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The Smell Of Rotting TARP

September 16th, 2010 Posted in Uncategorized

Sep, 16 2010

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September 16, 2010

I never liked the TARP program. As we approach the second anniversary of its having been signed into law by President Bush, we are getting a better look at how really ugly it has been. Marshall Auerback picked up a law degree from Corpus Christi College, Oxford University in 1983 and currently serves as a consulting strategist for RAB Capital Plc in addition to being an economic consultant to PIMCO. Mr. Auerback recently wrote a piece for the Naked Capitalism website in response to a posting by Ben Smith at Politico. Smith’s piece touted the TARP program as a big success, with such statements as:

The consensus of economists and policymakers at the time of the original TARP was that the U.S. government couldn’t afford to experiment with an economic collapse. That view in mainstream economic circles has, if anything, only hardened with the program’s success in recouping the federal spending.

Marshall Auerback’s essay, rebutting Ben Smith’s piece, was entitled, “TARP Was Not a Success — It Simply Institutionalized Fraud”. Mr. Auerback began his argument this way:

Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?

After pointing out that “Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments”, Mr. Auerback concluded by enumerating the steps followed to create an illusion of viability for those “zombie banks”:

Both the Bush and Obama administration followed a three-part strategy towards our zombie banks: (1) cover up the losses through (legalized) accounting fraud, (2) launch an “everything is great” propaganda campaign (the faux stress tests were key to this tactic and Ben Smith perpetuates this nonsense in his latest piece on TARP), and (3) provide a host of secret taxpayer subsidies to the systemically dangerous institutions (the so-called “too big to fail” banks). This strategy is the opposite of what the Swedes and Norwegians did during their banking crisis in the 1990s, which remains the template on a true financial success.

Despite this sleight-of-hand by our government, the Moment of Truth has arrived. Alistair Barr reported for MarketWatch that it has finally become necessary for the Treasury Department to face reality and crack down on the deadbeat banks that are not paying back what they owe as a result of receiving TARP bailouts. That’s right. Despite what you’ve heard about what a great “investment” the TARP program supposedly has been, there is quite a long list of banks that cannot boast of having paid back the government for their TARP bailouts. (Don’t forget that although Goldman Sachs claims that it repaid the government for what it received from TARP, Goldman never repaid the $13 billion it received by way of Maiden Lane III.) The MarketWatch report provided us with this bad news:

In August, 123 financial institutions missed dividend payments on securities they sold to the Treasury Department under the Troubled Asset Relief Program, or TARP. That’s up from 55 in November 2009, according to Keefe, Bruyette & Woods.

More important — of those 123 financial institutions, seven have never made any TARP dividend payments on securities they sold to the Treasury. Those seven institutions are: Anchor Bancorp Wisconsin, Blue Valley Ban Corp, Seacoast Banking Corp., Lone Star Bank, OneUnited Bank, Saigon National Bank and United American Bank. The report included this point:

Saigon National is the only institution to have missed seven consecutive quarterly TARP dividend payments. The other six have missed six consecutive payments, KBW noted.

The following statement from the MarketWatch piece further undermined Ben Smith’s claim that the TARP program was a great success:

Most of the big banks have repaid the TARP money they got and the Treasury has collected about $10 billion in dividend payments from the effort. However, the rising number of smaller banks that are struggling to meet dividend payments shows the program hasn’t been a complete success.

Of course, the TARP program’s success (or lack thereof) will be debated for a long time. At this point, it is important to take a look at the final words from the “Conclusion” section (at page 108) of a document entitled, September Oversight Report (Assessing the TARP on the Eve of its Expiration), prepared by the Congressional Oversight Panel. (You remember the COP – it was created to oversee the TARP program.) That parting shot came after this observation at page 106:

Both now and in the future, however, any evaluation must begin with an understanding of what the TARP was intended to do. Congress authorized Treasury to use the TARP in a manner that “protects home values, college funds, retirement accounts, and life savings; preserves home ownership and promotes jobs and economic growth; [and] maximizes overall returns to the taxpayers of the United States.” But weaknesses persist. Since EESA was signed into law in October 2008, home values nationwide have fallen. More than seven million homeowners have received foreclosure notices. Many Americans’ most significant investments for college and retirement have yet to recover their value. At the peak of the crisis, in its most significant acts and consistent with its mandate in EESA, the TARP provided critical support at a time in which confidence in the financial system was in freefall. The acute crisis was quelled. But as the Panel has discussed in the past, and as the continued economic weakness shows, the TARP’s effectiveness at pursuing its broader statutory goals was far more limited.

The above-quoted passage, as well as these final words from the Congressional Oversight Panel’s report, provide a greater degree of candor than what can be seen in Ben Smith’s article:

The TARP program is today so widely unpopular that Treasury has expressed concern that banks avoided participating in the CPP program due to stigma, and the legislation proposing the Small Business Lending Fund, a program outside the TARP, specifically provided an assurance that it was not a TARP program. Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high. The program’s unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future.

No doubt.

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Geithner Watch

August 19th, 2010 Posted in Uncategorized

Aug, 19 2010

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August 19, 2010

It’s that time once again. The Treasury Department has launched another “charm offensive” – and not a moment too soon. “Turbo” Tim Geithner got some really bad publicity at the Daily Beast website by way of a piece by Philip Shenon. The story concerned the fact that a man named Daniel Zelikow — while in between revolving door spins at JP Morgan Chase — let Geithner live rent-free in Zelikow’s $3.5 million Washington townhouse, during Geithner’s first eight months as Treasury Secretary. Zelikow (who had previously worked for JP Morgan Chase from 1999 until 2007) was working at the Inter-American Development Bank at the time. The Daily Beast described the situation this way:

At that time, Geithner was overseeing the bailout of several huge Wall Street banks, including JPMorgan, which received $25 billion in federal rescue funds from the TARP program.

Zelikow, a friend of Geithner’s since they were classmates at Dartmouth College in the early 1980s, begins work this month running JPMorgan’s new 12-member International Public Sector Group, which will develop foreign governments as clients.

* * *

Stephen Gillers, a law professor at New York University who is a specialist in government ethics and author of a leading textbook on legal ethics, described Geithner’s original decision to move in with Zelikow last year as “just awful” — given the conflict-of-interest problems it seemed to create.

He tells The Daily Beast that Geithner now needs to avoid even the appearance of assisting JPMorgan in any way that suggested a “thank-you note” to Zelikow in exchange for last year’s free rent.

“He needs to be purer than Caesar’s wife — purer than Caesar’s whole family,” Gillers said of the Treasury secretary.

The Daily Beast story came right on the heels of Matt Taibbi’s superlative article in Rolling Stone, exposing the skullduggery involved in removing all the teeth from the financial “reform” bill. Taibbi did not speak kindly of Geithner:

If Obama’s team had had their way, last month’s debate over the Volcker rule would never have happened. When the original version of the finance-reform bill passed the House last fall – heavily influenced by treasury secretary and noted pencil-necked Wall Street stooge Timothy Geithner – it contained no attempt to ban banks with federally insured deposits from engaging in prop trading.

Just when it became clear that Geithner needed to make some new friends in the blogosphere, another conclave with financial bloggers took place on Monday, August 16. The first such event took place last November. I reviewed several accounts of the November meeting in a piece entitled “Avoiding The Kool -Aid”. Since that time, Treasury has decided to conduct such meetings 4 – 6 times per year. The conferences follow an “open discussion” format, led by individual senior Treasury officials (including Turbo Tim himself) with three presenters, each leading a 45-minute session. A small number of financial bloggers are invited to attend. Some of the bloggers who were unable to attend last November’s session were sorry they missed it. The August 16 meeting was the first one I’d heard about since the November event. The following bloggers attended the August 16 session: Phil Davis of Phil’s Stock World, Yves Smith of Naked Capitalism, John Lounsbury for Ed Harrison’s Credit Writedowns, Michael Konczal of Rortybomb, Steve Waldman of Interfluidity, as well as Tyler Cowen and Alex Tabarrok of Marginal Revolution. As of this writing, Alex Tabarrok and John Lounsbury were the only attendees to have written about the event. You can expect to see something soon from Yves Smith of Naked Capitalism.

At this juncture, the effort appears to have worked to Geithner’s advantage, since he made a favorable impression on Alex Tabarrok, just as he had done last November with Tabarrok’s partner at Marginal Revolution, Tyler Cowen:

As Tyler said after an earlier visit, Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.

It will be interesting to see whether the upcoming accounts of the meeting continue to provide Geithner with the image makeover he so desperately needs.

Alex Tabarrok, American capitalism, bank bailout, banking crisis, banking lobby, Barack Obama, blog, centrist, Commentary, comprehensive bank bailout plan, conflict of interest, Congress, conservative, Credit Writedowns, crony capitalism, Daniel Zelikow, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, economics, economists, Federal Reserve, financial bloggers, financial crisis, financial reform, Financial Stability Plan, Geithner Watch, Goldman Sachs, government guarantees, image makeover, insolvent banks, Interfluidity, investment banks, John Burke, John Lounsbury, John T Burke Jr, JP Morgan Chase, liberal, lobbyists, Marginal Revolution, Matt Taibbi, Michael Konczal, moral hazard, Naked Capitalism, New York Stock Exchange, News, Obama Administration, Obama Presidency, Opinion, Phil Davis, Phil's Stock World, Philip Shenon, Political, Politics, President of the United States, proprietary trading, regulatory capture, Republican, Republican Party, Rolling Stone, Rortybomb, securities, self-dealing insiders, socialized loss and privatized gain, Stephen Gillers, Steve Waldman, stock markets, stress tests, systemic risk, systemic risk regulator, TARP, TARP bailout, taxpayer subsidies to investment banks, taxpayers, the center lane, The Daily Beast, the economy, The White House, thecenterlane, Timothy Geithner, too big to fail, toxic assets, transparency, Treasury Department, troubled assets, Turbo Tim Geithner, Tyler Cowen, United States Senate, United States Treasury, Wall Street, Wall Street lobbyists, wealth transfer, welfare for the rich, Yves Smith, zombie banks

Getting Rolled By Wall Street

August 5th, 2010 Posted in Uncategorized

Aug, 05 2010

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August 5, 2010

For the past few years, investors have been flocking to exchange-traded funds (ETFs) as an alternative to mutual funds, which often penalize investors for bailing out less than 90 days after buying in. The ETFs are traded on exchanges in the same manner as individual stocks. Investors can buy however many shares of an ETF as they desire, rather than being faced with a minimum investment as required by many mutual funds. Other investors see ETFs as a less-risky alternative than buying individual stocks, since some funds consist of an assortment of stocks from a given sector.

The most recent essay by one of my favorite commentators, Paul Farrell of MarketWatch, is focused on the ETFs that are based on commodities, rather than stocks. As it turns out, the commodity ETFs have turned out to be yet another one of Wall Street’s weapons of mass financial destruction. Paul Farrell brings the reader’s attention to a number of articles written on this subject – all of which bear a theme similar to the title of Mr. Farrell’s piece: “Commodity ETFs: Toxic, deadly, evil”.

Mr. Farrell discussed a recent article from Bloomberg BusinessWeek, exposing the hazards inherent in commodity ETFs. That article began by discussing the experience of a man who invested $10,000 in an ETF called the U.S. Oil Fund (ticker symbol: USO), designed to track the price of light, sweet crude oil. The investor’s experience became a familiar theme for many who had bought into commodity ETFs:

What happened next didn’t make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent. What was going on?

What was going on was something called “contango”. The BusinessWeek article explained it this way:

Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff. It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs. When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise they would have to take delivery of billions of dollars’ worth of raw materials. When they buy the more expensive contracts — more expensive thanks to contango — they lose money for their investors. Contango eats a fund’s seed corn, chewing away its value.

* * *

Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments. Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense. Unlike ETF managers, the professionals don’t trade at set times. They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures. The strategy is called “pre-rolling.”

“I make a living off the dumb money,” says Emil van Essen, founder of an eponymous commodity trading company in Chicago. Van Essen developed software that predicts and profits from pre-rolling. “These index funds get eaten alive by people like me,” he says.

A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials, according to Bloomberg data.

* * *

Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks. “You walk into a casino, you expect to lose money,” says Greg Forero, former director of commodities trading at UBS (UBS). “It’s the same with these products. You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.”

Another problem caused by commodity ETFs is the havoc they create by raising prices of consumer goods – not because of a supply and demand effect – but purely by financial speculation:

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, N.Y., to fire five of its 32 employees. “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Paul Farrell also brought our attention to an article entitled “ETFs Gone Wild” to highlight the hazards these products create for the entire financial system:

In Bloomberg Markets’ “ETFs Gone Wild,” investors are warned that many ETFs are “stuffed with exotic derivatives,” at risk of becoming “the next financial time bomb.” In short, thanks to ETFs, Wall Street is already creating a dangerous new kind of global weapon of mass destruction — a bomb primed to detonate like the 2000 dot-coms, the 2008 subprimes — and detonation is dead ahead.

Mr. Farrell’s essay included a discussion of a Rolling Stone article by McKenzie Funk, describing the exploits of Phil Heilberg, a former AIG commodity trader. The Rolling Stone piece demonstrated how commodity ETFs are just the latest weapon used to advance “Chaos Capitalism”:

And yet, as Funk puts it: “Heilberg’s bet on chaos is beginning to play out on the streets.” The toxic trail of commodity ETFs is already proving to be deadly, starving thousands worldwide, while the new Capitalists of Chaos only see incredible profit opportunities, as they make huge bets that they’ll get even richer in the next round of catastrophes, disasters, poverty, starvation and wars.

Bottom line: Commodity ETF/WMDs are mutating into a toxic pandemic fueled (and protected by) the insatiable greed of banks, traders and politicians whose brains are incapable of giving up their profit machine, won’t until it implodes and self-destructs. The Wall Street Banksters have no sense of morals, no ethics, no soul, no goal in life other than getting very rich, very fast. They care nothing of democracy, civilization or the planet.

Don’t count on the faux financial “reform” bill to remedy any of the problems created by commodity ETFs. As the BusinessWeek article pointed out, the Commodity Futures Trading Commission is going to have its hands full:

How much the new law will help remains to be seen, says Jill E. Sommers, one of the agency’s five commissioners, because Congress still needs to appropriate funds and write guidelines for implementation and enforcement.

Let’s not overlook the fact that those “guidelines” are going to be written by industry lobbyists. The more things change — the more they remain the same.

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The End

July 29th, 2010 Posted in Uncategorized

Jul, 29 2010

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July 29, 2010

The long-awaited economic recovery seems to be coming to a premature end. For over a year, many pundits have been anticipating a “jobless recovery”. In other words: don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway. These hopes have been buoyed by the widespread corporate tactic of cost-cutting (usually by mass layoffs) to gin-up the bottom line in time for earnings reports. This helps inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery. The “jobless recovery” advocates ignore the extent to which the American economy is consumer-driven. If those consumers don’t have jobs, they aren’t going to be spending money.

Although many observers seem to take comfort in the assumption that the jobless rate is below ten percent, many are beginning to question the validity of the statistics to that effect provided by the Department of Labor. AOL’s Daily Finance website provided this commentary on the June, 2010 unemployment survey conducted by Raghavan Mayur, president of TechnoMetrica Market Intelligence:

The June poll turned up 27.8% of households with at least one member who’s unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation. That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department’s jobless numbers.

* * *

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled “The Unemployment Myth,” that the government had “cooked the books” by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low. At the time, Goolsbee was a professor at the University of Chicago. When asked whether Goolsbee still believes the government undercounts unemployment, a White House spokeswoman said Goolsbee wasn’t available to comment.

Such undercounting of unemployment can be an enormously dangerous exercise today. It could lead some lawmakers to underestimate the gravity of the labor market’s problems and base their policymaking on a far-less-grim picture than actually exists. Economically, and socially, that would make a bad situation much worse for America.

“The implications of such undercounting is that policymakers aren’t going to be thinking as big as they should be,” says Ginsburg, also a professor emeritus of economics at Brooklyn College. “It also means that [consumer] demand is not going to be there, because the income from people who are employed isn’t going to be there.”

Frank Aquila of Sullivan & Cromwell recently wrote an article for Bloomberg BusinessWeek, discussing the possibility that we could be headed into the second leg of a “double-dip” recession:

The sputtering economy and talk of a possible second recession have certainly rattled an already fragile American consumer. Consumer confidence is now at its lowest level in a year, and consumer spending tumbled in May and June. Since consumer spending accounts for more than two-thirds of U.S. economic growth, a nervous consumer is not a good omen for a robust recovery.

Job creation is a key factor in increasing consumer confidence. While economists estimate that we need economic growth of 4 percent or more to stimulate significant job creation, the economy has grown at only about 2 percent to 3 percent, with a slowdown expected in the second half.

* * *

With governments struggling under the weight of ballooning budget deficits and businesses waiting for the return of sustained growth, it is the American consumer who will have to lift the global economy out of the mire. Given the recent news and current consumer sentiment, that appears to be an unlikely prospect in the near term.

The same government that found it necessary to provide corporate welfare to those “too big to fail” financial institutions has now become infested with creatures described by Barry Ritholtz as “deficit chicken hawks”. The deficit chicken hawks are now preaching the gospel of “austerity” as an excuse for roadblocking any further efforts to use any form of stimulus to end the economic crisis. One of the gurus of the deficit chicken hawks is economic historian Niall Ferguson. Because Ferguson is just an economic historian, a real economist – Brad DeLong — had no trouble exposing the hypocrisy exhibited by the Iraq war cheerleader, while revisiting an article Ferguson had written for The New York Times, back in 2003. Matthew Yglesias had even more fun compiling and publishing a Ferguson (2003) vs. Ferguson (2010) debate.

At The Daily Beast, Sir Harry Evans emphasized how the sudden emphasis on “austerity” is worse than hypocrisy:

As for the banks, one of the obscenities of our time is that so many in the financial community who owe their survival to the massive taxpayer bailouts, not only rewarded themselves with absurd bonuses, but now have the gall to sport the plumage of deficit hawks. The unemployed? Let them eat cake, the day after tomorrow.

Gerald Celente, publisher of The Trends Journal, wrote a great essay for The Daily Reckoning website entitled, “Let Them Eat Losses”. He pointed out how the kleptocracy violated and destroyed the “very essence of functioning capitalism”. Worse yet, our government betrayed us by forcing the taxpayers “to finance the failed financiers”:

No individual, business, institution, nation or empire is too-big-to-fail. Had true capitalism been allowed to function unimpeded, the bloated, over-extended, inefficient and gluttonous firms and industries would have failed. There would have been hardships and losses but, finally rid of its financial tapeworms, the purged system could be restored to health.

No “ism” or “ology” — regardless of purity of intent or moral foundation — is immune to corruption and abuse. While capitalism itself is being blamed for the excesses that brought on financial chaos, prior to the most recent gambling binge, in tandem with the blanket dismantling of safeguards and the overt takeover of Washington by Wall Street, capitalism was responsible for creating one of the world’s most successful and universally admired societies.

As I discussed on July 8, because President Obama lacked the political courage to advance an effective economic stimulus package last year, the effects of his “semi-stimulus” have now abated and we are headed into another recession. Reuters reported on July 27 that Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor’s S&P/Case-Shiller Index, gave us this unsettling macroeconomic prognostication:

“For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent,” Shiller said.

“I actually expect it.”

During the last few months of 2009, did you ever think that someday you would be looking back at that time as “the good old days”?

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Wading In Quicksand

July 12th, 2010 Posted in Uncategorized

Jul, 12 2010

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July 12, 2010

The recent Gallup Poll, revealing that President Obama’s approval rating has dropped to 38% among independent voters, has resulted in an outpouring of (unsolicited) advice offered to the President by numerous commentators. As I pointed out in my last posting, Matt Miller’s July 8 Washington Post article set out a really great plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”. Nevertheless, Mr. Miller’s piece was not written as advice to the President, as some of the more recent articles have been. I recently read one of those “advice to Obama” pieces that the President would do well to ignore. It was written by a former Bill Clinton pollster named Douglas Schoen for the New York Daily News. Schoen’s plan focused on this premise:

The independent swing voters who hold the fate of the Democratic Party in their hands are looking for candidates and parties that champion fiscal discipline, limited government, deficit reduction and a free market, pro-growth agenda.

Not true. The independent swing voters are disappointed with Obama because the candidate’s promise of “hope and change” turned out to be a “bait and switch” scam to sell the public more cronyism. At this point, it appears as though the entire Democratic Party will suffer the consequences in the 2010 elections.

The shortcomings of the Obama administration were more accurately summed up by Robert Kuttner for The Huffington Post:

But even a dire economic crisis and a Republican blockade of needed remedies have not fundamentally altered the temperament, trajectory, or tactical instincts of this surprisingly aloof president. He has not been willing or able to use his office to move public opinion in a direction that favors more activism. Nor has Obama, for the most part, seized partisan and ideological opportunities that hapless Republicans and clueless corporate executives keep lobbing him like so many high, hanging curve balls.

* * *

But despite our hopes, Barack Obama is unlikely to offer bolder policies or give tougher speeches any time soon, even as threats of a double-dip recession and an electoral blowout in November loom. This is just not who he is. If the worst economic crisis in eight decades were going to change his assumptions about how to govern and how to lead, it would have done so by now.

* * *

I have also watched Obama’s loyal opposition –people like Joseph Stiglitz, Paul Krugman, Elizabeth Warren, Sheila Bair — be proven right by events, again and again. So there are alternative paths, as there always are. But the White House has disdained them.

And I’ve noticed that it is the populists among Democratic elected officials who are best defended against defeat in November. That tells you something, too. Why should the project of rallying the common people against elites in Washington, on Wall Street, and in the media, be ceded to the far right? But that is what this White House is doing.

E. J. Dionne of The Washington Post demonstrated a good understanding of why independent voters have become fed up with Obama and how this has ballooned into a larger issue of anti-Democrat sentiment:

On the one hand, independent voters are turning on them. Democratic House candidates enjoyed a 51 percent to 43 percent advantage over Republicans in 2008. This time, the polls show independents tilting Republican by substantial margins.

But Democrats are also suffering from a lack of enthusiasm among their own supporters. Poll after poll has shown that while Republicans are eager to cast ballots, many Democrats seem inclined to sit out this election.

The apathy of the rank-and-file Democrats and the alienation of the independents is best explained by the Administration’s faux-reform agenda. The so-called healthcare “reform” bill turned out to be a giveaway to big pharma and the health insurance industry. Worse yet, the financial “reform” bill not only turned out to be a hoax – it did nothing to address systemic risk. In other words, if one of those five “untouchable” Wall Street banks fails, it will take the entire financial system down with it — in the absence of another huge, trillion-dollar bailout from the taxpayers.

Mike Konczal of the Roosevelt Institute documented the extent to which Obama’s Treasury Department undermined the financial reform bill at every step:

Examples? Off the top of my head, ones with a paper trail: They fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716 removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal. spinning out swap desks,

You can agree or disagree with any number of those items, think they are brilliant or dumb, reasonable or a pipe dream. But what is worth noting is that they always end up leaving their fingerprints on the side of less structural reform and in favor of the status quo on Wall Street.

The Obama administration is apparently operating from the mistaken perspective that the voters are too stupid to see through their antics. Sending Joe Biden to appear on Jay Leno’s Tonight Show to dissuade the public from considering the motives of politicians will not solve the administration’s problem of sinking approval ratings.

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Rare Glimpses Of Honesty And Sanity

July 1st, 2010 Posted in Uncategorized

Jul, 01 2010

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July 1, 2010

Too many of the commentaries we see these days are either motivated by or calculated to promote hysteria. When someone expresses a rational point of view or an honest look at the skullduggery going on in Washington, it’s as refreshing as a cold beer on a hot, summer day.

With so much panic over sovereign debt and budget deficits afflicting the consensual mood, it’s always great to read a piece by someone willing to analyze the situation from a perspective based on facts instead of fear. Brett Arends wrote a great piece for MarketWatch, dissecting the debt panic and looking at the data to be considered by those implementing public policy on this issue. His essay focused on “the three biggest lies about the economy”: that unemployment is below ten percent, that the markets are panicking about the deficit and that the United States is sliding into socialism. Here is some of what he had to say:

Most people have no idea what’s really going on in the economy. They’re living on spin, myths and downright lies. And if we don’t know the facts, how can we make intelligent decisions?

High unemployment exerts a huge deflationary force on the economy. Beyond that, the income taxes those unemployed citizens used to pay are no longer helping to pick up the tab for our bloated budget. Mr. Arends emphasized the importance of looking at the real unemployment rate – what is referred to as U6 – which includes those people deliberately disregarded when counting the “unemployed”:

For example it counts discouraged job seekers, and those forced to work part-time because they can’t get a full-time job.

That rate right now is 16.6%, just below its recent high and twice the level it was a few years ago.

* * *

Consider, for example, the situation among men of prime working age. An analysis of data at the U.S. Labor Department shows that there are 79 million men in America between the ages of 25 and 65. And nearly 18 million of them, or 22%, are out of work completely. (The rate in the 1950s was less than 10%.) And that doesn’t even count those who are working part-time because they can’t get full-time work. Add those to the mix and about one in four men of prime working age lacks a full-time job.

In exploding the myth about claimed market panic concerning the debt, Arends dug back into his arsenal of common sense, explaining what would happen if the markets were panicked:

. . . the interest rate on government bonds would be skyrocketing. That’s what happens with risky debt: Lenders demand higher and higher interest payments to compensate them for the dangers.

But the rates on U.S. bonds have been plummeting recently. The yield on the 30-year Treasury bond is down to just 4%. By historic standards that’s chickenfeed. Panicked? The bond markets are practically snoring.

The specious claims about domestic socialism don’t really deserve a response, but here is how Arends dealt with that narrative:

Meanwhile, federal spending, about 25% of the economy this year, is expected to fall to about 23% by 2013. In 1983, under Ronald Reagan, it hit 23.5%. In the early 1990s it was around 22%. Some socialism.

Another prevalent false narrative being circulated lately (particularly by President Obama and his administration) concerns the hoax known as the “financial reform” bill. Wisconsin Senator Russ Feingold gave us a rare, disgusted insider’s look at how Wall Street was able to get what it wanted from its lackeys on Capitol Hill:

Since the Senate bill passed, I have had a number of conversations with key members of the administration, Senate leadership and the conference committee that drafted the final bill. Unfortunately, not once has anyone suggested in those conversations the possibility of strengthening the bill to address my concerns and win my support. People want my vote, but they want it for a bill that, while including some positive provisions, has Wall Street’s fingerprints all over it.

In fact, reports indicate that the administration and conference leaders have gone to significant lengths to avoid making the bill stronger.

Lest we forget that the financial crisis of 2008 was caused by the antics of cretins such as “Countrywide Chris” Dodd, Senator Feingold’s essay mentioned that sleazy chapter in Senate history to put this latest disgrace in the proper perspective:

Many of the critical actors who shaped this bill were present at the creation of the financial crisis. They supported the enactment of Gramm-Leach-Bliley, deregulating derivatives, even the massive Interstate Banking bill that helped grease the “too big to fail” skids. It shouldn’t be a surprise to anyone that the final version of the bill looks the way it does, or that I won’t fall in line with their version of “reform.”

As I discussed in “Your Sleazy Government at Work”, the voters will not forget about the Democrats (including President Obama) who undermined financial reform legislation, while pretending to advance it. The Democratic Party has until early 2012 to face up to the fact that their organization would be better off supporting a Presidential candidate with the integrity of Russ Feingold or Maria Cantwell if they expect to maintain control over the Executive branch of our government.

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Financial Reform Bill Exposed As Hoax

June 28th, 2010 Posted in Uncategorized

Jun, 28 2010

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June 28, 2010

You don’t have to look too far to find damning criticism of the so-called financial “reform” bill. Once the Kaufman-Brown amendment was subverted (thanks to the Obama administration), the efforts to solve the problem of financial institutions’ growth to a state of being “too big to fail” (TBTF) became a lost cause. Dylan Ratigan, who had been fuming for a while about the financial reform charade, had this to say about the product that emerged from reconciliation on Friday morning:

It means that the same people who brought you these horrible changes — rising wealth discrepancy, massive unemployment and a crumbling infrastructure – have now further institutionalized the policies that will keep the causes of these problems firmly in place.

The best trashing of this bill came from Tyler Durden at Zero Hedge:

Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can’t even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.

* * *

In other words, the greatest theatrical production of the past few months is now over, it has achieved nothing, it will prevent nothing, and ultimately the financial markets will blow up yet again, but not before the Teleprompter in Chief pummels the idiot public with address after address how he singlehandedly was bribed, pardon, achieved a historic event of being the only president to completely crumble under Wall Street’s pressure on every item that was supposed to reign in the greatest risktaking generation (with Other People’s Money) in history.

Robert Lenzner of Forbes focused his criticism of the bill on the fact that nothing was done to limit the absurd leverage used by the banks to borrow against their capital. After all, at the January 13 hearing of the Financial Crisis Inquiry Commission, Lloyd Bankfiend of Goldman Sachs and JP Morgan’s Dimon Dog admitted that excessive leverage was a key problem in causing the financial crisis. As I discussed in “Lev Is The Drug”:

Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”.

At Forbes, Robert Lenzner discussed the ugly truth about how the limits on leverage were excised from this bill:

The capitulation on this matter of leverage is extraordinary evidence of Wall Street’s power to influence Congress through its lobbying dollars. It is another example of the public servants serving the agents of finance capitalism. After pumping in gobs of sovereign credit to replace the credit that had been wiped out and replace the supply of credit to the economic system, a weak reform bill will just be an invitation to drum up the leverage that caused the crisis in the first place.

Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit). The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study. The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban. Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome. Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact. Jim Jubak exposed the strategy employed by the lobbyists:

But lobbying Congress is only part of the game. Congress writes the laws, but it leaves it up to regulators to write the rules. In a mid-June review of the text of the financial-reform legislation, the Chamber of Commerce counted 399 rule-makings and 47 studies required by lawmakers.

Each one of these, like the proposed de minimus exemption of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input. But the financial-industry lobbyists who once worked at the Federal Reserve, the Treasury, the Securities and Exchange Commission, the Commodities Futures Trading Commission or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules. Need help understanding a complex issue? A regulator has the name of a former colleague now working as a lobbyist in an e-mail address book. Want to share an industry point of view with a rule-maker? Odds are a lobbyist knows whom to call to get a few minutes of face time.

At the Naked Capitalism website, Yves Smith served up some more negative reactions to the bill, along with her own cutting commentary:

I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Administration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.

* * *

So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.

The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks. And the consumer protection authority was substantially watered down. Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on.

So there you have it. The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective. Once this 2,000-page farce is signed into law, watch for the reactions. It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.

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Demolition Derby

June 24th, 2010 Posted in Uncategorized

Jun, 24 2010

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June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell). Barry Ritholtz calls them the “deficit chicken hawks”. The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”, in reference to that same (deficit chicken hawk) group. The Reformed Broker described them this way:

. . . this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them. Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it: into a Demolition Derby. The first smash-up in this derby was to sabotage any potential recovery in the job market. Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through. Removing fiscal stimulus too soon risks derailing the recovery. Anti-deficit sentiment has already hampered a push for further stimulus to support job growth. Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011. Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits. Because the unemployed don’t have any money to bribe legislators, they make a great target. David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle. You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today. Unemployment is 9.7 percent. Inflation in recent months has been zero. States are cutting their budgets. Congress is balking at spending the money to prevent state layoffs. The Fed is standing pat, too. Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk: too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis. It involves sabotaging the economic recovery as well. In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak. The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts can impair economic recovery:

In the US, we must start to get our fiscal house in order. But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with. If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially. And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming: a cataclysmic crash. As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns: “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

* * *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair.”

So it is written. The Demolition Derby shall end in disaster.

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Still Wrong After All These Years

June 21st, 2010 Posted in Uncategorized

Jun, 21 2010

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June 21, 2010

I’m quite surprised by the fact that people continue to pay serious attention to the musings of Alan Greenspan. On June 18, The Wall Street Journal saw fit to publish an opinion piece by the man referred to as “The Maestro” (although – these days – that expression is commonly used in sarcasm). The former Fed chairman expounded that recent attempts to rein in the federal budget are coming “none too soon”. Near the end of the article, Greenspan made the statement that will earn him a nomination for TheCenterLane.com’s Jackass of the Year Award:

I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced.

John Mauldin recently provided us with a thorough explanation of why Greenspan’s statement is wrong:

There are loud calls in the US and elsewhere for more fiscal constraints. I am part of that call. Fiscal deficits of 10% of GDP is a prescription for disaster. As we have discussed in previous letters, the book by Rogoff and Reinhart (This Time is Different) clearly shows that at some point, bond investors start to ask for higher rates and then the interest rate becomes a spiral. Think of Greece. So, not dealing with the deficit is simply creating a future crisis even worse than the one we just had.

But cutting the deficit too fast could also throw the country back in a recession. There has to be a balance.

* * *

That deficit reduction will also reduce GDP. That means you collect less taxes which makes the deficits worse which means you have to make more cuts than planned which means lower tax receipts which means etc. Ireland is working hard to reduce its deficits but their GDP has dropped by almost 20%! Latvia and Estonia have seen their nominal GDP drop by almost 30%! That can only be characterized as a depression for them.

Robert Reich’s refutation of Greenspan’s article was right on target:

Contrary to Greenspan, today’s debt is not being driven by new spending initiatives. It’s being driven by policies that Greenspan himself bears major responsibility for.

Greenspan supported George W. Bush’s gigantic tax cut in 2001 (that went mostly to the rich), and uttered no warnings about W’s subsequent spending frenzy on the military and a Medicare drug benefit (corporate welfare for Big Pharma) — all of which contributed massively to today’s debt. Greenspan also lowered short-term interest rates to zero in 2002 but refused to monitor what Wall Street was doing with all this free money. Years before that, he urged Congress to repeal the Glass-Steagall Act and he opposed oversight of derivative trading. All this contributed to Wall Street’s implosion in 2008 that led to massive bailout, and a huge contraction of the economy that required the stimulus package. These account for most of the rest of today’s debt.

If there’s a single American more responsible for today’s “federal debt explosion” than Alan Greenspan, I don’t know him.

But we can manage the Greenspan Debt if we get the U.S. economy growing again. The only way to do that when consumers can’t and won’t spend and when corporations won’t invest is for the federal government to pick up the slack.

This brings us back to my initial question of why anyone would still take Alan Greenspan seriously. As far back as April of 2008 – five months before the financial crisis hit the “meltdown” stage — Bernd Debusmann had this to say about The Maestro for Reuters, in a piece entitled, “Alan Greenspan, dented American idol”:

Instead of the fawning praise heaped on Greenspan when the economy was booming, there are now websites portraying him in dark colors. One site is called The Mess That Greenspan Made, another Greenspan’s Body Count. Greenspan’s memoirs, The Age of Turbulence, prompted hedge fund manager William Fleckenstein to write a book entitled Greenspan’s Bubbles, the Age of Ignorance at the Federal Reserve. It’s in its fourth printing.

The day after Greenspan’s essay appeared in The Wall Street Journal, Howard Gold provided us with this recap of Greenspan’s Fed chairmanship in an article for MarketWatch:

The Fed chairman’s hands-off stance helped the housing bubble morph into a full-blown financial crisis when hundreds of billions of dollars’ worth of collateralized debt obligations, credit default swaps, and other unregulated derivatives — backed by subprime mortgages and other dubious instruments — went up in smoke.

Highly leveraged banks that bet on those vehicles soon were insolvent, too, and the Fed, the U.S. Treasury and, of course, taxpayers had to foot the bill. We’re still paying.

But this was not just a case of unregulated markets run amok. Government policies clearly made things much worse — and here, too, Greenspan was the culprit.

The Fed’s manipulation of interest rates in the middle of the last decade laid the groundwork for the most fevered stage of the housing bubble. To this day, Greenspan, using heavy-duty statistical analysis, disputes the role his super-low federal funds rate played in encouraging risky behavior in housing and capital markets.

Among the harsh critiques of Greenspan’s career at the Fed, was Frederick Sheehan’s book, Panderer to Power. Ryan McMaken’s review of the book recently appeared at the LewRockwell.com website – with the title, “The Real Legacy of Alan Greenspan”. Here is some of what McMacken had to say:

. . . Panderer to Power is the story of an economist whose primary skill was self-promotion, and who in the end became increasingly divorced from economic reality. Even as early as April 2008 (before the bust was obvious to all), the L.A. Times, observing Greenspan’s post-retirement speaking tour, noted that “the unseemly, globe-trotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”

* * *

Although Greenspan had always had a terrible record on perceiving trends in the economy, Sheehan’s story shows a Greenspan who becomes increasingly out to lunch with each passing year as he spun more and more outlandish theories about hidden profits and productivity in the economy that no one else could see. He spoke incessantly on topics like oil and technology while the bubbles grew larger and larger. And finally, in the end, he retired to the lecture circuit where he was forced to defend his tarnished record.

The ugly truth is that America has been in a bear market economy since 2000 (when “The Maestro” was still Fed chair). In stark contrast to what you’ve been hearing from the people on TV, the folks at Comstock Partners put together a list of ten compelling reasons why “the stock market is in a secular (long-term) downtrend that began in early 2000 and still has some time to go.” This essay is a “must read”. Further undermining Greenspan’s recent opinion piece was the conclusion reached in the Comstock article:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

As always, Alan Greenspan is still wrong. Unfortunately, there are still too many people taking him seriously.

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The Poisonous Bailout

June 10th, 2010 Posted in Uncategorized

Jun, 10 2010

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June 10, 2010

The adults in the room have spoken. The Congressional Oversight Panel – headed by Harvard Law School professor Elizabeth Warren – created to oversee the TARP program, has just issued a report disclosing the ugly truth about the bailout of AIG:

The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace.

Note the present tense in that statement. Not only did the bailout have a poisonous effect on the marketplace at the time –it continues to have a poisonous effect on the marketplace. The 300-page report includes the reason why the AIG bailout continues to have this poisonous effect:

The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.

And that, dear readers, is precisely what the concept of “moral hazard” is all about. It is the reason why we should not continue to allow financial institutions to be “too big to fail”. Bad behavior by financial institutions is encouraged by the Federal Reserve and Treasury with assurance that any losses incurred as a result of that risky activity will be borne by the taxpayers rather than the reckless institutions. You might remember the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009:

. . . you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

With particular emphasis on the AIG bailout, this is what Senator Bunning said to Bernanke:

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated. Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par. In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined. I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut. Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks.

Hugh Son of Bloomberg BusinessWeek explained how the Congressional Oversight Panel’s latest report does not have a particularly optimistic view of AIG’s ability to repay the bailout:

The bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer through swaps or securities lending.

AIG owes about $26.6 billion on the credit line and $49 billion to the Treasury. The company returned to profit in the first quarter, posting net income of $1.45 billion.

‘Strong, Vibrant Company’

“I’m confident you’ll get your money, plus a profit,” AIG Chief Executive Officer Robert Benmosche told the panel in Washington on May 26. “We are a strong, vibrant company.”

The panel said in the report that the government’s prospects for recovering funds depends partly on the ability of AIG to find buyers for its units and on investors’ willingness to purchase shares if the Treasury Department sells its holdings. AIG turned over a stake of almost 80 percent as part of the bailout and the Treasury holds additional preferred shares from subsequent investments.

“While the potential for the Treasury to realize a positive return on its significant assistance to AIG has improved over the past 12 months, it still appears more likely than not that some loss is inevitable,” the panel said.

Simmi Aujla of the Politico reported on Elizabeth Warren’s contention that Treasury and Federal Reserve officials should have attempted to save AIG without using taxpayer money:

“The negotiations would have been difficult and they might have failed,” she said Wednesday in a conference call with reporters. “But the benefits of crafting a private or even a joint public-private solution were so superior to the cost of a complete government bailout that they should have been pursued as vigorously as humanly possible.”

The Treasury and Federal Reserve are now in “damage control” mode, issuing statements that basically reiterate Bernanke’s “panic” excuse referenced in the above-quoted remarks by Jim Bunning.

The release of this report is well-timed, considering the fact that the toothless, so-called “financial reform” bill is now going through the reconciliation stage. Now that Blanche Lincoln is officially the Democratic candidate to retain her Senate seat representing Arkansas – will the derivatives reform provisions disappear from the bill? In light of the information contained in the Congressional Oversight Panel’s report, a responsible – honest – government would not only crack down on derivatives trading but would also ban the trading of “naked” swaps. In other words: No betting on defaults if you don’t have a potential loss you are hedging – or as Phil Angelides explained it: No buying fire insurance on your neighbor’s house. Of course, we will probably never see such regulation enacted – until after he next financial crisis.

AIG, bank bailout, banking crisis, banking lobby, Barack Obama, Ben Bernanke, blog, Bloomberg BusinessWeek, centrist, Commentary, comprehensive bank bailout plan, conflict of interest, Congress, Congressional Oversight Panel, conservative, credit default swaps, crony capitalism, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, economics, economists, Elizabeth Warren, Federal Reserve, financial crisis, financial reform, Financial Stability Plan, Goldman Sachs, government guarantees, Hugh Son, insolvent banks, investment banks, John Burke, John T Burke Jr, liberal, lobbyists, Merrill Lynch, moral hazard, mortgage-backed securities, naked credit default swaps, New York Fed, News, Obama Administration, Obama Presidency, Opinion, over-the-counter derivatives, Phil Angelides, Political, Politico, Politics, President of the United States, regulatory capture, Republican, Republican Party, Robert Benmosche, SEC, securities, Securities and Exchange Commission, Senate Banking Committee, Senator Jim Bunning, Simmi Aujla, socialized loss and privatized gain, systemic risk, TARP, TARP bailout, TARP Inspector General, taxpayer subsidies to investment banks, taxpayers, the center lane, the economy, The Poisonous Bailout, The White House, thecenterlane, Tim Geithner, too big to fail, toxic assets, transparency, Treasury Department, troubled assets, Troubled Assets Relief Program, United States Senate, United States Treasury, Wall Street, Wall Street lobbyists, wealth transfer, welfare for the rich, zombie banks

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The Smell Of Rotting TARP

Geithner Watch

Getting Rolled By Wall Street

The End

Wading In Quicksand

Rare Glimpses Of Honesty And Sanity

Financial Reform Bill Exposed As Hoax

Demolition Derby

Still Wrong After All These Years

The Poisonous Bailout

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