Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending. It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006. Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:
In his eight years as Goldman’s chief executive, Paulson had presided over the firm’s plunge into the business of buying up subprime mortgages to marginal borrowers and then repackaging them into securities, overseeing the firm’s huge positions in what became a fraud-infested market.
During Paulson’s first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely. Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities.
By now, the rest of that painful story has become a burden for everyone in America and beyond. Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts. When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson. The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:
Ireland has at least faced up to the consequences of the reckless lending, unlike the United States. The Obama administration has adopted a muddle-through approach, hoping that a recovery in housing prices might mean that the big US banks can avoid recognising crippling property losses.
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Leading US bank analyst, Chris Whalen, co-founder of Institutional Risk Analytics, has warned that the banks are struggling to cope with the mountain of problem home loans and delinquent commercial property loans. Whalen estimates that the big US banks have restructured less than a quarter of their delinquent commercial and residential real estate loans, and the backlog of problem loans is growing.
This is eroding bank profitability, because they are no longer collecting interest on a huge chunk of their loan book. At the same time, they also face higher administration and legal costs as they deal with the problem property loans.
Banks nursing huge portfolios of problem loans become reluctant to make new loans, which chokes off economic activity.
Ultimately, Whalen warns, the US government will have to bow to the inevitable and restructure some of the major US banks. At that point the US banking system will have to recognise hundreds of billions of dollars in losses from the deflation of the US mortgage bubble.
If Whalen is right, Ireland is a template of what lies ahead for the US.
Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves. Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness: CNBC. Whalen was interviewed on CNBC’s Fast Money program on October 8. You can see the video here. The Whalen interview begins at 7 minutes into the clip. John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc. Here are some tidbits from this must-read interview:
LL: Chris, when are you expecting the storm to hit?
CW: When the too big to fail banks can no longer fudge the cost of restructuring their real estate exposures, on and off balance sheet. Q3 earnings may be the catalyst
LL: What banks are most exposed to this tsunami?
CW: Bank of America, Wells Fargo, JPMorgan, Citigroup among the top four. GMAC. Why do we still refer to the ugly girls — Bank of America, JPMorgan and Wells Fargo in particular — as zombies? Because the avalanche of foreclosures and claims against the too-big-too-fail banks has not even crested.
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LL: How many banks to expect to fail next year because of this?
CW: The better question is how we will deal with the process of restructuring. My view is that the government/FDIC can act as receiver in a government led restructuring of top-four banks. It is time for PIMCO, BlackRock and their bond holder clients to contribute to the restructuring process.
Of course, this restructuring could have and should have been done two years earlier — in February of 2009. Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts. As the saying goes: “He who hesitates is lost.” In this case, President Obama hesitated and we lost. We lost big.
I include myself among those who are astonished by the number of people who believe that the economy is well on the road to recovery. The cheerleaders on television never seem to have trouble convincing a certain number of people that all is well. Nevertheless, the recent stock market activity, particularly on Thursday, April 29 – when the specter of debt contagion from Greece sent many to Walgreen’s for their first-time purchase of Depends – provided evidence that there is plenty of denial about our uncertain economic situation. It seems as though most people are convinced that America can money-print its way out of any problem that comes along. They must believe that if Ben Bernanke’s printing press beat the financial crisis it can defeat everything from climate change to terrorism. But what about the economic impact from the recent oil rig disaster in the Gulf of Mexico? Do people believe that Ben Bernanke can just print more fish and save the seafood industry?
David Kotok is the Chief Investment Officer for Cumberland Advisors. His grim outlook concerning the consequences from the Deepwater Horizon tragedy are obviously too painful for the magical thinking crowd to consider for more than a nanosecond. The Business Insider website provided us with some glimpses of what Mr. Kotok sees resulting from what many people prefer to view as simply “another oil spill – possibly as bad as that caused by the Exxon Valdez”. From Mr. Kotok’s perspective, there is a dimension of economic turmoil about to result from the recent catastrophe that could send our precariously-situated economy into a double-dip recession:
Thousands of small and independent businesses as well as larger public companies in tourism are hurt here. This is not just about the source of half the nation’s shrimp. That is already a casualty. It’s also about the bank loans for the $200,000 shrimp boat and the house the boat owner and/or his employees live in and the fact that this shock piles on a fragile financial system that is trying to recover from a three-year financial crisis.
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Federal deficit spending will certainly rise by tens, and maybe hundreds, of billions as emergency appropriations are directed at larger and larger efforts to clean up this mess. At the same time, federal and state revenues tied to Gulf-region businesses will fall.
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We expect to see the deterioration of the economic statistics for the US to reveal the onset of this oil-slick crisis in May, and the negative impact will intensify during the summer months. A “double-dip” recession probably has been made more likely by this tragedy.
As the great multitude of media outlets spin the story to fit the usual narratives (“lessons learned”, “finger pointing”, “Obama’s Katrina”, “Halliburton’s latest controversy”, etc.) the most important story – the likely economic consequences of this event – is being ignored by the mainstream media for as long as possible. As usual, Wall Street’s favorite chumps – those who believe that macroeconomic events are irrelevant to what happens in the stock market – are poised for another bloodbath. This time, Ben Bernanke’s printing press won’t serve as the ultimate panacea. Fish can’t be printed.
Everyone is speculating about what will happen next. The shock waves resulting from the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, have left the blogosphere’s commentators with plenty to discuss. Unfortunately, the mainstream media isn’t giving this story very much traction. On March 15, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal. Here is some of what he said:
Look, I know that Lehman collapsed a year and a half ago, but this is a major story — one that finally gets awfully close to putting the crimes in the crisis. I’ll go ahead and say it: If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times. This on the biggest financial news story of the week — and one of the biggest of the year. These papers have hundreds of journalists at their disposal. The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.
I’m hardly the only one who has noticed this. James Kwak of Baseline Scenario wrote this earlier today:
Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.
At the Zero Hedge website, Tyler Durden reacted to the Columbia Journalism Review piece this way:
Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention. As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the NewYork Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America’s key media organizations.
One probable reason why the Lehman story is being buried is because its timing dovetails so well with the unveiling of Senator “Countrywide Chris” Dodd’s financial reform plan. The fact that Dodd’s plan includes the inane idea of expanding the powers of the Federal Reserve was not to be ignored by John Carney of The Business Insider website:
Why do we think these are such bad ideas? At the most basic level, it’s hard to see how the expansion of the scope of the Federal Reserve’s authority to cover any large financial institution makes sense. The Federal Reserve was not able to prevent disaster at the firms it was already charged with overseeing. What reason is there to think it will do a better job at regulating a wider universe of firms?
More concretely, the Federal Reserve had regulators in place inside of Lehman Brothers following the collapse of Bear Stearns. These in-house regulators did not realize that Lehman’s management was rebuking market demands for reduced risk and covering up its rebuke with accounting sleight-of-hand. When Lehman actually came looking for a bailout, officials were reportedly surprised at how bad things were at the firm. A similar situation unfolded at Merrill Lynch. The regulators proved inadequate to the task.
Just think: It was only one week ago when we were reading those fawning, sycophantic stories in The New Yorker and The Atlantic about what a great guy “Turbo” Tim Geithner is. This week brought us a great essay by Professor Randall Wray, which raised the question of whether Geithner helped Lehman hide its accounting tricks. Beyond that, Professor Wray emphasized how this scandal underscores the need for Federal Reserve transparency, which has been so ardently resisted by Ben Bernanke. (Remember the lawsuit by the late Mark Pittman of Bloomberg News?) Among the great points made by Professor Wray were these:
Not only did the NY Fed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better. Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)
Geithner told Congress that he has never been a regulator. (see here) That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NY Fed.
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More generally, this revelation drives home three related points. First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable. He must determine what did Geithner know, and when did he know it. All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released. Further, Obama must ask what has Geithner done to favor his clients on Wall Street? It now looks like even the Fed BOG, not just the NY Fed, is involved in the cover-up. It is in the interest of the Obama administration to come clean. It is hard to believe that it does not already have sufficient cause to fire Geithner. In terms of dollar costs to the government, this is surely the biggest scandal in US history. In terms of sheer sleaze does it rank with Watergate? I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.
It remains to be seen whether anyone in the mainstream media will be hitting this story so hard. One possible reason for the lack of significant coverage may exist in this disturbing point at the conclusion of Wray’s piece:
Of greater importance is the recognition that all of the big banks are probably insolvent. Another financial crisis is nearly certain to hit in coming months — probably before summer. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.
Oh, boy! Not good! Not good at all! We’d better change the subject to March Madness, American Idol or Rielle Hunter! Anything but this!
I recently saw the movie Food, Inc. and was struck by the idea that there are some fundamental problems that span just about every situation where government corruption and ineptitude have facilitated an industry’s efforts to crush the interests of consumers. At approximately 36 minutes into the film, Michael Pollan explained how government efforts to prevent abuses in the food industry are undermined by the fact that the government always relies on the “quick fix” or “band-aid” approach, rather than a strategy addressed at solving a systemic problem. In other words: government prefers to treat the symptoms rather than the disease.
As I thought about Michael Pollan’s remark, I was immediately reminded of our financial crisis. In that case, the solution was to bail out the “too big to fail” financial institutions. As legislative proposals are introduced to address the systemic problems and prevent a recurrence of what happened in the fall of 2008, the lobbyists have stepped in to sabotage those efforts.
There were two other factors discussed in Food Inc. as presenting roadblocks to effective consumer-protective legislation: the revolving door between the industry and Washington, as well as “regulatory capture” — a situation where government regulators are beholden to those whom they regulate.
We have seen the impact of these two factors in the financial area and they have been well-documented. The “revolving door” was the subject of two recent essays by John Carney at The Business Insider website. Carney discussed “The Banking Blob” as a secret club of Senate staffers and Wall Street lobbyists:
Staffers on the powerful Senate banking committee are part of what is known as “The Banking Blob,” a person familiar with the matter told us. The Banking Blob is made up of current banking committee staffers and former staffers who are now bankers or lobbyists. They frequently socialize together, often organizing happy hours and parties.
“They move in a pack. They socialize together,” the person says. “Hell. They even inter-marry.”
The Blob is made up of both Republican and Democratic staffers. Outsiders tend to think the Blob members view themselves as “cooler” than other Capitol Hill staff members. Often a job on the banking committee leads to a well-paying job for a Wall Street firm or a position at a K-Street lobbyist law firm.
Carney had previously discussed the problem of Senate banking committee staffers who see their job as simply a stepping stone to a lucrative banking job:
The allure of banking is hardly a mystery. The money is better. Far better than the government wages paid to Capitol Hill staffers. After years of toiling in government service, many staffers dream of a better life in one of the leafy neighborhoods that are so posh you cannot get there on DC’s Metro. . . .
“Everyone talks about people going from Goldman to government. But the problem is the other way. Too many staffers go from Capitol Hill to banking. And even more aspire to make that move. It corrupts the process,” the staffer told us.
The third problem — “regulatory capture” — is best epitomized in the person of “Turbo” Tim Geithner. Joshua Rosner recently dissected Turbo Tim’s often-repeated claim that he has always worked in “public service”. Rosner demonstrated that the only sector that has been “serviced” by Geithner was the banking industry:
Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?
Geithner’s last job, as the President of the New York Fed highlights that question.
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The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those it has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.
The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.
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In truth, Geithner’s ineffectiveness in his role as NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident.
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If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense.
One important lesson to be learned from our government’s inability to do its job regulating the financial sector, is that this failure is primarily caused by three problems:
An unwillingness to address a systemic problem by choosing, instead, to focus on “quick fixes”;
A revolving door between government and industry;
Regulatory capture.
Legislators, consumer advocates and commentators should focus on these three problem areas when addressing any situation where our government proves itself ineffective in preventing abuses by a particular industry.
In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis. A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides. The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. Like the Pecora Commission, the FCIC has subpoena power.
On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses. The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday. The witness list and schedule appear at The Huffington Post website. Wednesday’s first panel is comprised of the following financial institution CEOs: Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. Curiously, Vikram Pandit of Citigroup was not invited.
Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column. Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:
Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.
More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.
A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post. Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation. Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations. Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:
The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said. Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.
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Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing. Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.
Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.
“There are a lot of people who still haven’t learned the lessons,” he said.
One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing. Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:
There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner. While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke. It is time for a fresh start.
Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed. As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.
Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):
1. Banks do not face a liquidity crisis, rather they are massively insolvent. Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. …
2. Saving financial institutions does not save the economy. …
3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound. Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street. …
4. Finally, we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. …
At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign. The text version of this discussion appears at The Huffington Post. Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:
We would like to see Geithner go now.
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But there’s little chance this will happen. The Obama administration cannot afford to show weakness. If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority. Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.
There’s also little political upside to getting rid of Geithner now. It will not save Congressional Democrats any seats in the mid-term election. Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.
All of this changes following the midterm elections, when Democrats will likely lose seats in Congress. At that point, the administration will be looking for a fall guy. Geithner will make an attractive fall guy.
Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.
Matt Taibbi hit another grand slam with his recent Rolling Stone article: “Obama’s Big Sellout”. It was another classic work in his unique style. The ugly truth it drove home was that Barack Obama used a “bait and switch” tactic in his Presidential campaign: promising to reform Wall Street — until the day after he got elected — at which time he immediately jumped into bed with the culprits of the financial crisis. The reaction of the Obama apologists to the Rolling Stone piece involved the usual tactic of attacking the messenger (in this case: Taibbi himself). It didn’t work. The best way to see how this played out should begin with a reading of Taibbi’s retort to a critique appearing in The American Prospect — a feeble attempt to demonstrate that Taibbi got his facts wrong. A neutral judge, Felix Salmon of Reuters, then stepped in and ruled in favor of Taibbi. The online responses to Felix Salmon’s essay are a great read. At the Open Left website, David Sirota upbraided Taibbi’s critics, who spanned the political spectrum — many of whom expressed condescension at the “naïve” decision of an outside-the-beltway reporter to expose the breach of a campaign promise:
It’s certainly true that a lot of politicians’ words mean nothing – but if reporters start treating that as a non-newsworthy assumption in their coverage, then the whole journalistic system becomes a joke – a miasma of personality profiles and puff pieces that assumes that the only thing that must be valued in politics is personal intangibles like “charisma” and “charm” and “toughness” and all those other incessant cliches. And what a joke that makes of our democracy. In a republic where we only get to vote our politicians in or out every few years, all we have to go on are their promises. If we now must assume their promises aren’t true, and attack people for being “naïve” for daring to try to hold them to their promises, then we’ve made a joke of our whole political system.
Matt Taibbi’s article immediately forced the White House into a damage control mode. Another softball interview was immediately set up with Steve Croft of 60 Minutes, wherein Obama attempted to redeem his false image as an adversary of the Wall Street investment banks. The President took advantage of that opportunity to present himself as an antagonist of those he described as “fat cats”. On the following day, Obama held a meeting in the White House cabinet room with some banking representatives who found the event important enough to attend. Immediately afterward, Charlie Gasparino revealed the backstory behind Obama’s meeting with the bankers. After informing us that the administration provided the bankers with Obama’s “talking points” in advance of the meeting, Gasparino disclosed this:
. . . people with first-hand knowledge of the sitdown said, it was a heavily scripted affair — with none of the fireworks Obama displays in public.
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Said one CEO who attended: “I expected to be taken to the woodshed, but the tone was quite the opposite.”
Said another senior exec with knowledge of the meeting: “The whole thing was so telegraphed that not much was accomplished, other than giving Obama a PR stunt. . . . He might have sounded mean on ‘60 Minutes,’ but during the meeting he was a hell of a lot nicer.”
Many commentators were quick to point out that by the time Obama started talking tough about “fat cats”, he had already given them all they wanted by allowing them to pay back their TARP loans on an expedited basis. As Henry Blodget explained forThe Business Insider:
And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks. They just ditched the bad stuff — namely, pay caps — and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone). Obama can jawbone all he wants about “fat cats,” but that’s all he can do.
At The Washington Post, Steven Pearlstein bemoaned the fact that the TARP beneficiaries had been “let off their leash”. Pearlstein expressed concern that this move created the potential for more problems in the future:
By rushing to cash in their chips, however, the administration not only gave up political leverage and additional profit, but took the risk that one or more of the banks may find that it can’t make it on its own. While the financial system has rebounded faster than anyone could have imagined, potential threats still loom — a further collapse of commercial real estate, for example, or a string of sovereign debt defaults. And bank profits, while having rebounded, remain significantly dependent on the availability of cheap funding from the Federal Reserve and other central banks that cannot be expected to last indefinitely.
The administration’s damage control effort turned out to be worthless. With his centerpiece healthcare reform effort floundering in the Senate, Obama the President is appearing to be significantly less effective than Obama the candidate. The President’s critics have been quick to pounce. George Will noted that Obama has “seen his job approval vary inversely with his ubiquity”. The New York Post’s Michael Goodwin alleged that Obama “doesn’t look like he cares that big chunks of the country, left, right and center, are giving up on him.” However, the best analysis of the confidence crisis afflicting the Obama Presidency came from Dan Gerstein of Forbes.com. Gerstein observed that the new Preisdent’s leadership style was to blame — something Gerstein described as “the Reverse Roosevelt: Talk boldly and carry a toothpick.” While debunking the administration’s claim that it had lost the leverage it had over Wall Street with the TARP paybacks, Gerstein argued that such an excuse “doesn’t pass the laugh test” because the banking industry is the most regulated industry in the country. The task Obama faces is to cultivate a leadership style that will be useful in confronting the challenges he undertook when he assumed office:
For those center dwellers, the issue is not that Obama is too liberal or too pragmatic (the chief complaints of the noisemakers on the left and right), but that he is not effective enough. They question whether he has what it takes to get results: to find the right balance on health care, to admit and fix the inadequacies of the stimulus, to begin taming the deficit without impeding growth. It is a crisis of confidence that at its heart is, as Brookings scholar and former Clinton adviser Bill Galston points out, a crisis of competence.
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But regardless of the reasons, Obama signed up for these missions, and his ability to succeed in them will largely hinge on whether he can grow as a leader. Can he overcome his inhibitions, whatever their cause, and learn from the legacies of our most effective presidents about how to wield the full power of his office? He clearly knows how to don the velvet glove (often with substantial impact) — will he come to understand when to unleash the iron fist?
Obama’s pattern so far is far from encouraging. But I would not give up hope for growth.
It appears as though we are back to the themes of “hope” and “change”. This time we’re hoping that Obama will change.
In the November 18 edition of The Telegraph, Ambrose Evans-Pritchard revealed that the French investment bank, Societe Generale “has advised its clients to be ready for a possible ‘global economic collapse’ over the next two years, mapping a strategy of defensive investments to avoid wealth destruction”. That gloomy outlook was the theme of a report entitled: “Worst-case Debt Scenario” in which the bank warned that a new set of problems had been created by government rescue programs, which simply transferred private debt liabilities onto already “sagging sovereign shoulders”:
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
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The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
To make matters worse, America still has an unemployment problem that just won’t abate. A recent essay by Charles Hugh Smith for The Business Insider took a view beyond the “happy talk” propaganda to the actual unpleasant statistics. Mr. Smith also called our attention to what can be seen by anyone willing to face reality, while walking around in any urban area or airport:
The divergence between the reality easily observed in the real world and the heavily touted hype that “the recession is over because GDP rose 3.5%” is growing. It’s obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.
By this point, most Americans are painfully aware of the massive bailouts afforded to those financial institutions considered “too big to fail”. The thought of transferring private debt liabilities onto already “sagging sovereign shoulders” immediately reminds people of TARP and the as-yet-undisclosed assistance provided by the Federal Reserve to some of those same, TARP-enabled institutions.
As Kevin Drawbaugh reported for Reuters, the European Union has already taken action to break up those institutions whose failure could create a risk to the entire financial system:
EU regulators are set to turn the spotlight on 28 European banks bailed out by governments for possible mandated divestitures, officials said on Wednesday.
The EU executive has already approved restructuring plans for British lender Lloyds Banking (LLOY.L), Dutch financial group ING Groep NV (ING.AS) and Belgian group KBC (KBC.BR).
Giving break-up power to regulators would be “a good thing,” said Paul Miller, a policy analyst at investment firm FBR Capital Markets, on Wednesday.
Big banks in general are bad for the economy because they do not allocate credit well, especially to small businesses, he said. “Eventually the big banks get broken up in one way or another,” Miller said at the Reuters Global Finance Summit.
Meanwhile in the United States, the House Financial Services Committee approved a measure that would grant federal regulators the authority to break up financial institutions that would threaten the entire system if they were to fail. Needless to say, this proposal does have its opponents, as the Reuters article pointed out:
In both the House and the Senate, “financial lobbyists will continue to try to water down this new and intrusive federal regulatory power,” said Joseph Engelhard, policy analyst at investment firm Capital Alpha Partners.
If a new break-up power does survive the legislative process, Engelhard said, it is unlikely a “council of numerous financial regulators would be able to agree on such a radical step as breaking up a large bank, except in the most unusual circumstances, and that the Treasury Secretary … would have the ability to veto any imprudent use of such power.”
When I first read this, I immediately realized that Treasury Secretary “Turbo” Tim Geithner would consider any use of such power as imprudent and he would likely veto any attempt to break up a large bank. Nevertheless, my concerns about the “Geithner factor” began to fade after I read some other encouraging news stories. In The Huffington Post, Sam Stein disclosed that Oregon Congressman Peter DeFazio (a Democrat) had called for the firing of White House economic advisor Larry Summers and Treasury Secretary “Timmy Geithner” during an interview with MSNBC’s Ed Schultz. Mr. Stein provided the following recap of that discussion:
“We think it is time, maybe, that we turn our focus to Main Street — we reclaim some of the unspent [TARP] funds, we reclaim some of the funds that are being paid back, which will not be paid back in full, and we use it to put people back to work. Rebuilding America’s infrastructure is a tried and true way to put people back to work,” said DeFazio.
“Unfortunately, the President has an adviser from Wall Street, Larry Summers, and a Treasury Secretary from Wall Street, Timmy Geithner, who don’t like that idea,” he added. “They want to keep the TARP money either to continue to bail out Wall Street … or to pay down the deficit. That’s absurd.”
Asked specifically whether Geithner should stay in his job, DeFazio replied: “No.”
“Especially if you look back at the AIG scandal,” he added, “and Goldman and others who got their bets paid off in full … with taxpayer money through AIG. We channeled the money through them. Geithner would not answer my question when I said, ‘Were those naked credit default swaps by Goldman or were they a counter-party?’ He would not answer that question.”
DeFazio said that among he and others in the Congressional Progressive Caucus, there was a growing consensus that Geithner needed to be removed. He added that some lawmakers were “considering questions regarding him and other economic advisers” — though a petition calling for the Treasury Secretary’s removal had not been drafted, he said.
Another glimmer of hope for the possible removal of Turbo Tim came from Jeff Madrick at The Daily Beast. Madrick’s piece provided us with a brief history of Geithner’s unusually fast rise to power (he was 42 when he was appointed president of the New York Federal Reserve) along with a reference to the fantastic discourse about Geithner by Jo Becker and Gretchen Morgenson, which appeared in The New York Times last April. Mr. Madrick demonstrated that what we have learned about Geithner since April, has affirmed those early doubts:
Recall that few thought Geithner was seasoned enough to be Treasury secretary when Obama picked him. Rubin wasn’t ready to be Treasury secretary when Clinton was elected and he had run Goldman Sachs. Was Geithner’s main attraction that he could easily be controlled by Summers and the White House political advisers? It’s a good bet. A better strategy, some argued, would have been to name Paul Volcker, the former Fed chairman, for a year’s worth of service and give Geithner as his deputy time to grow. But Volcker would have been far harder to control by the White House.
But now the president needs a Treasury Secretary who is respected enough to stand up to Wall Street, restabilize the world’s trade flows and currencies, and persuade Congress to join a battle to get the economic recovery on a strong path. He also needs someone with enough economic understanding to be a counterweight to the White House advisers, led by Summers, who have consistently been behind the curve, except for the $800 billion stimulus. And now that is looking like it was too little. The best guess is that Geithner is not telling the president anything that the president does not know or doesn’t hear from someone down the hall.
The problem for Geithner and his boss, is that the stakes if anything are higher than ever.
As the rest of the world prepares for worsening economic conditions, the United States should do the same. Keeping Tim Geithner in charge of the Treasury makes less sense than it did last April.
Meghan McCain’s recent lament in The Daily Beast struck me as rather strange. She really should know better. Ms. McCain expressed her frustration over mainstream media treatment of “two of the most prominent women in politics — Hillary Clinton and Sarah Palin”. Ms. McCain felt the coverage received by those two politicians has been so misogynistic that she has nearly given up on the possibility that she may ever see a woman get elected to the Presidency:
It seems to me the male-dominated media suffers from a Goldilocks Syndrome that keeps women from shattering the glass ceiling. Worse, I fear it will prevent tomorrow’s female leaders from even seeking office.
Of course, if one can see no further than Hillary Clinton or Sarah Palin when seeking female Presidential candidates, then despair is inevitable. In the summer of 2008, after Ms.Clinton faced up to the reality that Barack Obama had won the Democratic nomination, we heard similar doubts expressed by many despondent female supporters of Hillary Clinton — that they would never see a female elected President within their own lifetimes. At that point, I wrote apiece entitled “Women To Watch”, reminding readers that “there are a number of women presently in the Senate, who got there without having been married to a former President (whose surname could be relied upon for recognition purposes).” One of those women, whom I discussed at that time, was Senator Maria Cantwell of Washington. Maria Cantwell has been in the news quite a bit recently and the coverage has been favorable. As I said in June of 2008, those holding out hope for a female Presidential candidate should keep an eye on her.
In our highly-partisan political climate, one rarely hears a national politician break from “party line” rhetoric and talking points while being interviewed by the news media or when writing commentary pieces for news publications and blogs. Nevertheless, Senator Cantwell has taken the bold step of criticizing, not only the administration’s handling of the economic crisis, but the K Street payoff culture enlisting her fellow Democrats as enablers of the status quo.
On October 30, Senator Cantwell wrote a piece for The Huffington Post, decrying the fact that those financial institutions benefiting from the massive bailouts from TARP and the Federal Reserve “have resumed their old habit of using other people’s money to gamble with the same risky unregulated derivatives that led us into this crisis.” The reason for the failure at every level of the federal government to even consider appropriate legislation or regulations to rein-in continuing irresponsible behavior by those institutions was candidly discussed by the Senator:
Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress, which might help explain why, to date, nothing has been fixed in our porous financial regulatory system. Americans want to know when Congress will put an end to the Wall Street’s secret off-book gambling schemes and restore our capitalist system by requiring real transparency and true competition.
Senator Cantwell’s essay is essential reading, coming on the heels of a rebuke, by her fellow Democrats, against efforts at requiring transparency in the trading of credit default swaps:
Imposing full transparency and true competition will require moving derivative trades onto regulated exchanges. That would mean full transparency of trading prices and volumes, reporting requirements for large trader positions, and adequate capital reserves to protect against a default. The government needs full anti-fraud and anti-manipulation authority. Giving regulators this power will ensure a transparent and competitive marketplace and will ensure that violators will go to jail.
On November 2, Senator Cantwell appeared on MSNBC’s Morning Meeting with Dylan Ratigan. At that time, Mr. Ratigan had just written a piece for The Business Insider, expressing his outrage about recent statements by Treasury Secretary “Turbo” Tim Geithner, supporting House bank reform legislation allowing credit default swaps to continue being traded in secret. Since Senator Cantwell had previously discussed that subject with him on October 16, Mr. Ratigan focused on Geithner. Ratigan noted Geithner’s endorsement of the proposed House “banking reform” legislation on the previous day’s broadcast of Meet The Press — despite the bill’s “massive exemptions” allowing opacity in the trading of credit default swaps. Ratigan then asked Senator Cantwell why Tim Geithner still has a job, to which she replied:
I’m not sure because David Gregory had him almost — trying to get a straight answer out of him. What the Treasury Secretary basically said was: yes, banks should take more risks and we should continue the loopholes — and that is really appalling because, right now, we know that lack of transparency has caused this problem with the U.S. economy and Wall Street is continuing, one year later, continuing the same kind of loopholes. And so if the Treasury Secretary doesn’t come down hard against these loopholes and advocate foreclosing them, then we’re going to have a tough time closing them in Congress. So the Treasury Secretary is dodging the issue.
Senator Cantwell sure isn’t dodging any issues. Beyond that, she is demonstrating that she has more cajones than any of her male counterparts in the Senate. So far, all of the publicity concerning her position on financial reform has been favorable. After all, she is boldly standing up to the lobbyists, the Congress they own and a White House that received nearly a million dollars in campaign contributions from Goldman Sachs.
Back in Senator Cantwell’s home state of Washington, The Seattle Times praised her co-sponsorship of Senate Bill 823, the Net Operating Loss Carryback Act, which has already been passed by both houses of Congress. This bill increases the corporate income tax refunds for businesses that were making money during the pre-2008 era but now operate at a loss. As the Seattle Times editorial explained:
The national unemployment rate is still rising. It has just gone double-digit for the first time in 26 years, and is at 10.2 percent.
This is not recovery.
The new law does not have taxpayers underwrite credit default swaps or any of the other alchemic creations of Wall Street investment banks. It is not more aid and comfort for the nationalized and quasi-nationalized corporate giants; it specifically exempts Fannie Mae, Freddie Mac and any company in which the Treasury has recently become an owner.
This law is for the businesses that suffer in the recession, not the ones that caused it. It is one of the few things Congress has done that reaches directly to Main Street America. It is a big deal to many local businesses, including businesses here.
Congratulations, Senator Cantwell!
To Meghan McCain and other women remaining in doubt as to whether they will ever see a female sworn in as President: Just keep watching Maria Cantwell as she continues to earn well-deserved respect.
But ask what your country can do for its largest banks.
— “Turbo” Tim
All right . . . “Turbo” Tim Geithner didn’t really say that (yet) but we’ve all seen how his actions affirm that doctrine. Former federal banking regulator, Professor William Black, recently criticized Geithner for not protecting the taxpayers when Turbo Tim bailed out CIT Group to the tune of 2.4 billion dollars this past summer. CIT has now filed for bankruptcy. Henry Blodget of The Business Insider described Professor Black’s outrage over this situation:
The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds. More importantly, being the lender of last resort, the government should have guaranteed we’d be the first to get paid if CIT eventually filed Chapter 11. By failing to do so, “it’s like he [Geithner] burned billions of dollars again in government money, our money, gratuitously,” says Black.
After Tuesday’s election defeats for the Democrats in two gubernatorial races, the subject of “bailout fatigue” has been getting more attention.
Acting under the pretext of “transparency” the Obama administration has developed a strategy of holding meetings for people and groups with whom the administration knows it is losing credibility. Jane Hamsher of FiredogLake.com has written about the Obama team’s efforts to keep the disaffected Left under control by corralling these groups into what Hamsher calls “the veal pen”. She described one meeting wherein Rahm Emanuel used the expression “f**king stupid” in reference to the critics of those Democrats opposing the public option in proposed healthcare reform legislation.
A different format was followed at what appeared to be a “message control” conference, held on Monday at the Treasury Department. This time, the guest list was comprised of a politically diverse group of financial bloggers. One attendee, Yves Smith of Naked Capitalism, described the meeting as “curious”:
None of us knew in advance how many attendees there would be; there were eight of us at a two-hour session, Interfluidity, Marginal Revolution, Kid Dynamite’s World, Across the Curve, Financial Armageddon, Accrued Interest, and Aleph (and of course, others may have been invited who had scheduling conflicts).
* * *
It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken). I will give them credit for having the session be almost entirely a Q&A, not much in the way of presentation. One official made some remarks about the state of financial institutions; later another said a few things about regulatory reform. The funniest moment was when, right after the spiel on regulatory reform, Steve Waldman said, “I’ve read your bill and I think it’s terrible.” They did offer to go over it with him. It will be interesting to see if that happens.
* * *
My bottom line is that the people we met are very cognitively captured, assuming one can take their remarks at face value. Although they kept stressing all the things that had changed or they were planning to change, the polite pushback from pretty all the attendees was that what Treasury thought of as major progress was insufficient.
* * *
Several of us raised questions about whether what their vision for the industry’s structure was and that the objective seemed to be to restore the financial system that got us in trouble in the first place.
. . . it wasn’t clear that there was a “plan B” in place if things do not recover in 2010 as many mainstream analysts expect. In fact, the suggestion from one official was that the tenure of the current crisis would likely be nearer the shorter end of expectations.
There was also a bit of a disconnect between the remarks various Treasury officials have made in public forums and what was said at the meeting. … Yesterday, however, a number of those present clearly acknowledged that things could (still) go wrong and said such fears kept them awake at night. While that is not unusual in and of itself, at the very least it adds to doubts I and others have expressed about the true state of the financial system and the economy.
Finally, the meeting seemed to confirm the strong grip that Wall Street has on the levers of legislative power.
The most informative rendition of the events at the conclave came from Kid Dynamite, whose two-part narrative began with a look at how Michael Panzner interrupted a Treasury official who was describing the Treasury’s current focus “on reducing the footprint of economic intervention cautiously, quickly and prudently”:
Michael Panzner jumped right in, addressing a concept I’ve written about previously – that of “extend and pretend,” or “delay and pray” – the concept of attempting to avoid recognizing actual losses and or insolvencies, and growing out of them after enough time. Panzner called it “fake it ‘till you make it.” I mentioned that I felt like we were undergoing a “Ponzi scheme of confidence” – but that confidence mattered less than ever in the current environment where, contrary to perhaps the prior 10 years, confidence can no longer be “spent.”
Kid Dynamite’s report contained too many great passages for me to quote here without running on excessively. Just be sure to read his entire report, including Part II (which should be posted by the time you read this).
David Merkel of The Aleph Blog also submitted a two-part report (so far — with more to come) although Part 2 is more informative. Here are some highlights:
As all bloggers there will note, those from the Treasury were kind, intelligent, funny … they were real people, unlike the common tendency to demonize those in DC.
* * *
To the Treasury I would say, “Markets are inherently unstable, and that is a good thing.” They often have to adjust to severe changes in the human condition, and governmental attempts to tame markets may result in calm for a time, and a tsunami thereafter.
* * *
As for the bank stress-testing, one can look at it two ways: 1) the way I looked at it at the time — short on details, many generalities, not trusting the results. (Remember, I have done many such analyses myself for insurers.) or, 2) something that gave confidence to the markets when they were in an oversold state. Duh, but I was dumb — the oversold market rallied when it learned that the Treasury had its back.
John Jansen from Across The Curve included his report on the meeting within his usual morning posting concerning the bond market on November 4. In a subsequent posting that afternoon, he referred his readers to the Kid Dynamite report. Here’s what Mr. Jansen did say about the event:
. . . those officials expressed real concern about the downside risks to the economy (as did blogger Michael Panzner of Financial Armageddon) and since I think that the relationship between the Treasury and the Federal Reserve has morphed into something somewhat incestuous I suspect that the Federal Reserve will not jump off the reservation and take the first baby steps to exiting its easy money policy.
The report at the Accrued Interest blog drew some hostile comments from readers who seemed convinced that Accrued was the only blogger there who actually drank the Kool-Aid being served by the Treasury. Their reaction was easily understandable after reading this remark (which followed a breach of protocol with the admission that Turbo Tim was there in the flesh):
It was a fascinating experience and I have to admit, it was just plain cool to be within the bowels of power like that.
Huh? All I can say is: If you like being in powerful bowels, just take a cruise over to duPont Circle. Actually — it was at his next statement where he lost me:
I am also on record as saying that Geithner was a good choice for Treasury secretary.
— and then it was all downhill from there.
The administration’s “charm offensive” has moved to the dicey issue of financial reform, where it is drawing criticism from across the political spectrum. Given the fact that they have all but admitted to a strategy of simply reading The Secret and willing everything to get better by their positive thoughts — Michael Panzner might as well start writing Financial Armageddon — The Sequel.
For some reason, a large number of people continue to rely on the advice of stock market prognosticators, long after those pundits have proven themselves unreliable, usually due to a string of erroneous predictions. The best example of this phenomenon is Jim Cramer of CNBC. On March 4, Jon Stewart featured a number of video clips wherein Cramer wasn’t just wrong — he was wildly wrong, often when due diligence on Cramer’s part would have resulted in a different forecast. Nevertheless, some individuals still follow Cramer’s investment advice.
This summer’s stock market rally made many of us feel foolish. John Carney of The Business Insider compiled a great presentation entitled “The Idiot-Maker Rally” which focused on 15 stock market gurus “who now look like fools” because they remained in denial about the rally, while those who ignored them made loads of money.
One guy who got it right was a gentleman named Jeremy Grantham. His asset management firm, GMO, is responsible for investing over $85 billion of its clients’ funds. On May 14, I discussed Mr. Grantham’s economic forecast from his Quarterly Letter, published at the end of this year’s first quarter. At that time, he predicted that in late 2009 or early 2010, there would be a stock market rally, bringing the Standard and Poor’s 500 index near the 1100 range. As you probably know, we saw that happen last week. Unfortunately, he was not particularly optimistic about what would follow:
A large rally here is far more likely to prove a last hurrah — a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.
Mr. Grantham’s Quarterly Letter for the third quarter of 2009 was recently published by his firm, GMO. This document is essential reading for anyone who is interested in the outlook for the stock market and our economy. Grantham is sticking with his prediction for “seven lean years” which he expects to commence at the conclusion of the current rally:
Price, however, does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difficult environment.
* * *
So, back to timing. It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1100. It can certainly happen.
Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well informed guess, I hope) that before next year is out, the market will drop painfully from current levels. “Painfully” is arbitrarily deemed by me to start at -15%. My guess, though, is that the U.S.market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19).
Scary as that may sound, Mr. Grantham does not believe that the S&P 500 will reach a new low, surpassing the Hadean level of 666 reached last March. On page 4 of the report, Grantham expressed his view that the current “fair value” of the S&P 500 “is now about 860”.
What I particularly enjoyed about the latest GMO Quarterly Letter was Grantham’s discussion of the factors that brought our economy to where it is today. In doing so, he targeted some of my favorite culprits: Alan Greenspan (who was pummeled on page 3), Larry Summers, Turbo Tim Geithner (who “sat in the very engine room of the USS Disaster and helped steer her onto the rocks”), Goldman Sachs and finally: Ben Bernanke — whose nomination to a second term as Federal Reserve chairman was treated with well-deserved outrage.
The report included a supplement (beginning at page 10) wherein Mr. Grantham discussed the imperative need to redesign our financial system:
A simpler, more manageable financial system is much more than a luxury. Without it we shall surely fail again.
* * *
I have no idea why the current administration, which came in on a promise of change, for heaven’s sake, is so determined to protect the status quo of the financial system at the expense of already weary taxpayers who are promised only somewhat better lifeboats. It is obvious to most that there was a more or less complete failure of our private financial system and its public overseers. The regulatory leaders in particular were all far too captured and cozy in their dealings with reckless and greedy financial enterprises.
Grantham’s suggested changes include forcing banks to spin off their “proprietary trading” operations, wherein a bank trades investments on behalf of its own account, usually in breach of the fiduciary duties it owes its customers. He also addressed the need to break up those financial institutions considered “too big to fail”. (As an aside, the British government has now taken steps to break up its banks that pose a systemic risk to the entire financial structure.) Grantham’s final point concerned the need for public oversight, to prevent the “regulatory capture” that has helped maintain this intolerable status quo.
Jeremy Grantham is a guy who gets it right. Our leaders need to pay more serious attention to him. If they don’t — we should vote them out of office.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.
Two Years Too Late
October 11, 2010
Greg Gordon recently wrote a fantastic article for the McClatchy Newspapers, in which he discussed how former Treasury Secretary Hank Paulson failed to take any action to curb risky mortgage lending. It should come as no surprise that Paulson’s nonfeasance in this area worked to the benefit of Goldman Sachs, where Paulson had presided as CEO for the eight years prior to his taking office as Treasury Secretary on July 10, 2006. Greg Gordon’s article provided an interesting timeline to illustrate Paulson’s role in facilitating the subprime mortgage crisis:
By now, the rest of that painful story has become a burden for everyone in America and beyond. Paulson tried to undo the damage to Goldman and the other insolvent, “too big to fail” banks at taxpayer expense with the TARP bailouts. When President Obama assumed office in January of 2009, his first order of business was to ignore the advice of Adam Posen (“Temporary Nationalization Is Needed to Save the U.S. Banking System”) and Professor Matthew Richardson. The consequences of Obama’s failure to put those “zombie banks” through temporary receivership were explained by Karen Maley of the Business Spectator website:
Chris Whalen’s recent presentation, “Pictures of Deflation” is downright scary and I’m amazed that it has not been receiving the attention it deserves. Surprisingly — and ironically – one of the only news sources discussing Whalen’s outlook has been that peerless font of stock market bullishness: CNBC. Whalen was interviewed on CNBC’s Fast Money program on October 8. You can see the video here. The Whalen interview begins at 7 minutes into the clip. John Carney (formerly of The Business Insider website) now runs the NetNet blog for CNBC, which featured this interview by Lori Ann LoRocco with Chris Whalen and Jim Rickards, Senior Managing Director of Market Intelligence at Omnis, Inc. Here are some tidbits from this must-read interview:
Of course, this restructuring could have and should have been done two years earlier — in February of 2009. Once the dust settles, you can be sure that someone will calculate the cost of kicking this can down the road — especially if it involves another round of bank bailouts. As the saying goes: “He who hesitates is lost.” In this case, President Obama hesitated and we lost. We lost big.