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Turning Point

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As we approach Election Day, many commentators are confirming an observation used as the theme of my posting from September 6:

The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House.

Too many people whom the President thought he could count among his supporters have become his biggest critics.  One might expect that after eight years of outrage over the antics of the Bush administration, Maureen Dowd would be thrilled about the work done by the Obama White House.  Nevertheless, her most recent discussion of Obama’s performance was less than flattering:

In 2008, the message was him.  The promise was him.  And that’s why 2010 is a referendum on him.

With his coalition and governing majority shattering around him, President Obama will have to summon political skills — starting Wednesday — that he has not yet shown he has.

*   *   *

With the exception of Obama, most Americans seemed to agree that the “right” thing to do until the economy recovered was to focus on jobs instead of getting the Congress mired for months in making over health insurance and energy policy.  And the “right” thing to do was to come down harder on the big banks for spending on bonuses instead of lending to small businesses that don’t get bailouts.

Contrary to the President’s expectations, the voting public has not overlooked the administration’s refusal to heed the advice of Bill Black, Robert Reich, and the roster of economists that included Adam Posen and Matthew Richardson advocating the use of the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  To the dismay of everyone in the world (outside of Obama’s inner circle) the new President chose to follow the advice of Larry Summers and put the welfare (as in corporate welfare) of those insolvent, too-big-to-fail banks ahead of the nation’s economic health.  When President Obama appeared on The Daily Show with Jon Stewart on October 27, Stewart began the discussion by asking Obama to explain the rationale underlying his appointment of Larry Summers (a retread from the Clinton administration) as director of the National Economic Council.  President Obama fell back on his two-year-old claim that to follow any course other than that recommended by Summers, would have resulted in the failure of at least 100 banks.  Obama’s claim that the cost of the financial crisis was less than 1% of GDP did not slip past Yves Smith of the Naked Capitalism website.  Ms. Smith (who voted for Obama in 2008) didn’t pull any punches in refuting that claim:

I’m so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin.  Not only does this Administration lie on a routine basis, it doesn’t even bother to tell credible lies.  And this one came directly from the top, not via minions.  It’s not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure.

*   *   *

The reason Obama makes such baldfacedly phony statements is twofold:  first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.

*   *   *

But Team Obama is no doubt rationalizing this chicanery:  if they can keep from recognizing losses until the recovery takes place, then the ultimate damage will be lower.  But Japan’s post bubble record shows that doesn’t work.  You simply don’t get a recovery with a diseased financial system.  You need to purge the bad assets, only then will meaningful growth resume.

Financial risk management guru, Chris Whalen, recently expressed his anguish over the administration’s unwillingness to restructure the zombie banks:

The reluctance comes partly from what truths restructuring will reveal.  As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private.  Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years.  And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile.

The idea that Obama sees “PR as the preferred solution to all problems” surfaced again in a great piece by Peter Baker of The New York Times, which included this observation:

Rather than entertaining the possibility that the program they have pursued is genuinely and even legitimately unpopular, the White House and its allies have concluded that their political troubles amount to mainly a message and image problem.

Baker’s article focused on the most recent gripe made by Obama at another one of his highbrow fundraisers.  Remember the blowback from the President’s recent diatribe at a fundraiser hosted by the appropriately-named Rich Richman?  Well, something similar happened again.  The setting this time was a $15,200-per-ticket affair for doctors at the home of a wealthy hospital executive in Boston.  While addressing this audience, the President explained that the reason why the voters have not embraced the Democrats during this election cycle is because the voters are having trouble thinking clearly, as they are “scared”.  Not surprisingly, this re-ignited the controversy focused on Obama’s elitism.

The Tea Party spokespeople aren’t the only ones who are accusing President Obama of elitism.  The Progressive-oriented TruthDig website, recently published an interesting essay by Chris Hedges, author of  Death of the Liberal Class.  Hedges points out that elitism is exactly the problem afflicting not only Obama, but the entire group, referred to as “the liberal class”.  Consider his argument:

The liberal class, which once made piecemeal and incremental reform possible, functioned traditionally as a safety valve.  During the Great Depression, with the collapse of capitalism, it made possible the New Deal.  During the turmoil of the 1960s, it provided legitimate channels within the system to express the discontent of African-Americans and the anti-war movement.  But the liberal class, in our age of neo-feudalism, is now powerless.  It offers nothing but empty rhetoric.  It refuses to concede that power has been wrested so efficiently from the hands of citizens by corporations that the Constitution and its guarantees of personal liberty are irrelevant.  It does not act to mitigate the suffering of tens of millions of Americans who now make up a growing and desperate permanent underclass.  And the disparity between the rhetoric of liberal values and the rapacious system of inverted totalitarianism the liberal class serves makes liberal elites, including Barack Obama, a legitimate source of public ridicule.  The liberal class, whether in universities, the press or the Democratic Party, insists on clinging to its privileges and comforts even if this forces it to serve as an apologist for the expanding cruelty and exploitation carried out by the corporate state.

*   *   *
As long as the liberal class had even limited influence, whether through the press or the legislative process, liberals were tolerated and even respected.  But once the liberal class lost all influence it became a class of parasites.  The liberal class, like the déclassé French aristocracy, has no real function within the power elite.  And the rising right-wing populists, correctly, ask why liberals should be tolerated when their rhetoric bears no relation to reality and their presence has no influence on power.

As Maureen Dowd pointed out, Wednesday is going to be a big day.  If President Obama thought he had his hands full going into this election   .  .  .  wait until the aftermath.



Two Years Too Late

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October 11, 2010

Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending.  It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006.  Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:

In his eight years as Goldman’s chief executive, Paulson had presided over the firm’s plunge into the business of buying up subprime mortgages to marginal borrowers and then repackaging them into securities, overseeing the firm’s huge positions in what became a fraud-infested market.

During Paulson’s first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely.  Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities.

By now, the rest of that painful story has become a burden for everyone in America and beyond.  Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts.  When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson.  The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:

Ireland has at least faced up to the consequences of the reckless lending, unlike the United States.  The Obama administration has adopted a muddle-through approach, hoping that a recovery in housing prices might mean that the big US banks can avoid recognising crippling property losses.

*   *   *

Leading US bank analyst, Chris Whalen, co-founder of Institutional Risk Analytics, has warned that the banks are struggling to cope with the mountain of problem home loans and delinquent commercial property loans.  Whalen estimates that the big US banks have restructured less than a quarter of their delinquent commercial and residential real estate loans, and the backlog of problem loans is growing.

This is eroding bank profitability, because they are no longer collecting interest on a huge chunk of their loan book.  At the same time, they also face higher administration and legal costs as they deal with the problem property loans.

Banks nursing huge portfolios of problem loans become reluctant to make new loans, which chokes off economic activity.

Ultimately, Whalen warns, the US government will have to bow to the inevitable and restructure some of the major US banks.  At that point the US banking system will have to recognise hundreds of billions of dollars in losses from the deflation of the US mortgage bubble.

If Whalen is right, Ireland is a template of what lies ahead for the US.

Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves.  Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness:  CNBC.   Whalen was interviewed on CNBC’s Fast Money program on October 8.  You can see the video here.  The Whalen interview begins at 7 minutes into the clip.  John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc.  Here are some tidbits from this must-read interview:

LL:  Chris, when are you expecting the storm to hit?

CW:  When the too big to fail banks can no longer fudge the cost of restructuring their real estate exposures, on and off balance sheet. Q3 earnings may be the catalyst

LL:  What banks are most exposed to this tsunami?

CW:  Bank of America, Wells Fargo, JPMorgan, Citigroup among the top four.  GMAC.  Why do we still refer to the ugly girls — Bank of America, JPMorgan and Wells Fargo in particular — as zombies?  Because the avalanche of foreclosures and claims against the too-big-too-fail banks has not even crested.

*   *   *

LL:  How many banks to expect to fail next year because of this?

CW:  The better question is how we will deal with the process of restructuring.  My view is that the government/FDIC can act as receiver in a government led restructuring of top-four banks.  It is time for PIMCO, BlackRock and their bond holder clients to contribute to the restructuring process.

Of course, this restructuring could have and should have been done two years earlier — in February of 2009.  Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts.  As the saying goes:  “He who hesitates is lost.”  In this case, President Obama hesitated and we lost.  We lost big.



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The New Welfare Queens

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February 26, 2009

In 1999, UCLA Professor Franklin D. Gilliam wrote a report for Harvard University’s Nieman Foundation for Journalism.  That paper concerned a study he had done regarding public perception of the “welfare queen” stereotype and how that perception had been shaped by the media.  He discussed how the term had been introduced by Ronald Reagan during the 1976 Presidential campaign.  Reagan told the story of a woman from Chicago’s South Side, who had been arrested for welfare fraud.  The term became widely used in reference to a racist (and sexist) stereotype of an iconic African-American woman, enjoying a lavish lifestyle and driving a Cadillac while cheating the welfare system.

Ten years after the publication of Gilliam’s paper, we have a new group of “welfare queens”:  the banks.  The banks have already soaked over a trillion dollars from the federal government to remedy their self-inflicted wounds.  Shortly after receiving their first $350,000,000,000 in payments under the TARP program (which had no mechanism of documenting where the money went) their collective reputation as “welfare queens” was firmly established.  In the most widely-reported example of “corporate welfare” abuse by a bank, public outcry resulted in Citigroup’s refusal of delivery on its lavishly-appointed, French-made, Falcon 50 private jet.  Had the sale gone through, Citi would have purchased the jet with fifty million dollars of TARP funds.  Now, as they seek even more money from us, the banks chafe at the idea that American taxpayers, economists and political leaders are suggesting that insolvent (or “zombie”) banks should be placed into temporary receivership until their “toxic assets” are sold off and their balance sheets are cleaned up.  This has been referred to as “nationalization” of those banks.

Despite all the bad publicity and public outrage, banks still persist in their welfare abuse.  After all, they have habits to support.  Their “drug” of choice seems to be the lavish golf outing at a posh resort.  The most recent example of this resulted in Maureen Dowd’s amusing article in The New York Times, about a public relations misstep by Sheryl Crow.

The New Welfare Queens have their defenders.  CNBC’s wildly-animated Jim Cramer has all but pulled out his remaining strands of hair during his numerous rants about how nationalization of banks “would crush America”.  A number of investment advisors, such as Bill Gross, co-chief investment officer at Pacific Investment Management Company, have also voiced objections to the idea of bank nationalization.

Another defender of these welfare queens appears to be Federal Reserve Chairman Ben Bernanke.   In his latest explanation of Turbo Tim Geithner’s “stress test” agenda, Bernanke attempted to assure investors that the Obama administration does not consider the nationalization of banks as a viable option for improving their financial health.  As Craig Torres and Bradley Keoun reported for Bloomberg News on February 25, the latest word from Bernanke suggests that nationalization is not on the table:

. . .  while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full- scale nationalization that wipes out stockholders.

Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington today.

The only way to deal with The New Welfare Queens is to replace their directors and managers.  The Obama administration appears unwilling to do that.  During his February 25 appearance on MSNBC’s Countdown, Paul Krugman (recipient of the Nobel Prize in Economics) expressed his dread about the Administration’s plan to rehabilitate the banks:

I’ve got a bad feeling about this, as do a number of people.  I was just reading testimony from Adam Posen, who is our leading expert on Japan.  He says we are moving right on the track of the Japanese during the 1990s:  propping up zombie banks — just not doing resolution.

. . .  The actual implementation of policy looks like a kind of failure of nerve.

*   *   *

On the banks — I really can’t see  — there really seems to be — we’re going to put in some money, as we’re going to say some stern things to the bankers about how they should behave better.  But if there is a strategy there, it’s continuing to be a mystery to me and to everybody I’ve talked to.

You can read Adam Posen’s paper:  “Temporary Nationalization Is Needed to Save the U.S. Banking System” here.  Another Economics professor, Matthew Richardson, wrote an excellent analysis of the pros and cons of bank nationalization for the RGE Monitor.  After discussing both sides of this case, he reached the following conclusion:

We are definitely caught between a rock and a hard place.  But the question is what can we do if a major bank is insolvent?  Sometimes the best way to repair a severely dilapidated house is to knock it down and rebuild it.  Ironically, the best hope of maintaining a private banking system may be to nationalize some of its banks.  Yes, it is risky.  It could go wrong. But it is the surest path to avoid a “lost decade” like Japan.

As the experts report on their scrutiny of the “stress testing” methodology, I get the impression that it’s all a big farce.  Eric Falkenstein received a PhD in Economics from Northwestern University.  His analysis of Geithner’s testing regimen (posted on the Seeking Alpha website) revealed it to be nothing more than what is often referred to as “junk science”:

Geithner noted he will wrap this up by April.  Given the absurdity of this exercise, they should shoot for Friday and save everyone a lot of time.  It won’t be any more accurate by taking two months.

On a similar note, Ari Levy wrote an illuminating piece for Bloomberg News, wherein he discussed the stress testing with Nancy Bush, bank analyst and founder of Annandale, New Jersey-based NAB Research LLC and Richard Bove of Rochdale Securities.  Here’s what Mr. Levy learned:

Rather than checking the ability of banks to withstand losses, the tests outlined yesterday are designed to convince investors that the firms don’t need to be nationalized, said analysts including (Nancy) Bush and Richard Bove from Rochdale Securities.

*   *   *

“I’ve always thought that this stress-testing was a politically motivated approach to try to defuse the argument that the banks didn’t have enough capital,” said Bove, in an interview from Lutz, Florida.  “They’re trying to prove that the banks are well-funded.”

Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers?  Will the Obama administration’s “failure of nerve” —  by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.