Econ 2009

[ewmayer]

Denninger, having digested the 1136-page whopper, reports back on Senator Dodd`s Financial Stability Bill - his key notes:

* It does not ban off-balance sheet exposures. Why not, given their history both in ENRON's collapse and the panic of 2008? How many times do we have to see these entities abused for the explicit purpose of hiding risk?

* It draws a distinction between "regular" and "too big to fail" companies, putting the second into a putative "more supervised" bucket.

* It lists requirements that allegedly already exist - including for capital, leverage and "prompt corrective action." But nowhere in the proposed Title does it appear to contain either civil or criminal penalties for the new agency if it fails to discharge its responsibilities. As we have repeatedly seen under existing "Prompt Corrective Action" you can have all the laws you want but if nobody will enforce them they are meaningless.

* It does not appear that this act prevents "large" companies from restructuring as a group of bank holding companies to evade supervision.

* The leverage limits specified in the act [as much as 50:1] is ridiculously low.

* This bill puts a 25% limit (!) on unaffiliated credit exposure - a more than doubling of the previous limits. This is a tightening of risk controls? Like hell.

* The putative "resolution authority" allows the assumption of literally any risk, putative "asset" or liability of a failing firm with the full faith and credit of The United States. This is effectively the provision of a blanket guarantee of any large financial firm's assets and liabilities by The US Federal Government. I thought we were getting rid of moral hazard (or is that "mortal hazard" - to the government?)

* The putative "resolution authority" creates an explicit right to do what The Administration did with GM, Chrysler and others - to insert the government in front of Senior Creditors. Over the last year or so the sanctity of the capital structure has been essentially destroyed - this act makes that destruction a matter of formal federal law. Blech.

* The putative "resolution authority" specifically bars judicial review for those creditors who claim they were screwed by the imposition of modified claim priority. This codifies in black letter Federal Law what was done to Chrysler and GM bondholders.

* Ridiculous shortening of statutes of limitations. There are peppered all over this legislation unbelievably short periods of time to file claims, from 30 to 90 days - dramatically shortening the time to bring suits. This appears to be intentionally designed to limit the ability of those who believe they were abused by these processes to obtain judicial relief.

* The supposed "strengthening" of regulation of OTC derivatives contains a very important weasel provision on page 385. Specifically, it says ".... MAY jointly prescribe rules defining the term "swap" or "security-based swap" to include transactions that have been structured to evade this title." Note the word MAY. It is not SHALL, meaning that just as has occurred to date, the CFTC and SEC can willfully and intentionally allow firms to evade all of these "reforms" - and you can bet they will, since this is entirely within their discretion. Oh, and the byzantine definition of these products has enough holes to drive a truck through - sideways.

* This act specifically preempts state "bucket shop" laws relating to swaps and OTC derivatives. This is a serious problem folks - the issue with "bucket shops" is that the putative "dealer" isn't really dealing at all - you're betting against him and he controls the bid and offer, thereby making it trivially easy to guarantee that you lose. While there hasn't been much in the way of attention paid to this, I am deeply troubled by inclusion of explicit federal preemption of these laws - who in the financial industry wants to be able to evade these important protections in state law, and why?

There is a fair bit to like in this act. The explicit statement of support for state laws in the consumer protection realm that are stronger than federal protections is one of these areas. The abolishment of "venue shopping" when it comes to regulators (e.g. OCC .vs. OTS) is long overdue.

But the above bullet points are troubling, and this act reeks of having intentional loopholes written into it via obfuscation, along with no statutory demand that the new FIRA agency actually stomp on such abusers. There are too many "mays", not enough "shalls", and an absolute lack of "or else's" - making this one of those acts that says more by its absence than presence.

Add to that the further loosening of leverage limits and you have what is obviously a lobbyist-written "bill" that totals 1136 pages primarily as a means to dissuade anyone from reading it.

My Comment: We would expect no less from Chris "friend of Angelo Mozilo" Dodd.

[__HRB__]

As initiated in the thread: http://www.mersenneforum.org/forumdisplay.php?f=78

Here's the appropriate music for the topic.

http://www.youtube.com/watch?v=UOOx_nOvS6w

[cheesehead]

Originally Posted by Fusion_power

You only left out one detail Ernst. You forgot to mention the effect on the average person in America of devaluing the dollar. You get paid the same or less but everything costs more to buy

... but the devalued-dollar argument applies only to what we buy that's imported (from countries whose currency rises versus the dollar). If one shops exclusively at stores with a "We Sell Stuff Made in the USA" slogan, notably Wal-Mart ... oh, wait ... that was back during the Clinton administration.

My keyboard was made in China.

Never mind.

[ewmayer]

Silverdome sells for ... less than a house: Unidentified Toronto-based real estate company buys Pontiac stadium for $583,000 - a fraction of the $55.7 million it cost to build.

A Toronto-based family-owned company bid $583,000 for the under-used stadium on Monday, which is currently owned by the City of Pontiac, Mich., according to auctioneer Williams & Williams.

The company plans to refurbish the Silverdome into a stadium for men's Major League Soccer and women's professional soccer teams, said the auctioneer. While the stadium was the former home of the National Football League's Detroit Lions, it also played host to the World Cup in 1994, when Brazil beat Italy in a knuckle-biter that ended in a penalty shootout.

The auctioneer Williams & Williams, based in Tulsa, Okla., said it will not identify the buyer "until the final details are worked out and the sale closes."

"The Silverdome will now be in the hands of professionals who can devote their time to transform this high-profile property into a vital asset instead of enabling it to continue to languish as an empty facility," said Fred Leeb, the emergency financial planner for Pontiac, in a press release.
0:00 /02:32Hollywood helps Michigan jobless

The sale of the Silverdome takes a large financial burden off the hard-hit city of Pontiac, which has fallen on hard times, with budget shortfalls and high unemployment. Earlier this year, GM announced it would close a truck plant, taking about 1,400 jobs from the city.

As a result, Leeb said, Pontiac could ill afford to continue paying $1.5 million in annual upkeep for the stadium. With a private owner, the property "will go back on the tax rolls," he explained.

The 80,000-seat Silverdome was the biggest stadium in the National Football League when it was built in 1975 for $55.7 million. The stadium, which sits on a 127-acre plot, is also the former home of the National Basketball Association's Detroit Pistons.

The stadium reached its football zenith in 1982 as the site of Super Bowl XVI, when San Francisco's 49ers beat the Cincinnati Bengals.

The Silverdome has also served as a music venue for some of the hottest acts in show business, including Michael Jackson, Madonna and Elvis. Another high profile visitor, Pope John Paul II, once delivered Mass from the field.

But the Silverdome's biggest event was Wrestle Mania III in 1987, when 93,000 fans packed into the stadium to watch Hulk Hogan body-slam Andre the Giant. That was the biggest turnout ever for an indoor sports event.

My Comment: When CNN/Money say "Silverdome sells for less than a house", I presume they mean a California house, not a Michigan house... but `tis a quibble. My one and only visit to the Silverdome was for a Pro Wrasslin extravaganza around 1990 ... me and a buddy went mainly to root for our favorite Heel, The Honky Tonk Man, whose shtick was as an Elvis impersonator and who used to introduce himself with exaggerated Southern-drawl-y lines like "Ah wuz born on a pool table in Memphis, Tay-nuss-see" and whose finishing move was to smash a guitar over the head of his faux-incapacitated opponent. Ah, good times...

Getting back to business - While the sale of the Silverdome may be a good thing in terms of recovering some tax revenues for the city of Pontiac in the near term, I doubt that area of the country will support a pro soccer team of any caliber, much less one which could fill the Silverdome a couple dozens of times per year. Even with the low distress-sale price, it`s going to to be a huge money-losing boondoggle for the investors.

[ewmayer]

Now we know why movie star and foreclosure victim (if one can properly classify having one`s Bavarian castles foreclosed upon as "victimhood") Nicolas Cage is spending his time of late in an avid search for lost treasure:

Nic Cage sues ex-Manager for Fraud: Nicolas Cage brought about his own financial ruin with a spending spree that included two castles, 15 palatial homes, a flotilla of yachts and a squadron of Rolls Royces, his former business manager said.

Levin said he warned Cage - whose given name is Nicolas Coppola - that he needed to earn $30 million a year "just to maintain his lavish lifestyle." He urged Cage to save "a cash cushion" of at least $10 million "to alleviate the financial pressure to take film roles that might be detrimental to his career," Levin`s response said.

Several of Cage`s recent movie roles have been seen by critics as "paycheck gigs" taken only because of his pressing debt.

Levin`s filing claimed that starting in 2005 and then "with increasing urgency" over the next two years he "implored Coppola to stop buying real estate and urged him to reduce his real estate holdings, warning Coppola that the financial press was filled with references to a `real estate bubble.`"

He countered Cage`s claim that the actor was left in the dark about his finances.

"Levin repeatedly warned Coppola that he was living beyond his means, urged him to spend less, and warned him that financial disaster loomed if he continued to spend uncontrollably," Levin`s filing said.

"Levin described the folly of several other well-known entertainers who compulsively overspent their way into bankruptcy, and warned Coppola `it could happen to you,`" the filing said.

Cage should have known about his debt because "he signed every check for every monetary transaction throughout the relationship," Levin said.

"Instead of listening to Levin, cross-defendant Coppola spent most of his free time shopping for high ticket purchases, and wound up with 15 personal residences, most of which were bought against Levin`s advice," Levin`s complaint said. "Likewise, Levin advised Coppola against buying a Gulfstream jet, against buying and owning a flotilla of yachts, against buying and owning a squadron of Rolls Royces, against buying millions of dollars in jewelry and art."

Cage`s four yachts included one each for the Caribbean, the Mediterranean, Newport Beach, California, and Rhode Island, Levin said.

In 2007 alone, Cage`s "shopping spree entailed the purchase of three additional residences at a total cost of more than $33 million; the purchase of 22 automobiles (including 9 Rolls Royces); 12 purchases of expensive jewelry; and 47 purchases of artwork and exotic items," Levin`s filing said.

"Coppola also spent huge sums taking his sizable entourage on costly vacations and threw enormous, Gatsby-style parties at his residences," it said.

Levin`s warnings that Cage was living beyond his means were not just ignored, but "at times Levin was rebuked for trying to restrain the outflow of cash," he said.

"The pinnacle" of Cage`s spending spree was the purchase of two castles - in England and Germany - which Levin warned "were decrepit and needed huge expenditures," he said.

Cage`s financial collapse came in 2008 when the real estate values plunged in 2008 and most of his residences turned "upside down, just as the global credit crunch made it impossible to cover Coppola`s endless cash calls by borrowing more money," Levin said.

My Comment: Nic Cage`s fiscal habits are very reminiscent of the U.S. government`s ... substitute "foreign wars" for "castles", "military spending" for "Rolls Royces", "pork-barrel spending" fro "expensive jewelry and artworks" and "welfare state" for "entourage" and there you go.


White House: $98 billion in bad payments: The federal government made $98 billion in improper government payments in 2009, budget director Orszag says.

WASHINGTON (CNN) -- The federal government made $98 billion in improper payments in fiscal 2009, and President Barack Obama will issue an executive order in coming days to combat the problem, his budget director announced Tuesday.

The 2009 total for improper payments -- from outright fraud to misdirected reimbursements due to factors such as an illegible doctor's signature -- was a 37.5% increase over the $72 billion in 2008, according to figures provided by Peter Orszag, director of the White House Office of Management and Budget.

In an evening media briefing, Orszag was unable to provide an overall figure for what percentage of the bad payments was due to fraud. He also lacked a breakdown on how much of the total improper payments involved spending on Obama's $787 billion economic recovery package passed in February.

My Comment: I wonder if the 4-year-old kid and the cat who (among many hundreds of thousands of other worthy benefitees) signed up for the $8000 home-purchase subsidy got counted in that sample? But as the president properly understands, fixing these problems is as simple as the stroke of a pen and a pompous "let me be clear" TeeVee N00z soundbite - just sign that executive order and your problems are solved, mate. surely no one in their right mind would attempt to take advantage of our government`s fiscal profligacy if there`s an -gasp! - EXECUTIVE ORDER - saying it`s a no-no. and just think - if we only manage to eliminate 20 times that amount in wasteful spending, we could close the federal deficit! (Or maybe the O-man can simply sign an executive order to that effect, as well - I`m surprised he hasn`t done so yet, think I`ll send him a quick note suggesting it.)

[cheesehead]

Originally Posted by ewmayer

But as the president properly understands, fixing these problems is as simple as the stroke of a pen and a pompous "let me be clear" TeeVee N00z soundbite - just sign that executive order and your problems are solved, mate.

Exactly what would you have the president do _instead of_ ordering designated people to fix the problem?

Are you thinking Obama should roll up his sleeves and _personally_ audit the records, issue federal arrest warrants, and so on, instead of delegating authority to someone a bit further down the line to do the actual gruntwork?

EXECUTIVE ORDER

What is your beef with Executive Orders? Are you under some misimpression that an EO is magical or something?

An EO is just a presidential order that is intended to be permanent and entered on the public record. By "permanent", I mean that it is intended to remain in force throughout not only Obama's term of office, but all future terms no matter which individual succeeds him as president, unless/until it is specifically rescinded by Obama or a later sitting president. Presidents have issued thousands of them -- what's the problem with that?

Is it just that EOs have a special official name because they're issued by the president rather than someone else in the executive branch? Got over it. Call them "permanent public-record orders by the president" if you have some trouble with the name "Executive Order".

Do you think any executive, not only the president, is to govern without issuing orders in writing, and without designating some of those orders to be permanent until explicitly cancelled?

[ewmayer]

Originally Posted by cheesehead

Exactly what would you have the president do _instead of_ ordering designated people to fix the problem?

Are you thinking Obama should roll up his sleeves and _personally_ audit the records, issue federal arrest warrants, and so on, instead of delegating authority to someone a bit further down the line to do the actual gruntwork?

What is your beef with Executive Orders? Are you under some misimpression that an EO is magical or something?

In order:

- Rather than issuing EOs "to combat fraud", How about actually enforcing existing laws against fraud? You know, arrest alleged fraudsters, try them and send them to prison if they are found guilty, that sort of thing. Wall street and the financial industry would be a good place to start. An interesting factoid: During the S&L crisis of the early 1990s, over 1000 executives of S&Ls ended up going to jail. The current crisis dwarfs S&L, and the amount of fraud, mis- and malfeasance which appears to have been perpetrated - by regulators who didn't, mortgage lenders who cooked the books and encouraged borrowers to lie, appraisers who gave fraudulent appraisals of property values, banks who packaged the resulting loans into securities and sold them despite knowing they were toxic, and ratings agencies who gave the junk fraudulently high ratings - is proportionally larger. Where are the arrests and mass prosecutions?

- Obama could, during his first days in office, given the justice department a broad mandate to go after the criminals who caused the financial crisis, and insisted that they be brought to justice without regard to rank or position. The needed extra funding for the effort (likely in the billions of dollars) could have been recouped from fines levied against the firms involved. But instead of thousands of criminal indictments, what have we gotten to date? Madoff in jail, and a couple of Bear Stearns hedge-fund managers (Cioffi and Tannin, who peddled billions in toxic CMBS to their clients while they were exchanging e-mails that indicated they knew it was garbage) got put on trial and acquitted "because they were working hard to save their funds right up to the end". (But I'll take a trial with a too-naive jury over nothing).

- I am under no impression that an EO is in any way magical ... but Obama seems to think otherwise. Much like he seems to think that talking about this whole federal debt problem is equivalent to "doing something about the federal debt".

[Fusion_power]

Picture a stack of $1000 bills stacked up as high as the interest that we Americans will accrue on the federal debt over the next 10 years. It is nearly $5 Trillion. How high would that stack of $1000 bills be given that each is about .001 inches thick.

I make it as a stack nearly 800 miles tall. There is no atmosphere and for all practical purposes, you are in space at 100 miles. I thought at one time that "stratopheric debt" was a good description. Guess I was wrong.

Darrel Jones

[ewmayer]

Originally Posted by Fusion_power

Picture a stack of $1000 bills stacked up as high as the interest that we Americans will accrue on the federal debt over the next 10 years. It is nearly $5 Trillion. How high would that stack of $1000 bills be given that each is about .001 inches thick.

I make it as a stack nearly 800 miles tall. There is no atmosphere and for all practical purposes, you are in space at 100 miles. I thought at one time that "stratopheric debt" was a good description. Guess I was wrong.

Stratospheric debt only covers the 5-30-mile-high range ... what you describe extends well into what is considered outer space, hence is clearly "astronomical debt".

Breaking News: Attempt to Gut the "Audit the Fed" Bill Denied

Paul-Grayson Amendment To Audit The Fed Passes Overwhelmingly By 43-26

In what could be the biggest news of the day, with potentially historic consequences, Mel Watt's attempt to detour the Fed transparency process has been soundly denied. The vote on the final passage of the bill is delayed, but the critical amendment has passed. Congratulations to Messrs Paul and Grayson.

A related link, from the Huffington Post via Mish: The Fed's having bought and paid for 90% of U.s. economists in one way or another is no longer going unnoticed:

Economists Opposing Fed Audit Are All on Fed Payroll



Chart of the Day:

Courtesy of Barry Ritholtz ... the October housing starts numbers yesterday almost caused the markets to sell off, but apparently there was too much giddiness (or the ongoing "hidden bid" buoying the NYSE, take your pick) for the expected "reality check correction" to get started. At some point enough folks will realize that all the happy talk about "recovery" is BS, but we haven't yet reached critical mass. Anyway, it's interesting to put recent data regarding U.S. single-family housing starts in a longer-term perspective, so here ya go, let me know if you see a "recovery" going on there:

[__HRB__]

Originally Posted by ewmayer

Stratospheric debt only covers the 5-30-mile-high range ... what you describe extends well into what is considered outer space, hence is clearly "astronomical debt".

Does this mean that when universal healthcare blows up we jump over galaxial debt and go straight to universal debt?

[ewmayer]

The Huffington Post - which broke the news about 7 of the 8 "independent economists" who signed a last-minute "auditing the Fed would be very bad" letter to congress being anything but independent of the Fed - has a followup today about the defeat of Mel Watt`s "gut the audit the Fed bill" amendment ... especially interesting is the bit about House Finance Committee chair Barney Frank showing his true colors at the last moment:

Bill To Audit Federal Reserve Passes Key Hurdle

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

The measure, cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), authorizes the Government Accountability Office to conduct a wide-ranging audit of the Fed's opaque deals with foreign central banks and major U.S. financial institutions. The Fed has never had a real audit in its history and little is known of what it does with the trillions of dollars at its disposal.

Backers of the Watt amendment pressed their case on Wednesday by sending a letter from a "political cross section of prominent economists" backing a measure like Watt's. HuffPost reported, however, that those economists might well have be prominent, but they certainly aren't a "political cross section." Seven of the eight economists in question have extensive connections to the Fed -- and half of them are currently on the Fed payroll. Those affiliations were not noted in the letter.

The playbook in Washington often goes like this: When a measure that threatens the establishment builds enough momentum that it must be dealt with, it is labeled as "unserious." The Washington Post editorial board, true to the script, called Paul's measure "an unserious answer to a serious question."

And it particularly rankles the center that a pair of "wingnuts" are behind a successful effort to challenge the prevailing order. [See Grayson Called "Wingnut" By New York Times].

For anyone remaining confused, the debate was further clarified by the central bank itself: Federal Reserve Vice Chair Don Cohn and General Counsel Scott Alvarez spent much of the day calling committee members, urging them to oppose the Paul-Grayson amendment in favor of Watt's, a member of Congress who asked for confidentiality told HuffPost.

Paul's opponents also placed a letter from former Fed chairmen Alan Greenspan and Paul Volcker on the seats of every committee member. Such a move is in violation of House rules and Grayson was able to have the letters removed.

My Comment: Gee, do you get the impression that the folks at the Fed really, really, really don`t want to open up their books and show us where they`ve been spending the trillions of taxpayer dollars they`ve thrown at the financial crisis over the past couple of years?

But the victory is not yet won - as Mish reminds us, "Bear in mind there will be other attempts to water down this bill and/or to change it dramatically in the Senate. Be prepared to phone, fax, and call in again as necessary."

Lastly, ZeroHedge has a video clips of post-vote comments by HR1207 co-sponsor Alan Grayson (who I admit can come off as a bit of a nut sometimes, but who has his facts about the need for opening up the secretive Fed cabal to public scrutiny right), as well a complete lists of votes for and against. Representative Paul`s own website has the vote breakdown by party - Interesting that every single one of the "nays" was a democrat, so much for the Dems being "the party of the common man" and similar nonsense.