Misery Economic Theater 2011

[Christenson]

Originally Posted by ewmayer

Former Moody's Senior VP ays Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed

MOODY'S ANALYST BREAKS SILENCE: Says Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed

This senior VP has apparently sustained a little bit of brain damage in his commentary to the SEC...it reads like Irwin Feerst (a cross between SM88 and RDS -- angry, truthful, and not quite coherent). He would have much better impact if he had an editor and trimmed down his comments. And if you think the alphabet soup around here is bad, you should try reading his document!

But I'm with the consumer federation of america....in any system where the ratings are payed for by the issuer, you need incredible management patience to keep the conflicts from destroying integrity.

So, I have an investment/startup idea for you....let's call it Mersenne's investor's service...for 0.1% of the price of your security, assuming you are a buyer, we will tell you all about it. I claim it's a good idea, because if we wait for the SEC to get it, we'll all be selling pencils on the street.

[ewmayer]

Bloomberg (as a result of winning its FOIA lawsuit after 2 years of foot-dragging by the Fed) has released more details of the Fed`s 2008 emergency-lending-facilities beneficiaries - "stretching its emergency lending authority to the limit" is a gross understatement:

Wall Street KleptocracyAristocracy Got $1.2 Trillion From Fed

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance under the seven programs tallied by Bloomberg -- was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

My Comment: With regard to the bolded last claim (boldfaced, because it`s so baldfaced), the Fed is again playing one of its "these aren`t the bailout losses you`re looking for" misdirection games. The real losses are still waiting to be recognized: Firstly on the banks` own balance sheets, where they continue to carry trillions in bad (the polite term is "nonperforming") loans at face value, thanks to the 2009 government-sponsored suspension of mark-to-market valuation rules, and secondly in the $1.25 Trillion of similarly dubious MBS paper the Fed bought from the banks (again at par value, based on what we know) in 2009 as part of it QE1 program. Bernanke, like central bankers are wont to do, appears to be following the maxim of one Meyer Rothschild: "Give me control of a nation's currency and I care not who makes its laws."

And speaking of balance-sheet rot, recent action in Bank of America shares and CDS spreads looks very reminiscent of the likes of Lehman Brothers shortly before it went belly-up. In other words, either somebody knows something very bad and this is the usual insider-trading ahead of the news going public, or both the stock and CDS markets are completely wrong about BAC.

[fivemack]

Originally Posted by Christenson

So, I have an investment/startup idea for you....let's call it Mersenne's investor's service...for 0.1% of the price of your security, assuming you are a buyer, we will tell you all about it. I claim it's a good idea, because if we wait for the SEC to get it, we'll all be selling pencils on the street.

Consider my imaginary friend Tim, who is a timorous character and wishes to buy nine shares in Intel for $175; he goes and asks your advice, pays his eighteen cents; you inform him not to touch a fly-by-night start-up like Intel with a bargepole. That evening, over a half-pretzel (price eighteen cents) he informs me of your advice, causing me to refrain from purchasing ninety million shares.

The analysis really has to be publicly funded, since it's a non-confinable good.

[ewmayer]

On the "bipartisan stupidity" front, Joe Nocera`s latest NYT op-ed taks the Democrats to task for their counterproductive coziness with organized labor:

How Democrats Hurt Jobs

The airplane’s aft section arrived early Monday morning. That’s what they’d been waiting for at the final assembly plant in North Charleston, S.C. They already had the wings, the nose, the tail — all the other major sections of Boeing’s new 787 Dreamliner. With the arrival of the aft, the 5,000 nonunion workers in the plant can finally begin to assemble their first aircraft — a plane three years behind schedule and critical to Boeing’s future.

The Dreamliner is important to America’s future, too. As companies have moved manufacturing offshore, Boeing has remained steadfast in maintaining a large manufacturing presence in America. It is America’s biggest exporter of manufactured products. Indeed, despite the delays, Boeing still has 827 Dreamliners on order, worth a staggering $162 billion.

Boeing’s aircraft assembly has long been done by its unionized labor force in Puget Sound, Wash. Most of the new Dreamliners will be built in Puget Sound as well. But with the plane so far behind schedule, Boeing decided to spend $750 million to open the South Carolina facility. Between the two plants, the company hopes to build 10 Dreamliners a month.

That’s the plan, at least. The Obama administration, however, has a different plan. In April, the National Labor Relations Board filed a complaint against Boeing, accusing it of opening the South Carolina plant to retaliate against the union, which has a history of striking at contract time. The N.L.R.B.’s proposed solution, believe it or not, is to move all the Dreamliner production back to Puget Sound, leaving those 5,000 workers in South Carolina twiddling their thumbs.

Seriously, when has a government agency ever tried to dictate where a company makes its products? I can’t ever remember it happening. Neither can Boeing, which is fighting the complaint. J. Michael Luttig, Boeing’s general counsel, has described the action as “unprecedented.” He has also said that it was a disservice to a country that is “in desperate need of economic growth and the concomitant job creation.” He’s right.

That’s also why I’ve become mildly obsessed with the Boeing affair. Nothing matters more right now than job creation. Last week, President Obama barnstormed the Midwest, promising a jobs package in September and blaming Republicans for blocking job-creation efforts. Republicans, of course, have blamed the administration, complaining that regulatory overkill is keeping companies from creating jobs.

They’re both right. Republicans won’t pass anything that might stimulate job growth because they are so ideologically opposed to federal spending. But the Democrats have blind spots, too. No, the Environmental Protection Agency shouldn’t be rolling back its rules, as the Republican presidential candidates seem to want. But a fair-minded person would have to acknowledge that the N.L.R.B.’s action is exactly the kind of overreach that should embarrass Democrats who claim to care about job creation. It’s paralyzing, is what it is.

(The above is roughly the 1st half of the full piece).

[Christenson]

Originally Posted by fivemack

Consider my imaginary friend Tim, who is a timorous character and wishes to buy nine shares in Intel for $175; he goes and asks your advice, pays his eighteen cents; you inform him not to touch a fly-by-night start-up like Intel with a bargepole. That evening, over a half-pretzel (price eighteen cents) he informs me of your advice, causing me to refrain from purchasing ninety million shares.

The analysis really has to be publicly funded, since it's a non-confinable good.

Consider my imaginary friend, Harvey, a six-foot rabbit....

Turns out, there are 7 competitors to the "big three" of S&P, Moody's, and Fitch's. You can find their names in the SEC comments, they have about 2% market share collectively. Some of them operate on a subscription model -- their rabbit friends know that they pay for the information, and keep it confidential for a year or two. But these are almost certainly large, sophisticated investors.

I think you are seeing some of the really smart investors looking at changes in that information and opinion, and that is causing the bank stocks to move in the correct direction.

*************
We can see how a relentless drive for market share has completely corrupted Moody's Investment Seller's Service.

I don't see how to keep Tim's lips, on average, sealed, since he didn't pay much for the information -- what's a pretzel worth?

I can see that if you took the cash value of the transaction, added a fraction of a cent to it, you could collect enough taxes to make an evaluation system work. But I don't see how to distribute that tax money in such a way as to have multiple, independent opinions, and startups challenging the government-funded ratings agencies when they got slothful.

Ideas on how to get objective information on the markets paid for, with incentives for correctness in place? Or does this need to become a function of the "Underwriters", who would take the risk (how?) in a catastrophe?

[Christenson]

Originally Posted by ewmayer

On the "bipartisan stupidity" front, Joe Nocera`s latest NYT op-ed taks the Democrats to task for their counterproductive coziness with organized labor:

How Democrats Hurt Jobs

(The above is roughly the 1st half of the full piece).

Behind the hype, I remember Boeing as being a place where they actually had an engineer's union......I also remember working in the facilities department, where all the people they couldn't work with but couldn't quite fire ended up.

But Boeing screwed up with the way they presented the SC plant....it's clearly an expansion, and they should bill it that way and offer to let their union members move down there. Yes, it might be a threat to the union in Puget Sound, but the last company I know that did that (Mack Truck, Allentown/Macungie PA) managed to get a union certified in South Carolina three years after moving there to get rid of the attitude problems on the shop floor. The problem: All the management and first-line supervisors went with them, and the union was a reaction to the (mis-)management.

The most important thing for Boeing management to do here is to ensure that everyone in the SC plant is re-trained, and understands what not to do to create an adversarial relationship between the employed and management. That kind of energy needs to be applied to beating the rest of the world.


I've heard guys who have been in both union and non-union shops talk about the difference between the two when something production critical breaks down and a bunch of hands are needed....in the non-union shop, he said, he could walk through the shop and pick up guys to work the problem, where he could not do that in a union shop.

[Fusion_power]

We saw GM resuscitated about a year ago with a fast track bankruptcy followed by the "NEW" GM shares floated in the market. The initial float was about $36 and the stock trended up for a few weeks until it reached $39 before starting a long downhill slide. Today it is sitting in the $22 range which represents a 40% loss in one year. The question to ask is whether GM can actually compete in a global market, a place where Ford is reasonable adept. I personally would not buy GM shares at this time because the outlook is overwhelmingly negative given the weak economy.

DarJones

[ewmayer]

NYAG Refuses to Play Ball With Mortgage Firms, Gets the Boot:

New York Attorney General Kicked Off Government Group Leading Foreclosure Probe

WASHINGTON -- New York Attorney General Eric Schneiderman on Tuesday was kicked off the committee leading the 50-state task force charged with probing foreclosure abuses and negotiating a possible settlement agreement with the nation's five largest mortgage firms.

My Comment: The reason? Schneidermann was against letting the mortgage giants in question off with a mere wrist-slap, and against giving them blanket immunity against further prosecutions as a reward for paying some (in relative terms) token fines. As I`ve said repeatedly, the rule of law means nothing when it comes to big-time financial and corporate fraud in this country.

Here is the take on the story by a popular Foreclosure-fraud-focused blog, 4closurefraud.org.

Buffett Sinks $5 Bln Into "Well Capitalized" BofA

Hilarious action in Bank of America shares this morning...after strongly denying in the past several weeks that it was in dire need of fresh capital, BofA today announced (and the MSFM gleefully jumped on as a sign of "new bull market in financials") a $5 Bln capital infusion from "Uncle Warren" Buffett, similar to the one he made in Goldman Sachs in 2008. As a result BAC shares opened up nearly 20%, quickly rose another 5% (likely as result of desperate shorts covering), and then promptly started selling off to as low as 5% above the previous close, recovered slightly to +10% as I write this. Now WEB is a smart man, and would not sink that kind of dough into a firm he thought was in deep trouble ... but in the current environment that may have less to do with BAC`s viability as a going concern than it does with the (not ill-founded) belief that the government will ride to the rescue if needed, and make Uncle Warren`s bet a winning one. Mish is similarly underwhelmed by WEB`s riding-to-the-rescue. And lastly, here is ZeroHedge`s take:

As for what to expect with this surprising move out of Omaha? Absolutely nothing. The $5 billion in cash, unlike Buffett's investment in Goldman, will be laughably insufficient, considering that the bank's mortgage exposure is in the tens of billions, while its litigation liability is another $20-30 billion. This does nothing to change our thesis that BAC will need to come to the market again and again to raise capital. However, as this "raise" confirmed, BAC only has access to private investments: we hope Buffett has very deep pockets to keep doubling down.


German president says ECB bond buying illegal

German president says ECB bond buying illegal

Germany’s head of state has accused the European Central Bank of “legally questionable” action in buying up the bonds of countries worst-hit by the eurozone debt crisis.

The blunt attack by German president Christian Wulff on Wednesday is the highest profile criticism so far of the ECB’s controversial programme,

Earlier this month, the ECB started buying bonds issued by Italy and Spain in an attempt to stop their governments’ borrowing costs spiralling out of control.

So far, the ECB has spent €110bn on bonds under the programme originally launched in May last year. Last week, it spent €14.3bn, following €22bn of bond purchases in the previous seven days.

The ECB’s action is seen by financial markets as having bolstered investor confidence in the eurozone. But Mr Wulff said the ECB had gone “way beyond the bounds” of its mandate.

“I regard the huge buy-up of government bonds of individual states ... as legally questionable,” he told an international gathering of economists in Lindau, south Germany.

European Union treaties forbid the ECB from buying debt directly from governments, Mr Wulff pointed out. The Frankfurt-institution has instead bought bonds on the open market but Mr Wulff argued that the prohibition on central bank financing of governments “only makes sense if those responsible do not get around it by making substantial purchases on the secondary market”.
...
The ECB declined to comment on Wednesday. But an official at one central bank in Europe said the German president failed to realise the ECB’s crucial role in preventing the collapse of the eurozone.

In Frankfurt, the ECB has long recognised that it has lost support among German voters – even though it was originally modelled on the Bundesbank and inherited many of the policy instincts of the Germany’s famously conservative central bank.

Officially, the ECB argues that its bond purchase programme is temporary and aimed at ensuring the functioning of financial markets so that its interest rate decisions are passed on effectively to the real economy. That argument has been harder to sustain more recently, however. Jean-Claude Trichet, ECB president, this month used the programme as a lever to force Rome and Madrid to introduce fresh fiscal austerity measures.

The ECB hopes that its role in intervening in bond markets will be taken over later this year by the European Financial Stability Facility – once eurozone member states have approved new powers for the EU’s bail-out fund.

My Comment: Yes, you read that right: "Jean-Claude Trichet, ECB president, this month used the programme as a lever to force Rome and Madrid to introduce fresh fiscal austerity measures." And how did Mr. Trichet 'accomplish' this? Why, by removing any market incentives which would actually act as the desired austerity-forcing mechanism. Probably some kind of very clever "reverse-psychology" ploy by Mr. Trichet: To get a debtor nation to get its finances in order, give it all the money it needs to avoid having to do so. Yeah, that makes sense.

In other German-Financial-Market news, the DAX had another flash crash today about 90 minutes before the close:

[ewmayer]

Interesting article on the China debt-bubble from The Daily Beast:

China’s Looming Debt Disaster: The United States has made painstaking efforts to reassure China about the American economy. Yet it’s China that should be doing the reassuring.

Despite all the apocalyptic pronouncements about America’s budget problems, the reality is that the U.S. has a higher credit rating than China and, unlike Beijing, has never repudiated its sovereign debt. More important, the People’s Republic has been understating its debt for years to avoid global attention and criticism.

Indeed, China claims its debt-to-GDP ratio—the standard measure of sustainability—was a healthy 17 percent at the end of last year. Yet Beijing-based Dragonomics, a well-respected consultancy, put China’s ratio at 89 percent—about the same as America’s. Worse still, a growing number of analysts think the Chinese ratio was really 160 percent. At that astronomical level, China looks worse than Greece.

The wide discrepancy in estimates is due to the so-called hidden debts. The largest of these off-the-books obligations have been incurred by local governments and state banks. Yet there are other components, including central-government debt incurred for municipal and local projects, Ministry of Finance guarantees related to partial bank recapitalizations, and miscellaneous obligations such as grain-subsidy payments. No one actually thinks Beijing will default on its outstanding external debt, but these hidden obligations matter; to work down the crushing debt load, the country’s technocrats are adopting strategies that will cripple growth for a decade, maybe longer.

It didn’t have to happen this way. When the global downturn hit in 2008, China decided to spend its way out of the crisis. The country adopted a stimulus program that in 2009 pumped, according to my calculations, about $1.1 trillion into its then–$4.3 trillion economy. Beijing created robust growth—9.1 percent in 2009 and 10.3 percent last year—but in the process, the country’s hidden debts ballooned, as the country’s leaders forced state banks to lend to unviable projects.

These include ghost cities such as Ordos in Inner Mongolia, where the government has built sundry new homes and office buildings, which remain empty. Last year, the state grid reported there were 64.5 million flats—enough housing for 200 million people—that used no electricity for six consecutive months. Despite the obvious oversupply, the government—in conjunction with private developers—is constructing 40 million to 50 million more units. And the Chinese government recently announced it will be building 20 new cities a year over the next two decades.

All this building is technically creating gross domestic product, but it is extraordinarily wasteful. In a free-market economy, this grossly imbalanced situation would lead to both a property crisis and a banking crisis. Weak developers and financial institutions would go bankrupt, their assets would end up in the hands of more productive market participants, and the economy would recover quickly.

But Chinese leaders are not allowing this creative destruction to occur. To rescue financial institutions, for instance, central authorities are forcing down interest rates paid to depositors so that banks can earn their way out of difficulties. Yet in doing so, they are condemning their economy to years of stagnation.

My Comment: The hidden-debt numbers claimed in the article (if at all close to the mark) are startling. The article concludes with

Until now, just about everyone seemed to be looking to the Chinese to become the new engine of world economic growth. We will surely be disappointed.

[ewmayer]

Apologies for the ThreadSpammage, but I`ll be out tomorrow and may not be online all weekend, so wanted to leave you, loyal readers, with plenty of material to chew on.

Matt Taibbi comments in his inimitable fashion on the Banks/Government vs Schneiderman case:

Obama Goes All Out For Dirty Banker Deal

A power play is underway in the foreclosure arena, according to the New York Times.

On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008.

On the other side is the Obama administration, the banks, and all the other state attorneys general.

This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.

The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.

This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline.

This deal will also submarine efforts by both defrauded investors in MBS and unfairly foreclosed-upon homeowners and borrowers to obtain any kind of relief in the civil court system. The AGs initially talked about $20 billion as a settlement number, money that would “toward loan modifications and possibly counseling for homeowners,” as Gretchen Morgenson reported the other day.

The banks, however, apparently “balked” at paying that sum, and no doubt it will end up being a lesser amount when the deal is finally done.

To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS.

So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators.

But Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR.

My Comment: If you like that snip, read the full piece - simply the ability Taibbi has to turn a phrase - gems such as "these banks just finished the longest and most orgiastic campaign of stealing in the history of money" - will make it worth your while.

[cheesehead]

Sam Harris has something to say to Ayn Rand-ish opponents of raising U.S. taxes on the wealthy: that they seem to ignore the role of luck in lives.

(Note: I'm not endorsing what Harris writes outside of what I quote here.)

http://www.samharris.org/blog/item/h...t-even-trying/

. . .

And lurking at the bottom of this morass one finds flagrantly irrational ideas about the human condition. Many of my critics pretend that they have been entirely self-made. They seem to feel responsible for their intellectual gifts, for their freedom from injury and disease, and for the fact that they were born at a specific moment in history. Many appear to have absolutely no awareness of how lucky one must be to succeed at anything in life, no matter how hard one works. One must be lucky to be able to work. One must be lucky to be intelligent, to not have cerebral palsy, or to not have been bankrupted in middle age by the mortal illness of a spouse.

Many of us have been extraordinarily lucky—and we did not earn it. Many good people have been extraordinarily unlucky—and they did not deserve it. And yet I get the distinct sense that if I asked some of my readers why they weren’t born with club feet, or orphaned before the age of five, they would not hesitate to take credit for these accomplishments. There is a stunning lack of insight into the unfolding of human events that passes for moral and economic wisdom in some circles. And it is pernicious. Followers of Rand, in particular, believe that only a blind reliance on market forces and the narrowest conception of self interest can steer us collectively toward the best civilization possible and that any attempt to impose wisdom or compassion from the top—no matter who is at the top and no matter what the need—is necessarily corrupting of the whole enterprise. This conviction is, at the very least, unproven. And there are many reasons to believe that it is dangerously wrong.

Given the current condition of the human mind, we seem to need a State to set and enforce certain priorities. I share everyone’s concern that our political process is broken, that it can select for precisely the sorts of people one wouldn’t want in charge, and that fantastic sums of money get squandered. But no one has profited more from our current system, with all its flaws, than the ultra rich. They should be the last to take their money off the table. And they should be the first to realize when more resources are necessary to secure the common good.

. . .