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The Longest Year

September 14th, 2009 Posted in Uncategorized

Sep, 14 2009

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September 14, 2009

As I write this, President Obama is preparing another fine-sounding, yet empty speech. His subject this time is financial reform. You may recall last week’s lofty address to the joint session of Congress, promoting his latest, somewhat-less-nebulous approach to healthcare reform. He assured the audience that the so-called “public option” (wherein a government-created entity competes with private sector healthcare insurers) would be an integral part of the plan. Within a week, two pieces of political toast from the Democratic Party (Nancy Pelosi and Harry Reid) set about undermining that aspect of the healthcare reform agenda. This is just one reason why, on November 2, 2010, the people who elected Democrats in 2006 and 2008 will be taking a “voters’ holiday”, paving the way for Republican majorities in the Senate and House. The moral lapse involving the public option was documented by David Sirota for Danny Schechter’s NewsDissector blog:

House Speaker Nancy Pelosi for the first time yesterday suggested she may be backing off her support of the public option – the government-run health plan that the private insurance industry is desperately trying to kill. According to CNN, Pelosi and Senate Majority Leader Harry Reid “said they would support any provision that increases competition and accessibility for health insurance – whether or not it is the public option favored by most Democrats.”

This announcement came just hours before Steve Elmendorf, a registered UnitedHealth lobbyist and the head of UnitedHealth’s lobbying firm Elmendorf Strategies, blasted this email invitation throughout Washington, D.C. I just happened to get my hands on a copy of the invitation from a source – check it out:

From: Steve Elmendorf [mailto:steve@elmendorfstrategies.com]
Sent: Friday, September 11, 2009 8:31 AM
Subject: event with Speaker Pelosi at my home
You are cordially invited to a reception with

Speaker of the House
Nancy Pelosi

Thursday, September 24, 2009
6:30pm ~ 8:00pm

At the home of
Steve Elmendorf
2301 Connecticut Avenue, NW
Apt. 7B
Washington, D.C.

$5,000 PAC
$2,400 Individual

Again, Elmendorf is a registered lobbyist for UnitedHealth, and his firm’s website brags about its work for UnitedHealth on its website.

The sequencing here is important: Pelosi makes her announcement and then just hours later, the fundraising invitation goes out. Coincidental? I’m guessing no – these things rarely ever are.

I wrote a book a few years ago called Hostile Takeover whose premise was that corruption and legalized bribery has become so widespread that nobody in Washington even tries to hide it. This is about as good an example of that truism as I’ve ever seen.

Whatever President Obama proposes to accomplish in terms of financial reform will surely be met with a similar fate. Worse yet, his appointment of “Turbo” Tim Geithner as Treasury Secretary and his nomination of Ben Bernanke to a second term as Federal Reserve chairman are the best signals of the President’s true intention: Preservation of the status quo, regardless of the cost to the taxpayers.

On this first anniversary of the demise of Lehman Brothers and the acknowledgment of the financial crisis, many commentators have noted the keen observations by Simon Johnson, a former chief economist at the International Monetary Fund, published in the May, 2009 issue of The Atlantic. The theme of Johnson’s article, “The Quiet Coup” was that the current economic and financial crisis in the United States is “shockingly reminiscent” of those experienced in emerging markets (i.e. banana republics and proto-capitalist regimes). The devil behind all the details in setting these systems upright after a financial crisis is the age-old concept of moral hazard or more simply: sleaze. In making the comparison of the United States to the emerging market countries he encountered at the IMF, Mr. Johnson began this way:

But there’s a deeper and more disturbing similarity: elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Here are a few more passages from “The Quiet Coup” that our political leaders would be well-advised to consider:

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

* * *

The second problem the U.S. faces—the power of the oligarchy— is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly— they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

Mr. Johnson pointed out the need to overhaul our current antitrust laws – not because any single institution controls so much market share as to influence prices – but because the failure of any one “to big to fail” bank could collapse the entire financial system.

One of my favorite reporters at The New York Times, Gretchen Morgenson, observed the anniversary of the Lehman Brothers failure with an essay that focused, in large part, on a recent paper by Edward Kane, a finance professor at Boston College, who created the expression: “zombie bank” in 1987. This month, the Networks Financial Institute at Indiana State University published a policy brief by Dr. Kane on the subject of financial regulation. In her article: “But Who Is Watching Regulators?”, Ms. Morgenson summed up Professor Kane’s paper in the following way:

This ugly financial episode we’ve all had to live through makes clear, Mr. Kane says, that taxpayers must protect themselves against two things: the corrupting influence of bureaucratic self-interest among regulators and the political clout wielded by the large institutions they are supposed to police. Finally, he argues, taxpayers must demand that the government publicize the costs of efforts taken to save the financial system from itself.

Although you may have seen widely-publicized news reports about an “overwhelming number” of academicians opposing the current efforts to require transparency from the Federal Reserve, Professor Kane provides a strong argument in favor of Fed transparency as well as scrutiny of the Treasury and the other government entities enmeshed the complex system of bailouts created within the past year.

At thirty-eight pages, his paper is quite a deep read. Nevertheless, it’s packed with great criticism of the Federal Reserve and the Treasury. We need more of this and when someone of Professor Kane’s stature provides it, there had better be people in high places taking it very seriously. The following are just a few of the many astute observations made by Dr. Kane:

Agency elitism would be evidenced by the extent to which its leaders use crises to establish interpretations and precedents that cover up its mistakes, inflate its powers, expand its discretion, and extend its jurisdiction. According to this standard, Fed efforts to use the crisis as a platform for self-congratulation and for securing enlarged systemic-risk authority sidetracks rather than promotes effective reform.

* * *

A financial institution’s incentive to disobey, circumvent or lobby against a particular rule increases with the opportunity cost of compliance. This means that, to sort out the welfare consequences of any regulatory program, we must assess not only the costs and benefits of compliance, but include the costs and benefits of circumvention as well.

* * *

Realistically, every government-managed program of disaster relief is a strongly lobbied and nontransparent tax-transfer scheme for redistributing wealth and shifting risk away from the disaster’s immediate victims. A financial crisis externalizes – in margin and other collateral calls, in depositor runs, and in bank and borrower pleas for government assistance – a political and economic struggle over when and how losses accumulated in corporate balance sheets and in the portfolios of insolvent financial institutions are to be unwound and reallocated across society. At the same time, insolvent firms and government rescuers share a common interest in mischaracterizing the size and nature of the redistribution so as to minimize taxpayer unrest.

In principle, lenders and investors that voluntarily assume real and financial risks should reap the gains and bear the losses their risk exposures generate. However, in crises, losers pressure government officials to rescue them and to induce other parties to share their pain.

The advocates of crony capitalism and their tools (our politicians and regulatory bureaucrats) need to know that we are on to them. If the current administration is willing to facilitate more of the same, then it’s time for some new candidates to step forward.

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The Forgotten Urgency Of Financial Reform

September 10th, 2009 Posted in Uncategorized

Sep, 10 2009

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September 10, 2009

With all the fighting over healthcare reform and the many exciting controversies envisioned by its opponents, such as: death panels, state-sponsored abortions and illegal aliens’ coming to America for free breast implants, the formerly-urgent need for financial reform his slipped away from public concern. Alan Blinder recently wrote a piece for The New York Times, lamenting how the subject of financial reform has disappeared from the Congressional radar:

After all we’ve been through, and with so much anger still directed at financial miscreants, the political indifference toward financial reform is somewhere between maddening and tragic. Why is the pulse of reform so faint?

Blinder then discussed five reasons why. My favorite concerned lobbying:

Almost everything becomes lobbied to death in Washington. In the case of financial reform, the money at stake is mind-boggling, and one financial industry after another will go to the mat to fight any provision that might hurt it.

Mr. Blinder expressed concern that these three important changes would be left out of any financial reform legislation: a) resolving the problem of having financial institutions that are “too big to fail”, b) cleaning up the derivatives mess and c) creating a “systemic risk regulator”. (All right — I rearranged the order.)

In case you’re wondering just what the hell a “systemic risk regulator” is, Blinder provided the readers with a link to one of his earlier articles, which said this:

The main task of a systemic-risk regulator is to serve as an early-warning-and-prevention system, on the prowl for looming risks that extend across traditional boundaries and are becoming large enough to have systemic consequences.

* * *

Suppose such a regulator had been in place in 2005. Because the market for residential mortgages and the mountain of securities built on them constituted the largest financial market in the world, that regulator probably would have kept a watchful eye on it. If so, it would have seen what the banking agencies apparently missed: lots of dodgy mortgages being granted by nonbank lenders with no federal supervision.

If the regulator saw those mortgages, it might then have looked into the securities being built on them. That investigation might have turned up the questionable triple-A ratings being showered on these securities, and it certainly should have uncovered the huge risk concentrations both on and off of banks’ balance sheets. And, unless it was totally incompetent, the regulator would have been alarmed to learn that a single company, American International Group, stood behind an inordinate share of all the credit-default swaps — essentially insurance policies against default — that had been issued.

Blinder shares the view, expressed by Treasury Secretary “Turbo” Tim Geithner, that the Federal Reserve should serve as systemic risk regulator, because “there is no other alternative”. Unfortunately, President Obama is also in favor of such an approach. The drawback to empowering the Fed with such additional responsibility was acknowledged by Mr. Blinder:

On the other hand, some members of Congress are grumbling that the Fed has already overreached, usurping Congressional authority. Others contend that it has performed so poorly as a regulator that it hardly deserves more power.

Federal Reserve Chairman Ben Bernanke discussed this issue himself back on March 5, in a speech entitled: “Financial Reform to Address Systemic Risk”. Near the end of this speech, Bernanke discussed the subject objectively, although he concluded with a pitch to get this authority for his own realm:

Some commentators have proposed that the Federal Reserve take on the role of systemic risk authority; others have expressed concern that adding this responsibility would overburden the central bank. The extent to which this new responsibility might be a good match for the Federal Reserve depends a great deal on precisely how the Congress defines the role and responsibilities of the authority, as well as on how the necessary resources and expertise complement those employed by the Federal Reserve in the pursuit of its long-established core missions.

It seems to me that we should keep our minds open on these questions. We have been discussing them a good deal within the Federal Reserve System, and their importance warrants careful consideration by legislators and other policymakers. As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role. . . . The Federal Reserve plays such a key role in part because it serves as liquidity provider of last resort, a power that has proved critical in financial crises throughout history. In addition, the Federal Reserve has broad expertise derived from its wide range of activities, including its role as umbrella supervisor for bank and financial holding companies and its active monitoring of capital markets in support of its monetary policy and financial stability objectives.

This rationale leads me to suspect that Mr. Bernanke might be planning to use his super powers as: “liquidity provider of last resort” to money-print away any systemic risks that might arise on his watch in such a capacity. This is reminiscent of how comedian Steve Smith always suggests the use of duct tape to solve just about any problem that might arise in life.

In the September 8 edition of The Wall Street Journal, Peter Wallison wrote an article entitled: “The Fed Can’t Monitor ‘Systemic Risk’”. More important was the subtitle: That’s like asking a thief to police himself. Wallison begins with the point that President Obama’s inclusion of granting such powers to the Fed as the centerpiece of his financial regulatory reform agenda “is a serious error.” Wallison seemed to share my concern about Bernanke’s “duct tape” panacea:

The problem is the Fed itself can create systemic risk. Many scholars, for example, have argued that by keeping interest rates too low for too long the Fed created the housing bubble that gave us the current mortgage meltdown, financial crisis and recession.

Vesting such authority in the Fed creates an inherent conflict of interest. Mr. Wallison explained this quite well:

Tasking the Fed with that responsibility would bury it among many other inconsistent roles and give the agency incentives to ignore warning signals that an independent body would be likely to spot.

Unlike balancing its current competing assignments — price stability and promoting full employment — detecting systemic risk would require the Fed to see the subtle flaws in its own policies. Errors that are small at first could grow into major problems. It is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run. If we are going to have a systemic-risk monitor, it should be an independent council of regulators.

When the dust finally settles on the healthcare reform debate, perhaps Congress can approach the subject of financial reform . . . if it’s not too late by that point.

AIG, Alan Blinder, American capitalism, American International Group, bank holding company, bank stocks, Barack Obama, Ben Bernanke, blog, centrist, comedian Steve Smith, Commentary, conflict of interest, Congress, conservative, controlling the markets, credit default swaps, crony capitalism, Democrat, Democratic Party, Democrats, Dow Jones industrial average, duct tape, economics, economists, equities markets, FDIC, Federal Deposit Insurance Corporation, Federal Reserve, Federal Reserve Chairman Ben Bernanke, financial institutions as too big to fail, financial reform, Financial Reform to Address Systemic Risk, Goldman Sachs, government guarantees, Government Sachs, healthcare reform, investment banks, John Burke, John T Burke Jr, liberal, like asking a thief to police himself, liquidity provider of last resort, lobbyists, market manipulation, money printing, moral hazard, NASDAQ 100 index, New York Stock Exchange, News, NYSE, Obama Administration, Obama Presidency, Opinion, Peter Wallison, Political, Politics, President of the United States, Republican, Republican Party, revolving door, S&P 500 index, SEC, Securities and Exchange Commission, self-dealing insiders, socialized loss and privatized gain, Standard and Poors 500, stock markets, systemic risk regulator, taxpayer subsidies to investment banks, taxpayers, the banks, the center lane, the economy, The Fed Cant Monitor Systemic Risk, The Forgotten Urgency Of Financial Reform, The New York Times, The Wall Street Journal, The White House, thecenterlane, too big to fail, Treasury Department, Treasury Secretary Tim Geithner, Turbo Tim Geithner, United States Senate, United States Treasury, Wall Street, Wall Street lobbyists, Wall Street meltdown, wealth transfer, welfare for the rich

Just In Time For Labor Day

September 7th, 2009 Posted in Uncategorized

Sep, 07 2009

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September 7, 2009

Friday’s report from the Bureau of Labor Statistics, concerning non-farm payrolls for the month of August, left many people squirming. The “green shoots” crowd usually has no trouble cherry-picking through the monthly BLS reports for something they can spin into happy-sounding news, utilizing the “not as bad as expected” approach. Nevertheless, the August BLS report portrayed unpleasant conditions, not only for the unemployed but for those currently working full-time in the labor force, as well.

The current unemployment level is a living nightmare for the unemployed individuals and their families. It also brings some degree of discomfort (although less significant) to those people with money to invest, who are waiting for signs of a sustainable economic upturn before heading back out from the sidelines and into the equities markets. Both groups got an unvarnished look at the latest BLS data from Dave Rosenberg, Chief Economist at Gluskin Sheff in Toronto. His September 4 economic commentary: Lunch with Dave, gave us a thorough analysis of the BLS report:

While the Obama economics team is pulling rabbits out of the hat to revive autos and housing, there is nothing they can really do about employment; barring legislation that would prevent companies from continuing to adjust their staffing requirements to the new world order of credit contraction. While nonfarm payrolls were basically in line with the consensus, declining 216,000 in August, there were downward revisions of 49,000 and the details were simply awful. The fact that 65% of companies are still in the process of cutting their staff loads is quite disturbing — even manufacturing employment fell 63,000 in August, to its lowest level since April 1941 (!), despite the inventory replenishment in the automotive sector and all the excitement over the recent 50+ print in the ballyhooed ISM index. The fact that temp agency employment is still declining, albeit at a slower pace, alongside the flat workweek and jobless claims stuck at 570,000, are all foreshadowing continued weakness in the labour market ahead. Until we see signs of a sustained turnaround in the jobs market all bets are off over the sustainability of any economic recovery.

Looking at the details of the Household Survey, Rosenberg found “a rather alarming picture” of what is happening in the labor market:

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle). As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positivity discuss that particular statistic in their post-payroll assessments; we are not exactly holding our breath.

Second, the unemployment rate jumped to 9.7% from 9.4% in July, the highest since June 1983 and at the pace it is rising, it will pierce the post-WWII high of 10.8% in time for next year’s midterm election. And, this has nothing to do with a swelling labour force, which normally accompanies a turnaround in the jobs market — the ranks of the unemployed surged 466,000 last month.

The language of the BLS report itself on this subject demonstrates how the current unemployment crisis is not an “equal opportunity” phenomenon:

Among the major worker groups, the unemployment rates for adult men (10.1 percent), whites (8.9 percent), and Hispanics (13.0 percent) rose in August. The jobless rates for adult women (7.6 percent), teenagers (25.5 percent), and blacks (15.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)The civilian labor force participation rate remained at 65.5 percent in August. The employment population ratio, at 59.2 percent, edged down over the month and has declined by 3.5 percentage points since the recession began in December 2007.

Dave Rosenberg added the painful reminder that the unemployment picture always lags behind the end of a recession. How far behind? Look at this:

Jobless claims started off August at 554k and closed the month at 570k. So it seems as though we enter September with the prospect of yet another month of declining payrolls because claims have to break decisively below 500k before jobs stop vanishing and below 400k before the unemployment rate stops rising. Remember, in the early 1990s credit crunch the recession ended in March 1991 and yet the unemployment rate did not peak until June 1992; and in the last cycle, which was an asset deflation phase, the recession ended in November 2001 and yet the jobless rate did not peak until June 2003. So in the last two cycles, it took 15-20 months for the unemployment rate to peak even after the economic downturn officially ended.

At least Mr. Rosenberg had some constructive criticism for the current administration’s efforts at job creation. It’s one thing to just yell: “FAIL” and yet, quite another to put some thought into what needs to be done:

Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.

As for those who are still in the labor force, the situation is also deteriorating, rather than improving. A report by Carlos Torres for Bloomberg News noted that the “real number” for unemployment is 16.8 percent. Beyond that, the work week for factory employees is currently 39.8 hours. It will have to reach 41 hours before we even get a chance to see some changes:

The index of total hours worked, which takes into account changes in payrolls and the workweek, fell 0.3 percent last month to the lowest level since 2003.

“It tells us payrolls aren’t turning positive any time soon,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said on a conference call yesterday, referring to the workweek figures. “This wasn’t a friendly report.”

A measure of unemployment, which includes the part-time workers who would prefer a full-time position and people who want work but have given up looking, reached 16.8 percent last month, the highest level in data going back to 1994.

The workweek for factory employees, which held at 39.8 hours last month, leads total payrolls by about three months, LaVorgna said. Once it reaches at least 41 hours and once payrolls for temporary workers stabilize, then an increase in total employment can be expected months later, he said.

Payrolls for temporary workers started turning down in January 2007, 11 months before the recession began. They dropped by another 6,500 workers in August, the government’s report showed yesterday.

In other words, the decline in temporary worker payrolls preceded the recession by 11 months! Worse yet, the payrolls for temporary workers must stabilize before an increase in total employment comes along “months later”.

Meanwhile, at the Financial Times, Sarah O’Connor reports that many people who have jobs must still rely on food stamps to survive:

The number of working Americans turning to free government food stamps has surged as their hours and wages erode, in a stark sign that the recession is inflicting pain on the employed as well as the newly jobless.

* * *

The food stamp data suggest that “the labour market problems are more significant than you would expect, given just the unemployment rate”, said John Silvia, chief economist at Wells Fargo. “For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.”

Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP. Economists fear that people may be unwilling to resume that role.

That conclusion is exactly what the “green shoots” enthusiasts don’t seem to understand. Those who are well-off enough to pay for their groceries with real money will be focused on paying down their credit cards and saving money before they go out to buy another television or jet ski. If these people have little or no “discretionary income”, then the High Frequency Trading computers on Wall Street can talk to each other all they want — but the stock values will not go up.

Happy Labor Day!

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The Big Lie Gets Some Blowback

September 3rd, 2009 Posted in Uncategorized

Sep, 03 2009

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September 3, 2009

My favorite “blowback” story of the week resulted from the ill-advised decisions by people at The New York Times and the Financial Times to trumpet talking points apparently “Fed” (pun intended) to them by the Federal Reserve. Both publications asserted that the TARP program has already returned profits for the Untied States government. The Financial Times claimed the profit so far has been $14 billion. The New York Times, reporting the amount as $18 billion, claimed that “taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.” So where is my check? Anyone with a reasonable degree of intelligence, who bothered to completely read through either of these articles, could quickly recognize yet another rendition of The Big Lie. The blowback against these articles was swift and harsh. Matt Taibbi’s critique was short and sweet:

This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry.

* * *

The other reason for that is that it’s only a tiny sliver of the whole bailout picture. The real burden carried by the government and the Fed comes from the various anonymous bailout facilities — the TALF, the PPIP, the Maiden Lanes, and so on. . . .

And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg’s FOIA request for those records actually goes through.

Over at The Business Insider, John Carney also quoted Matt Taibbi’s piece, adding that:

We simply don’t know how to value the mortgage backed securities the Fed bought. We don’t know how much the government will wind up paying on the backstops of Citi and Bear Stearns assets. And we don’t know how much more money might have to be pumped into the system to keep it afloat.

At another centrist website called The Moderate Voice, Michael Silverstein pointed out that any news reporter with a conscience ought to feel a bit of shame for participating in such a propaganda effort:

I’ve been an economics and financial writer for 30 years. I used to enjoy my work. I used to take pride in it. The markets were kinky, sure, but that made the writing more fun.

* * *

That’s not true anymore. Reportage about the economy and the markets — at least in most mainstream media — now largely consists of parroting press releases from experts of various stripes or government spokespeople. And the result is not just infuriating for a long-term professional in this field, but outright embarrassing.

A perfect example was yesterday’s “good news” supposedly showing that our economic masters were every bit as smart as they think they are. A few banks have repaid their TARP loans, part of the $4 trillion that government has sunk into our black hole banking system.

* * *

The $74 billion the government has been repaid is less than two percent of the $4 trillion the government has borrowed or printed to keep incompetent lenders from going down. Less than two percent! Even this piddling sum was generated by a manipulated stock market rally that allowed banks shares to soar, bringing a lot of money into bank coffers, almost all of which they added to reserves before paying back a few billion to the government.

Rolfe Winkler at Reuters joined the chorus criticizing the sycophantic cheerleading for these claims of TARP profitability:

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

“As big banks repay bailout, U.S.sees profit” read the headline in the New York Times on Monday. The story was parroted on evening newscasts.

* * *

Taxpayers should keep that in mind whenever they see misguided reports that they are making money from bailouts. The truth is that the biggest banks are still insolvent and, ultimately, their losses are likely to be absorbed by taxpayers.

As the above-quoted sources have reported, the ugly truth goes beyond the fact that the Treasury and the Federal Reserve have been manipulating the stock markets by pumping them to the stratosphere — there is also a coordinated “happy talk” propaganda campaign to reinforce the “bull market” fantasy. Despite the efforts of many news outlets to enable this cause, it’s nice to know that there are some honest sources willing to speak the truth. The unpleasant reality is exposed regularly and ignored constantly. Tragically, there just aren’t enough mainstream media outlets willing to pass along the type of wisdom we can find from Chris Whalen and company at The Institutional Risk Analyst:

Plain fact is that the Fed and Treasury spent all the available liquidity propping up Wall Street’s toxic asset waste pile and the banks that created it, so now Main Street employers and private investors, and the relatively smaller banks that support them both, must go begging for capital and liquidity in a market where government is the only player left. The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally.

Somebody ought to write that on a cake and send it over to Ben Bernanke, while he celebrates his nomination to a second term as Federal Reserve chairman.

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A Helluva Read

August 31st, 2009 Posted in Uncategorized

Aug, 31 2009

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August 31, 2009

We are constantly being bombarded with predictions and opinions about where the economy is headed. Since last fall’s financial crisis, people have seen their home values reduced to shocking levels; they’ve seen their investments take a nosedive and they’ve watched our government attempt to respond to crises on several fronts. There have been numerous programs including TARP, TALF, PPIP and quantitative easing, that some of us have tried to understand and that others find too overwhelming to approach. When one attempts to gain an appreciation of what caused this crisis, it quickly becomes apparent that there are a number of different theories being espoused, depending upon which pundit is doing the talking. One of my favorite explanations of what caused the financial crisis came from William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City School of Law. In his lecture: The Great American Bank Robbery (which can be seen here) Black explains that we have a culture of corruption at the highest levels of our government, which, combined with ineptitude, allowed some of the sleaziest people on Wall Street to nearly destroy our entire financial system.

William Black recently participated in a conference with a group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy. The panel included authorities from all over the world and met in Paris on June 15 – 16. A report on the meeting was prepared by Professor James K. Galbraith and was published by The Levy Economics Institute of Bard College. The paper, entitled Financial and Monetary Issues as the Crisis Unfolds, is available here. At 16 pages, the document goes into great detail about what has been going wrong and how to address it, in terms that are understandable to the layperson. Here’s how the report was summarized in the Preface:

Despite some success in averting a catastrophic collapse of liquidity and a decline in output, the group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus among the group that the pre-crisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

As to the question of where we are now, at the current stage of the economic crisis, Professor Galbraith recalled one panel member’s analogy to the eye of a hurricane:

The first wall of the storm has passed over us: the collapse of the banking system, which engendered panic and a massive public sector rescue effort. At rest in the eye, we face the second: the bankruptcy of states, provinces, cities, and even some national governments, from California, USA, to Belgium. Since this is a slower process involving weaker players, complicated questions of politics, fairness, and solidarity, and more diffused system risk, there is no assurance that the response by capable actors at the national or transnational level will be either timely or sufficient, either in the United States or in Europe.

There is plenty to quote from in this document, especially in light of the fact that it provides a good deal of sound, constructive criticism of our government’s response to the crisis. Additionally, the panel offered solutions you’re not likely to hear from politicians, most of whom are in the habit of repeating talking points, written by lobbyists.

Focusing on the situation here in the United States, the report gave us some refreshing criticism, especially in the current climate where commentators are stumbling over each other to congratulate Ben Bernanke on his nomination to a second term as Federal Reserve chairman:

American participants were almost equally skeptical of the effectiveness of the U.S.approach to date. As one put it, “Diabetes is a metabolic disease.” Elements of a metabolic disease can be treated (here, “stimulus” plays the role of insulin), but the key to success is to deal with the underlying metabolic problem. In the economic sphere, that problem lies essentially with the transfer of resources and power to the top and the dismantling of effective taxing power over those at the top of the system. (The speaker noted that the effective corporate tax rate for the top 20 firms in the United States is under 2 percent.) The effect of this is to create a “trained professional class of retainers” who devote themselves to preserving the existing (unstable) system. Further, there were massive frauds in the origination of mortgages, in the ratings processes that led to securitization, and in the credit default swaps that were supposed to insure against loss. In the policy approach so far, there is a consistent failure to address, analyze, remedy, and prosecute these frauds.

* * *

Meanwhile, major legislation from health care to bank reform continues to be written in consultation with the lobbies; as one speaker noted, legislation on credit default swaps was being prepared by “Jamie Dimon and his lobbyists.”

One of the gravest dangers to economic recovery, finally, lies precisely in the crisis-fatigue of the political classes, in their lack of patience with a deep and intractable problem, and with their inflexible commitment to the preceding economic order. This feeds denial of the problem, a deep desire to move back to familiar rhetorical and political ground, and the urge to declare victory, groundlessly and prematurely. As one speaker argued, the U.S.discussion of “green shoots” amounts to little more than politically inspired wishful thinking — a substitute for action, at least so far as hopes for the recovery of employment are concerned.

Lest I go on, quoting the whole damned thing, I’ll simply urge you to take a look at it. At the conclusion of the paper was the unpleasant point that some of the damage from this crisis has been irreversible. There was an admonition that before undertaking reconstruction of the damage, some careful planning should be done, inclusive of the necessary safeguards to make it possible to move forward.

Whether or not anyone in Washington will pay serious attention to these findings is another issue altogether. Our system of legalized graft in the form of lobbying and campaign contributions, guarantees an uphill battle for anyone attempting to change the status quo.

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The SEC Is Out To Lunch

August 27th, 2009 Posted in Uncategorized

Aug, 27 2009

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August 27, 2009

Back on January 5, I wrote a piece entitled: “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”. I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns. Some of the highlights from the Times piece included these points:

. . . H. David Kotz, the commission’s new inspector general, has documented several major botched investigations. He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.

* * *

There are other difficulties plaguing the agency. A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.

I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):

Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers . . . said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul. “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

* * *

In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.

I also quoted from a two-part op-ed piece for the January 3 New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn. Here’s what they had to say about the SEC:

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York. The matter was succinctly described by Louise Story of The New York Times:

The case centers on $3.6 billion bonuses that were paid out by Merrill Lynch late last year, just before that firm was merged with Bank of America. Neither company disclosed the bonuses to shareholders, and the S.E.C. has charged that the companies’ proxy statement about the merger were misleading in their description of the bonuses.

To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees. The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters. The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker. Denninger’s bottom line was this:

It is time for the damn gloves to come off. Our economy cannot recover until the scam street games are stopped, the fraudsters are removed from the executive suites (and if necessary from Washington) and the underlying frauds – particularly including the games played with the so-called “value” of assets on the balance sheets of various firms are all flushed out.

On a similarly disappointing note, there is the not-so-small matter of: “Where did all the TARP money go?” You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts. Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP). Why did all of this become necessary? Let’s take another look back to last January. At that time, a number of Democratic Senators, including: Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds. The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds. Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it). At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion. As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Although it was a nice-sounding pledge, the new President never lived up to it. Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went. Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered. I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP. This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel. Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”. He discussed the cynical appointment of Atkins with this explanation:

Atkins was named last week to be one of two Republicans on the five-member TARP panel headed by Harvard Law School professor Elizabeth Warren. He replaces former Senator John Sununu, who stepped down in July.

* * *

And while a power-broker within the commission, Atkins was also seen as the sharp tip of the deregulatory spear during George W. Bush’s presidency.

Atkins didn’t waver from his hands-off position, even as the credit crunch intensified. Speaking less than two months before the collapse of Lehman Brothers Holdings Inc., Atkins in one of his last speeches at the SEC warned against calls for a “new regulatory order.”

He added, “We must not immediately jump to the conclusion that failures of firms in the marketplace or the unavailability of credit in the marketplace is caused by market failure, or indeed regulatory failure.”

When I spoke with him yesterday, Atkins hadn’t changed his tune. “If the takeaway by some people is that deregulation is the thing that led to problems in the marketplace, that’s completely wrong,” he said. “The problems happened in the most heavily regulated areas of the financial-services industry.”

Regulated by whom?

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Invoking Thomas Paine

August 24th, 2009 Posted in Uncategorized

Aug, 24 2009

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August 24, 2009

In January of 1776, Thomas Paine wrote a 48-page pamphlet, entitled: Common Sense, in which he argued the case that the American colonies should be independent from Britain. He published the pamphlet anonymously, providing only a hint of authorship with the statement: “Written by an Englishman”. This aspect of Paine’s pamphlet brings to mind the debate over the issue of anonymity in the blogosphere, which became quite heated-up this past weekend. As it turned out, a writer for one of Rupert Murdoch’s newspapers, who uses the surname “Whitehouse”, targeted the Zero Hedge website, accusing its publisher (who uses the pseudonym: Tyler Durden — i.e. Brad Pitt’s character from the movie Fight Club) of being a fellow who was “banned from the securities industry” for making $780 on an “insider” trade. For whatever reason, Naked Capitalism’s Yves Smith (whose real name is Susan Webber) saw fit to write a posting (now removed from the site) critical of the “messianic zeal and strident tone” of the material at Zero Hedge, despite the fact that Tyler Durden has written many guest posts for her own Naked Capitalism site. She also criticized the use of pseudonyms by bloggers, particularly at financial sites — because the practice “raises questions about credibility”. She differentiated her own situation with the explanation that her true identity could be ascertained with only “a modicum of digging”. Making a point more supportive of Zero Hedge, she shared her suspicion about the motive behind the attempt to identify Tyler Durden as a disgraced trader:

. . . this story is appearing now precisely because Durden is getting to close to some even more damaging stories than he has provided thus far.

Ms. Smith (or Webber) believes that “Tyler Durden” is actually a pseudonym used by a number of writers at Zero Hedge.

As a result of that posting, Naked Capitalism lost one of its best contributors: Leo Kolivakis of Pension Pulse, whose final contribution to Naked Capitalism can be found here. Mr. Kolivakis then immediately joined the team at Zero Hedge, providing this explanation. When reading his posting, be sure to read the comments, which are always entertaining at Zero Hedge.

I enjoy both Naked Capitalism and Zero Hedge and I will continue to keep them both on my blogroll, despite this dust-up. In response to the intrigue concerning the identity of Tyler Durden, his cohort, Marla Singer submitted this proposed op-ed piece to The New York Times, reminding readers of the anonymous writings by Thomas Paine.

This past weekend brought us another invocation of Thomas Paine, with the publication of a piece entitled: “Common Sense 2009”, which appeared in The Huffington Post. The author did not conceal his identity, since he has made a point of generating controversy about himself throughout his life. He was none other than Larry Flynt. Flynt began with the explanation that last fall’s financial crisis was caused by the fact that “the financial elite had bribed our legislators to roll back the protections enacted after the Stock Market Crash of 1929”. He rightfully criticized President Obama for attempting to lay part of the blame for this disaster on “Main Street”. Beyond that, he noted how Obama continues to facilitate the same bad behavior that started this mess:

To date, no serious legislation has been offered by the Obama administration to correct these problems.

Instead, Obama wants to increase the oversight power of the Federal Reserve. Never mind that it already had significant oversight power before our most recent economic meltdown, yet failed to take action. Never mind that the Fed is not a government agency but a cartel of private bankers that cannot be held accountable by Washington. Whatever the Fed does with these supposed new oversight powers will be behind closed doors.

Obama’s failure to act sends one message loud and clear: He cannot stand up to the powerful Wall Street interests that supplied the bulk of his campaign money for the 2008 election. Nor, for that matter, can Congress, for much the same reason.

Larry Flynt then offered a bold solution to break the hold of the plutocracy that has been controlling our country for too long:

I’m calling for a national strike, one designed to close the country down for a day. The intent? Real campaign-finance reform and strong restrictions on lobbying. Because nothing will change until we take corporate money out of politics. Nothing will improve until our politicians are once again answerable to their constituents, not the rich and powerful.

Let’s set a date. No one goes to work. No one buys anything. And if that isn’t effective — if the politicians ignore us — we do it again. And again. And again.

This initiative is a much more effective and constructive use of populist rage than what saw at recent “town hall” meetings and “teabagging” events. Besides: If anyone knows what can and cannot be accomplished by “teabagging” – it’s Larry Flint.

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Searching For A Port In A Storm Of Bad Behavior

August 20th, 2009 Posted in Uncategorized

Aug, 20 2009

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August 20, 2009

Since I began complaining about manipulation of the stock markets back on December 18, I’ve been comforted by the fact that a number of bloggers have voiced similar concerns. At such websites as Naked Capitalism, Zero Hedge, The Market Ticker and others too numerous to mention — a common theme keeps popping up: some portion of the extraordinary amounts of money disseminated by the Treasury and the Federal Reserve is obviously being used to manipulate the equities markets. One paper, released by Precision Capital Management, analyzed the correlation between those days when the Federal Reserve bought back Treasury securities from investment banks and “tape painting” during the final minutes of those trading days on the stock markets.

Eliot “Socks” Spitzer recently wrote a piece for Slate, warning the “small investor” about a “rigged” system, as well as the additional hazards encountered due to routine breaches of the fiduciary duties owed by investment firms to their clients:

Recent rebounds notwithstanding, most people now are asking whether the system is fundamentally rigged. It’s not just that they have an understandable aversion to losing their life savings when the market crashes; it’s that each of the scandals and crises has a common pattern: The small investor was taken advantage of by the piranhas that hide in the rapidly moving currents. And underlying this pattern is a simple theme: conflicts of interest that violated the duty the market players had to their supposed clients.

The natural reaction of the retail investor to these hazards and scandals often involves seeking refuge in professionally-managed mutual funds. Nevertheless, as Spitzer pointed out, the mutual fund alternative has dangers of its own:

Mutual funds charge exorbitant fees that investors have to absorb — fees that dramatically reduce any possibility of outperforming the market and that are set by captive boards of captive management companies, not one of which has been replaced for inadequate performance, violating their duty to guard the interests of the fund investors for whom they supposedly work.

Worse yet, is the fact that mutual funds are now increasing their fees and, in effect, punishing their customers for the poor performance of those funds during the past year. Financial planner Allan Roth, had this to say at CBS MoneyWatch.com:

After one of the most awful years in the history of the mutual fund industry, when the average U.S. stock fund and international fund fell by 39 percent and 46 percent respectively, you might expect fund companies would give investors a break and lower their fees. But just the opposite is true.

An exclusive analysis for MoneyWatch.com by investment research firm Morningstar shows that over the past year, fund fees have risen in nearly every category. For stock funds, the fees shot up by roughly 5 percent.

* * *

Every penny you pay in fees, of course, lowers your return. In fact, my research indicates that each additional 0.25 percent in annual fees pushes back your financial independence goal by a year.

What’s more, the only factor that is predictive of a fund’s relative performance against similar funds is fees. A low-cost domestic stock fund is likely to outperform an equivalent high-cost fund, just as a low-cost bond fund is likely to outperform an equivalent high-cost fund. . . . As fund fees increase, performance decreases. In fact, fees explained nearly 60 percent of the U.S. stock fund family performance ratings given by Morningstar. Numerous studies done to predict mutual fund performance indicate that neither the Morningstar rating nor the track record of the fund manager were indicative of future performance.

Another questionable practice in the mutual fund industry — the hiring of “rookies” to manage the funds — was recently placed under the spotlight by Ken Kam for the MSN TopStocks blog:

In this market, it’s going to take skill to make back last year’s losses. After a 40% loss, it takes a 67% gain just to get back to even. You would think that mutual funds would put their most experienced managers and analysts to work right now. But according to Morningstar, the managers of 28 out of 48 unique healthcare funds, almost 60%, (see data) have less than five years with their fund. I think you need to see at least a five-year track record before you can even begin to judge a manager’s worth.

I’m willing to pay for good management that will do something to protect me if the market crashes again. But I want to see some evidence that I am getting a good manager before I trust them with my money. I want to see at least a five-year track record. If I paid for good management and I got a rookie manager with no track record instead, I would be more than a little upset.

Beyond that, John Authers of Morningstar recently wrote an article for the Financial Times, explaining that investors will obtain better results investing in a stock index fund, rather than an “actively managed” equity mutual fund, whether or not that manager is a rookie:

For decades, retail savers have invested in stocks via mutual funds that are actively managed to try to beat an index. The funds hold about 100 stocks, and can raise or lower their cash holdings, but cannot bet on stocks to go down by selling them short.

This model has, it appears, been savaged by a flock of sheep.

Index investing, which cuts costs by replicating an index rather than trying to beat it, has been gaining in popularity.

Active managers argued that they could raise cash, or move to defensive stocks, in a downturn. Passive funds would track their index over the edge of the cliff.

But active managers, in aggregate, failed to do better than their indices in 2008.

So … if you have become too frustrated to continue investing in stocks, be mindful of the fact that equity-based mutual funds have problems of their own.

As for other alternatives: Ian Wyatt recently wrote a favorable piece about the advantages of exchange-traded funds (ETFs) for SmallCapInvestor.com. Nevertheless, if the stocks comprising those ETFs (and the ETFs themselves) are being traded in a “rigged” market, you’re back to square one. Happy investing!

DISCLAIMER: NOTHING CONTAINED ANYWHERE ON THIS SITE CONSTITUTES ANY INVESTING ADVICE OR RECOMMENDATION. ANY PURCHASES OR SALES OF SECURITIES OR OTHER INVESTMENTS ARE SOLELY AT THE DISCRETION OF THE READER.

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An Ominous Drumbeat Gets Louder

August 13th, 2009 Posted in Uncategorized

Aug, 13 2009

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August 13, 2009

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

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

* * *

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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Doubts Concerning The Stock Market Rally

August 6th, 2009 Posted in Uncategorized

Aug, 06 2009

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August 6, 2009

As of today (Wednesday night) the current “bear market rally” continues to surprise people with its longevity. On the other hand, many news outlets, including The Washington Times and CNBC are declaring a “New Bull Market”. There seems to be no shortage of commentators proclaiming that the market indices will continue to climb forever.

Back on planet earth, there is a good deal of commentary about the suspicious activity behind this rally. In my last posting, I discussed the “Plunge Protection Team” or PPT. Rather than repeat all that, for the benefit of those unfamiliar with the PPT, I will quote the handy definition at the Hamzei Analytics website:

Plunge Protection Team has been the “Working Group” established by law in 1988 to buy the markets should declines get out of control. It is suspected by many market watchers that PPT has become far more interventionist than was originally intended under the law. There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy the markets when they decide the markets need to be bought, including the equity markets. Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk, which easily shows up in the M-3 numbers, warning intervention was near. As of April 2006, M-3 is longer reported.

Many of us have looked to the PPT as the driving force behind this rally. News sources have claimed that the rally is the result of money “coming into the markets from the sidelines” — implying that crisis-wary investors had finally thrown caution to the wind and jumped into the equities markets to partake in the orgy of newfound wealth. The cash accumulating in the investors’ money market accounts was supposedly being invested in stocks. This propaganda was quickly debunked by the folks at the Zero Hedge website, with the following revelation:

Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S.banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card.

Similar skepticism was voiced by Karl Denninger of The Market Ticker website:

So once again we have The Fed blowing bubbles, this time in the equity markets, with (another) wink and a nod from Congress. This explains why there has been no “great rush” for individual investors to “get back in”, and it explains why the money market accounts aren’t being drained by individuals “hopping on the bus”, despite the screeching of CNBC and others that you better “buy now or be priced out”, with Larry Kudlow’s “New Bull Market” claim being particularly offensive.

Unfortunately the banksters on Wall Street and the NY Fed did their job too well – by engineering a 50% rally off the bottom in March while revenues continue to tank, personal income is in the toilet and tax receipts are in freefall they have exposed the equity markets for what they have (unfortunately) turned into — a computer-trading rigged casino with the grand lever-meister being housed at the NY Fed.

* * *

No, real buying is just that – real buying from real retail investors who believe in the forward prospects for the economy and business, not funny-money Treasury and MBS buying by The Fed from “newly created bank reserves” funneled back into the market via high-speed computers. The latter is nothing more than a manufactured ramp job that will last only until “the boyz” get to the end of their rope (and yes,that rope does have an end) as the fractional creation machine does run just as well in reverse, and as such “the boyz” cannot allow the trade to run the wrong way lest it literally destroy them (10:1 or more leverage is a real bitch when its working against you!)

Is it coming to an end now? Nobody can be certain when, but what is certain is that over the last week or so there have been signs of heavy distribution – that is, the selling off of big blocks of stock into the market by these very same “boyz.” This is not proof that the floor is about to disappear, but it is an absolute certainty that these “players” are protecting themselves from the possibility and making sure that if there is to be a bagholder, it will be you.

Many commentators, including Joseph Saluzzi of Themis Trading, have explained how the practice of computer-driven “High-Frequency Trading” has added approximately 70 percent of “volume” to the equities markets. This is accomplished because the exchanges pay a quarter-of-a-penny rebate to High-Frequency Trading firms for each order they place, waiving all transaction fees. As a result, the “big boy” firms, such as J.P. Morgan and Goldman Sachs, will make trades with their own money, buying and selling shares at the same price, simply for the rebates. Those pennies can add up to hundreds of millions of dollars.

I recently came across a very interesting paper (just over eight pages in length) entitled: A Grand Unified Theory of Market Manipulation, published by Precision Capital Management. The paper describes a tug of war between Treasury Secretary Ben Bernanke and the New York Fed, that is playing out in the equities and Treasury securities markets. The authors suggest that if Bernanke’s biggest threat is high long-term Treasury yields (interest rates), the easiest way to prevent or postpone a yield ramp would be to kill the stock market rally and create a “flight to safety in Treasuries” – situation that lowers long-term yields. The paper describes how the New York Fed facilitates “painting the tape” in the stock markets to keep the rally alive. For those of you who don’t know what that expression means, here’s a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

Instead of accusations that the PPT is the culprit doing the tape painting during the final minutes of the trading day, we again see a focus on the New York Fed as the facilitator of this practice. Here’s the explanation given in the paper by Precision Capital Management:

The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date. Thanks to Thanassis Strathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges. These auctions are conducted from about 10:30 a.m. to 11:00 a.m. on pre-announced days. In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B. These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital interjections are able to leverage this money by 100 to 500 times and then use it to ramp equities.

As for the all-important question of how the authors expect this to play out, they focus on what might happen at the market close on August 5:

And, while it is a bit early to favor one side or the other, we are currently leaning toward a nervous Bernanke and the need to ramp Treasuries at the expense of equities into August 9. Equities have had more than a nice run and can suffer a bit of a correction. Key will be watching the close on Wednesday. A failed POMO paint the tape close could signal that an equities correction of at least a few weeks has gotten underway.

What we saw on Wednesday afternoon was just that. At approximately 3 p.m. there was an effort to push the S&P 500 index into positive territory for the first time that day, which succeeded for just a few minutes. The index then dropped back down, closing .29 percent lower than the previous close. Does this mean that a market correction is underway? Time will tell. With the S&P 500 index at 1002 as I write this, many experts consider the market to be “overbought”. Fund manager Jeremy Grantham, who has been entrusted to invest over $89 billion of his customers’ hard-inherited money, is of the opinion that the current fair value for the S&P 500 should be just below 880. Thus, there is plenty of room for a correction. The answer to the question of whether that correction is now underway should be something we will learn rather quickly.

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