Econ 2009

[ewmayer]

Originally Posted by ewmayer

My Comment: See my post of 01 Jun, the day GM filed Chapter 11 and its common shares promptly rocketed from a post-announcement low of 25 cents to nearly a dollar. Since then the common has consistently traded above a dollar. Not bad for a guaranteed-to-go-to-zero issue. Perhaps the herd of delusional Greater Fools is even more vast than supposed, but one thing is guaranteed: There are folks making a lot of money from the price fluctuations.

Looks like FINRA decided that the pink-sheeted symbol GMGMQ.PK was still "too confusing" to the day-trading gamblers playing in the Old GM common stock, because after halting trading in it yesterday, they renaming it MTLQQ.PK, and based on today's price action, it seems some of the gambling addicts have been shown the door to the casino. But what do I know, there might be a "new bull market" in the rebranded old-GM pink-sheet shares starting tomorrow. Is trading by-definition-intrinsically-worthless common shares of a bankrupt company really any different than trading in one of those precious-metals ETFs (e.g. GLD or SLV) which assure investors that their shares are "backed by real bullion" but never allow anyone to verify that claim, and which would furthermore have to move around implausibly large numbers of bullion on a near-daily basis in order to keep their holdings in line with the current level of investment? I think not - it's all a big frickin' casino dealing in intrinsically worthless paper, the only thing that matters is getting some poor sucker to pay more for it than you did. The game of Old Maid (Der Schwarze Peter to our German readers) is an apt analogy.

[Fusion_power]

CIT financial service is teetering on the verge of bankruptcy. Estimates of its financial condition indicate that it would take in excess of $200 billion to restore this company to the status of a bleeding corpse capable of resuscitation. Based on raw numbers, you can expect either a bankruptcy filing or else a government takeover within days.

Green shoots anyone? We have a special on green shoots fertilized with lots of newly printed money.

DarJones

[ewmayer]

Originally Posted by Fusion_power

CIT financial service is teetering on the verge of bankruptcy. Estimates of its financial condition indicate that it would take in excess of $200 billion to restore this company to the status of a bleeding corpse capable of resuscitation. Based on raw numbers, you can expect either a bankruptcy filing or else a government takeover within days.

Green shoots anyone? We have a special on green shoots fertilized with lots of newly printed money.

But, but ... JP Morgan (like its even more evil counterpart Goverment Sachs) used some of that interest-free gubbermint money to make huge trading profits by speculating in the same markets which were getting juiced up on green-shoots amphetamines ... that's great news for the economy, ain't it? (At least for the economy of JPM, that is). CIT just reinforces to me the appalling bias in who-gets-bailed-out: The investment banks like GS and JPM (and C and BAC/Merrill) which have made themselves too-big-to-fail by virtue of their huge derivatives books and their having gotten the govt to allow them to leverage up as much 40-to-1, get bailed out at any cost, but lenders to main street like CIT which don't enjoy the same privilege to engage in unlimited risk-taking but actually support the *real* economy, are told to snuff it. I'm not saying CIT engaged in only-wholesome lending practices, but c'mon. For the interested reader, Barry Ritholtz has blog postings today about CIT's woes here (make sure to read the reader comments on that one about Goldman being "fully hedged") and here. He notes that during the recent credit crisis, CIT actually did the prudent thing and curtailed their lending - no huge amounts of risky lending means less systemic risk, hence less chance of getting bailed out. Moral Hazard strikes once again.


Regular thread contributor and ex-Nortel-employee Fusion_power will likely find the following story of interest:

Nortel Workers Threaten To Blow Up Factory Unless They Get Decent Layoffs

Liquidating Nortel has more troubles to add to its plate. Not only is the Canadian firm seeing a major push back to its liquidation plans by recently notorious private equity firm MatlinPatterson, which refuses to go gently into that good night and write off its $400 million investment in the failed telecom maker, but now it has to deal with its own employees who have threatened to blow up a French plant unless they get preferential layoff terms. The Globe and Mail reports that "workers had placed gas cylinders in front of the plant in the Yvelines area near Paris, where 480 jobs are set to be axed following bankruptcy proceedings."

It seems the French have gotten the upper hand in counter-[GM bankruptcy czar Steve] Rattnerian negotiating tactics. It is yet to be seen if comparable "negotiations" are pursued by the millions of business owners who will have no further recourse to loans by soon to be bankrupt lender CIT.

My Comment: The above ZeroHedge posting prompted some interesting reader comments, such as (from a U.S. reader) "Funny that the French just refuse to fit our self-serving stereotypes of them as effete clowns. If the average American had half the balls of the French, our government would appropriately fear its people, rather than the other way around.".


Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama's Mortgage Rescues Create ‘Confusion’: Foreclosure prevention programs are going to continue to fail as long as home prices are sinking and unemployment is rising.

The trend in home prices is still down and will likely be down for several more years. Please see Housing Update - How Far To The Bottom? for details.

The jobs picture is even more bleak as Bernanke Sees Chance of Jobless Recovery.

Given that the Fed's first mission is to delay, confuse, hope, and otherwise attempt to buy time while engaging in wishful thinking along the way, that Bernanke is willing to admit this may be a jobless recovery is a sign that things will likely be at least that bad. In other words, prepare for a job loss recovery.

Foreclosure prevention programs are going to continue to fail as long as home prices are sinking and unemployment is rising. Attempts to manipulate the market and/or prevent foreclosures will merely create "perverse incentives that distort the housing market".

The only real solution is time and price. Homes have to fall to the point of affordability and people have to have jobs before any house is affordable. This should be obvious but given the number of failed programs it must not be.

My Comment: Around this time last years, pundits were telling us the U.S. foreclosure spike was not a worry since "over 90% of mortgages are current". Oops.


China's economy grows by 7.9% on surge in govt spending, bank lending: China's growth rate shot up in the second quarter on the back of a surge in state spending and bank lending, boosting hopes the biggest emerging economy will lead the way out of the worst global downturn since the 1930s.

A slew of accompanying data for June depicted an economy successfully making up for a slump in exports through domestic demand, but in a note of caution the National Bureau of Statistics warned the base for recovery remained week.

In Japan, a Reuters poll showed manufacturers' confidence has improved for four months in a row, as exports and industrial output picked up, but the mood among services firms has slipped back to near a record low. Encouraging data from the United States and Europe and upbeat earnings from Goldman Sachs and Intel in recent days has revived optimism that the recession is abating, driving up Asian stocks for a third day on Thursday.

"In addition to hopes for a recovery in US corporate earnings, investors are welcoming growing signs of a recovery in US economic data," Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities, said.

My Comment:Notice the blizzard of wishful thinking unaccompanied by any real data to justify it in the above. Government stimulus spending and government-mandated dodgy bank lending now constitute "domestic demand", "manufacturing confidence" substitutes for "demand-driven manufacturing activity", and cherry-picked "upbeat earnings" from Goldman Sachs and Intel are cause to ignore the ongoing horrid fundamentals in the U.S. Moreover, by way of its state-controlled media, the Chinese government can of course simply make up any GDP number it wants in order to pretend all is well. Show ...me ... the ... exports. Oh wait, none of the loud "China on track to recover!!!" articles in the MSFM say anything concrete about actual exports. Rather strange for a developing economy which is more-or-less entirely dependent on exports, is it not?

[Fusion_power]

This guy is a lot closer than most to reality with his economic analysis.

http://finance.yahoo.com/news/Nine-R....html?x=0&.v=1

Next year will be even worse than this year, especially when the stimulus dollars run out.

States will be even more cash strapped next year than they are today.

Excess manufacturing capacity means the only place with jobs - cheap jobs - will be in the service sector. So who is skilled at flipping burgers?

The most damning statement of all is that the stimulus $ have been 'ineffective' at best. Can you say "Squandered"?

I like the 'iceberg' analogy. Methinks the 'titanic' economy is about to founder on the unemployment 'iceberg'.

DarJones

p.s. I am a 'saver'. I am working diligently to get myself out of debt as soon as feasible. I think this one is going to be a LOT worse than most people think.

[ewmayer]

Speaking of The House of Goldman, structured-finance expert and vocal Wall Street critic Janet Tavakoli had an op-ed on that subject at CNN.com yesterday:

CNN | Commentary: What Wall Street owes you

CHICAGO, Illinois (CNN) -- Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009.

Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share.

Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible.

In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight.

Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year.

In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends.

But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock.

U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system.

In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary.

In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed.

The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty.

Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company.

The key question is whether Goldman asked AIG to insure products that were as dodgy as the doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope."

If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are owed some of the bailout money passed directly through AIG to Goldman.

Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative transactions. This was the most lucrative windfall business in the history of the derivatives markets. When AIG left money on the table, it was U.S. taxpayer money.

Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed.

Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding.

My Comment: Using Rolling Stone investigative journalist Matt Taibbi`s description of GS, it would appear that we have a corporate sighting of the mystical sea creature known as Vampyroteuthis infernalis

[cheesehead]

Originally Posted by ewmayer

(from a U.S. reader) "Funny that the French just refuse to fit our self-serving stereotypes of them as effete clowns. If the average American had half the balls of the French, our government would appropriately fear its people, rather than the other way around."

I'll bet that reader is a Republican, but at least he realizes that the GOP's demonization of the French was self-serving.

It was the French fleet's blockade to keep the British navy from reinforcing Cornwallis's army that enabled George Washington to defeat Cornwallis in the key victory of the American Revolution. Without French help the American colonists might well have failed to overthrow British rule.

You'd think that patriotic Republicans would remember that instead of calling the French cowards.

It was the French who conceived, designed and constructed the Statue of Liberty, and gave it to the US as a centennial present. (Specifically, it was Gustave Eiffel -- yes, that Eiffel -- who designed "the massive iron pylon and secondary skeletal framework which allows the statue's copper skin to move independently yet stand upright.". http://en.wikipedia.org/wiki/Statue_of_Liberty)

You'd think that patriotic Republicans would remember that, too.

[ewmayer]

ZeroHedge is having no small amount of fun with an (apparently genuine) "Save the Fed" petition signed by several hundred economists and status-quo-friendly big-finance types. Names on the list include "Ben Dover" (cousin to the well-known economist Hugh G. Rection) and the (distinctly non-fake) Allen Stanford. I was surprised and dismayed not to see "Bernard Madoff" on the list ... apparently he is currently on "administrative leave" or something similar.

[ewmayer]

How the Obama Administration is going to close the yawning Federal current-account deficit:

Not with the ongoing implosion in in Federal income tax revenue, they're not. Time for some more accounting magic tricks ... how about "Borrowing against expected future tax revenue from GDP increases resulting from Green Energy initiatives?" Yeah, that's the ticket ... throw in some "Unemployment-driven Net labor unit cost savings", add a dash of "Expected tax windfall from Universal-Healthcare-stimulated employee sick day reduction" and a pinch of "Increased corporate tax remittances from linen-paper and ink manufacturers contracted by the U.S. Treasury Bureau of Engraving and Printing", and you're all set, only ($2 Trillion - epsilon) to go...


Friday Humor:

Goldman Sachs in Talks to Acquire Treasury Department: Sister Entities to Share Employees, Money

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.

According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is "a good fit" because "they're in the business of printing money and so are we."

The Goldman spokesman said that the merger would create efficiencies for both entities: "We already have so many employees and so much money flowing back and forth, this would just streamline things."

Mr. Hestron said the only challenge facing Goldman in completing the merger "is trying to figure out which parts of the Treasury Dept. we don't already own."

Goldman recently celebrated record earnings by roasting a suckling pig over a bonfire of hundred-dollar bills.

Elsewhere, conspiracy theorists celebrated the 40th anniversary of NASA faking the moon landing.

And in South Carolina, Gov. Mark Sanford gave his wife a new diamond ring, while his wife gave him an electronic ankle bracelet.

My Comment: Would that it weren't so frighteningly close to the truth...

[Fusion_power]

This article goes a long way to explaining the current unemployment situation in the U.S. As previously discussed, the true unemployment/underemployment figures are currently sitting at about 16.5%. It will climb at least 2% over the next year given current economic malaise.

http://www.dollarsandsense.org/archi...709miller.html

DarJones

[ewmayer]

U.S. Financial Bailout Costs May Reach $23.7 Trillion, TARP Inspector Says: U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

My Comment: Are those current dollars or future lira-style joke dollars? By way of reference, $23.7 Trillion is nearly double the 2008 U.S. GDP of $14.3 Trillion.


This next one - a fascinating tour of the psychology of hubris, from Gallipoli 1915 to Bear Stearns 2007 - could almost find a home in the Evolution: The Scientific Evidence thread:

The psychology of overconfidence | The New Yorker

This is what social scientists mean when they say that human overconfidence can be an adaptive trait. “In conflicts involving mutual assessment, an exaggerated assessment of the probability of winning increases the probability of winning,” Richard Wrangham, a biological anthropologist at Harvard, writes. “Selection therefore favors this form of overconfidence.” Winners know how to bluff. And who bluffs the best? The person who, instead of pretending to be stronger than he is, actually believes himself to be stronger than he is. According to Wrangham, self-deception reduces the chances of “behavioral leakage”; that is, of “inadvertently revealing the truth through an inappropriate behavior.” This much is in keeping with what some psychologists have been telling us for years—that it can be useful to be especially optimistic about how attractive our spouse is, or how marketable our new idea is. In the words of the social psychologist Roy Baumeister, humans have an “optimal margin of illusion.”

My Comment: The people who make the best liars are the ones who can convince themselves that they are telling the truth ... Note that "optimal" here does not mean "all people, in all circumstances" - in fact there will be (as with other cognitive and behavioral traits) wide variations in "margin of illusion" (or better, of self-delusion) between people, and a level of self-delusion which works well in some circumstances may prove maladaptive in others: The level of cockiness that helps you bluff successfully much of the time in your poker games with your college buddies may get you shot in East L.A. But in a very broad, averaged-over-all-people-over-the-course-of-humanoid-evolution sense,

[__HRB__]

Originally Posted by ewmayer

My Comment: The people who make the best liars are the ones who can convince themselves that they are telling the truth ... Note that "optimal" here does not mean "all people, in all circumstances" - in fact there will be (as with other cognitive and behavioral traits) wide variations in "margin of illusion" (or better, of self-delusion) between people, and a level of self-delusion which works well in some circumstances may prove maladaptive in others: The level of cockiness that helps you bluff successfully much of the time in your poker games with your college buddies may get you shot in East L.A. But in a very broad, averaged-over-all-people-over-the-course-of-humanoid-evolution sense,

If an individual has a 99% chance to emerge as the winner from a conflict, then a serial onslaught of 1000 overconfident challengers would reduce his chances of survival to 0.004%. This is much better than all the challengers behaving rationally, thereby avoiding conflict but letting superman breed.

In essence, overconfidence is an evolved mechanism to solve the prisoners' dilemma.