Links to important economic news

So let's see, Black Rock advises Treasury, who regulates Bank of America , which in terns owns close to 1/2 of Black Rock???

http://www.nytimes.com/2009/05/19/business/19blackrock.html?ref=business

Spitzer is right, but leaves out the other Fed class C member(public advocate) Stephen Friedman..

http://www.slate.com/id/2218589/

this says it all. household leverage and consumption analysis by the SF fed:

http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html

elizabeth warren is a goddess.

admin, what i thought was interesting about the TE article was the discussion of where growth was before the bust. not robust before the bust. i amuse myself.

bring back brooksley born. this is an insult, meant to protect banks monopoly on a profitable business..

By Alan Bjerga
April 21 (Bloomberg) -- The chief proponent of making the
U.S. Commodity Futures Trading Commission the lead regulator for
the credit-default swap market says his proposal is in trouble
because of Wall Street’s sway over Congress.
Collin Peterson, the chairman of the House Agriculture
Committee that oversees the CFTC, said banks prefer the Federal
Reserve as the regulator for the $33 trillion credit-default
swaps market. The Fed, CFTC, Securities and Exchange Commission
and Treasury Department currently share information on trades.
“It’s a very difficult challenge to go up against these
guys who have given more money to Congress than any other
industry in the United States,” Peterson, a Minnesota Democrat,
said today in a briefing with reporters in Washington.
Giving oversight to the Fed, which regulates the credit-
default clearinghouse that Intercontinental Exchange Inc.
started last month, puts derivative regulation too close to
political donors from Wall Street, Peterson said. The securities
and investment industry gave $63.1 million to members of
Congress in the 2008 election cycle, according to the Center for
Responsive Politics in Washington. Only lawyers and retirees
gave more.
The Fed pushed for the lead role, citing its broader
oversight of the U.S. financial system, after the credit-default
swaps were linked to failures of Lehman Brothers Holdings Inc.
in September and the near-collapse of American International
Group Inc.

Competing Plans

Peterson’s committee in February approved legislation that
would require over-the-counter credit derivatives to be cleared
through an entity regulated by the CFTC or the SEC and imposed
limits on positions that a trader can hold. The plan is now
being considered by other legislative panels with jurisdiction.
Oversight plans have led to jurisdictional battles among
congressional agriculture, finance, judiciary and energy
committees over which bodies should regulate different types of
derivatives. Committee chairmen tend to favor regulatory
authority to fall under agencies related to their committees.
Atlanta-based Intercontinental Exchange, known as ICE, is
the only exchange currently operating a credit-default
clearinghouse. Competing offerings from Chicago-based CME Group
Inc., which is regulated by the CFTC, and NYSE Euronext don’t
have any customers.

--With assistance from Matthew Leising in New York. Editors:
Steve Stroth, Daniel Enoch.

http://blogs.wsj.com/economics/2009/05/20/shelby-rips-fed-in-questions-to-alumnus-geithner/

AR, you mean this part?

" According to Robert Gordon, a productivity guru at Northwestern University, America’s trend rate of growth in 2008 was only 2.5%, the lowest rate in its history, and well below the 3-3.5% that many took for granted a few years ago. Without factoring in the financial crisis, Mr Gordon expects potential growth to fall to 2.35% over the coming years. "

Yes, i was going to look up Gordon's work, but haven't had the time. I just find it remarkable that with all the money that had been created through the debt process our growth rate was still below the norm. What would it have been without the debt bubble, one wonders?

http://optionarmageddon.ml-implode.com/2009/05/19/a-portrait-of-the-ax-not-falling/

This probably belongs on the NYT Eco thread, but I wanted to point out one thing Rolfe Winkler's readers says with regard to Chase not seeking to foreclose on Bozo the Economist's home:

"Why not wait a little longer and see what incentive the gov’t offers lenders to modify mortgages? An $8K payoff from Uncle Sam? Much like the talk that setting a hard deadline for withdrawing from Iraq would encourage the insurgents to wait us out, the government suggesting forthcoming new and glorious salvation encourages mortgage services to wait it out and see what happens. I would prefer a different allegory as I don’t want to suggest that I equate mortgage servicers with Iraqi insurgents, but that’s the best that comes to mind."

The comparison of banks to terrorists reminded me of my earlier post about NPR's interview with the banker who discusses holding the economy hostage, so I posted it here instead.
http://www.npr.org/blogs/money/2009/02/hear_pay_up_or_else.html

“The American Express story is playing into it as well. If credit card companies are going to start cutting back on the availability of credit, it’s going to be difficult to sustain the growth of personal consumption.”

sustain what growth of personal consumption?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6xZ5OFJ5rq0&refer=home

How long can we keep this up? When does the dollar start going down and/or treasury rates go up? Admin please chime in...

Federal Reserve officials are open to raising the amount of Treasury and mortgage-related securities they are purchasing beyond the $1.75 trillion already committed, according to a summary of their late-April meeting released Wednesday after the customary lag.

Officials also projected an even deeper recession than they expected three months earlier and a more sluggish recovery in the next two years, as labor markets remain under pressure, according to the April minutes. However, the outlook appeared to have brightened somewhat between the March and April meetings.

wrt the dollar going down, with respect to other currencies is not a given. with respect to commodities it is, every fiat currency goes to 0, how fast? who knows. but the more the establishment hates deflation, the faster that happens. that's a huge transfer from the financially illiterate to the literate (just cause they can protect themselves better) and from creditors to debtors (in that currency of course).

higher long term yields are a certainty. there are tons of different forces at play that will determine when that begins to happen, it's not going to be straight up. there's tons of debt issuing coming not only from usa and already is not being easily digested. if the econ gets really bad deficits will increase but higher yields might actually take longer to show up (cause the expectation of future inflation and cost of opportunity of accepting a low return versus investing in a risky asset are both lower in that case).

some advice the treasury to issue more middle term maturities to ease the adsorption (like 10 years). but i believe that's precisely what they want to avoid as those are the closest to mortgage rates (that's the biggest mechanism of transmission of monetary policy and the rate that they want to keep down the most). i'd expect public spending to be cut once it's obvious that financing deficits gets complicated and that hte mkt is demanding much higher yields.

you have feedback loops all over the place. the stock mkt for example, gets nailed when rates go higher than 6%. that will take several years.

Why aren't they sezing the OTS?

http://www.washingtonpost.com/wp-dyn/content/article/2009/05/21/AR2009052104393.html

great voxeu piece on the rates/dollar issue.

http://www.voxeu.org/index.php?q=node%2F3596

what was the FDIC doing shutting a bank down on Thursday? they couldn't even wait until Friday? anyone else weirded out by this a bit (not to mention the cost)?

As my previous post shows, I'm still amazed at the OTS' role in the cover-up. Time to shut down Gilleran's legacy. They need to consolidate the OTS in with the FDIC.

simon johnson on his testimony in congress;

http://baselinescenario.com/2009/05/20/consumer-protection-when-all-else-fails-written-testimony/

May 22 (Bloomberg) -- Michael Steinhardt, whose hedge funds returned more than 20 percent a year for almost three decades, said the steepest U.S. stock market rally since the 1930s will probably end.

“The economy is still a scary place,” Steinhardt said in a Bloomberg Television interview. “My net feeling is that this rally doesn’t have all that much more to go and the dangers out there remain consequential.”

The Standard & Poor’s 500 Index has surged as much as 37 percent since March on signs the first global recession since World War II is abating. The Conference Board’s measure of leading economic indicators, including stock prices and manufacturing, increased in April for the first time since June. Still, the Federal Reserve projected on May 20 that unemployment will exceed 9 percent through next year and gross domestic product has shrunk for three straight quarters.

“Can the stock market do well in a muddling period in the economy, where at best it grows at a percent or two for a period of time? Maybe,” Steinhardt, 68, said. “But it’s not a period where you see an effusive stock market.”

In 1967, he opened New York-based Steinhardt Management Co., which produced hedge-fund returns averaging 24 percent a year for the next 28 years. He is chairman of WisdomTree Investments Inc., a New York-based asset-management firm that offers exchange-traded funds.

I almost posted that bloomberg article!! instead i'll offer this, on the trickle-down effects of unemployment. economics light, but sometimes i like the stories of real people rather than just statistics.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aQJzd0DkdWuQ&refer=home

a "friendly" transaction.

http://dealbreaker.com/2009/05/presented-without-comment-natu.php

aboutready, great piece. Was just reading it myself. It shows what many pro-realestate (non-Wall st) folks just don't seem to get: ****There has been a massive and continuing price reset*** in the NY area. Those in finance are painfully aware of deflation in our comps, which if not permanent will certainly be last till retirement for some. The ripple to the broader economy, the duration of adjustment, and certainly the credit constraints are key factors in the market price valuation of real estate.

Deleveraging and deflation impact assets; real estate is not immune.

DOLLAR PLUNGE; FEAR OVER DEBT
http://www.breitbart.com/article.php?id=D98BCFJO0&show_article=1

Posner is calling this a depression.

http://www.thedeal.com/dealscape/2009/05/richard_posner_defines_depress.php

i found this on the big picture website. nifty, but scary.

www.usdebtclock.org

how much more evidence of rampant deflation do we need? yes, this is a nice gesture on the part of these individuals but it is part of the unprecedented wage deflation going on everywhere.

"All 95 teachers and five administrators in the Tuckahoe school district in Westchester County have agreed to contribute $1,000 each to next year’s school budget to keep the area’s tax increase below 3 percent.

In the Tarrytown and Sleepy Hollow district, 80 percent of the 500 school employees — including teachers, clerks, custodians and bus drivers — have pledged more than $150,000 from their own pockets to help close a $300,000 budget gap.

And on Long Island, the 733 teachers in the William Floyd district in Mastic Beach decided to collectively give up $1 million in salary increases next year to help restore 19 teaching positions that were to be eliminated in budget cuts."

http://www.nytimes.com/2009/05/24/education/24teachers.html?hp

well, seems pretty obvious.
1) stocks will be subpar
2) munis might be ok (rising tax rates makes taxable equivalent yields attractive)
3) commodities should do well(investor's losing faith in currencies & less supply)

10% stocks 80% munis 10% commodities?

here's what i think: everyone in washington is doing the "right thing" more or less but its not going to work. what i have no idea is what that will mean. silver lining is that as we consume less, we will slow down the destruction of the planet. beyond that, who knows?

Not that this should be construed in any way as investment advice because I am completely unqualified to give it, but a little bird has told me that munis are the place to be right now.

You know what makes me ill? US workers are the most productive in the world. You would think this would make us valued employees, but instead we collectively take it in the shorts. I looked for a a good one-off article to post, but didn't find anything quick and easy.

Less destruction of the planet can only be a good thing. Long term, well, we're all dead I suppose. Cold comfort.

EVNYC. At the end of the day, I truly believe a laddered investment in high grade municipal bonds is the best approach an investor can make. I know too many people who over-invested in equities and are none too pleased at the moment.

evnyc, you mean the lazy american isn't?

http://www.ilo.org/global/About_the_ILO/Media_and_public_information/Press_releases/lang--en/WCMS_083976/index.htm

http://www.beearly.com/pdfFiles/BCAsep07_05sr.pdf

The mother of all inflations....
http://www.creditwritedowns.com/2009/04/jim-grant-says-us-policy-response-is-inflationary.html

From(american prospect)
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=05&year=2009&base_name=sorry_greg_this_crisis_was_com
..must say this explains alan geeenspan.

Sorry Greg, This Crisis Was Completely Predictable and Predicted

Gregory Mankiw uses his NYT column today to give us an explicit "who could have known?" about the economy crisis. He tells readers that: "fluctuations in economic activity are largely unpredictable."

No, this crisis was completely predictable. The problem was that the leading lights in the economics profession completely missed the boat and are now using their platforms to tell the public that it wasn't their fault.

The basic story was and is the housing bubble. How could they miss an $8 trillion housing bubble? What were they smoking?

We have a hundred year long trend, from 1895 to 1995, when nationwide house prices just track the overall rate of inflation. Suddenly in the mid-90s, coinciding with the stock bubble, house prices begin to hugely outpace inflation.

The run up in prices cannot be explained by any obvious shifts in the fundamentals of supply and demand. Furthermore there is no remotely corresponding increase in real rents. And, the vacancy rate for housing rises to record levels.

If economists could not see this bubble, then they should look for another line of work. Sorry, this fluctuation was entirely predictable. The people whose job responsibilities including recognizing a dangerous bubble like this one just blew it completely. It speaks volumes about the nature of the U.S. economy that almost all of those people still have their jobs, unlike the tens of millions of other workers who lost their jobs or can only work part-time because of the incompetence of the economists.

--Dean Baker

The original Times piece...(I think the prospect may have built a straw man here you decide)

http://www.nytimes.com/2009/05/24/business/economy/24view.html?scp=1&sq=greg%20mankiw&st=cse

This might be a little esoteric, but i found it interesting..
http://www.ritholtz.com/blog/2009/05/securitization-advanta-and-the-fiction-of-true-sale/

Riversider, Ritholtz put up a chart prepared by the Columbia School of Journalism the other day that shows the reporting of the crisis. It was immediately apparent that while the coverage was sparse, the issues were well known to any thinking person. Whether or not people chose not to think, or felt that the information provided was inaccurate or sensationalistic, is arguable. But the decline in real incomes was certainly known to the powers that be, and doubling and even tripling the amount (value-wise, including development and asset price, primarily on the coasts) of real estate in circulation with flat to declining incomes without a bubble is inconceivable. But then again, I don't like Mankiw (and i'm fairly certain Baker doesn't as well).

interesting analysis of US and Argentina.

http://paul.kedrosky.com/archives/2009/05/us_vs_argentina.html

bloomberg is really starting to irritate me. today there is a headline claiming that goods orders and housing sales probably rose, showing that recession is waning. now go to their own market calender, which shows that analysts' (those seers) consensus is for zero change, and the econoday analysis:

http://www.bloomberg.com/markets/ecalendar/index.html
Durable goods orders in March fell back 0.8 percent after a 1.6 percent rebound in February. Excluding the transportation component, new orders decreased 0.7 percent in March, after advancing 1.4 percent the prior month. Looking ahead, durables orders may continue to decline in April, based on more recent manufacturing surveys. The ISM, Philly Fed, and New York Fed manufacturing surveys for April all showed new orders indexes in negative territory

I lost a lot of money in munis, so be careful before you tread.

i too would be very wary of munis right now. not saying that there isn't opportunity, but beware.

Munis are a very broad asset class. Like like investing in corps, Credit analysis is important. Know the credit. Obtaining the credit rating is just not sufficient. Anyone remember WHOOPS?

I had the misfortune of having Dixie as my governor as a youngster. I think you still can't sell almost any muni in WA. I know when I did muni blue sky/lis in the '80s we didn't even try.

nyc10023: What happened with the munis? Sorry to hear.

Can someone(s) elaborate on muni danger?

The risk in tax frees are the same as with any other bond that rates go up and your bonds decline in value. This can be mitigated by not going out too many years. The other risk is credit risk, that you won't get paid back, same as with a corporate bond (like investing in G.M. or IBM) Some categories of munis are safer on average than others. The best would be G.O. bonds which are backed by taxes and refunding/escrowed issues WHICH are backed by Treasuries. But regardless of whether your bond is a G.O. or backed by a revenue stream you need to understand where the money backing your bond comes from, because that is ultimately your security.

If this is something you want to do ,suggest you read up and google some good sites. This is one
http://www.investinginbonds.com/learnmore.asp?catid=8

A lot of muni funds took a big hit last year. Ours was one of them. Have to admit - I was a bit lazy and went for a big old fund instead of shopping for ones tied to a specific income stream. Agree that GO bonds are the "safest" though I wouldn't touch Cali bonds with a 10-foot pole, and maybe NYS is headed that way?

Some analysts like the ones tied to the sewer system or some particular bit of infrastructure.

I'm panicked, as are a lot of people about the future of the US dollar and other currencies. Nervous about buying GLD, and as I've mentioned, I don't think we would pack enough heat and/or muscle to protect our little hoard of gold coins.

nyc10023. No reason to panic.
FDIC insures cd's and since most of what you buy is priced in u.s. dollars you don't have that much risk. Perhaps if you bought a lot of BMW'S and Bordeaux wine, then you have a point.
That muni fund that took a hit.. I'd guess it's been coming back recently..

Thanks Riverside & nyc10023. The way states & cities are doing these days, I don't know if I even want to go w/ muni bonds.

Here's a cheery bit (not):

http://www.rgemonitor.com/blog/roubini/256863/the_crisis_and_how_to_deal_with_it

Niall Ferguson: "Once you end up with public and private debts in excess of three and a half times the size of your annual output, you are Argentina.

You know, it's funny that people refer all the time back to the collapse of Lehman last September. Let's remember that this crisis actually began in June 2007. It fully became clear in August of 2007 that major financial institutions were almost certainly on the brink of insolvency to anybody who bothered to think about the impact of subprime mortgage defaults on their balance sheets.

But we were in denial. And we stayed in denial until September, more than a year later, of last year. Then we had the breakdown. Notice how psychological terms are very helpful when economics fails as a discipline. After the breakdown, we came out of denial and we realized that probably more than one major bank was insolvent. Then in September and October the world went into shock. It was deeply traumatic.

Now we're in the therapy phase. And what therapy are we using? Well, it's very interesting because we're using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman........."

http://www.rgemonitor.com/blog/roubini/256863/the_crisis_and_how_to_deal_with_it

Hope you read this article, because I'd like to hear your thoughts on it.

I think Roubini makes a great point here:
"Niall Ferguson said it's the end of the age of leverage. It's not really. There is not deleveraging. We have all the liabilities of the household sector, of the banks and financial institutions, of the corporate sectors; and now we've decided to socialize these bad debts and to put them on the balance sheet of the government. That's why the public debt is rising.

Instead, when you have an excessive debt problem, you have to convert such debt into equity. That's what you do with corporate restructuring—it converts unsecured debt into equity. That's what you should do with the banks: induce the unsecured creditors to convert their claims into equity. You could do the same thing with the housing market. But we're not doing the debt-into-equity conversion. What we're doing is piling public debt on top of private debt to socialize the losses; and at some point the back of some governments' balance sheet is going to break, and if that happens, it's going to be a disaster. "

http://zerohedge.blogspot.com/2009/05/barack-obama-we-are-out-of-money.html

SUNDAY, MAY 24, 2009
Barack Obama: "We Are Out Of Money"
Posted by Tyler Durden at 12:58 AM

Fast forward to 13:34 minutes in the clip below, in which the president, interviewed by C-Span, has the mother of all Freudian slips and discloses just what the real state of the economy is.

NPR always does a great job....

http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=104130944&m=104138155

i'm not in the mood for investing in general. happy to sit on cash for now, despite its lack of returns. but, i've got to say, oddly enough it seems, at least at this moment, the feds are much more likely to support corporate bonds at the end of the day than munis. doesn't guarantee against losses, but may guarantee against WPPS. if i really wanted to invest, i'd do my research in the corporate bond market.

dwell, i disagree to some extent here with Roubini. i think we are turning vast amounts of private debt into public debt, but only in certain places. they've selected the financials and housing as the debts to take public, and the latter in a very calculated manner that usually only does so to the extent that it helps the financials. the remaining household debt, and it is huge, is a burden that will not be transferred until and as it affects the banks (student loans, for example). deleveraging is occurring via defaults, foreclosures, savings, inventory reductions, rapidly, although not nearly as rapidly as it would occur naturally.

But he's correct in that the balance sheets of the governments are frightful, particularly absent a conumer and employment turnaround. I find it chilling that the government keeps warning of large job losses. They haven't been in the business of emphasizing anything bad. The fact that they feel compelled repeatedly to warn us of future job issues doesn't bode well in the slightest.

I haven't had a chance to watch the c-Span interview yet. will do so later today.

http://www.calculatedriskblog.com/2009/05/geithner-fails-to-correctly-describe.html

interview with Geithner. CR points out that Geithner lists a number of causes for the crisis, but still neglects to mention the lack of regulatory oversight that occurred.

In defense of munis, would say the following
1) Taxes are going up
2) Munis are boring and historically have experienced very low levels of defaults.
3) Offer high relative after tax yield vs gov't market
4) If A.R. is right that the Fed will not use balance sheet to support munis then this
this means better lower prices and higher yields;Great for a buy and hold strategy.

Conclusion:
A laddered diversified portfolio of high quality munis should provide a competitive return. Just don't go out more than seven years as the yields don't up that much, duration risk is greater should you have to sell, and you avoid locking in term just in time for our coming inflation wave.

Riversider, unless a number of munis go bust, and i'm not sure history will be your guide here. six months ago i would have said otherwise. i've seen good arguments on both sides, caution is necessary because many people feel that these are extremely low risk, and i would no longer rate them as such. not the investment of choice for an unsophisticated investor looking for guarantees.

everyone out there is linking to this, a roundtable discussion of the crisis and how to deal:

http://www.nybooks.com/articles/22756

http://www.cartoonstock.com/newscartoons/cartoonists/rma/lowres/rman6795l.jpg

i could have sworn it ended a few months ago.

What's wrong with this picture?
http://en.wikipedia.org/wiki/Gary_Gensler

http://www.thenation.com/doc/20090406/scheer?rel=hp_picks

http://www.nytimes.com/2008/12/19/business/19gensler.html

i think the nation reporter was a bit too mild. riversider, i've taken the liberty of posting the nation article in its entirety. i try not to do it too often as it clutters, but this is a must read and not too long.

Obama's Toxic Advisers By Robert Scheer

March 25, 2009

Bernie Sanders, the senator from Vermont who is independent in spirit as well as party label, has placed a hold on President Obama's nomination of Gary Gensler to head the Commodity Futures Trading Commission. Sounds like a minor issue to get worked up about, but the senator is right. Like most Americans, I am eager for Barack Obama to succeed, but I see this appointment as further evidence that the president has entrusted his economic policy to the wrong people.

Gensler helped create this financial crisis when he was in the Treasury Department back in the Clinton era, when bipartisan cooperation with Wall Street lobbyists was all the rage. Sanders gets right to the point: "Mr. Gensler worked with Senator Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history."

Sanders' hold will not stop the Gensler nomination, because Congress and the president, recognizing the nation's mood, want to give Wall Street whatever it wants to make the stock market go up. And Gensler is a reassuring figure to the moguls of finance; he was a partner at Goldman Sachs before being brought by Goldman honcho Robert Rubin to the Clinton Treasury Department.

After Rubin left to take a $20-million-a-year job at Citigroup, which he helped run into the ground, Lawrence Summers, his protege and replacement at Treasury, elevated Gensler to be an undersecretary. Gensler then performed as Summers' point man in advocating for deregulation legislation that enabled the current debacle.

The explosion of toxic assets is a direct result of the laws pushed through by Rubin and his followers, and in the decade since, we have had a twenty-fold increase, to more than $530 trillion, in the value of those newfangled financial instruments, which Warren Buffett in February 2003 correctly termed "financial weapons of mass destruction."

Yet when one member of the Clinton administration, Brooksley Born, then head of the Commodity Futures Trading Commission, attempted to sound a warning, she was treated by the rest of Clinton's economic team as the enemy.

In response to Born's warning, they drove her from government and pushed through the Commodity Futures Modernization Act, which summarily exempted from regulation the derivatives that now haunt us. The claim at the time by Summers, now top economic adviser in the Obama White House, was that "[t]his legislation promotes innovation and competition in the U.S. financial markets and may help to reduce systemic risk." Of course now we know, as Born predicted, that it did quite the opposite. What irony that Gensler is being rewarded with Born's old job for getting it wrong.

In congressional testimony supporting the radical deregulation of the financial derivatives market, Gensler had insisted with great enthusiasm that "OTC derivatives directly and indirectly support higher investment and growth in living standards in the United States and around the world." As to the many trillions of dollars in credit swaps that now afflict the world economy, Gensler specifically called for freeing swaps of this kind from existing government regulation in the Commodity Exchange Act, which regulated other futures such as wheat sales. He said, "...[S]wap transactions should not be regulated under the CEA. ..."

His key argument, and that of Summers as well, was that even raising the prospect of regulating what have proved to be toxic derivatives would deny these financial instruments the "legal certainty" they needed to thrive. What a loss that would be, warned Summers, who called the financial derivatives market "a powerful symbol of the kind of innovation and technology that has made the American financial system as strong as it is today."

So "they"--Summers, Gensler, Treasury Secretary Timothy Geithner and their ueber mentor, Rubin--were as wrong as anyone could be. Perhaps such error is human, but aren't there folks out there with a better prospect of getting it right that Obama can rely on?

A great deal is at stake, and we are being asked to support the president's plans as a matter of trust in a hopeful new leader. But the latest administration plan, announced by Geithner on Monday, seems to be more of the same. We taxpayers are being asked to buy back from the banks the very toxic assets that the members of Obama's economic team once celebrated as an unmitigated blessing. Only this time, instead of trusting the banks, we will turn over control, but little risk, to hedge funds that are totally unregulated. Here we go again

i'm not sure how i missed this. naomi klein and greider on the Charlie Rose show, is disaster capitalism here to stay?

http://www.thenation.com/doc/20090525/kleingreider_video

I"m on a Gensler kick. We just have to many Goldman-Rubin protgees running things.

http://www.thenation.com/doc/20090216/hayes

And Larry Summers in 1999 after repeat of Glass Steegal

'Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. "This historic legislation will better enable American companies to compete in the new economy."

I think the odds that Obama bails out California are about 3 out of 4. If he does, then owning CA munis (and every other muni out there) will be where you want to place your money. Effectively if Obama bails out CA then doesn't he have to bail out every other government as well? If munis now have an implicit backing by the Fed then they are more credit worthy and more secure and will go up in value.

How can Obama tell the voters of CA that he's going to bail out rich bankers but he won't bail out voters. Obama has put himself in a pickle -once you start telling some companies yes it's really hard not to tell everyone yes.

depends on what a bail out looks like. if its like chrysler, could be a problem for some stake holders.

I think the CA bailout looks like GM's. The whole point of bailing these governments out is to secure their credit ratings for future borrowings.
I certainly hope they let CA fail. They must face the facts, you can't collect 1980's property taxes and continue to pay 2009 expenses. You also can't continue to spend so much on government employees/pensions.

I hope NY eliminates all pensions for new government employees. Certainly the current system will bankrupt our kids.

not sure that i follow you here....gm appears to still be a work in progress? are you suggesting that there won't be significant concessions from major stakeholders?

"I hope NY eliminates all pensions for new government employees. "

it's the pensions/health care on current retirees and near future retirees what's the problem. they might have to pick up more of their health care costs as pensions are "guaranteed" but the level of coverage on health care is not.

jazzman, i have long been saying that a state bailout is next. but Obama recently said in no uncertain terms that it is not forthcoming. i don't see how, but i'm fairly certain a states' bailout won't come until many more states need it, and it may essentially be too late for CA.

i'll look for the obama says screw you to the states link. i thought i posted it here, but i can't find it.

They can't, admin. It's a giant Ponzi scheme, to some extent. We are heading into a future where states may default on their pension obligations...

"They can't, admin."

why not? didn't they already start that course? higher co-pays, not everything is covered and the like? there no guarantees of the type "the last health care technology is going to be available to all retirees for free".

Seems every successive bailout and stimulus measure is bigger than the last. I know the gov't says they'll undo the excess at the right time, but frankly I've never figured out how to put tooth paste back in the tube...

interesting piece on the real estate industry, superficial a bit but the graph is great. discusses, albeit lightly, the changes that are forthcoming for the current brokerage model.

http://www.calculatedriskblog.com/2009/05/real-estate-agents-giving-up.html

Sorry about my post about 3 hrs earlier - I meant to say that CA's bailout will look like Citi's.

And Aboutready: 1 out of 8 Americans live in CA. It's a crazy stat to think about 1 in 8 Americans live in CA. If Obama is going to bail out any state he'll start with CA.

jazzman, i think the states' bailout should have been one of the first things accomplished. few deny that spending money to bridge certain gaps provides one of the most direct boosts possilbe and reduces suffering. but, and it pisses me off because this rarely happens, i can't find the link but Obama came out with some measures that the Feds were willing to do (try to find differently structured debt for the states, for example), and they didn't include direct aid via a stimulus package. I think Obama's recent speech about the state of the US's finances was, indirectly, addressing this issue. He's warning us that there is no money. They chose to keep the status quo within the financial world, they don't feel there's anything left over.

i'd like to think a stimulus package for the states will happen, and soon, but i think there is zero interest in it at the moment in Congress, and if and when (i do believe it will be when, and it will squeek through under the umbrella of a general stimulus bill) it passes it will happen too late for some. CA may become the states' equivalent of Lehman. think of it politically, the ramifications of bailing out a state that is the epicenter of the housing bubble, that epitomizes the flipping and speculation, the enormous state that can't even begin to put its house in order. they've told them that they got $8 billion and they should be satisfied. It is crazy. But also recall the idiotic governors who tried to throw the relief money in Obama's face. Jindal et al. have a bunch to answer for as well.

Thanks Riverside & AR,

Oy, I'm agreeing with Sanders (re: Gensler): stranger bedfellows armageddon

Seems whether it's Bush or Obama, their choices for fiscal posts suck. Wish a POTUS would bring in Roubini or someone of his ilk.

How bout a debate:

Bailouts (Cali, GM, whatever) vs. No Bailout (let it fall). Discuss. I don't know what's worse.

Extra credit: Work in N. Korea & Iran. Will WW3 get our economic engines going or did we outsource that too?

AR: why are govs idiotic if they refuse TARP $? Yes, La is a fiscally crappy state, but, why should a state be forced by the fed gov to take TARP $ if it doesn't need it?

Funny Dwell., I changed my mind. I decided I'm "ok" with Gensler now. As pointed out he did penance with Sarbanes Oxley, supported regulating Fannie & Freddie back in 2000 testifying in favor of a bill that all knew was dead( http://www.treas.gov/press/releases/ls479.htm ) and I just loved the Gus Frerotte analogy.

Well, that's nice for you, Riverside, but, ya left me up in Vermont visiting Bernie for the wkend & the only thing to read are old copies of The Nation!! Thanks alot.

http://www.clipartguide.com/_small/0008-0802-2222-0439.jpg

dwell, i don't believe it was TARP, that stimulus package. feel free as a governor, in my book, to turn down anything you'd like from a new president when your party has just got the shit kicked out of them, as long as you can tell yourself and your constituents that they don't and will not need any assistance in the future. If you can't do so, you are playing political games with the future health and welfare of your people, something not unheard of in Louisiana, on all governmental levels.

agreed entirely that the economic team stinks, on many levels. riversider, i'll reject him just on the GS connection. he could be the second coming and if he'd spent time at GS i'd reject him. that's narrow and not at all intellectual and i don't care.

http://www.monkeybusinessblog.com/images/GoldmanHeroespose_175x175.jpg

well, if they're superheroes i'll have to reconsider. that sun rays/haloish effect and all. they certainly can move markets (and governments) in ways most magical.

http://www.newsweek.com/id/197810/page/1

She saw it coming...
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/25/AR2009052502108.html

http://www.youtube.com/watch?v=x_xYvV2YeT8

SInce we're posting youtube vids check out this one - it's a gross example of how bad our government is. The Fed has lent Trillions of dollars and they don't know where it is nor are they keeping track of whether their losing or making money on these loans. To give you an idea of you much a Trillion is ALL of the real estate in NYC has a market value of $890B.

http://www.youtube.com/watch?v=PXlxBeAvsB8

Alan Grayson again? Maybe congress should stop shoveling things into the Fed & Treasury the two most opaque institutions on the planet. Anyone realize Tresury again chose Fed to regulate swaps and not CFTC. Michael Greenberger & Brooskley Born actually tried to stop this mess over 10 years ago.

If you don't know who Michael Greenberger is, he worked under Brooksley Born(aka good guy)
this article summarizes some of the goings on.
http://businessmirror.com.ph/home/world/10346-obama-presses-for-derivatives-regulation.html
the video is a must see(re-including)
http://www.youtube.com/watch?v=x_xYvV2YeT8
what many don't realize is new products are frequently really a way to avoid regulation...

in reading about Greenberger, I could not help but sense the irony that the new head of the cftc(formerly run by Born & Greenberger) who got shot down by Summers, Greenspan, Levitz & Rubin will now be run by Gensler who worked under Summers....

admin have you heard of Greenberger?

If you can follow the story about PPIP then you need to watch this..
http://www.youtube.com/watch?v=myj4lMd2dkg

Banks Aiming to Play Both Sides of Coin
Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taypayer Aid From Own Loan Books

By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

Federal officials haven't specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

"Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.

The New York trade group represents 10 of the world's largest banks, including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Those banks are seen as likely sellers of assets using PPIP. Officials at the banks declined to comment.

"It's an issue that's been raised and an issue we're aware will need specific guidelines," said an FDIC spokesman, adding that the agency still is working on the final structure of its program and plans to launch a $1 billion pilot program this summer, which likely won't include an infusion from the Treasury.

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.

"To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm's books but really doesn't offload it is highly problematic," said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

"The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts," said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

One risk is that certain hard-to-value assets mightn't be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

"Sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a backdoor effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage," said Daniel Alpert, managing director at Westwood Capital LLC, an investment bank.

Even supporters of letting banks buy their own loans said it could be a tough sell.

"A bank bidding on its own assets really has the potential to look awful in the public's mind," said Mark J. Tenhundfeld, an American Bankers Association lobbyist. Some bankers said the concerns can be addressed through strong oversight by the government and outsiders.

The banking industry's lobbying is meant to overcome a hurdle facing PPIP: unwillingness by banks to sell assets at steep discounts.

Banks generally would rather hold on to assets they believe have more inherent value, avoiding selling them at a low point in the market. Many mortgage securities are valued at less than half their original price.

"Bankers see it as a win-win," said Tanya Wheeless, chief executive of the Arizona Bankers Association, which has urged the FDIC to let banks buy their own assets through PPIP.

U.S. banks held about $4.7 trillion in commercial and residential mortgages of the type that banks are lobbying to buy as of the end of the third quarter of 2008, according to Federal Reserve data. PPIP is designed in part to mitigate $600 billion of potential losses through the end of 2010 tied to toxic assets at the nation's 19 largest banks, according to the Fed's stress tests.

Mr. Nelson proposed to the FDIC that banks be allowed to control as much as half the capital in a buyers' group. In some cases, he wrote, "the selling bank should be able to participate as the only private-sector equity investor."

The California Bankers Association said in a letter that the FDIC's supervision of the asset-pricing process "should alleviate concerns about the inability to effect arm's length transactions between a bank and its affiliate that purchases through a public-private investment fund."

Irene Esteves, the chief financial officer at Regions Financial Corp., which has been lobbying to buy assets through PPIP, included a reference to gobbling up loans under the heading "Conflict of Interest" in a letter to the FDIC. A spokesman for the Birmingham, Ala., bank declined to comment.

Towne Bank of Arizona plans to sell some of its soured real-estate loans into PPIP and wants to profit from the program. "We think it would be attractive to our shareholders to be able to share in whatever profits there are from the venture," said CEO Patrick Patrick.
—Damian Paletta contributed to this article.

Write to David Enrich at david.enrich@wsj.com, Liz Rappaport at liz.rappaport@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

Good IRA article
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
be sure to also check out
http://us1.institutionalriskanalytics.com/pub/IRAStory.asp?tag=360
and
http://www.bloomberg.com/apps/news?pid=20601103&sid=aMMeY6OodQW4&refer=news

When I read stuff , like this I think all we did was sober up a drunk declared him cured and dropped him off to the moe's tavern(from the F.T.)

By John Dizard

Published: May 27 2009 03:00 | Last updated: May 27 2009 03:00

With all this reflationary work by the central banks and governments, don't you wonder what the new cash is buying?

Know anyone who's getting a new Porsche? Suezmax tanker? Damien Hirst pickled shark? Semiconductor test equipment?

Didn't think so. Neither do I. But the cash is going somewhere, such as into credit and credit derivative speculation.

A few months ago, you might not have expected to see those words again, outside congressional or parliamentary hearing transcripts. But that's what's been going on since March.

The credit specs are back. After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there's no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer.

Credit hedge fund managers, and even the banks' own desks, have uncoiled themselves from their foetal positions, and are back taking advantage of what are either risk-free arbitrages or value traps, depending on how the next few months go.

If I were them, I might be taking the money made in the past two and a half months off the table. But then I don't have to be reaching to get past a high-water mark.

"I am totally mystified by this rally," says one friend of mine in the credit fund trade.

He's made money on both the downside and the upside during the past year, and generally isn't at a loss to describe the parallelogram of forces, as they say in classical mechanics.

"Look, the system has taken out some of its financial leverage, but the economy still has too much excess capacity that will have to be dealt with. If we sit in the muck for five years [low growth], then there will be a tremendous number of defaults." That isn't being priced in to credit spreads.

Even after they've been reviled by talking heads and politicians from here to Ulan Bator, credit default swaps are still a very low-cost way of putting on speculative positions, as long as they still trade. And so, thanks to the Geithner Treasury's policy of reform, rather than dissolution, CDS trading has regained a vampiric strength the real economy still lacks.

Some specific credit sectors have done particularly well, such as retailers and chemicals. "They are just too expensive," says a German volatility trader. "JC Penney has gone from 800 or 900 over [the swaps curve] in the five year down to 190 to 200. That shows not [only] short covering, but [also] people jumping in after that." The consumer-dependent retailers and cyclicals such as the chemical companies still have issues with real-world demand, but the credit market people only see them as sources of cheap beta. For now.

The intrinsic leverage of CDS trades makes it possible to hope the portfolio manager might actually get paid a bonus some day.

For five-year CDS on credits such as those back-from-the-dead names every basis point on a $10m position can be worth $3,500 to $4,000.

Apart from going outright long "cheap" credit, there are, once again, fun games such as the "negative basis trades". That is, you can own a corporate bond, or emerging market sovereign bond, buy default protection on the paper with CDS, and collect interest payments for taking no risk. That's right: because CDS prices are depressed, relative to the comparable bonds, you can collect money for taking no risk.

A couple of years ago, someone might have said there was a risk that a CDS counterparty, such as, hypothetically, AIG, might get into trouble, and you would be unable to count on that leg of the trade. Then a risk-free arbitrage could turn into a money trap.

But thanks to Hank Paulson, Tim Geithner, and the rest of Team USA, that risk is no longer seen to be a problem. So you can now collect a couple of hundred basis points of risk-free money, as long as you have a line of credit with a dealer.

You may not be able to use credit markets to make reliably secured loans to auto companies, but the system can be used to collect more than 100 basis points of fully credit risk-hedged income from 10-year Turkish state bonds.

To be sure, not everyone has the nerve for this sort of game, risk free or not. The big problem is that while you don't have credit risk, or, thanks to the taxpayers, counterparty risk, you do fatten up the balance sheet in the process. As a recent Barclays Capital publication put it: "Some banks are still holding back on bond financing in order to shrink their balance sheets in advance of Q2 reporting, but interestingly, some hedge funds that still have cash are taking their places, seduced by rates of nearly 2 per cent over Libor and the ability to manage counterparty risk through tri-party repo arrangements." In a perfect - or even a functional - world, the Law of One Price would prevent such fat arbitrages from opening up. Until that day arrives we have to make do with what's at hand: Steve Rattner to run the auto industry, and negative basis trades for credit portfolios.

Sorry the ABS security that owns your Credit doesn't like you..

This one got lost in the Venus Fly Trap Shoots file at CNBC. From a letter sent out to Advanta clients today. Good thing the company had the foresight to give its long-suffering cardholders a whopping 5 day notice - for their sake they better be on good terms with Amex, Visa, MC.

Dear Customer,

Your Advanta Business Card account is funded by an independent trust which owns the balances you owe on your account and provides funding for new transactions. We expect the trust to stop funding activity on our accounts. The trust also restricts our flexibility to fund activity on your account. Unfortunately, as a result, effective May 30th all Advanta Business Credit Card accounts, including your account, will be closed.

This means that you will not be able to use your card or account for new transactions, including purchases, checks and balance transfers beginning on May 30th. We understand that you may have written checks on your account before May 30th and we will make every effort to honor those checks that are presented to us for payment by June 3rd. If you use your Advanta card to make automatic recurring bill payments, you will need to make alternative arrangements for those payments promptly.

It is important to understand that you are not required to pay your entire balance at this time. You may continue to pay down your account balance over time, as allowed under your Advanta Business Card Agreement.

You will not lose the rewards that you have earned. If you participate in a Cash Back program, you will receive a check for the amount of any accrued rewards more than $1.00 as long as you make the required minimum payments and your account remains in good standing. If you participate in a Business Rewards program, you will have at least 60 days to redeem your points as long as you make the required minimum payments and your account remains in good standing.

We deeply regret the impact this action will have on your business and very much wish it was not necessary.

thanks for all the posts Riversider, but I particularly enjoyed that Dizard article. exactly. what the hell do we think we're doing letting the big boys keep their ill-gotten gains for another turn at the candy store? it's bad enough to allow a bubble of ginormous proportions once, but then when that one starts to burst, to allow them to continue through government intervention and taxpayer money is sick. and not in an agentrachel sort of way.

A.R. I'm very disheartened. After hearing from Chris Whalen and Michael Greenberger I'm convinced things are not changing in enough positive ways. Hearing the talk about having the Fed act as a cop is a joke. The Fed is an institution of bankers and for bankers. To think they would propose radical changes in the system is naive. Any attempt by outside regulators to oversee the system is beaten back. I can't help notice the irony of putting one of Summer's men(Gensler) in charge of the CFTC who was again trying to do what Brooksley Born did a decade ago

i have this delightful image of Brooksley giving Summers the finger and yelling "i told you f'ing so" at the top of her lungs. Way too much class and integrity for such a thing, but it would be a wonder to behold nonetheless.

i'm feeling rather dragged down myself. i was so hoping to emerge from the bear cave.

Greenberger worked for her and did it in proxy.

The health of our banks. I always prefer the source data
http://www2.fdic.gov/qbp/2009mar/qbp.pdf