Econ 2009

[ewmayer]

Originally Posted by ewmayer

[23 September 2009] I still think TPTB are going to do everything in their power to push the Dow up over the "magic" 10,000 mark sometime between now and year`s end just so they can say they did (and thus point to another fake "economic recovery milestone")

Ding, ding, ding ... today was the day for the CNBC shills and assorted pump monkeys get to have their collective on-air orgasm. It`s the start of a new bull market, baby! Dow to 36,000!! Straight to the moon, Alice!

Of course if you translated that $10,000 which would buy 1 share of each DJIA company (neglecting commissions and expenses) into the sovereign currencies of less Ponzified economies (say Euros or Yen), or something actually useful like oil, or a store of value like gold which cannot be procured with a few keystrokes at a Fed computer terminal, you quickly realize that today`s 10,000 is not your Dad`s or even older brother`s 10,000. But for now ... "Mission Accomplished!"

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For all his perspicacity in identifying the causes of the financial crisis and the bailout mentality of the government in dealing with it, Barry Ritholtz appears to have a persistent and huge blind spot with respect to the evils wrought by the Wall Street bonus culture - as illustrated by his defense of the latest round of huge bonuses at Goldman Sachs:

Much Ado About $23B: Goldman Sachs Bonus

My Comment: IMO, Reader Singer`s reply at the top of the comments section is spot on.

[ewmayer]

Baltimore police, fire pension costs could double next year

An unusual pension benefit for police and firefighters could cost Baltimore $164.9 million next year, nearly double what the city is now paying and a figure that the city's finance director says taxpayers cannot afford.

After years of calls for pension reform, board members who oversee the nearly $2 billion system said their Tuesday vote that passes the whopping bill on to City Hall is a message that the fund is close to a breaking point and needs attention.

Edward J. Gallagher, the city's finance director, said the city "certainly cannot afford" to pay the full commitment due in July. "It seems that our concern has really come home to roost."

The new retiree funding request is twice as large as the $81.9 million the city paid to the fire and police pension fund last year.

If the pension system is not altered before the bill comes due, needed cash could come from raising the city property tax rate 11 percent, or "significant reductions across all agencies, including public safety," Gallagher said. Mayor Sheila Dixon, who has long sought reductions in the city's tax rate of $2.27 per $100 in assessed value, has said both options are unacceptable.

The extra cash is needed largely to shore up a part of the pension program called a variable annuity. The benefit is similar to a cost-of-living increase, but is tied to positive stock market returns.

My Comment: And we all know that - just like ral estate - the stock market will always go up at double-digit annual percentage rates, right? As Mish says, it's time for Baltimore to tell the oh-so-powerful municipal employee unions resisting any cuts in their cushy benefits to get stuffed and declare bankruptcy, and use that process to clear out the reckless and ruinous excesses built into the city`s current finances.


Former Clinton Secretary of Labor Robert Reich shares my thoughts about "the Great 2009 Ponzi Stock Market Rally":

Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet

How did the Dow break 10,000 when the rest of the economy is in the toilet?

1. Corporate earnings are up — mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies’ costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don’t have jobs or are afraid of losing them, they won’t buy, and company profits will disappear.

2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can’t keep up forever, though.

3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That’s good news for the Street because it means money stays cheap — and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street’s earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.

4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you’re one of the last in.

In other words, this is all temporary fluff, folks. Anyone who hasn’t learned by now that there’s almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.

[ewmayer]

SEC Hires A 29 Year Old Goldmanite As Its COO

While one may or may not have feelings about Goldman's tentacled capture of various regulatory agencies, the most recent news out of the SEC that it would be hiring a 29 year old former Goldman Vice President Adam Storch as its COO, questions the rationale behind this move. First, and not being ageist here, but a 29 year old to run what is arguably the most critical post at the SEC - that in charge of operations? Keeping up to date with market developments, the one area where the SEC has been an utter disaster (along with all other areas actually), is a core responsibility: at least the SEC could have hired someone with actual market/broker experience. Based on his record, Mr. Storch is not even a licensed (Series 7/63) broker: would it not be logical to hire someone who has at least had some market experience? Yet according to the SEC's Robert Khuzami, Storch is just the (very young and inexperienced) man for the job.

My Comment: Fox, meet henhouse ... one presumes that the "tech savviness" cited by SEC Head of Enforcement Robert Khuzami in his laudatory blurb translates roughly to "Adam is basically here to explain this whole 'HFT' thing to us in terms us non-vampire-squidites can understand, and to provide soothing words as to why an investment bank using HFT to front-run retail investors is not a bad thing". Khuzami is also the fellow who in a recent senate hearing - when queried by Chuck Schumer as to whether the SEC had fired a single one of the people who failed so utter in re. the Madoff fraud, despite being repeatedly given detailed credible evidence to pursue - hemmed and hawed his way out of answering the question.

[ewmayer]

Mish has a lengthy commentary (with lots of useful links to related articles) on the takeover of the U.S. government by Big Finance:

Where the Hell is the Outrage?

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CNN/Money breaks down the major trades at the center of the Galleon Hedge Fund insider-trading scandal ... some names very-well-known here in Silicon Valley on that list:

8 trades the insiders allegedly made: The government's case against the Galleon crew includes transactions in companies like Google, AMD, Hilton and Sun.

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Financial Armageddon in Alabama Proving Parable for Local U.S. Governments: In its 190-year history, Jefferson County, Alabama, has endured a cholera epidemic, a pounding in the Civil War, gunslingers, labor riots and terrorism by the Ku Klux Klan. Now this namesake of Thomas Jefferson, anchored by Birmingham, is staring at what one local politician calls financial “Armageddon.”

The spectacle -- a tax struck down, about 1,000 county employees furloughed, a politician indicted over $3 billion in sewer debt that may lead to the largest municipal bankruptcy in history -- has elbowed its way up the ladder of county lore.

“People want to kill somebody, but they don’t know who to shoot at,” says Russell Cunningham, past president of the Birmingham Regional Chamber of Commerce.

One target of their anger is Larry P. Langford, who was the county commission’s president in 2003 and 2004 and is now mayor of Birmingham. The 61-year-old Democrat goes on trial today, charged in a November 2008 federal indictment with taking cash, Rolex watches and designer clothes in exchange for helping to steer $7.1 million in fees to an Alabama investment banker as the county refinanced its sewer debt.

Jefferson County’s debacle is a parable for billions of dollars lost by state and local governments from Florida to California in transactions done behind closed doors. Selling debt without requiring competition made public officials vulnerable to bankers’ sales pitches, leaving taxpayers to foot the bill for borrowing gone awry.

Under Langford’s stewardship, the county bet on interest- rate swaps, agreements that a representative of New York-based JPMorgan Chase & Co. told commissioners could reduce their interest costs. Instead, the swaps -- covering more than $5 billion in all -- blew up during the credit crisis after ratings for the county’s bond insurers fell...

Payments on Jefferson County’s debt, which switched from 95 percent fixed-rate financing to 93 percent variable-rate bonds hedged with swaps, eventually ballooned to $460 million a year, or more than twice the sewer system’s annual revenue.

Three of the five current commissioners are resisting voluntary bankruptcy. A filing would vault this county of 660,000 residents over Orange County, California, which lost $1.6 billion on derivatives in 1994 and ranks as the largest municipal insolvency to date.

My Comment: Of course most of the commissioners are resisting the inevitable ... bankruptcy would likely cost them their jobs or at least come with a significant salary reduction. Might as well grab the last scraps of flesh and drain the last drops of blood from the corpse before leaving the bones for the vultures. What is really outrageous about the delaying is that it is costing local residents huge sums of money while the same banks that perpetrated these frauds are doing just that:

The county revealed in July that it had defaulted on $46 million of accelerated principal. It might already be in Chapter 9, the federal bankruptcy option for cash-strapped municipalities, except that it has received agreements from JPMorgan and other banks to hold off on forcing it to make accelerated payments on more than $800 million of unwanted bonds.

In August and September, amid the cuts that stemmed from the occupational-tax judgment, Jefferson County residents got a taste of what bankruptcy might look like. As the county began putting about 1,000 workers on leave without pay, one disgruntled employee allegedly e-mailed bomb threats to officials and was promptly arrested, according to the Jefferson County Sheriff’s Office.

Lines soon formed outside the courthouse as such tasks as renewing driver’s licenses slowed.

A kind of legal civil war broke out when three county agencies, the sheriff’s department, an indigent-care hospital and the tax-assessor’s office, sued the county commission to stop the budget cuts on the grounds that they posed a danger to public safety.

Bettye Fine Collins, the commission president, declared the situation, “our Armageddon.”

The fight over the occupational tax, a 0.50 percent levy on personal income, dates to 1999 when state lawmakers repealed it. The county appealed that action and won a series of state court decisions until January when a judge ruled the repeal was legal.

That left county leaders to find $75 million in cuts while they took the case to the Alabama Supreme Court, which upheld the lower court’s ruling in August. In parallel action, the state legislature reauthorized a modified version of the tax at a lower rate, 0.45 percent.

Commissioners reinstated the furloughed workers this month, putting most on 32-hour work weeks. They have also sought a $25 million line of credit from Birmingham-based Regions Financial Corp.

The legislature may have saved the county from uncharted territory. With the occupational tax crunch and the sewer-debt crisis, Collins said she had feared that, “In the worst-case scenario we could be drawn into bankruptcy on both sides.”

In August, Bank of New York Mellon Corp., as trustee for owners of about $3 billion in sewer warrants, filed suit in Jefferson County Circuit Court seeking an appointed receiver for the sewer system. The receiver should have authority to raise rates enough to meet the debt service, the bank said in the complaint, which is pending. A federal judge turned down a similar request in June, saying he lacked jurisdiction.

The sewer system is already charging customers about 300 percent more to drain bathtubs or flush toilets than a dozen years ago.

By one county estimate, average annual bills are now about $750, compared with the national average of $331, according to a 2007 survey by the Washington, D.C.-based National Association of Clean Water Agencies, a coalition of utilities.

It’s impossible to boost them enough without putting them beyond the means of many residents, County Commissioner Jim Carns says. “We’re like a guy making $50,000 a year with a $1 million mortgage.”

My Comment: Exactly ... painful as bankruptcy would be, at some point it becomes the better of 2 bad options - do you want to keep diverting scarce resources to servicing a debt which you will ultimately default on anyway, or just cut your losses?

Carns and Commissioner Bobby Humphryes, both Republicans, say they reluctantly favor bankruptcy, in part to prevent the appointment of a receiver who might seek increases. “We need a cram-down on the debt,” says Carns, adding that the county can afford to service less than half the obligations, about $1.4 billion worth. A bankruptcy court would have authority to reduce the amount owed.

Democrat Shelia Smoot, along with Democrat William Bell and commission President Collins, opposes filing voluntarily.

“It would be detrimental to our community for the next 50 years,” she says.

Orange County, after its 1994 default, was forced to take on “a crushing load of long-term debt,” according to a post-mortem published four years later by the Public Policy Institute of California, a nonprofit San Francisco-based economic research organization.

The county’s borrowing costs increased, forcing it to “divert tax funds from other county agencies (e.g. transportation) so the county government could borrow money to pay bondholders and vendors,” according to the report. The poor were hurt in particular. “Their services were cut during the bankruptcy and have not been fully restored.”

My Comment: So Orange county replaced flat-out unpayable short and long-term debt with "crushing" long-term debt ... like I said, still the better of 2 bad options. And if Jefferson county uses the fraud angle (i.e. the banks peddling exceedingly dangerous debt instruments without adequately disclosing the risk, and being involved in bribery of local officials - even peripherally - in order to do so) during their eventual bankruptcy process, they maybe able to negotiate rather more favorable terms for themselves. Are the poor not also hurt by having to pay outrageous rates for basic services? And Orange county did survive without catastrophic social disorder. I suspect what Ms. Smoot really means by "detrimental for 50 years" is "we would be forced to tighten our belts and live within our means, making it harder for politicians like me to buy votes by promising the moon and leaving future generations to foot the bill for our largesse."

[Fusion_power]

Yep, Birmingham is in a world of trouble. I moved out of there 8 years ago in part because of the occupational tax.


May I point out that the U.S. Govt is in similar shape financially. Consider the debt vs ability to service it. See how they compare.

DarJones

[ewmayer]

Originally Posted by Fusion_power

Yep, Birmingham is in a world of trouble. I moved out of there 8 years ago in part because of the occupational tax.

May I point out that the U.S. Govt is in similar shape financially. Consider the debt vs ability to service it. See how they compare.

The key difference being that the USGov can print money at will ... that is of course not a long-term cure for a moribund economy (see Zimbabwe, see Japan) but in the short term it allows them to effectively impose a "wealth tax" by way of currency debasement - i.e. the kind of tax they could never dream of passing into law by front-door non-currency-debasement means. And the evil beauty of a secretive organization like the Fed controlling the money-printing is that can do it by so many stealthy means which never (at least currently) see the light of day. Foreign governments no longer buying your Treasury debt? No problem ... just have the primary dealers shill-bid for it (to create the illusion of "robust demand") and then quickly turn around and sell it to the Fed. Need to stealth-recapitalize the insolvent TBTF banks? No problem ... first enact rules (last year) "allowing" the Fed to pay interest on the reserves the primary dealers hold at the Fed. If the bank is insolvent, you "recapitalize" them with a bunch of free (for them) government money. They earn interest on that money which they must "hold", while at the same time being able to borrow trillions at zero or near-zero rates from the alphabet soup of "special lending facilities" the Fed has created, by which they swap their toxic assets (which you have allowed them to value at par by way of last year's FASB mark-to-model rule change) for Treasuries, which they use as their capital base to "print money" (indeed, banks themselves are perhaps the biggest fiat money-printers of all - an underappreciated fact) at 10:1 leverage and then can either lend out at usury rates to the same poor schlubs whose present and future tax dollars are propping them up, or use to pump up the equities and commodities markets, with the assistance of a massive government-sponsored "green shoots" propaganda campaign - this is where the mainstream media's uncritical adoration of the media-dream Obama pays off in spades - designed to lure more poor schlubs into the once-again bubbly markets, allowing the banks to raise more capital by issuing a bazillion new shares at now-inflated prices.

Ain't Ponzi economics cool?

[Fusion_power]

There you go Ernst. You've created a new word. PONZINOMICS.

We'll use it to describe the current bubble blowing mind boggling fiat currency inflating economy.

DarJones

[Fusion_power]

OUCH! This one is way too accurate for words.

http://money.cnn.com/2009/10/19/news...tune/index.htm

(Fortune Magazine) -- This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers?

Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes.

"It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.

Sad to say that this is hurting people who are living on fixed incomes far more than those of us who are working. Unfortunately, the boomerang from this round will be ultra high inflation which will see interest rates rise but buying power decrease. So Whammy goes to Double Whammy.

DarJones

[Fusion_power]

Interesting videos

http://www.msnbc.msn.com/id/31510813/#33413156

http://www.msnbc.msn.com/id/31510813/#33412961

Just how much is it going to be? How far do we let this go on?

DarJones

[__HRB__]

Originally Posted by Fusion_power

How far do we let this go on?

Anybody who participates in a process with the intention to create a government that will steal money from someone to his benefit, and the government ends up stealing money from him to the benefit of someone else, must suffer the consequences until he becomes wiser.

[R.D. Silverman]

Originally Posted by Fusion_power

OUCH! This one is way too accurate for words.

http://money.cnn.com/2009/10/19/news...tune/index.htm



Sad to say that this is hurting people who are living on fixed incomes far more than those of us who are working. Unfortunately, the boomerang from this round will be ultra high inflation which will see interest rates rise but buying power decrease. So Whammy goes to Double Whammy.

DarJones

We have to wake up the American consumers. I am reminded of
Howard Beale (from 'Network')

"First, you have to get MAD. I'm mad as hell and I'm not going to take it
anymore."

"By morning, I want a million telegrams in the White House".

We need to demand from our lawmakers that they reel in Wall Street.
Stop the bonuses. Put the stockholders of public companies back
in charge of determining compensation for employees. Stop the
short-term award system that awards excess risk taking. Stop the golden
parachutes for screw-ups. Get Stockwatch and the SEC to reel in
insider trading. Make employees of banks criminally responsible for their
actions. Put a ceiling on salaries in ALL public companies. Something
along the lines of: No employee of a public company or corporation is
allowed to earn more than (say) 20 times the corporate median for their
TOTAL compensation for that company.

We need to stop the incestuous relationships that exist on corporate
boards. Senior execs sit on each others' boards, so of course they
approve each others' ridiculous compensation plans.