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Awareness Abounds

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November 12, 2009

When I started this blog in April of 2008, my focus was on that year’s political campaigns and the exciting Presidential primary season.  At the time, I expressed my concern that the most prominent centrist in the race, John McCain, would continue pandering to the televangelist lobby after winning the nomination, when those efforts were no longer necessary.  He unfortunately followed that strategy and went on to say dumb things about the most pressing issue facing America in decades: the economy.  During the Presidential campaign of Bill Clinton, James Carville was credited with writing this statement on a sign in front of Clinton’s campaign headquarters in Little Rock:  “It’s the economy, stupid!”  That phrase quickly became the mantra of most politicians until the attacks of September 11, 2001 revealed that our efforts at national security were inadequate.  Since that time, we have over-compensated in that area.  Nevertheless, with the demise of Rudy Giuliani’s political career, the American public is not as jumpy about terrorism as it had been — despite the suspicious connections of the deranged psychiatrist at Fort Hood.  As the recent editorials by Steve Chapman of the Chicago Tribune and Vincent Carroll of The Denver Post demonstrate, the cerebral bat guano necessary to get the public fired-up for a vindictive rampage just isn’t there anymore.

President Obama’s failure to abide by the Carville maxim appears to be costing him points in the latest approval ratings.  The fact that the new President has surrounded himself with the same characters who helped create the financial crisis, has become a subject of criticism by commentators from across the political spectrum.  Since Obama’s Presidential campaign received nearly one million dollars in contributions from Goldman Sachs, he should have known we’d be watching.  CNBC’s Charlie Gasparino was recently interviewed by Aaron Task.  During that discussion, Gasparino explained that Jamie Dimon (the CEO of JP Morgan Chase and director of the New York Federal Reserve) has managed to dissuade the new President from paying serious attention to Paul Volcker (chairman of the Economic Recovery Advisory Board) whose ideas for financial reform would prove inconvenient for those “too big to fail” financial institutions.  As long as JP Morgan’s “Dimon Dog” and Lloyd Bankfiend of Goldman Sachs have such firm control over the puppet strings of “Turbo” Tim Geithner, Larry Summers and Ben Bernanke, why pay attention to Paul Volcker?  The voting public (as well as most politicians) can’t understand most of these economic problems, anyway.  I seriously doubt that many of our elected officials could explain the difference between a credit default swap and a wife swap.

Once again, Dan Gerstein of Forbes.com has directed a water cannon of common sense on the malaise blaze that has been fueled by a plague of ignorance.  In his latest piece, Gerstein tossed aside that tattered, obsolete handbook referred to as “conventional wisdom” to take a hard look at the reality facing all incumbent, national politicians:

It’s the stupidity about the economy in Washington and on Wall Street that’s driving most voters berserk.  Indeed, the financial system is still out of whack and tens of millions of people are (or fear they soon could be) out of work, yet every day our political and economic leaders say and do knuckleheaded things that show they are unfailingly and imperviously out of touch with those realities.

Gerstein’s short essay is essential reading for a quick understanding of how and why America can’t seem to solve many of its pressing problems these days.  Gerstein has identified the responsible culprits as three groups:  the Democrats, the Republicans and the big banks — describing them as the “axis of cluelessness”:

We have gone long past “they don’t get it” territory.  It’s now unavoidably clear that they won’t get it — and we won’t get the responsible leadership and honest capitalism we want–until (as I have suggested before) we demand it.

Surprisingly, public awareness concerning the root cause of both the financial crisis and our ongoing economic predicament has escalated to a startling degree in recent weeks.  This past spring, if you wanted to find out about the nefarious activities transpiring at Goldman Sachs, you had to be familiar with Zero Hedge or GoldmanSachs666.com.  Today, you need look no further than Maureen Dowd’s column or the most recent episode of Saturday Night Live.  Everyone knows what the problem is.  Gordon Gekko’s 1987 proclamation that “greed is good” has not only become an acceptable fact of life, it has infected our laws and the opinions rendered by our highest courts.  We are now living with the consequences.

Fortunately, there are plenty of people in the American financial sector who are concerned about the well-being of our society.  A recent study by David Weild and Edward Kim (Capital Markets Advisors at Grant Thornton LLP) entitled “A wake-up call for America” has revealed the tragic consequences resulting from the fact that the United States, when compared with other developed countries, has fallen seriously behind in the number of companies listed on our stock exchanges.  Here’s some of what they had to say:

The United States has been engaged in a longstanding experiment to cut commission and trading costs.  What is lacking in this process is the understanding that higher transaction costs actually subsidized services that supported investors.  Lower transaction costs have ushered in the age of  “Casino Capitalism” by accommodating trading interests and enabling the growth of day traders and high-frequency trading.

The Great Depression in Listings was caused by a confluence of technological, legislative and regulatory events — termed The Great Delisting Machine — that started in 1996, before the 1997 peak year for U.S. listings.  We believe cost cutting advocates have gone overboard in a misguided attempt to benefit investors.  The result — investors, issuers and the economy have all been harmed.

The Grant Thornton study illustrates how and why “as many as 22 million” jobs have been lost since 1997, not to mention the destruction of retirement savings, forcing many people to come out of retirement and back to work.  Beyond that, smaller companies have found it more difficult to survive and business loans have become harder to obtain.

Aside from all the bad news, the report does offer solutions to this crisis:

The solutions offered will help get the U.S. back on track by creating high-quality jobs, driving economic growth, improving U.S. competitiveness, increasing the tax base, and decreasing the U.S. budget deficit — all while not costing the U.S. taxpayer a dime.

These solutions are easily adopted since they:

  • create new capital markets options while preserving current options,
  • expand choice for consumers and issuers,
  • preserve SEC oversight and disclosure, including Sarbanes-Oxley, in the public market solution, and
  • reserve private market participation only to “qualified” investors, thus protecting those investors that  need protection.

These solutions would refocus a significant portion of Wall Street on rebuilding the U.S. economy.

The Grant Thornton website also has a page containing links to the appropriate legislators and a prepared message you can send, urging those legislators to take action to resolve this crisis.

Now is your chance to do something that can help address the many problems with our economy and our financial system.  The people at Grant Thornton were thoughtful enough to facilitate your participation in the resolution of this crisis.  Let the officials in Washington know what their bosses — the people — expect from them.



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Bait And Switch

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October 19, 2009

On Friday, October 16, Aaron Task interviewed Elizabeth Warren for his online TV show, Tech Ticker.  In case you don’t remember, Ms. Warren is the Harvard law professor, appointed to chair the Congressional Oversight Panel which has attempted to trace the money thrown into the infamous slush fund known as TARP — the Troubled Assets Relief Program.  Mr. Task questioned Professor Warren as to whether, after all this time, we can expect a full accounting as to where the TARP money went.  Professor Warren responded:  “No.  I think there is no chance that we will get a full accounting of it.”  She explained the reason for this is because former Treasury Secretary Hank Paulson never asked for an explanation “on the front end” (when the TARP bailout program began) concerning what the recipients planned to do with this money, nor was any documentation of expenditures requested.  As an aside, the folks at The New York Times were kind enough to put together this TARP scorecard, for keeping track of which institutions pay back the money they received.  Of course, these amounts do not include all the loans, “backstopping” and other largesse provided to Wall Street by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury.  For that information, we can look to this Bailout Tally Report, prepared by Nomi Prins for her book:  It Takes a Pillage: Behind the Bailouts, Bonuses,and Backroom Deals from Washington to Wall Street.

During the interview with Aaron Task, Elizabeth Warren expressed particular concern over the fact that former Treasury Secretary Paulson failed to put any restrictions on the use of the TARP bailout funds prior to their dispersal, despite the explanation to the taxpayers that this money would be used to remove the “toxic assets” from the banks’ balance sheets.  Worse yet, as she explained:  “The toxic assets are still there, by and large” because the TARP money was used by the Wall Street banks to “make bets”.  The bait-and-switch tactic used by Secretary Paulson was exposed by Professor Warren when she criticized how the banks used that money:

My biggest complaint would be:  That was not how Secretary Paulsen described what was going to happen with American taxpayer dollars.   . . . He said we are going to put money into the banks to increase lending —  specifically to increase small business lending because that is the engine of our economy . . .  I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it’s used another way.

Professor Warren also noted that nothing had been done to contain “systemic risk” after the financial crisis because those institutions requiring bailouts as they were considered “too big to fail” have grown even larger.  This subject was addressed by Rolfe Winkler of Reuters, who questioned whether these institutions, such as Goldman Sachs, are really indispensable:

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses.  But that ship has sailed.  We socialized the risk while privatizing the profit because we were told we had no other choice:  The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk?  Congress is kicking around new resolution authority to help resolve failed systemically-important banks.  But the goal should be reducing systemic risk to begin with.  Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance.  It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

*   *   *

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street.  That may be.  But Main Street still owns much of the risk while Wall Street gets all of the profit.

Elizabeth Warren’s reaction to the issue of what has been done with those profits — the huge, record-breaking bonuses paid to the people at Goldman Sachs and JP Morgan, was to describe the situation as so inappropriate as to leave her “speechless”.  Fortunately this sentiment is shared by a number of people who are already taking action in the absence of any responsible government activity.  The Gawker website has announced its initiation of what it calls the “Goldman Project” as a way of pushing back against this atrocity:

But what makes it eye-stabbingly, brain-searingly blood-boiling is the fact that Goldman’s employees are personally reaping the benefits of these subsidies to the tune of an average of $700,000 per staffer.  Being unjustifiably wealthy in boom times is not enough — when market forces of their own creation brought their company low, they turned to the taxpayers both to rescue the firm and prop up their obscenely acquisitive lifestyles.

*   *   *

.  .  .  we’re launching the Goldman Project, an ongoing attempt to track and publicize the multi-million second homes, $50,000 cars, $500 bottles of wine, and ostentatious living that we are subsidizing.  And we need your help: Are you Facebook friends with a Goldmanite who just posted photos of his lavish bachelor party?  Post them to our fancy new tag page, #GoldmanProject, or e-mail them to us.  Are you a realtor who just sold a $4 million duplex a Goldman banker?  Is your ex-boyfriend Goldman banker planning a year-end trip to Cabo to blow his bonus wad?  Shoot us an e-mail.  Likewise, if you catch any references to Goldman employees living large in the media, post them to #GoldmanProject to keep a running clipfile.

The folks at Gawker aren’t the only ones taking action.  When the American Bankers Association holds its annual meeting in Chicago on October 25-26, it will be confronted with a (hopefully) large protest led by a coalition of labor, community and consumer groups, called the “Showdown in Chicago”.  Visit their website and do whatever you can to help make this event a success.  The arrogant influence peddlers in Washington need to get the message:  Clean things up or get thrown out.



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An Ominous Drumbeat Gets Louder

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August 13, 2009

Regular readers of this blog (all four of them) know that I have been very skeptical about the current “bear market rally” in the stock markets.  Nevertheless, the rally has continued.  However, we are now beginning to hear opinions from experts claiming that not only is this rally about to end — we could be headed for some real trouble.

Some commentators are currently discussing “The September Effect” and looking at how the stock market indices usually drop during the month of September.  Brett Arends gave us a detailed history of the September Effect in Tuesday’s edition of The Wall Street Journal.

Throughout the summer rally, a number of analysts focused on the question of how this rally could be taken seriously with such thin trading volume.  When the indices dropped on Monday, many blamed the decline on the fact that it was the lowest volume day for 2009.  However, take a look at Kate Gibson’s discussion of this situation for MarketWatch:

One market technician believes trading volume in recent days on the S&P 500 is a sign that the broad market gauge will test last month’s lows, then likely fall under its March low either next month or in October.

The decline in volume started on Friday and suggests the S&P 500 will make a new low beneath its July 8 bottom of 869.32, probably next week, on the way to a test in September or October of its March 6 intraday low of 666.79, said Tony Cherniawski, chief investment officer at Practical Investor, a financial advisory firm.

“In a normal breakout, you get rising volume. In this case, we had rising volume for a while; then it really dropped off last week,” said Cherniawski, who ascribes the recent rise in equities to “a huge short-covering rally.”

The S&P has rallied more than 50 percent from its March lows, briefly slipping in late June and early July.

Friday’s rise on the S&P 500 to a new yearly high was not echoed on the Nasdaq Composite Index, bringing more fodder to the bearish side, Cherniawski said.

“Whenever you have tops not confirmed by another major index, that’s another sign something fishy is going on,” he said.

What impressed me about Mr. Cherniawski’s statement is that, unlike most prognosticators, he gave us a specific time frame of “next week” to observe a 137-point drop in the S&P 500 index, leading to a further decline “in September or October” to the Hadean low of 666.

At CNNMoney.com, the question was raised as to whether the stock market had become the latest bubble created by the Federal Reserve:

The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create.  But along the way it may have pumped up another bubble, this time in stocks.

*   *   *

But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.

One important event that gave everyone a really good scare took place on Tuesday’s Morning Joe program on MSNBC.  Elizabeth Warren, Chair of the Congressional Oversight Panel (responsible for scrutiny of the TARP bailout program) discussed the fact that the “toxic assets” which had been the focus of last fall’s financial crisis, were still on the books of the banks.  Worse yet, “Turbo” Tim Geithner’s PPIP (Public-Private Investment Program) designed to relieve the banks of those toxins, has now morphed into something that will help only the “big” banks (Goldman Sachs, J.P. Morgan, et al.) holding “securitized” mortgages.  The banks not considered “too big to fail”, holding non-securitized “whole” loans, will now be left to twist in the wind on Geithner’s watch.  The complete interview can be seen here.  This disclosure resulted in some criticism of the Obama administration, coming from sources usually supportive of the current administration. Here’s what The Huffington Post had to say:

Warren, who’s been leading the call of late to reconcile the shoddy assets weighing down the bank sector, warned of a looming commercial mortgage crisis.  And even though Wall Street has steadied itself in recent weeks, smaller banks will likely need more aid, Warren said.

Roughly half of the $700 billion bailout, Warren added, was “don’t ask, don’t tell money. We didn’t ask how they were going to spend it, and they didn’t tell how they were going to spend it.”

She also took a passing shot at Tim Geithner – at one point, comparing Geithner’s handling of the bailout money to a certain style of casino gambling.  Geithner, she said, was throwing smaller portions of bailout money at several economic pressure points.

“He’s doing the sort of $2 bets all over the table in Vegas,” Warren joked.

David Corn, a usually supportive member of the White House press corps, reacted with indignation over Warren’s disclosures in an article entitled:  “An Economic Time Bomb Being Mishandled by the Obama Administration?”  He pulled no punches:

What’s happened is that accounting changes have made it easier for banks to contend with these assets. But this bad stuff hasn’t gone anywhere.  It’s literally been papered over. And it still has the potential to wreak havoc.  As the report puts it:

If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value.  Banks will incur further losses on their troubled assets.  The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.

*   *   *

In a conference call with a few reporters (myself included), Elizabeth Warren, the Harvard professor heading the Congressional Oversight Panel, noted that the biggest toxic assets threat to the economy could come not from the behemoth banks but from the “just below big” banks.  These institutions have not been the focus of Treasury efforts because their troubled assets are generally “whole loans” (that is, regular loans), not mortgage securities, and these less-than-big banks have been stuck with a lot of the commercial real estate loans likely to default in the next year or two.  Given that the smaller institutions are disproportionately responsible for providing credit to small businesses, Warren said, “if they are at risk, that has implications for the stability of the entire banking system and for economic recovery.”  Recalling that toxic assets were once the raison d’etre of TARP, she added, “Toxic assets posed a very real threat to our economy and have not yet been resolved.”

Yes, you’ve heard about various government efforts to deal with this mess.  With much hype, Secretary Timothy Geithner in March unveiled a private-public plan to buy up this financial waste.  But the program has hardly taken off, and it has ignored a big chunk of the problem (those”whole loans”).

*   *   *

The Congressional Oversight Panel warned that “troubled assets remain a substantial danger” and that this junk–which cannot be adequately valued–“can again become the trigger for instability.”  Warren’s panel does propose several steps the Treasury Department can take to reduce the risks.  But it’s frightening that Treasury needs to be prodded by Warren and her colleagues, who characterized troubled assets as “the most serious risk to the American financial system.”

On Wednesday morning’s CNBC program, Squawk Box, Nassim Taleb (author of the book, Black Swan — thus earning that moniker as his nickname) had plenty of harsh criticism for the way the financial and economic situations have been mishandled.  You can see the interview with him and Nouriel Roubini here, along with CNBC’s discussion of his criticisms:

“It is a matter of risk and responsibility, and I think the risks that were there before, these problems are still there,” he said. “We still have a very high level of debt, we still have leadership that’s literally incompetent …”

“They did not see the problem, they don’t look at the core of problem.  There’s an elephant in the room and they did not identify it.”

Pointing his finger directly at Fed Reserve Chairman Ben Bernanke and President Obama, Taleb said policymakers need to begin converting debt into equity but instead are continuing the programs that created the financial crisis.

“I don’t think that structural changes have been addressed,” he said.  “It doesn’t look like they’re fully aware of the problem, or they’re overlooking it because they don’t want to take hard medicine.”

With Bernanke’s term running out, Taleb said Obama would be making a mistake by reappointing the Fed chairman.

Just in case you aren’t scared yet, I’d like to direct your attention to Aaron Task’s interview with stock market prognosticator, Robert Prechter, on Aaron’s Tech Ticker internet TV show, which can be seen at the Yahoo Finance site.  Here’s how some of Prechter’s discussion was summarized:

“The big question is whether the rally is over,” Prechter says, suggesting “countertrend moves can be tricky” to predict.  But the veteran market watcher is “quite sure the next wave down is going to be larger than what we’ve already experienced,” and take major averages well below their March 2009 lows.

“Well below” the Hadean low of 666?  Now that’s really scary!