Econ 2009

[ewmayer]

Originally Posted by cheesehead

... and why Adam had testicles when he was created (Before Eve) ...

In the garden of Eden lay Adam,
Complacently stroking his madam.
And loud was his mirth,
For on all of the Earth,
There were only two balls - and he had 'em!

----------------------------

Having made that seminal poetic contribution to the discussion, we next turn to today's news roundup: BofA does a majorly-dilutive new-share offering a day after being upgraded by Goldman Sachs (highly convenient timing there, eh? I wonder how many BAC shares GS sold into their own pump), typical insider-trading gamezz in the Wall street casino (yawn) ... Fed sprays Weed-B-Gone on those green shoots it's been touting, i.e. the usual "we would to hereby revise our earlier forecast from 'outright falsehood' to 'delusionally hopeful'..." stuff from Bennie and da boyzz ... Ah, here it starts getting interesting:

Administration: The Fox Really Knows Chickens - So Let the Fox Guard the Henhouse

May 19 (Bloomberg) -- The Obama administration may call for stripping the Securities and Exchange Commission of some of its duties under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

The proposal, still being drafted, is likely to give the Federal Reserve more power to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

My Comment: Karl Denninger (no fan of the in-bed-with-Wall-Street Bush-era SEC) really gets even more than usually frothy at the mouth when he contemplates this proposal for the "new SEC". Fox, keys to the henhouse are under the doormat...

But speaking of Bank Regulators and the many sensible things they`ve been doing in the past decade:

Banks Use Life Insurance to Fund Bonuses: Controversial Policies on Employees Pay for Executive Benefits, Help Companies With Taxes

Banks are using a little-known tactic to help pay bonuses, deferred pay and pensions they owe executives: They're holding life-insurance policies on hundreds of thousands of their workers, with themselves as the beneficiaries.

Banks took out much of this life insurance during the mortgage bubble, when executives' pay -- and the IOUs for their deferred compensation -- surged, and banking regulators affirmed the use of life insurance as a way to finance executive pay and benefits.

Bank of America Corp. has the most life insurance on employees: $17.3 billion at the end of the first quarter, according to bank filings.

My Comment: As if we needed any more proof that megabank executives are lower than pond scum ... heck, using such a metaphor is an insult to pond scum, which actually serves a useful purpose.


Pension Benefit Guaranty's Deficit Triples in Six Months to $33.5 Billion: Pension Benefit Guaranty Corp.’s deficit tripled to $33.5 billion in the past six months as companies canceled retirement plans in the U.S. recession, the head of the government-owned corporation said.

My Comment: Companies slashing costs by dumping retirement obligations on the PBGC ... this will not end well. Like the FDIC, the PBGC is already teetering on the edge of insolvency, and as Mish notes, the bankruptcy of first Chrysler and (likely) next GM could easily add over $40 Billion in unfunded pension "guarantees" to the PBGC`s already dire balance sheet. But the absolute best (in an ironic sense) twist in the tale of the PBGC has got to be this little gem of worst-case timing on its part:

Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn.

My Comment: And now you know where much (if not most) of that $33.5 billion hole came from. But that will seem like peanuts a couple years down the road, when PBGC will be facing Fannie and Freddie style insolvency-on-an-unspeakable-scale. Suggest the interested reader check out the full article - The lying liar (Charles Millard, who it should be noted is a former managing director of Lehman Brothers) who ran the agency under the Bush administration actually has the gall to claim "the new investment policy is not riskier than the old one". I kid you not - he actually said that. But hey - who are we unwashed-rabble types to question the word of a former managing director of Lehman Brothers when it comes to gauging risk?

Oh, and fittingly, GM spent much of the past several years loading up its pension program`s investment portfolio with - ta da! - now nearly-worthless GM shares, which they finally dumped last month for around $1, i.e. at just a *slight* discount to the purchase price. One wonders: since it`s not illegal for them to buy their own shares for their pension fund, would it also be legal for them to *short* their own shares?

[ewmayer]

U.K. May Lose AAA Rating at S&P as Government Debt Approaches 100% of GDP: Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II.

Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product. The pound fell the most in four weeks versus the dollar before rebounding, the FTSE 100 Index slid 2.8 percent and the cost of insuring U.K. debt against default rose.

Britain needs to sell a record 220 billion pounds ($349 billion) of bonds in the fiscal year through March 2010 as the economy contracts and Chancellor of the Exchequer Alistair Darling predicts that the budget deficit will reach 175 billion pounds, or 12.4 percent of GDP. The U.K.’s worsening finances parallel the public perception of Prime Minister Gordon Brown, whose Labour government has trailed the Conservative opposition for more than a year in polls.

My Comment: MarketWatch notes that the UK and US are on very similar trajectories here:

The move by Standard & Poor's raises the prospect not only of a credit-rating downgrade in Britain but a lowering of the outlook in the U.S., which has taken a similar path of big spending and quantitative easing to escape the credit-led recession.

GM Reorganization ‘Blatantly Unfair,’ Bondholder Says

May 21 (Bloomberg) -- The U.S. government’s reorganization plan for General Motors Corp., the nation’s largest automaker, is “blatantly unfair” to bondholders, said one investor, Mark Modica.

“If we just look at the offer, we have the Treasury and the UAW forgiving $20 billion of debt and getting 89 percent of ownership, and the bondholders are forgiving $27 billion and getting 10 percent ownership,” Modica, a bondholder, told Bloomberg Television. “If anyone thinks that’s fair, they’re not a GM bondholder.”

Modica, a business manager at a Saturn dealership in Chalfont, Pennsylvania, is a member of a group of GM debt holders calling themselves the “Main Street Bondholders.” The investors are in Washington to seek meetings with President Barack Obama’s auto task force and members of Congress to discuss the plan for GM’s revival.

An ad hoc committee of large bondholders including Franklin Resources Inc. is pushing its own restructuring plan for GM, calling for 58 percent of the equity in a reorganized automaker. The group represents institutions holding about $12 billion in GM debt.

Modica said he favors a scenario where bondholders would receive 50 percent of a reorganized GM. He said retirees holding GM’s bonds will be hurt by the proposal.

My Comment: Readers may be asking themselves, "why should I care about the whining of some big-money GM bondholders?" The reason is that the conditions being crammed down the throats of GM debtholders - very similar to those recently forced on Chrysler bondholders - illustrate a deeply disturbing tendency of the Obama administration to flout contract law, allegedly "in the best interests of the nation".

All the similar-themed proposals to e.g. allow judges to modify mortgage contracts as they see fit (cramdown legislation - fortunately that failed, at lest this time around), Chrysler and GM senior secured bondholders being treated like day-trading market speculators and arm-twisted into taking pennies on the dollar and waiving their right to seek better terms in bankruptcy court, or having their appeals tossed out by judges whose paychecks come from the government and whose chances of future promotion depend on the favor of the current administration - These are not trivial legal rights which are being run roughshod over in the name of National Economic Exigency - this is a wholesale abrogation of long-established contract law. As one of Barry Ritholtz` regular readers comments:

It occurs to me that the end-game for all this is that there isn’t one. The sanctity of contract, i.e., the freedom to enter into a legally-enforceable relationship by two consenting entities/adults, has been destroyed. Contracts, be they residential notes and mortgages, or secured commercial bonds, or CDS’s, are written on water. What do they mean? Whatever the government says they mean. Heretofore the government’s role had been providing an enforcement mechanism for contractual relationships. It now has now become a third-party to them all, deciding on its whim which it will support and which it will destroy.

We are rapidly moving to a regime where we are ruled by men and not by law, justified by the thin reed of economic contraction that still does not even remotely approach the worst of the last century. To retain its newly-acquired power, the government will need to keep a continued state of economic agitation and fear alive. It proclaims that its naked power grab is just an attempt to solve the problems brought on by the market economy. Not true. Its power grab is just that–an expansion of its purpose and size and power for its own sake.

Once the economy settles down, don’t expect a dialing down of government power and influence. Organizations do not willingly decrease their power and influence. The government will need to instill a new fear to keep the governed in thrall to its power. Time will tell what they’ll pick next.

The parallels with the Bush administration post-9/11 are unmistakable, only the nature of the permanent state of emergency has changed.

[cheesehead]

Originally Posted by ewmayer

My Comment: Readers may be asking themselves, "why should I care about the whining of some big-money GM bondholders?" The reason is that the conditions being crammed down the throats of GM debtholders - very similar to those recently forced on Chrysler bondholders - illustrate a deeply disturbing tendency of the Obama administration to flout contract law, allegedly "in the best interests of the nation".

All the similar-themed proposals to e.g. allow judges to modify mortgage contracts as they see fit (cramdown legislation - fortunately that failed, at lest this time around), Chrysler and GM senior secured bondholders being treated like day-trading market speculators and arm-twisted into taking pennies on the dollar and waiving their right to seek better terms in bankruptcy court, or having their appeals tossed out by judges whose paychecks come from the government and whose chances of future promotion depend on the favor of the current administration - These are not trivial legal rights which are being run roughshod over in the name of National Economic Exigency - this is a wholesale abrogation of long-established contract law. As one of Barry Ritholtz` regular readers comments:

The parallels with the Bush administration post-9/11 are unmistakable, only the nature of the permanent state of emergency has changed.

Moral hazards of starting down certain roads ... including the roads that earlier led to those roads ...

[__HRB__]

Originally Posted by R.D. Silverman

It is not the responsibility of lenders to protect people from their own
stupidity.

If you don't understand that it is in the lenders interest to lend money to people who make wise investments, then I agree with your ex-wife's lawyers that you shouldn't own anything.

[Prime95]

Originally Posted by __HRB__

If you don't understand that it is in the lenders interest to lend money to people who make wise investments...

On the contrary, it was in the lender's best interest to loan money to absolutely anyone, pocket a fat commission, and resell the loan to some other poor sap.

Oh, you're the poor sap -- a taxpayer.

[__HRB__]

Originally Posted by Prime95

On the contrary, it was in the lender's best interest to loan money to absolutely anyone, pocket a fat commission, and resell the loan to some other poor sap.

Oh, you're the poor sap -- a taxpayer.

I think his Highness has the agent mixed up with the principal. The 'lender' his Highness is referring to, is effectively only acting as an agent on behalf of the actual lender, because the loan is essentially an item in transit.

http://en.wikipedia.org/wiki/Contract_theory

Frankly, I cannot feel sorry for the current taxpayer, either. If you elect economic illiterates who promise to make you better off by picking your own pocket, then that's what you get!

[AES]

Originally Posted by Prime95

On the contrary, it was in the lender's best interest to loan money to absolutely anyone, pocket a fat commission, and resell the loan to some other poor sap.

Oh, you're the poor sap -- a taxpayer.

We're not poor saps. We're BRILLIANT in a Guinness "all six at once" kind of way.

[cheesehead]

Originally Posted by __HRB__

If you elect economic illiterates who promise to make you better off by picking your own pocket, then that's what you get!

... just as what you get when you elect a professional actor who as Prez quite convincingly looks you straight in the eye (through TV) and says he's vetoing a bill because it contains too much spending, when what he really means is that he'll sign the bill after more spending (in the categories he prefers) is added.

[cheesehead]

Originally Posted by ewmayer

My Comment: Everyone but gasoline retailers seems to be getting the deflationary message - Oil down 55% YoY, but gas prices at my local Valero station have only dropped 40%.

http://news.yahoo.com/s/ap/20090521/...Njb3N0c21vcmU-

"Gas costs more, but don't expect a repeat of 2008"

. . .

... For much of this year, there has been a glut of gasoline in storage around the country, keeping prices low. And demand has been light because of the poor economy.

But gasoline has jumped in May. Oil refineries, trying to make money just like any other business, are taking in less oil because of the glut in gas, and those cutbacks are showing up at the pump.

At the same time, prices are starting to rise for seasonal reasons. Americans drive more in summer, and federal and state laws require different, more expensive gasoline blends this time of year.

The trading markets are at work, too. By mid-February, the price of oil had fallen so far — below $34 a barrel, compared with a peak of $147 last July — that large investors couldn't resist buying in.

Investing momentum feeds on itself, and government data suggests speculative trades are on the rise, meaning people are buying in simply because they know they can sell for a quick profit.

"There's no lack of gasoline right now or the lack of ability to produce it, and anyone who says speculators are not playing a role in this run is delusional," said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service.

The same thing happened last year, to a much greater extent. ...

. . .

Even the kind of cataclysmic event that sends gas prices into a spike, like a hurricane in the oil-rich Gulf of Mexico, probably won't push gas past $4 a gallon this summer, analysts say.

. . .

So how high will gas go?

Darin Newsom, senior energy analyst at DTN in Omaha, Neb., said he expects the average price for regular unleaded to push $2.80 a gallon this summer — higher than many other forecasts. Even if a devastating hurricane strikes, he thinks prices will stay below $3.10 a gallon.

[ewmayer]

Originally Posted by ewmayer

Everyone but gasoline retailers seems to be getting the deflationary message - Oil down 55% YoY, but gas prices at my local Valero station have only dropped 40%.

...and up another 15 cents per gallon (roughly 6%) since I posted that a week ago.

It is interesting to ponder to what extent the plunge in gas (and generic energy) prices in the past year has helped to keep the Great Recession from being even worse. Gas approaching $3 per gallon will certainly stunt the growth of some of those mythical green shoots in the stubbly starter lawn of (alleged) economic recovery.

[ewmayer]

I recently read that here in California nearly a quarter-million people are on the state payroll ... there's one obvious reason the state is effectively bankrupt.

Well, to be fair, the bloated state payroll is not the only reason:

Pumping water and cash from the Delta - San Jose Mercury News:

As the West Coast's largest estuary plunged to the brink of collapse from 2000 to 2007, state water officials pumped unprecedented amounts of water out of the Delta only to effectively buy some of it back at taxpayer expense for a failed environmental protection plan, a MediaNews investigation has found.

The "environmental water account" set up in 2000 to improve the Delta ecosystem spent nearly $200 million mostly to benefit water users while also creating a cash stream for private landowners and water agencies in the Bakersfield area.

Financed with taxpayer-backed environment and water bonds, the program spent most of its money in Kern County, a largely agricultural region at the southern
end of the San Joaquin Valley. There, water was purchased from the state and then traded back to the account for a higher price.

The proceeds were used to fund an employee retirement plan, buy land and groundwater storage facilities and pay miscellaneous costs to keep water bills low, documents and interviews show.

Revenues from those sales also might have helped finance a lawsuit against the Department of Water Resources, the same agency that wrote the checks, documents show.

No one appears to have benefitted more than companies owned or controlled by Stewart Resnick, a Beverly Hills billionaire, philanthropist and major political donor whose companies, including Paramount Farms, own more than 115,000 acres in Kern County.

Resnick's water and farm companies collected about 20 cents of every dollar spent by the program.

Those companies sold $30.6 million of water to the state program, participated as a partner in an additional $16 million in sales and received an additional $3.8 million in checks and credits for sales through public water agencies, documents show.

"For a program that was supposed to benefit the environment, it apparently did two things — it didn't benefit the environment and it appears to have enriched private individuals using public money," said Jonas Minton, a water policy adviser to the Planning and Conservation League, a California environmental advocacy group.

But it`s the aforementioned folks who are generating are these great ideas for wasting money and providing an ever-bigger bureaucracy requiring ever-more bureaucrats to "run" it.

For a stark recent-historical summary of the explosion in CA state spending, see this site. Money quote:

Causes of the crisis

* The state budget is based on assumptions about future revenue: According to California's 2004-2005 state finance director Tom Campbell, the source of the long-term problem is that assumptions of future revenue are unreliable, and when they prove wrong, the spending has already been committed.[6]

* Productivity drain: According to Devin Nunes, a congressman from California, one source of the problem is that the "entrepreneurs, investment capital and the hardy workers who made it a global leader in agriculture, technological innovation and scientific research" are fleeing the state because it has an unattractive tax and regulatory burden. California has the sixth-highest tax burden in the country.[9]

* Significant increases in compensation of state and local government employees: Michael Haley of the Napa Valley Taxpayers Alliance points out that the funds required for the expanded pension and compensation of government employees that began in 2000 "are more than we can ever hope to collect in taxes, even with large tax increases, and it centers around the state’s main expense, employee compensation". Haley also notes that during the Gray Davis tenure, pension promises were unsustainable: "Safety personnel can now retire with 90 percent or more of their highest salaries at age 50, and other employees can retire with 75 percent or more at age 55."[38]