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A Look Ahead

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December 7, 2009

As 2010 approaches, expect the usual bombardment of prognostications from the stars of the info-tainment industry, concerning everything from celebrity divorces to the nuclear ambitions of Iran.   Meanwhile, those of us preferring quality news reporting must increasingly rely on internet-based venues to seek out the views of more trustworthy sources on the many serious subjects confronting the world.  On October 29, I discussed the most recent GMO Quarterly Newsletter from financial wizard Jeremy Grantham and his expectation that the stock market will undergo a

“correction” or drop of approximately 20 percent next year.   Grantham’s paper inspired others to ponder the future of the troubled American economy and the overheated stock market.  Mark Hulbert, editor of The Hulbert Financial Digest, wrote a piece for the December 5 edition of The New York Times, picking up on Jeremy Grantham’s stock performance expectations.  Hulbert noted Grantham’s continuing emphasis on “high-quality, blue chip” stocks as the most likely to perform well in the coming year.  Grantham’s rationale is based on the fact that the recent stock market rally was excessively biased in favor of junk stocks, rather than the higher-quality “blue chips”, such as Wal-Mart.  Hulbert noted how Wal-mart shares gained only 14 percent since March 9, while the shares of the debt-laden electronics services firm, Sanmina-SCI, have risen more than 600 percent during that same period.  Hulbert pointed out that the conclusion to be reached from this information should be pretty obvious:

As an unintended consequence, Mr. Grantham said, high-quality stocks today are about as cheap as they have ever been relative to shares of firms with weaker finances.

It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term,” he said.

My favorite reaction to Jeremy Grantham’s newsletter came from Paul Farrell of MarketWatch, who emphasized Grantham’s broader view for the economy as a whole, rather than taking a limited focus on stock performance.  Farrell targeted President Obama’s “predictably irrational” economic policies by presenting us with a handy outline of Grantham’s criticism of those policies.  Farrell prefaced his outline with this statement:

So please listen closely to his 14-point analysis of the rampant irrationality at the highest level of American government today, because what he is also predicting is another catastrophic meltdown dead ahead.

At the first point in the outline, Farrell made this observation:

If Grantham ever was a fan, he’s clearly disillusioned with the president.   His 14 points expose the extremely irrational behavior of Obama breaking promises by turning Washington over to Wall Street, a blunder that will trigger the Great Depression 2.

Farrell’s discussion included a reference to the latest article by Matt Taibbi for Rolling Stone, entitled “Obama’s Big Sellout”.  The Rolling Stone website described Taibbi’s latest essay in these terms:

In “Obama’s Big Sellout”, Matt Taibbi argues that President Obama has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway.  Rather than keeping his progressive campaign advisers on board, Taibbi says Obama gave key economic positions in the White House to the very people who caused the economic crisis in the first place.  Taibbi also points to the ties Obama’s appointees have to one main in particular:  Bob Rubin, the former Goldman Sachs co-chairman who served as Treasury secretary under Bill Clinton.

Since the article is not available online yet, you will have to purchase the latest issue of Rolling Stone or wait patiently for the release of their next issue, at which time “Obama’s Big Sellout” should be online.  In the mean time, they have provided this brief video of Matt Taibbi’s discussion of the piece.

The new year will also bring us a new book by Danny Schecter, entitled The Crime of Our Time.  Mr. Schecter recently discussed this book in a live interview with Max Keiser.  (The interview begins at 16:55 into the video.)  In discussing the book, Schecter explained how “the financial industry essentially de-regulated its own marketplace.  They got rid of the laws that required disclosure and accountability …” and created a “shadow banking system”.  Shechter’s previous book, Plunder, has now become a film that will be released soon.  In Plunder, he described how the subprime mortgage crisis nearly destroyed the American economy.  The interview by Max Keiser contains a short clip from the upcoming film.  Danny also directed the movie based on (and named after) his 2006 book, In Debt We Trust, wherein he predicted the bursting of the credit bubble.

It was right at this point last year when Danny’s father died.  The event is easy for me to remember because my own father died one week later.  At that time, I was comforted by reading Danny’s eloquent piece about his father’s death.  Danny was kind enough to respond to the e-mail I had sent him since, as an old fan from his days at WBCN radio in Boston, during the early 1970s, my friends and I tried our best to provide Danny with any leads we came across.  These days, it’s good to see that Danny Schechter “The News Dissector” is still at it with the same vigor he demonstrated more than thirty-five years ago.  I look forward to his new book and the new film.



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The Legacy Of Mark Pittman

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December 3, 2009

Just a week before the Senate banking committee was to begin confirmation hearings on President Obama’s nomination of Ben Bernanke to a second term as chairman of the Federal Reserve, one of the most important watchdogs of the Fed died at the age of 52.  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 last August by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions 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 is pursuing an appeal of that decision.

Since September of 2008, we have been overexposed to the specious claims by politicians, regulators and other federal officials, that the financial crisis was “unforeseeable”.  The veracity of such statements is undercut by the fact that on June 29 of 2007, Mark Pittman provided us with this ominous warning from his desk at Bloomberg News:

The subprime meltdown is sending shock waves through the capital markets in part because mortgage bonds are the world’s biggest debt market, according to the Securities Industry Financial Markets Association.

Pittman’s groundbreaking work on the havoc created by the subprime mortgage-backed securities market resulted in his receiving the Gerald Loeb Award in 2008, which he shared with his fellow Bloomberg reporters, Bob Ivry and Kathleen Howley, for a five-part series entitled “Wall Street’s Faustian Bargain”.

On November 30, Bob Ivry wrote what many have described as the “definitive obituary” for Mark Pittman.  Ivry disclosed that although the actual cause of death was not yet known, Pittman had suffered from “heart-related illnesses”.  In addition to providing us with his colleague’s impressive biography, Ivry shared the reactions to Pittman’s death, expressed by several prominent individuals:

“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a professor at Columbia University in New York and the winner of the 2001 Nobel Prize for economics. “His death is shocking.”

*   *   *

“Who sues the Fed?  One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg News.  “The more complex the issue, the more he wanted to dig into it.  Years ago, he forced us to learn what a credit- default swap was.  He dragged us kicking and screaming.”

*   *   *

“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the NewYork Times.  “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication.  His investigative work during the crisis set the standard for other reporters everywhere.  He was a giant.”

Congressman Brad Miller of North Carolina wrote an informative remembrance of Pittman for The Huffington Post.  This statement is one of the highlights from that piece:

The financial crisis is a result of a failure of every institution of our democracy.  Regulators failed.  Congress failed.  And the financial press failed abysmally.  Mark was an exception.  Mark’s irreverence allowed him to see the crisis coming when other financial reporters accepted uncritically what the industry said.  Mark’s irreverence was what made him a great reporter.

Mark Pittman was featured in the recent film American Casino, a documentary which analyzed the subprime mortgage catastrophe and the resulting financial crisis.  In September of 2008, when the crisis had most people in the world scratching their heads in confusion, Pittman provided a roadmap to the initial bailouts, shortly after they were distributed.

The interview with Mark Pittman, conducted by Ryan Chittum for the Columbia Journalism Review in February of 2009, gave Pittman the opportunity to share his experiences during the onset of the financial crisis.  The interview is especially informative as to what we can expect to find out about this mess in the future, as the investigations begin to unfold.  Passages like these reveal the magnitude of the loss resulting from Pittman’s death:

TA:  Does there need to be regulation just to simplify things to where it makes sense to more people?

MP:  If it was all transparent the complexity wouldn’t matter.  If the CDO market had had publicly available prospectuses with the contents of the CDO disclosed, we wouldn’t have this issue, because Bloomberg probably would have made fun of anybody who bought anything like this.  But there was this enormous shadow banking system going on.  We did a series about that, too.  A lot of times people don’t see what we do.

*   *   *

The thing that people don’t realize is that the Fed is now the “bad bank.”  That’s just something that people don’t understand.  They’ve taken collateral, and they refuse to tell us how they valued it  …

We have numerous banks — dozens, maybe hundreds that are insolvent.  And they become more insolvent every day because more people quit paying their mortgage loans, and more guys move out of the shopping center, and more people quit paying their credit cards.  But nobody wants to have the adult conversation.  We need to be honest about what the problem is here, how big it is, and how we’re going forward to clean it up, and who’s going to pay for it.

*   *   *

Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed (laughs).  We need to know how to prevent it from happening again, and we need to know who did it.  There’s renewed energy on this front because we’ve staffed up the people who cover banks, the securities firms.  We have a lot more people going at real estate and a bunch of different areas that this involves.  That was a conscious move from meetings we started having in 2007.  We hired people and we moved people from one area to another area.

Pittman’s final statement during the interview underscores the fact that one of the greatest fighters for an informed public has been lost:

This is a big deal and it’s going to be going on — I swear to God I’m going to retire on this story, because it’s just going to keep happening.

Tragically, Mark Pittman was forced to “retire” on terms that were not satisfactory to any of us.  We can only hope that others will be inspired by his work and follow his lead.



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The Pushback Against Bernanke

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November 30, 2009

This week brings us the confirmation hearings on President Obama’s nomination of Ben Bernanke to a second four-year term as chairman of the Federal Reserve.  The recent progress in Congressional efforts to audit the Federal Reserve will certainly spice up the confirmation hearings.  If that weren’t enough, Bernanke saw fit to write a commentary piece for Sunday’s edition of The Washington Post, expressing his opposition to any attempts to limit the Fed’s power and subject it to an audit.  Here is some of what he had to say in that column:

These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.  The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

Well, he should have known what would be coming next  . . .  the avalanche of criticism pointing out how the Fed played a major role in causing the crisis.  As you will see below, that response was swift.  Worse yet, Bernanke’s theme of “we learned our lesson” will surely inspire harsh interrogation at the confirmation hearings:

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis.  We have extensively reviewed our performance and moved aggressively to fix the problems.

Dean Baker did not waste any time before ripping into Bernanke’s essay.  Baker’s Beat the Press blog at The American Prospect website regularly upbraids Bernanke for his responsibility in causing the economic crisis.  Baker’s retort to the Washington Post piece was published at the Talking Points Memo website.  The final paragraph of Baker’s essay reflected his outrage that the Post would publish Bernanke’s rant without an opposing response:

The arrogance of this column is almost beyond belief.  This man is incredibly lucky to still have his job at time when millions of other workers have lost theirs as a direct result of his incompetence.  A serious news outlet would not have printed such a ridiculously self-serving piece without at least securing an opposing opinion.  Of course, Bernanke’s piece appeared in the Washington Post.

Dean Baker’s primary criticism of Bernanke is based on the Fed chair’s failure to control the 8-trillion-dollar housing bubble before it burst, nearly destroying the entire economy:

We had further losses in demand associated with the bursting of a bubble in non-residential real estate.  In total, the loss in bubble-driven demand was well over $1 trillion a year.  All of it an entirely predictable outcome of the collapse of a housing bubble.

The simple reality is that there is nothing in the Fed’s bag of tricks that will allow it to easily replace over $1 trillion in annual demand.  In short, the bubble guaranteed the economic disaster that we are now experiencing, end of story.

At the Naked Capitalism website, Yves Smith dealt a hefty load of thorough criticism on the Bernanke article.  She began with the verdict against Bernanke and built an impressive argument supporting her opinion:

What is interesting is how much the tables have turned.  The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

Smith did not restrict her criticism to the Fed’s failure to control the housing bubble.  Here are some of her points:

For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology.  Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape.  Hun?  This is Japan circa 1989 thinking.

*   *   *

Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too).  So that does not fit my notion of “tougher oversight.”  And the rest is just empty promises.

In response to Bernanke’s claim that Congressional efforts to rein-in the authority of the Fed are “very much out of step with the global consensus on the appropriate role of central banks,” Ms. Smith pounced:

Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis.  Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not.  The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is.  The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling.  And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period.  And he is declaring the Fed’s policies to be successful when the jury is still out.

Brenanke’s claim that the idiotic bank stress tests “marked a turning point in public confidence in the banking system” invited a well-deserved attack.  Here’s how Yves Smith handled it:

The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise.  That alone should disqualify them from getting a bigger role in bank supervision.  And if you read their pronouncements, they plan to continue to use them, and have the process run by …  monetary economists!  Pray tell, what do they know about bank operations?  Help me!  And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry.  Think McKinsey is going to devise anything that might be rough on its biggest meal tickets?

Remember that these negative reactions to the Bernanke article are just what appeared on Sunday.  By the time the confirmation hearings begin on December 3, you can be sure that Bernanke’s own words from the Post column will be used against him.  We may find that his decision to write this piece was a crucial turning point leading to a decision against his confirmation.



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