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Congressional Sleaze In The Spotlight

November 14th, 2011 Posted in Uncategorized

Nov, 14 2011

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Last February, I wrote a piece entitled, “License To Steal”, concerning a certain legal loophole which allows members of Congress to trade stocks using “insider information”:

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act). The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress. As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress. Remember how Martha Stewart went to prison? Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties. In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal. That’s because the laws which apply to you and I do not apply to those in Congress. Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect. Since that time, there have been no further efforts to propose similar legislation.

At a time when the public is finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions, more attention is being focused on how the “real money” is made in Congress. A new book by Peter Schweizer – Throw Them All Out – deals with this very subject. The book’s subtitle is reminiscent of the point I tried to make in my February posting: “How politicians and their friends get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison”.

Peter J. Boyer wrote an article for Newsweek, explaining how Peter Schweizer came about writing this book. Schweizer is the William J. Casey research fellow at the Hoover Institution and as Boyer pointed out, Schweizer is considered by liberal critics as a “right wing hit man”. It’s nice to see someone from the right provide us with an important treatise on crony capitalism. The book exposes insider trading by both Democrats and Republicans – hell-bent on profiteering from the laws they enact. Boyer’s essay provided us with some examples of the sleazy trades made by Congress-cretins, as described in Throw Them All Out. Here are a few examples:

Indeed, Schweizer reports that, during the debate over Obama’s health-care reform package, John Boehner, then the House minority leader, was investing “tens of thousands of dollars” in health-insurance-company stocks, which made sizable gains when the proposed public option in the reform deal was killed.

* * *

One of the more dramatic episodes in the book recounts the trading activity of Republican Rep. Spencer Bachus, of Alabama, who, as the ranking member of the House Financial Services Committee, was privy to sensitive high-level meetings during the 2008 financial crisis and proceeded to make a series of profitable stock-option trades.

Bachus was known in the House as a guy who liked to play the market, and in fact he was pretty good at it; one year, he reported a capital gain in excess of $150,000 from his trading activities. More striking is that Bachus boldly carried forth his trading in the teeth of the impending financial collapse, the nightmarish dimensions of which he had learned about first-hand in confidential briefings from Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke. On Sept. 19, 2008, after attending two such briefings, Bachus bought options in an index fund (ProShares UltraShort QQQ) that effectively amounted to a bet that the market would fall. That is indeed what happened, and, on Sept. 23, Bachus sold his “short” options, purchased for $7,846, for more than $13,000—nearly doubling his investment in four days.

Around the time Congress and the Bush administration worked out a TARP bailout, Bachus made another options buy and again nearly doubled his money.

* * *

After the first briefing from Bernanke and Paulson, brokers for Democratic Congressman Jim Moran, of Virginia, and his wife sold their shares in 90 companies, dodging the losses that others who stayed in the market would soon face. Republican Rep. Shelley Capito, of West Virginia, sold between $100,000 and $250,000 of Citigroup stock the day after the first meeting, recording capital gains on Citigroup transactions in that rocky period.

Peter Schweizer’s analysis of the bipartisan culture of corruption on Capitol Hill reinforces one of my favorite criticisms of American government: Our Sham Two-Party System. The Republi-Cratic Corporatist Party owes its allegiance to no population, no principle, no cause – other than pocketing as much money as possible. Just as there have been some recent “pushback” efforts by outraged citizens, Schweizer is now advocating a “Throw Them All Out” campaign. This could have a potentially significant impact on Congress, because the term of office in the House of Representatives lasts for only two years. Consider Schweizer’s thought at the close of the Newsweek piece:

“I was troubled,” he says, “by the fact that the political elite gets to play by a different set of rules than the rest of us. In the process of researching this book, I came to the conclusion that political party and political philosophy matter a lot less than we think. Washington is a company town, and politics is a business. People wonder why we don’t get more change in Washington, and the reason is that the permanent political class is very comfortable. Business is good.”

I concluded my February 28 posting with this point:

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade. Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses? Well, if they were honest . . .

A successful “Throw Them All Out” campaign would obviate the necessity of attempting to convince this Congress to pass the “Stop Trading on Congressional Knowledge Act” (STOCK Act). If the next Congress knows that its political survival is depending on its passage of the STOCK Act, we might see it become law.

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Looking Beyond Rhetoric

October 10th, 2011 Posted in Uncategorized

Oct, 10 2011

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As a result of the increasing popularity of the Occupy Wall Street movement (which now gets so much coverage, it’s referred to as “OWS”) President Obama has found it necessary to crank up the populist rhetoric. He must walk a fine line because his injecting too much enthusiasm into any populist-themed discussion of the economic crisis will alienate those deep-pocketed campaign donors from the financial sector. Don’t forget: Goldman Sachs was Obama’s leading private source of 2008 campaign contributions, providing more than one million dollars for the cause.

The Occupy Wall Street protest has now placed Obama and his fellow Democrats in a double-bind situation. Many commentators – while pondering that predicament – have found it necessary to take a good, hard look at the favorable treatment given to Wall Street by the current administration. A recent essay by Robert Reich approached this subject by noting that Obama is as far from left-wing populism as any Democratic President in modern history:

To the contrary, Obama has been extraordinarily solicitous of Wall Street and big business – making Timothy Geithner Treasury Secretary and de facto ambassador from the Street; seeing to it that Bush’s Fed appointee, Ben Bernanke, got another term; and appointing GE Chair Jeffrey Immelt to head his jobs council.

Most tellingly, it was President Obama’s unwillingness to place conditions on the bailout of Wall Street – not demanding, for example, that the banks reorganize the mortgages of distressed homeowners, and that they accept the resurrection of the Glass-Steagall Act, as conditions for getting hundreds of billions of taxpayer dollars – that contributed to the new populist insurrection.

* * *

But the modern Democratic Party is not likely to embrace left-wing populism the way the GOP has embraced – or, more accurately, been forced to embrace – right-wing populism. Just follow the money, and remember history.

Another commentator, who has usually been positive in his analysis of the current administration’s policies – Tom Friedman of The New York Times – couldn’t help but criticize Obama’s performance while lamenting the loss a great American leader, Steve Jobs:

Obama supporters complain that the G.O.P. has tried to block him at every turn. That is true. But why have they gotten away with it? It’s because Obama never persuaded people that he had a Grand Bargain tied to a vision worth fighting for.

* * *

The paucity of Obama’s audacity is striking.

As I recently pointed out, any discussion of our nation’s economic problems ultimately focuses on President Obama’s failure to seize the opportunity – during the first year of his Presidency – to turn the economy around and reduce unemployment. Despite the administration’s repeated claims that it has reduced unemployment, Pro Publica offered an honest look of that claim:

Overall, job creation has been relatively meager during the Obama administration, particularly compared to the massive job losses brought on by the recession. According to the St. Louis Federal Reserve, even if job creation were happening at pre-recession levels, it would take us 11 years to get back to an unemployment rate of 5 percent.

Ron Suskind’s new book, Confidence Men provided a shocking revelation about Obama’s decision allow unemployment to remain above 9 percent by ignoring the advice of Larry Summers (Chair of the National Economic Council) and Christina Romer (Chair of the Council of Economic Advisers). I discussed that issue and the outrage expressed in reaction to Obama’s attitude on September 22.

At The Washington Post, Ezra Klein wrote an engaging piece, which provided us with a close look at how the Obama administration was fighting the economic crisis. Klein interviewed several people from inside the administration and provided a sympathetic perspective on Obama’s decisions. Nevertheless, Klein’s ultimate conclusion – although nuanced – didn’t do much for the President:

From the outset, the policies were too small for the recession the administration and economists thought we faced. They were much too small for the recession we actually faced. More and better stimulus, more aggressive interventions in the housing market, more aggressive policy from the Fed, and more attention to preventing layoffs and hiring the unemployed could have led to millions more jobs. At least in theory.

Of course, ideas always sound better than policies. Policies must be implemented, and they have unintended consequences and unforeseen flaws. In the best of circumstances, the policymaking process is imperfect. But January 2009 had the worst of circumstances – a once-in-a-lifetime economic emergency during a presidential transition.

* * *

These sorts of economic crises are, in other words, inherently politically destabilizing, and that makes a sufficient response, at least in a democracy, nearly impossible.

Klein’s apologia simply underscored the necessity for a President to exhibit good leadership qualities. Despite a “Presidential transition”, the Democratic Party held the majority of seats in both the Senate and the House. In July of 2009, when it was obvious that the stimulus had been inadequate, Obama was too preoccupied with his healthcare bill to refocus on economic recovery. As I said back then:

President Obama should have done it right the first time. His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”. The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return. The voting public will perceive this as weak leadership. As a result, President Obama will need to re-invent this aspect of his public image before he can even consider presenting a second economic stimulus proposal.

Weak leadership is hardly a justifiable excuse for an inadequate, half-done, economic stimulus program. Beyond that, President Obama’s sell-out to Wall Street by way of a sham financial “reform” bill has drawn widespread criticism. In his March 29 op-ed piece for The New York Times, Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP) criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary.

* * *

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

Running as an incumbent President presents a unique challenge to Mr. Obama. He must now reconcile his populist rhetoric with his record as President. The contrast is too sharp to ignore.

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Barack Oblivious

August 11th, 2011 Posted in Uncategorized

Aug, 11 2011

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As I’ve been discussing here for quite a while, commentators from across the political spectrum have been busy criticizing the job performance of President Obama. The mood of most critics seems to have progressed from disappointment to shock. The situation eventually reached the point where, regardless of what one thought about the job Obama was doing – at least the President could provide us with a good speech. That changed on Monday, August 8 – when Obama delivered his infamous “debt downgrade” speech – in the wake of the controversial decision by Standard and Poor’s to lower America’s credit rating from AAA to AA+. This reaction from Joe Nocera of The New York Times was among the more restrained:

When did President Obama become such a lousy speech-maker? His remarks on Monday afternoon, aimed at calming the markets, were flat and uninspired — as they have consistently been throughout the debt ceiling crisis. “No matter what some agency may say,” he said, ”we’ve always been and always will be a triple-A country.” Is that really the best he could do? The markets, realizing he had little or nothing to offer, continued their swoon. What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern.

Actually, President Obama should have been concerned about job creation back in January of 2009. For some reason, this President had been pushing ahead with his own agenda, while oblivious to the concerns of America’s middle class. His focus on what eventually became an enfeebled healthcare bill caused him to ignore this country’s most serious problem: unemployment. Our economy is 70% consumer-driven. Because the twenty-five million Americans who lost their jobs since the inception of the financial crisis have remained unemployed — goods aren’t being sold. This hurts manufacturers, retailers and shipping companies. With twenty-five million Americans persistently unemployed, the tax base is diminished – meaning that there is less money available to pay down America’s debt. The people Barry Ritholtz calls the “deficit chicken hawks” (politicians who oppose any government spending programs which don’t benefit their own constituents) refuse to allow the federal government to get involved in short-term “job creation”. This “savings” depletes taxable revenue and increases government debt. President Obama — the master debater from Harvard – has refused to challenge the “deficit chicken hawks” to debate the need for any sort of short-term jobs program.

Bond guru Bill Gross of PIMCO recently lamented this administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation. Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed. The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today’s marketplace.

* * *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is. Government must step up to the plate, as it should have in early 2009.

Back in July of 2009 – five months after the economic stimulus bill was passed – I pointed out how many prominent economists – including at least one of Obama’s closest advisors, had been emphasizing that the stimulus was inadequate and that we could eventually face a double-dip recession:

A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”. Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. “We probably have already 2.5 million more job losses than anticipated.”

Economist Brad DeLong recently provided us with a little background on the thinking that had been taking place within the President’s inner circle during 2009:

In the late spring of 2009, Barack Obama had five economic policy principals: Tim Geithner, who thought Obama had done enough to boost demand and needed to turn to long-run deficit reduction; Ben Bernanke, who thought that the Fed had done enough to boost demand and that the administration needed to turn to deficit reduction; Peter Orszag, who thought the administration needed to turn to deficit reduction immediately and could also use that process to pass (small) further stimulus; Larry Summers, who thought that long-run deficit reduction could wait until the recovery was well-established and that the administration needed to push for more demand stimulus; and Christina Romer, who thought that long-run deficit reduction should wait until the recovery was well-established and that the administration needed to push for much more demand stimulus.

Now Romer, Summers, and Orszag are gone. Their successors – Goolsbee, Sperling, and Lew – are extraordinary capable civil servants but are not nearly as loud policy voices and lack the substantive issue knowledge of their predecessors. The two who are left, Geithner and Bernanke, are the two who did not see the world as it was in mid-2009. And they do not seem to have recalibrated their beliefs about how the world works – they still think that they were right in mid-2009, or should have been right, or something.

I fear that they still do not see the situation as it really is.

And I do not see anyone in the American government serving as a counterbalance.

Meanwhile, the dreaded “double-dip” recession is nearly at hand. Professor DeLong recently posted a chart on his blog, depicting daily Treasury real yield curve rates under the heading, “Treasury Real Interest Rates Now Negative Out to Ten Years…” He added this comment:

If this isn’t a market prediction of a double-dip and a lost decade (or more), I don’t know what would be. At least Hoover was undertaking interventions in financial markets–and not just blathering about how cutting spending was the way to call the Confidence Fairy…

President Obama has been oblivious to our nation’s true economic predicament since 2009. Even if there were any Hope that his attentiveness to this matter might Change – at this point, it’s probably too late.

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Federal Reserve Bailout Records Provoke Limited Outrage

April 14th, 2011 Posted in Uncategorized

Apr, 14 2011

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”. Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business. The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis. The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit. The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure. The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans. Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds. The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion. Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing. Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy. He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed. A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX), .   .   . “I don’t have [any] plan [for] legislation … It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill. Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers. The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi. He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches. Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations. Christy Mack is the wife of John Mack, the chairman of Morgan Stanley. Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”. Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility. But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.” If you want to learn how the shadow budget works, follow along. This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”. Think about it: the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage. So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal. When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate). Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding. These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States. Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words: Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible. There would have been no POMO auctions. As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”. This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.

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Leadership Void

April 11th, 2011 Posted in Uncategorized

Apr, 11 2011

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In my last posting, I re-ran a passage from what I wrote on December 2, which was supported by Robert Reich’s observation that, unlike Bill Clinton, Barack Obama is not at the helm of a country with an expanding economy. As I said on December 2:

After establishing an economic advisory team consisting of retreads from the Clinton White House, President Obama has persisted in approaching the 2010 economy as though it were the 1996 economy.

After I posted my April 7 piece, I felt a bit remorseful about repeating a stale theme. Nevertheless, a few days later, Ezra Klein’s widely-acclaimed Washington Post critique of President Obama’s misadventure in “negotiating” the 2011 budget was entitled, “2011 is not 1995”. Ezra Klein validated the point I was trying to make:

Clinton’s success was a function of a roaring economy. The late ‘90s were a boom time like few others — and not just in America. The unemployment rate was less than 6 percent in 1995, and fell to under 5 percent in 1996. Cutting deficits was the right thing to do at that time. Deficits should be low to nonexistent when the economy is strong, and larger when it is weak. The Obama administration’s economists know that full well. They are, after all, the very people who worked to balance the budget in the 1990s, and who fought to expand the deficit in response to the recession.

Right now, the economy is weak. Giving into austerity will weaken it further, or at least delay recovery for longer. And if Obama does not get a recovery, then he will not be a successful president, no matter how hard he works to claim Boehner’s successes as his own.

President Obama’s attempt at spin control with a claim of “bragging rights” for ending the budget stalemate brought similar criticism from economist Brad DeLong:

To reduce federal government spending by $38 billion in the second and third quarters of 2011 when the unemployment rate is 8.9% and the U.S. Treasury can borrow on terms that make pulling spending forward from the future into the present essentially free is not an accomplishment.

It will knock between 0.5% and 1.0% off the growth rate of real GDP in the second half of 2011, and leave us at the start of 2012 with an unemployment rate a couple of tenths of a percent higher than it would have been otherwise.

Robert Reich expressed his disappointment with the President’s handling of the 2011 budget deal by highlighting Mr. Obama’s failure to put the interests of the middle class ahead of the goals of the plutocracy:

He is losing the war of ideas because he won’t tell the American public the truth: That we need more government spending now – not less – in order to get out of the gravitational pull of the Great Recession.

That we got into the Great Recession because Wall Street went bonkers and government failed to do its job at regulating financial markets. And that much of the current deficit comes from the necessary response to that financial crisis.

That the only ways to deal with the long-term budget problem is to demand that the rich pay their fair share of taxes, and to slow down soaring health-care costs.

And that, at a deeper level, the increasingly lopsided distribution of income and wealth has robbed the vast working middle class of the purchasing power they need to keep the economy going at full capacity.

“We preserved the investments we need to win the future,” he said last night. That’s not true.

The idea that a huge portion of our current deficit comes from the response to the financial crisis created by Wall Street banks was explored in more detail by Cullen Roche of Pragmatic Capitalism. The approach of saving the banks, under the misguided notion that relief would “trickle down” to Main Street didn’t work. The second round of quantitative easing (QE 2) has proven to be nothing more than an imprudent decision to follow Japan’s ineffective playbook:

And in 2008 our government was convinced by Timothy Geithner, Hank Paulson and Ben Bernanke that if we just saved the banks we would fix the economy. So we embarked on the “recovery” plan that has led us to one of the weakest recoveries in US economic history. Because of the keen focus on the banking system there is a clear two tier recovery. Wall Street is thriving again and Main Street is still struggling.

Thus far, we have run budget deficits that have been large enough to offset much of the deleveraging of the private sector. And though the spending was poorly targeted it has been persistent enough that we are not repeating the mistakes of Japan – YET. By my estimates the balance sheet recession is likely to persist well into 2013.

* * *

QE2 has truly been a “monetary non-event”. As many of us predicted at its onset, this program has shown absolutely no impact on the US money supply (much to the dismay of the hyperinflationists). And now its damaging psychological impact (via rampant speculation) has altered the options available to combat the continuing balance sheet recession. While more stimulus is almost certainly off the table given the Fed’s misguided QE2 policy, it would be equally misguided to begin cutting the current budget deficit. Sizable cuts before the end of the balance sheet recession will almost guarantee that the US economy suffers a Japan-like relapse. It’s not too late to learn from the mistakes of Japan.

So where is the leader who is going to save us from a Japanese-style “lost decade” recession? It was over two years ago when I posed this question:

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.

Two years down – eight years to go.

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Grasping Reality With The Opinions Of Others

March 10th, 2011 Posted in Uncategorized

Mar, 10 2011

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary. Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution. The incident was recently discussed by Brad DeLong. (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.) Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy. On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15. Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog. Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle? Seriously? I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism? Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant. Her old man was an inspector of contracting in New York City. He got surprisingly rich. From that he went to starting his own contracting business. He got surprisingly rich. Then he went back to New York City in an even higher level supervisory job. He got surprisingly rich. So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated. Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers. The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold: this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities. And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems. Timothy Geithner was even doing victory laps last month in Europe. To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal. Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team. Volcker, Summers, Orszag, and Romer are all gone. So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

The financial system was on the verge of collapse. We all know that now – about US banks and European ones too. Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King. The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.

When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent. It is still unclear whether this was a political or an economic decision.

The most difficult political aspect of the banking crisis response was socialising bank losses. All banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent. That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.

Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror. Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds. That is the Geithner view.

Once the system is healthy again, it should expand. The reason you need to bail the banks out is that they have expansion opportunities abroad. As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit. American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets. His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done. The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery. With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services. I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development. But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?

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An Army Of Lobbyists For The Middle Class

March 3rd, 2011 Posted in Uncategorized

Mar, 03 2011

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Federal Reserve Chairman, Ben Bernanke appeared before the Senate Banking Committee this week to testify about the Fed’s monetary policy. Scot Kersgaard of The American Independent focused our attention on a five-minute exchange between Colorado Senator Michael Bennett and The Ben Bernank, with an embedded video clip. Senator Bennett asked Bernanke to share his opinions concerning the recommendations made by President Obama’s bipartisan deficit commission. Bernanke initially attempted to dodge the question with the disclaimer that the Fed’s authority extends to only monetary policy rather than fiscal policy – such as the work conducted by the deficit commission. If Congressman Ron Paul had been watching the hearing take place, I’m sure he had a good, hard laugh at that statement. Nevertheless, Bernanke couldn’t restrain himself from concurring with the effort to place the cost of Wall Street’s larceny on the backs of middle-class taxpayers.

The chant for “entitlement reform” continues to reverberate throughout the mainstream media as it has for the past year. Last May, economist Dean Baker exposed this latest effort toward upward wealth redistribution:

Emboldened by the fact that none of them have gone to jail for their role in the financial crisis, the Wall Street gang is now gunning for Social Security and Medicare, the country’s most important safety net programs. Led by investment banker Pete Peterson, this crew is spending more than a billion dollars to convince the public that slashing these programs is the only way to protect our children and grandchildren from poverty.

A key propaganda tactic used by the “entitlement reform” crusaders is to characterize Social Security as an “entitlement” even though it is not (as I discussed here). Phil Davis, avowed capitalist and self-described “serial entrepreneur”, wrote a great essay, which refuted the claim that Social Security is “broken” while explaining why it is not an “entitlement”. Unfortunately, there are very few politicians who are willing to step forward to provide the simple explanation that Social Security is not an entitlement. Senator Richard Blumenthal (D-Conn.) recently made a statement to that effect before a senior citizens’ group in East Haven, Connecticut – without really providing an explanation why it is not an entitlement. Susan Feiner wrote a great commentary on the subject last fall for womensenews.org. Here is some of what she said:

Moreover, Social Security is not an entitlement program as it’s paid for entirely by payroll taxes. It is an insurance program, not an entitlement. Not one penny of anyone’s Social Security comes out of the federal government’s general fund.

Social Security is, by law, wholly self-financing. It has no legal authority to borrow, so it never has.

If this incredibly successful and direly needed program hasn’t ever borrowed a dime, why is the president and his hand-picked commissioners putting Social Security cuts (and/or increases in the retirement age) in the same sentence as deficit reduction?

The attempt to mischaracterize Social Security as an “entitlement” is not a “Right vs. Left” dispute — It’s a class warfare issue. There have been commentaries from across the political spectrum emphasizing the same fact: Social Security is not an “entitlement”. The assertion has appeared on the conservative patriotsteaparty.net website, the DailyKos on the Left and in a piece by independent commentator, Marti Oakley.

The battle for “entitlement reform” is just one front in the larger war being waged by Wall Street against the middle class. Kevin Drum discussed this conflict in a recent posting at his Plutocracy Now blog for Mother Jones:

It’s about the loss of a countervailing power robust enough to stand up to the influence of business interests and the rich on equal terms. With that gone, the response to every new crisis and every new change in the economic landscape has inevitably pointed in the same direction. And after three decades, the cumulative effect of all those individual responses is an economy focused almost exclusively on the demands of business and finance. In theory, that’s supposed to produce rapid economic growth that serves us all, and 30 years of free-market evangelism have convinced nearly everyone — even middle-class voters who keep getting the short end of the economic stick — that the policy preferences of the business community are good for everyone. But in practice, the benefits have gone almost entirely to the very wealthy.

One of my favorite commentators, Paul Farrell of MarketWatch made this observation on March 1:

Wall Street’s corrupt banks have lost their moral compass … their insatiable greed has become a deadly virus destroying its host nation … their campaign billions buy senate votes, stop regulators’ actions, manipulate presidential decisions. Wall Street money controls voters, runs America, both parties. Yes, Wall Street is bankrupting America.

Wake up America, listen:

“Our country is bankrupt. It’s not bankrupt in 30 years or five years,” warns economist Larry Kotlikoff, “it’s bankrupt today.”

Economist Peter Morici: “Capitalism is broken, America’s government is two bankrupt political parties bankrupting the country.”

David Stockman, Reagan’s budget director: “If there were such a thing as Chapter 11 for politicians” the “tax cuts would amount to a bankruptcy filing.”

BusinessWeek recently asked analyst Mary Meeker to run the numbers. How bad is it? America really is bankrupt, with a “net worth of a negative $44 trillion.” Bankrupt.

And it will get worse. Unfortunately, nothing can stop America’s self-destructive Wall Street bankers. They simply do not care that their “doomsday capitalism” is destroying themselves from within, and is bankrupting America too.

On February 21, I quoted a statement made by bond guru Bill Gross of PIMCO, which included this thought:

America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.

That essay by Bill Gross became the subject of an article by Terrence Keeley of Bloomberg News. Mr. Keeley’s reaction to the suggestions made by Bill Gross was this:

To redeem Wall Street’s soul, radical solutions are clearly needed, but advocating the eradication of profit-based markets that have served humanity well on balance without a viable replacement is fanciful. Gross deserves an “A” for intent — but something more practical than a “heart transplant” is required to restore trust and efficacy to our banking system.

* * *

But an economy based on something other than profit risks misery and injustice of another sort. The antibodies now needed aren’t those that negate profitability. Rather, they are the ones that bind financial engineering to value creation and advancement of society.

Perhaps the most constructive solution to the problem is my suggestion from February 10: Recruit and employ an army of lobbyists to represent and advance the interests of the middle class on Capitol Hill. Some type of non-partisan, “citizens’ lobby” could be created as an online community. Once its lobbying goals are developed and articulated, an online funding drive would begin. The basic mission would be to defend middle-class taxpayers from the tyranny of the plutocracy that is destroying not just the middle class – but the entire nation. Fight lobbyists with lobbyists!

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License To Steal

February 28th, 2011 Posted in Uncategorized

Feb, 28 2011

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People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions. Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life. Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act). The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress. As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress. Remember how Martha Stewart went to prison? Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties. In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal. That’s because the laws which apply to you and I do not apply to those in Congress. Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect. Since that time, there have been no further efforts to propose similar legislation.

Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:

Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained: (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.

Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.

Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown. After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:

We clearly have an unprecedented crisis in our financial system. . . .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation. Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement. Boehner says his stock broker acted alone without even talking to him. Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

* * *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group. Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog. Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information. But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information. But it doesn’t apply to political intelligence. That makes this business lucrative. Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets. Consumer advocate Craig Holman is backing a bill called the STOCK Act. Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress. In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:

Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases. The same cannot be said for most Americans. Are your representatives getting rich in Congress and, if so, how?

Here is the Top Ten List of the Richest Members of Congress from opensecrets.org:

NAME               MINIMUM NET WORTH   AVERAGE   MAXIMUM NET WORTH

Darrell Issa (R-Calif) $156,050,022      $303,575,011    $451,100,000

Jane Harman (D-Calif) $151,480,522    $293,454,761 $435,429,001

John Kerry (D-Mass)    $182,755,534     $238,812,296 $294,869,059

Mark Warner (D-Va)     $65,692,210      $174,385,102   $283,077,995

Jared Polis (D-Colo)     $36,694,140       $160,909,068   $285,123,996

Herb Kohl (D-Wis)        $89,358,027           $160,302,011   $231,245,995

Vernon Buchanan (R-Fla)$-69,434,661    $148,373,160 $366,180,982

Michael McCaul (R-Texas) $73,685,086 $137,611,043 $201,537,000

Jay Rockefeller (D-WVa) $61,446,018      $98,832,010   $136,218,002

Dianne Feinstein (D-Calif) $46,055,250    $77,082,134   $108,109,018

Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller. How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public. In the case of #10 — California Senator Dianne Feinstein — we have an interesting situation. As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee. In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake. As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade. Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses? Well, if they were honest . . .

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Those Smart Bond Traders

February 21st, 2011 Posted in Uncategorized

Feb, 21 2011

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There seems to be a consensus that bond traders are smarter than stock traders. Consider this thought from Investopedia’s Financial Edge website:

Many investors believe bond traders understand the economy better than equity traders. Bond traders pay very close attention to any economic factor that might affect interest rates. Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.

Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash. It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:

The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”

In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening. That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.

* * *

The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders. They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.

* * *

Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains. Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation. Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com. Yet the fear of a crash persists.

Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise. Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since. Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:

Only the biggest and oldest companies are happy being listed on public markets today. As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy. To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years. Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check. With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns. The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Investors who decided to keep their money in bonds, heard some discouraging news from bond guru Bill Gross of PIMCO on February 2. Gus Lubin of The Business Insider provided a good summary of what Bill Gross had to say:

His latest investment letter identifies four scenarios in which bondholders would get burned. Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.

In other words, you can’t win. Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut: “This is not God’s work – it has the unmistakable odor of Mammon.”

Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.

I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital. Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”. When I reached the third paragraph of that piece, I had to re-read this startling fact:

His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April. It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross . . .

The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm. Accordingly, TCW made a pre-emptive strike and fired Gundlach. From there, the story gets more interesting:

Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems. The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.

* * *

He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”

That’s certainly easy to understand. Porn just hasn’t been the same since Ginger Lynn retired.

Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here. Take a good look at the graph on page 16: “Top 0.1% Income Earners Share of Total Income”. It’s just one of many reminders that our country is headed in the wrong direction.

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Another Cartoon For The Bernank To Hate

February 14th, 2011 Posted in Uncategorized

Feb, 14 2011

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Those of us who found it necessary to explain quantitative easing during the course of a blog posting, have struggled with creating our own definitions of the term. On October 18, 2010, I started using this one:

Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.

What I failed to include in that description was the fact that the Fed was printing money to make those purchases. I eventually resorted to simply linking the term to the definition of quantitative easing at Wikipedia.org.

Suddenly, in November of 2010, a cartoon – posted on YouTube – became an overnight sensation. It was a 6-minute discussion between two little bears, which explained how “The Ben Bernank” was trying to fix a broken economy by breaking it more.

We eventually learned a few things about the cartoon’s creator, Omid Malekan, who produced the clip for free on the xtranormal.com website. Kevin Depew, the Editor-in-Chief of Minyanville, interviewed Malekan within days of the cartoon’s debut. Malekan expressed his disgust with what he described as “the Washington-Wall Street Complex” and the revolving door between the financial industry and those agencies tasked to regulate it. David Weigel of Slate interviewed Malekan on November 22, 2010 (eleven days after the cartoon was made). At that point, we learned a bit about the political views of the 30-year-old, former stock trader-turned-real estate manager:

I’m all over the map. Socially, I’m pretty liberal. Economically, I’m fairly free-market oriented. I generally prefer to vote third party, because it’s just good for the country if we get another voice in there. To me none of this is really partisan because things are the same under both parties. Ben Bernanke was appointed by Bush and re-appointed by Obama, so they both have basically the same policies. The problem, really, is that monetary policy is now removed from people in general. People like Bernanke don’t have to get elected. There’s a disconnect between them and the people their decisions are affecting.

One month later, Malekan was interviewed by “Evan” of The Point Blog at the Sam Adams Alliance. On this occasion, the animator explained his decision to put “the” in front of so many proper names, as well as his reference to Ben Bernanke as “The Bernank”. Malekan had this to say about the popularity of the cartoon:

To be fully honest, I had no idea this would get the wide audience that it did. Initially when I made it, it was to explain it to a select group of friends of mine. And any other straggler that happened to see it, and I never thought that would be over 3 million people. But, the main reason was cause I think monetary policy is important to everybody because it’s monetary policy. Unlike fiscal policy or regulation, monetary policy, because of the way it impacts interest rates and the dollar, impacts every single person that buys and sells and earns dollars. So I think it’s something that everybody should be paying attention to, but most people don’t because it’s not ever presented to them in a way they could hope to understand it.

Omid Malekan produced another helpful cartoon on January 28. The new six-minute clip, “Bank Bailouts Explained” provides the viewer with an understanding of what many of us know as Maiden Lane III – as well as how the other “backdoor bailouts” work, including the true cost of Zero Interest Rate Policy (ZIRP) to the taxpayers. This cartoon is important because it can disabuse people of the propaganda based on the claim that the Wall Street megabanks – particularly Goldman Sachs – owe the American taxpayers nothing because they repaid the TARP bailouts. I discussed this obfuscation back on November 26, 2009:

For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism. A recent example came to us from James Stewart of The New Yorker. Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008. Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown. (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program. The acronym for that job title is SIGTARP.) In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”. That was a pretty weak start. Stewart went on to imply that the SIGTARP report refuted the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations. Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”. One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government. Here’s that passage from the SIGTARP report:

When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity. These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008. AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY. The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.

FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets. After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest. After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.

The end result was a $12.9 billion gift to “The Goldman Sachs”.

Thanks to Mr. Malekan, we now have a cartoon that explains how all of AIG’s counterparties were bailed out at taxpayer expense, along with an informative discourse about the other “backdoor bailouts”.

Omid Malekan has his own website here. You should make a point of regularly checking in on it, so you can catch his next cartoon before someone takes the opportunity to spoil all of the jokes for you. Enjoy!

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