approach or exceed a trillion dollars.


Barry Ritholtz (whose long-awaited book Bailout Nation is at last on its way to press with a new publisher, after the original one, McGraw-Hill, tried to redact the more-scathing portions that reflected badly on its subsidiary, Standard & Poors) comments on The Bernanke Revolution, characterizing the vast expansion of the Bernanke-led Federal Reserve in the past year not so much as a power grab (Mike Shedlock`s take on it) as a "reluctant filling of the void" left by the utter denial and fecklessness-in-the-face-of-economic-crisis of the Bush administration. He also has a 1934 Chicago Tribune Editorial Cartoon which shows that concerns about government throwing huge amounts of borrowed and printed money at a crisis caused by excess debt load are nothing new. And the salient question about the Rooseveltian stimulus-upon-stimulus approach of course remains: Is the bottoming and (modest) rebound of the U.S. economy in the latter half of the 1930s attributable to the huge wave of government stimulus spending, or would that kind of bottoming have occurred of its own accord? After all, economies don't grind to a complete halt because of a lack of paying jobs - people still have to eat and be clothed and have shelter and medical care, so at a very basic level there will always be the premodern subsistence/http://globaleconomicanalysis.blogsp...rter economics going on, and those who were not overleveraged at the start of the deflationary spiral will still have actual capital they can employ - the thing about great economic contractions is that they ruthlessly winnow out the indebted and nonproductive parts of the economy. The question is, do artificial stimulus packages (which typically go to bailouts and make-work-style projects rather than long-term-productive activities) help ameliorate the bottoming, or do they actually make it worse by delaying the eventual "natural" bounce-back, e.g. by propping up nonproductive "zombie" businesses? Don`t get me wrong, I am all for the social-safety-net spending of the Roosevelt era, but huge amounts of money for nonproductive make-work fake economics, I have a problem with.


And speaking of dubious government stimulus spending, even the normally tight-walleted German government is not immune...

Wise Man Franz Raps Government's New-Car Subsidies as `Economic Nonsense': German Chancellor Angela Merkel’s decision to prolong bonuses for car buyers is “economic nonsense” that’s primarily aimed at winning votes in September’s national election, a senior government adviser said.

“Every decent economist would agree that this decision is economic nonsense,” Wolfgang Franz, chairman of Merkel’s council of independent economic advisers, said today in a telephone interview from Mannheim, Germany. The chancellor was guided by a “perception that voters would be angry when the money is gone.”

Merkel’s cabinet agreed yesterday to extend a program that grants consumers 2,500 euros ($3,315) when they buy a new vehicle in exchange for scrapping a car that’s at least nine years old. Originally due to expire May 31, the plan will now run through the end of this year and cause the government to more than triple the budget for payments to 5 billion euros.

My Comment: So, are you going to keep artificially propping up the domestic car industry using taxpayer money forever? Of course not, so how do you think all that artificially-stimulated demand is going to affect car sales once the subsidies end?

[Fusion_power]

Ewmayer, Re Germany new car govt benefit, are you missing the point? With $5 Billion, and at $2500 per new car, that translates to two million brand new cars in Germany. With a population of @82 million people, allowing for 1 in 8 is a driver, there are 10 million drivers in Germany who will buy 2 million new cars. That means 1 in 5 cars in Germany will be BRAND NEW! Germany will have the newest cars in the world! It is ALL about Bling!

And if you believe that, let me talk to you about a bridge I own.

On a separate note, GM has received marching orders to prepare for an orderly bankruptcy. I don't like to see this happen, but given the utter inviability of GM as is, bk is the only viable option in my opinion. When will some of the economic idiots realize that we have banks that are in worse shape than GM?

DarJones

[ewmayer]

Collected this stuff intending to post on Friday, but never found the time:

Malls shedding stores at record pace: Vacancy rates at strip malls, neighborhood markets and community centers accelerate as retailers confront spending slump, industry report says.

In just the first quarter of 2009, retail tenants at these centers have vacated 8.7 million square feet of commercial space, according to the latest report from New York-based real estate research firm Reis.

That number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.

Reis' report shows that store vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, and marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

My Comment: One certainly would not guess how dire the state of CRE is from the performance of REITs in the past month...


A Game of Credit Cost Smoke and Mirrors at Wells Fargo?

Wells Fargo & Co. (WFC: 19.61 +31.70%) managed to bring some holiday cheer into financial markets Wednesday, just ahead of the Easter holiday, with its pronouncement that it expects to post a record quarterly net income of $3 billion — or 55 cents per share — when it officially reports Q1 2009 earnings later this month. But more than a few voices are already questioning the results, warning that this quarter’s big gain is more likely to be a flash in the pan than a market turning point.

In particular, Wells Fargo reported that they will absorb just $3.3 billion in charge-offs on bad loans for the quarter, and just $4.6 billion in loss provision expense; both numbers are well below most analyst estimates, and are the primary reason Wells will report earnings trumping earlier Street estimates.

“The shocker was that they only had only $3.3 billion [in] charge offs,” said Whitney Tilson of hedge fund manager T2 Partners, in a CNBC interview Wednesday afternoon. “It’s weird, because in Q4 Wachovia and Wells Fargo together had $6.1 billion in charge-offs, and then in a quarter in which things were terrible, those charge offs fell by 50 percent … They’re going to have a lot of losses over the next couple of years, [and] anyone baselining at $3.3 billion in charge offs per quarter is crazy.”

My Comment: Also interesting is the mere fact that WFC were in such a hurry to pre-announce "expected earnings" 2 weeks early ... curious, that. Even more interesting is that the biggest beneficiary of Wells` announcement in terms of share-price rise yesterday was ... Bank of America. I`m imagining acronym-laden text-messages flying around among stricken short sellers yesterday to the effect of "WFC est EPS 2x anlst! BofA up 40pct ... WTF?!! :( :( :("


A trader comments on the proposed reinstatement of the Great-Depression-era "uptick rule", by which a stock can only be sold short on "upticks" in its price:

I just happen to think that the uptick rule is a non-event.

In the days when it was effective, most trades were handled by trading specialists on the floor of the exchange. Prices moved up and down by 1/8ths. Those two factors provided a slowness to the overall trading volume.

Today, we have most trades handled (and placed) by programs. You can enter in prices that vary by 1/100th of a cent.

So say they put back in the uptick rule. Your typical order book is sitting there, with lots of orders offering at a range of asks, and a good set of orders sitting there with limit bids. Mexican standoff waiting for some hapless "market" order to come in.

Now say you're a hedge fund with a computer, and you want to short the bejezzus out of a stock. The last order was a market sell, and you have to wait for an uptick.

Well, use your d@mn computer to make an uptick until your short sale goes through:

1. Put in your "Sell 80,000 shares of XXX short, at market" order.
2. Then start entering in the following: "Buy 1 share at market". Do this over and over again, about 10 times per second, until the upticks you've generated by flooding the market with market buys has assisted your 80,000 share short sale. If you're shorting 80k share, buying a couple thousand in order to allow your massive sale attack to go through is a minor cost.
3. To be really effective, split your short orders among multiple exchanges, so you can harvest upticks from multiple systems.
4. To be really really effective, short against order volume being handled by your own investment bank's customers, that way you can just bypass the frickin uptick rule altogether, and just report the net of trades to the major exchanges. Your customers will never know.

Details to be filled in, but trust me, computers can be used to completely bypass the uptick rule unless we also go back to humans touching every trade, and large price bumps for each movement. The uptick rule is being milked for every bit of rumored impact they can, because when it is put in place, there will end up being very little impact.

My Comment: I love the "Mexican standoff" metaphor ... BTW, If you trade stocks and don`t understand the difference between a market and a limit order, STOP TRADING until you do - you should *never* use the former, and if your brokerage charges you a non-negligible premium for the latter, change your brokerage.


Citigroup's Place on a Roll of Shame: Eleven years ago this week, banking mogul Sandy Weill took a victory lap at the Masters Tournament. Today his creation is on a government list of losers.

No banking company is today more worrisome, to more regulators, than Citigroup.

Still, Citi -- too big and interconnected to fail and pumped up by government money -- survives. So I was therefore especially startled when a FORTUNE subscriber pointed out to me that Citi is conspicuous on a list of "Failures and Assistance Transactions" that is posted, quite obscurely, on a Federal Deposit Insurance Corp. website. The data goes back to the panic year of 1934, the first year of the FDIC's operation.

In the more recent panic year of 2008, the FDIC handled 25 true failures. They ranged from tiny Hume Bank, of Hume, Mo., with its $14 million in deposits, to the very large Washington Mutual Bank, with $188 billion. (Wamu, of course, was taken over by JPMorgan Chase).

But in the midst of these failures are five items of "assistance," listed together. They are all Citigroup banks: Department Stores National Bank (deposits: $301 million); Banamex USA ($876 million); Citicorp Trust Bank FSB ($7.2 billion); Citibank (South Dakota) N.A. ($42 billion); and one of the largest holders of deposits in the nation, Citibank National Association ($230 billion).

How did Citigroup's banks get on this list? Because on Nov. 23, the U.S. government, by way of the Treasury and the FDIC -- and the Federal Reserve, as an ultimate backstop -- stepped in to guarantee up to $306 billion of Citi's assets. The FDIC's maximum exposure, which qualifies as its "assistance," is $10 billion.

Technically, the FDIC aid amounted to what it calls "open-bank assistance," and an absolute rarity this is. Before Citi rudely inserted itself into this picture, the last instance of such assistance was in 1992, when a small bank in Princeton, Texas, was propped up by the FDIC because it was judged vital to its community.

But neither competitors nor Congress liked open-bank assistance, wondering why the institutions getting it shouldn't just be allowed to fail. So a 1991 banking law called FDICIA, and a subsequent amendment to a related law, essentially barred the FDIC from granting such assistance -- except in instances of systemic risk.

And even then, the procedures set up by the law for determining that systemic risk truly existed were extraordinary. The law says that before assistance can be granted two-thirds of the boards of the FDIC and the Federal Reserve must first recommend the step and that the Secretary of the Treasury, before making a final determination, must confer with the President.

So did Treasury Secretary Henry Paulson make a trip to the Oval Office last November, or even make a phone call, to consult with President Bush and say that FDIC assistance -- and much more -- must be granted Citi? Or did the exigencies of the financial crisis sweep aside procedure?

We may know a precise answer to those questions when Hank Paulson completes the book that he is known to be feverishly writing. For now, what we know is that the second-largest banking company in the nation, Citigroup -- founded 11 years by an exuberant Weill -- will forever have its banks tabulated on the FDIC's list of "Failures and Assistance."

[ewmayer]

Bernanke Bet on Keynes Has Meltzer Siding With Friedman on Inflation Risks: Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.

Bernanke’s gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will hold down inflation is straight out of the late British economist Keynes. Should late Nobel-prize-winner Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed’s balance sheet may leave him to cope with surging consumer prices.

So far, investors and economic data both back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years.

...John Brynjolfsson, chief investment officer at hedge fund Armored Wolf in Aliso Viejo, California, says the Fed is still in the early stages of its effort to pump up the economy.

“We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation,” he said in a Bloomberg Television interview on April 6.

My Comment: Indeed, deflation will likely trump all the new money until housing prices finally bottom out and the economy stops hemorrhaging jobs ... but then all that new money will be seeking a home, and inflation of one kind or another - in consumer prices, yet another Fed-fueled asset bubble, perhaps both - will be the inevitable result. But seriously, "Armored Wolf"? Dude, *totally* awesome hedge fund name, there. It`s like, all, aggressive and capital-raisy, and stuff.


Wall Street in Wells Fargo Moment as Obama Stress Tests Earnings Euphoria: No amount of enthusiasm for Wall Street earnings reported this month -- and there was plenty on April 9 to send Wells Fargo & Co. shares up 32 percent after the bank announced a record first quarter -- can overcome what President Barack Obama may soon have to say.

That’s because the results that matter, the ones that will determine whether San Francisco-based Wells Fargo and 18 other U.S. banks need more government cash, won’t be revealed until the end of April, when the Obama administration’s stress tests are completed. Treasury Secretary Timothy Geithner has said he expects some lenders will require “large” amounts of capital, and that could take the bloom off any rosy first-quarter report.

“There will be a pregnant pause until the outcome of the stress test is known,” said Dino Kos, a managing director at Portales Partners LLC in New York who has worked at Morgan Stanley and the Federal Reserve Bank of New York. “The test is ultimately about who gets diluted and how much.”

The six largest U.S. banks by assets are set to report their latest quarterly figures over the next two weeks. Analysts’ estimates compiled by Bloomberg show that four of them will post a profit. Only Citigroup Inc. and New York-based Morgan Stanley may disclose losses.

My Comment: If the government were lending me huge sums of capital at near-zero interest rates and I were lending that money out at double-digit interest rates thanks to a spate of huge credit-card-rate and fee hikes, how could I not make money? Ya gotta admit it`s a pretty sweet business model ... the same taxpayers keeping your reckless, insolvent zombie bank on life support get the shaft by way of usury-level interest rates and fees, by way of "thanks for the bailout money."

But back to the "stress tests" ... the idea that the results "matter" is laughable. Given the utter nontransparency of the process, the Treasury can report whatever it wants to - if they want to continue to prop up Federal National ZombieBancorp, they report "pass", FNZ gets a nice pop in its share price and lines up for more bailout money. If they decide to bite the bullet and nationalize one of the zombies, they report "fail" and thus have the political cover they need for doing so. (Although given Geithner`s tool-of-Wall-Street MO I consider the latter scenario extremely unlikely).

Regulators are using two economic scenarios for the tests. The first is a “baseline” forecast of 8.4 percent unemployment and 2 percent economic contraction in 2009, followed by 2.1 percent economic growth and an 8.8 percent jobless rate in 2010. The other is a “more adverse” scenario, with 8.9 percent unemployment and 3.3 percent contraction in 2009, followed by a 10.3 percent jobless rate and 0.5 percent growth in 2010.

The U.S. unemployment rate has already exceeded the baseline forecast, reaching 8.5 percent last month, the highest level since 1983. Gross domestic product probably fell at a 5 percent annual pace in the first three months of 2009, more than in the adverse scenario, according to the median estimate of economists surveyed earlier this month.

My Comment: So even the Treasury's "adverse" scenario for the economy through 2010 is more rosy than things already are. Oh yeah, those results - even if honestly reported (whatever the hell that means) - are gonna be *really* meaningful. About as meaningful as an "adverse" scenario back in 2006 would have been, which postulated, "What if housing prices actually stopped rising - or golly gee, actually *fell* by 5%? Not that that could *ever* happen, but let`s just imagine how bad that would be..."

And it seems the game of who-can-announce-earnings-in-advance-even-more-than-their-rivals continues:

Goldman reports $1.8 billion profit: The big investment firm also sets plans to sell $5 billion in stock, paving the way for it to repay its TARP loans.

The New York-based investment firm, which reported its results a day earlier than expected, said it earned $1.81 billion, or $3.39 a share, for the quarter ended March 31. Analysts surveyed by Thomson Financial were looking for a profit of $1.64 a share.

Goldman shares, which have surged more than 70% during the past month, continued rising late Monday, gaining about 4.7% for the day. Shares were unchanged in after-hours trading.

With the results, Goldman bounced back decisively from the last quarter of 2008, when it posted its only quarterly loss since becoming a public company in 1999.

The firm said the latest quarter's gains were driven by big profits in its fixed income business, where revenue surged to $6.56 billion - 34% above the previous record.

My Comment: Note that the announced profits exclude any profits or losses from the "United States Treasury" subsidiary of Goldman (Ticker: GS:UST), since GS:UST won`t be able to value its TARP investments in the banking sector for several years. At that point, any profits will accrue to Goldman and any losses to the U.s. taxpayer, as per usual accounting rules. Regarding the large gains in the firm`s "fixed income" business, curious readers may be wondering whether certain unusual computer-trading patterns at Goldman may be playing a role behind the scenes. Note the very odd self-contradiction in Mish`s take on the breathtaking computer-trading volume at Goldman compared to its peers - first he asserts that to think that Goldman and other firms might "front-run" their own news announcements and trading recommendations in order to profit (often at the expense of their own clients) is absurd:

That Goldman, Citigroup, and the now defunct Bear Stearns and Lehman, etc, could ever be in a position to front run trades based on analysis they know they are going to publish, and/or to purposely make recommendations to ignite short squeezes or selloffs based on positions they hold is simply wrong.

...And in the very next piece of commentary he wonders if that might be exactly what happened:

Please consider the following horrendous advice last week by Citigroup. Flashback March 31, 2009 Citibank to Investors: We Suggest You Bet Against Us...

With Citigroup, one should never rule out sheer incompetence as the most likely answer for anything it says or does, but one also cannot help but wonder if Citigroup was on the winning side of that recommendation as a market maker.

Inquiring minds will note that Citigroup's advice came out just before a ruling on mark-to-market accounting that was expected to be (and was) very favorable to every company in the XLF. The chart shows that XLF exploded North.

Was this sheer incompetence by Citigroup or something more sinister? What about recommendations from Goldman? Can anyone say for sure? Even if someone thinks they can, are the answers believable?

In other news, Mish is predicting tax revolts across the U.S., especially in tax-happy states like California:

A tax revolt is brewing, and the tax-and-spenders in Sacramento and Washington appear oblivious – just as in 1978 when overtaxed Californians overwhelmingly passed Proposition 13, the landmark property-tax limitation initiative.

The revolt is long overdue. Even a prosperous populace has its limits, particularly as prosperity evaporates in the most severe recession since the Great Depression.

Like the proverbial frog in a gradually boiling pot of water, Californians apparently didn't notice taxes being elevated incrementally until they now have the highest income tax rate in the nation, the highest sales tax rate and the sixth-highest overall tax burden among the 50 states. Incredibly, tax-happy state legislators now want taxpayers to add another $16 billion in taxes to their burden by approving an initiative the lawmakers put on a May 19 special election ballot, on the heels of $12.9 billion in new taxes the Legislature itself imposed only two months ago.

My Comment: Once again I ask: California's budget has more than doubled since 2000 - what did all that extra money buy? Perhaps the city of San Jose`s spending priorities in the face of a huge budget deficit will provide a clue:

Generous sick-leave cashouts for retirees cost San Jose millions

Former San Jose Deputy Fire Chief James H. Carter got an extra $285,000 last year — a check that exceeded the total pay of any of the city's top-ranked officials.

Former Assistant Police Chief Charles "Tuck" Younis, who now serves as chief in Los Altos, collected more than $243,000 on top of his salary and pension. Two other San Jose police officials last year took home checks for more than $200,000 each.

These retired public safety officials didn't win the lottery. Instead, they benefited from city policies that are under scrutiny as San Jose confronts staggering budget deficits: letting longtime employees cash out unused sick and vacation leave when they retire.

The policy cost taxpayers $7.8 million in 2008, up from $5.5 million the year before, according to pay data requested by the Mercury News. That's about one-tenth of next budget year's projected $78 million deficit.

City officials say the benefit exceeds what government officials get elsewhere, not to mention private-sector employees where such large cash-outs are unheard of.

[ewmayer]

Originally Posted by ewmayer

A Game of Credit Cost Smoke and Mirrors at Wells Fargo?

...But let`s hear what Nouriel "Dr. Doom" Roubini (these days the nickname should probably be changed to "Dr. Skeptical Realist who has been right far more often than 99.99% of mainstream economists") has to say on the matter:

A look below the surface reveals some caveats to this positive picture. As Nouriel Roubini points out in a recent writing: “In brief, banks are benefitting from close to zero borrowing costs and fewer competitors; they are benefitting from a massive transfer of wealth from savers to borrowers given a dozen different government bailout and subsidy programs for the financial system; they are not properly provisioning/reserving for massive future loan losses; they are not properly marking down current losses from loans in delinquency; they are using the recent mark-to-market accounting changes by FASB to inflate the value of many assets; they are using a number of accounting tricks to minimize reported losses and maximize reported earnings; the Treasury is using a stress scenario for the stress tests that is not a true stress scenario as actual data are already running worse than the worst case scenario.”

My Comment: Hard to say when the latest "bottom is in ... we see glimmers of hope" PR campaign will finally run smack into a wall of ugly reality (yesterday`s "worse than expected" March retail numbers were but a small foretaste), but for now I still sense that delusional optimism reigns on Wall Street. For the banks, "government-sponsored earnings" in no way equates to "solvency", but the banks have done everything in their power (and have been aided by the government and the FASB in this regard) to obscure the true state of their balance sheets, and the media dutifully report the easier-to-measure earnings numbers as if those were all that mattered, It is possible that the government is taking a "if we simply throw enough money at them, then hopefully the housing market will be all fixed in a year or so and a new bull market will begin and the solvency issue will be papered over without another megabank failure along the way" approach, as described in this recent commentary by Bloomberg's Jonathan Weil:

Obama Stakes His Fortunes on Failed Banksters:

[Obama] could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

The Obama administration’s “strategy,” for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them.

A couple trillion in newly-printed money will make even the biggest zombie bank solvent...but turning to the underlying fundamentals, even a few trillion may not be enough to avert the next crisis in the overall sector - returning to the Roubini piece:

Meanwhile, in the real economy credit growth to the private sector has continued to slow at a fast pace in the U.S. as well as in Europe, while U.S. credit card charge-offs rose to an all-time high in February at 8.82%. Moody’s predicts the charge-off rate index will peak at about 10.5 percent in the first half of 2010, assuming a coincident unemployment rate peak at 10 percent. In turn, Fitch warns that credit card delinquencies point to record defaults ahead. Keep also in mind that global high-yield defaults are expected to reach 15% by the end of 2009 and that the commercial real estate market has just turned.

According to recent press reports, in a report next week the IMF plans to raise its global loan and securities loss estimate to $4 trillion by the end of 2010, including about $3.1 trillion in U.S. originated losses (up from $2.2 trillion estimate as of January) and $900bn in European and Asian originated losses. Compare these numbers with U.S. originated loan and securities losses of $3.6 trillion as estimated by RGE Monitor in a January report. As outlined in our report, $1.8 trillion are expected to fall on U.S. banks alone.

On the plus side, GM is very likely to end up in bankruptcy in the coming month, but it seems at least a bit of common sense has crept in on the "should bondholders get a haircut" front - now they just need to avoid any "protecting the bondholders is crucial to economic stability" backroom deals by Terrible Timmy Geithner and his Wall Street cronies as happened with the AIG bonuses recently:

Auto Workers Essential to GM's Future Said to Win Out Over Bondholders: A United Auto Workers union retiree health-care fund probably will get preferential treatment over other unsecured claims in a General Motors Corp. bankruptcy or restructuring, people familiar with the plans said.

[ewmayer]

Nation's No. 2 mall owner files for bankruptcy: General Growth Properties Inc., the second largest U.S. mall owner, filed for bankruptcy protection on Thursday in one of the biggest real estate failures in U.S. history.

Ending months of speculation, the Chicago-based mall owner, which listed total assets of $29.56 billion and total debts of $27.29 billion, sought Chapter 11 bankruptcy protection from creditors along with 158 of its more than 200 U.S. malls, while it seeks to restructure some of its debt.

Since November, General Growth has warned that it may have to seek protection from its creditors when it was unable to refinance maturing mortgages.

The company said in a statement that it planned to continue exploring strategic alternatives during the bankruptcy protection, from which it is seeking to emerge as quickly as possible through a reorganization that preserves its national business.

General Growth's filing in the U.S. bankruptcy court in Manhattan makes it one of the largest nonfinancial companies to succumb to the financial crisis in the U.S.

Before the bankruptcy protection filing, the company had defaulted on several mortgages as well as a series of bonds. It has also put several of its flagship properties up for sale.

Analysts and other real estate experts have speculated that mall owners Simon Property Group Inc and Westfield Group would be interested in buying some of General Growth's assets from bankruptcy.

General Growth has been generating enough cash flow for the company to pay monthly interest costs and expenses, but it has been unable to refinance the principal of loans and mortgages as they come due because banks and other financing sources have been reluctant to issue large mortgages and loans.

"Our core business remains sound and is performing well with stable cash flows," General Growth Chief Executive Adam Metz said in a statement.

My Comment: Now - ignoring the obligatory all-is-so-well-that-we-are-bankrupt egregious lie from Mr. Metz (who apparently studied the pre-collapse PR clips from Bear Stearns and Lehman Brothers quite carefully) - you might think that commercial real estate-related equities (REITs) might be selling off on this news, but quite to the contrary, most of GGP`s competitors are rallying hugely on the news. SRS, the popular CRE-inverse ETF, just hit its all-time low today. Logic has no place in this market ... which makes me suspect that either a whole lot of the cheap government money the banks are supposed to be lending to consumers (which the banks are wisely refusing to do to all but the most creditworthy - would that such prudence had prevailed for the preceding part of this decade) is instead going into equities, or there is a highly organized bank-earnings-season market pump job going on behind the scenes. One just needs the mainstream financial media (MSM) to cooperate in the bullish spin, lure in hordes of unwitting retail investors, then sell at the top before the bottom falls out. Far-fetched? Perhaps ... but consider that (for example) GE reports earnings tomorrow, and GE owns the wildly popular financial news network CNBC. It`ll be very interesting to watch in the next couple months, to see if there is a clear inflection point after which the MSM begin to spin more-or-less-the-same-fundamentals much more negatively. For instance, in today`s irrationally exuberant climate, the following story will likely get spun as bizarrely positive for the economy:

Foreclosure Filings in U.S. Climbed to Record in First Quarter: U.S. foreclosure filings rose to a record in the first quarter as employers cut jobs in the recession and temporary programs to delay action on defaults came to an end, RealtyTrac Inc. said.


...much like the latest fake jobless-claims data are getting promoted as "worst is over!" indicators:

Initial jobless claims plunge: The number of people filing initial jobless claims drops 53,000 to 610,000. Continuing claims break record at 6 million.

Initial jobless claims were expected to total 658,000 in the week ended April 11, according to a consensus of economist forecasts compiled by Briefing.com.

John Lonski, chief economist for Moody's Investors Service, said he puts more of his focus on the continuing claims number - and its pessimistic outlook - than the weekly tally.

"That tells you that things are getting worse and we're going to see another rise in the unemployment rate, and that's not good news," said Lonski.

My Comment: Given that the BLS has been consistently making huge upward revisions to the initially-announced numbers ever since the jobless rate started to rocket last year, I don`t put much credence in the preliminary numbers anyway. We don`t know exactly what kind of statistical fudge goes into the BLS "black box" model they use to gerrymander the actually enumerated numbers beyond all recognition, but it is clear the model consistently and grossly underpredicts actual unemployment trends (as measured by, say, actual payroll statistics and later-revised data) in highly stressed economic times like these. To borrow terminology from thermodynamics, it`s an equilibrium model applied to a highly nonequilibrium phenomenon.

Also, let`s not forget that with overall unemployment having nearly doubled year-over-year, there are simply fewer people left to lay off - again, this is clearly a positive sign, since the next best thing to an uptrend is a "decelerating downtrend". To borrow terminology from skydiving, "the chute still refuses to open, but the downward acceleration has slowed anyway!"

[Fusion_power]

the chute still refuses to open, but the downward acceleration has slowed anyway!

Must have reached terminal velocity!

DarJones

[ewmayer]

Originally Posted by Fusion_power

Must have reached terminal velocity!

DarJones

...Which, according to CNBC, "Is a bullish sign that we are closer to the bottom than we were before!" I'm serious, this is the kind of retarded "reasoning" one sees all the time from the alleged experts on the n00zt00b.

If the U.S. economy lost half its jobs one year and another half the next, these clowns would tout it as a positive development because "job losses are only half what they were last year!!"

[Fusion_power]

Reminds me of a joke I read years ago about a race between a Russian and an American. The one mile race went off without a hitch and the American won. the next day, the American newspapers read "American wins race". the Russian newspapers read "Russian comes in 2nd, American comes in next to last!"

No insult intended for Russian readers, this just happens to illustrate the kind of illogical reporting often seen in mainstream media.

DarJones

[ewmayer]

Quantitative Easing, illustrated via the St. Louis Fed's Money Supply data - This is the money that's been helping to inflate the banks` tattered balance sheets and to bid up stock prices recently: