Glenn Wilson

Are the U.S. Stock Markets at a bottom? Are they at THE bottom? There was a huge selloff last Friday and then the markets rallied, although they did fall off at the end of the day. The Dow and S&P 500 finished negative on the day and the Nasdaq was slightly up for the day. Last week was the worst week ever for the stock market.

At this moment, the Asian markets are up. European markets are up. U.S. Market futures are up. The TED Spread is down but still very high.

If this is a typical post WWII recession and bear market then we should be at or very near a market bottom. But, we know enough to know that this is not a typical bear market or recession. Things that are different are not the same.

If this is more like the 1870 or 1927 crashes then the market still has a long way to fall and a long time before it rises. Compared to those scenarios there are many reasons for optimism. At least so far.

If the market rallies today will it be sustainable or will it be a sucker's rally? Is there still more de-leveraging and forced selling to come?

Some of the answer about the future of the economy and the markets will depend on governments action that is still yet to come.

The chairman of the Federal Reserve is also one of the nation's pre-eminent scholars of the Great Depression.
Fed chief guided by lessons from Depression

He must be an expert on the Great Depression because so far, he and Paulson and the Bush Administration have taken all of the right steps to create the conditions for another one. But again, things that are different are not the same.

We'll see. Clearly, the economy will get worse before it gets better. The stock market is expected to recover before the economy does. But is that now or a year from now? How does one weigh the risk of further falls against the reward of rises in value? Another data point to compare against:

The Nikkei 225 is now almost back to where it was in 1981 and has never made any attempt to regain its 1989 peak.

S&P 500 VS NIKKEI 225

Labels: economy

Nouriel Roubini predicted this mess and continues to predict further mess.

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.IMF warns of financial meltdown

German Chancellor Angela Merkel heads to Paris to present Sunday to her colleagues from the euro zone a financial sector bailout plan for Germany that's expected to be more than half the size of what has been enacted in the U.S.
German Bailout Likely to Be Over $400 Billion

Those responsible for the meltdown are trying to shift the blame to minorities and the poor:

As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail. ...

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis. ...

Federal Reserve Board data show that:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.
Private sector loans, not Fannie or Freddie, triggered crisis

Now, as he spends his last months in office trying to avert a global economic collapse, Mr. Bush has been telling people privately that it’s a good thing he’s in charge.

“He said that if it was going to happen at all, he was glad it was happening under his presidency, because he had a good group of people in D.C. working for him,” Dru Van Steenberg, one of several small-business owners who met with Mr. Bush in San Antonio earlier this week. The president expressed the same sentiment, others said, during a similar private session in Chantilly, Va., the next day.

“He said that whoever was going to take over in January was going to have a huge crisis on their hands the day they come into office,” Ms. Van Steenberg added. “He thought by this happening now, that perhaps everyone could see signs of improvement before the next president comes into office.”In Final Months in Office, Bush Is Burdened but Still Confident

Meanwhile, back in the world of reality and facts:

So what do we get from this? Well, the economy performed best under Clinton, then JFK/LBJ. Then Carter, and since he’s almost as good, we’ll call Reagan a tie for third. Then Nixon/Ford, with Ike and GW tied for sixth, and GHW bringing up the rear. And in terms of parties, there is no contest… the economy as a whole seems to grow faster under Democrats. Giving Reagan the benefit of the doubt, he’s the only the Republican that does as well as the worst Democratic President. 100% of Democratic administrations in the sample get at least a bronze medal.Comparing Presidents: Rankings of Economic Growth

Labels: economy

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out. ...

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

Thursday midnite update: A few hours after I had written this note the market crash that I warned about is underway in Asia: the Nikkei index in Japan is down 11% and all other Asian markets are sharply down. This reinforces the urgency of credible and rapid policy actions by the G7 financial officials who are meeting in a few hours in Washington and the need to also involve in such global policy coordination the systemically important emergent market economies.
The world is at severe risk of a global systemic financial meltdown and a severe global depression

Yesterday, IBM announced favorable earnings:

IBM posted a stronger-than-expected preliminary quarterly profit and stood by its full-year outlook, defying worries that the financial crisis would hurt demand for its computer products and services.
IBM Preliminary Profit Beats Expectations

But:

Shares of IBM fell $1.55, or 1.7 percent, to close at $89 on Thursday.
link

The stock market is the only source of "liquidity" (cash) for some big players. Unwinding and de-leveraging is leading to forced selling of stocks at distressed prices. Which lowers prices and the value of remaining leveraged stocks further. Which leads to more forced selling and reduced prices. So people pull money out of hedge funds and mutual funds forcing those to sell equities in a down market. Investors panic. Where does it end? How low can we go?

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.
Moment of Truth

In this financial catastrophe, last week's unthinkable idea quickly becomes this week's imperative. The Bush administration is wisely contemplating following the lead of British Prime Minister Gordon Brown in having government take ownership shares in many banks to get them more cash and allow them to lend again.
Hoover vs. Roosevelt?

Labels: economy

For a number of weeks professional economists and experts of banking crises have been arguing that the proper way to resolve a banking crisis is not to buy toxic assets but rather to recapitalize banks directly via injections of public capital (in the form of preferred shares) into distressed but solvent financial institutions. We criticized the TARP legislation just passed by Congress for not allowing for such a recapitalization of banks via public capital (an approach that has been instead now taken by the UK with its $87 bn bank rescue package and even Belgium/Netherlands in the case of the rescue of Fortis).

So how come that "to inject capital into financial institutions" was the first item that Hank Paulson listed as his priority in his press conference yesterday, thus suggesting that now the US, like the UK, will undertake a partial nationalization of its distressed banks?

The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity – however preferred – in financial institutions; there was concern that being explicit about public recap of banks would lead to banks’ resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation.
How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation

But Congress went ahead and forced on Paulson a provision that said he had to get equity or senior debt from financial institutions in exchange for taking significant assets off their hands--effectively enabling backdoor recapitalizations. Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it.

None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!). Along with Paulson's affirmation that the FDIC was going to use its "systemic risk" powers to protect depositors and unsecured creditors "as appropriate," I take it as one more sign that we're headed toward a Swedish solution of our banking crisis—recapitalization and temporary nationalization of much of the banking system. This is the right thing to do, I think. But I'm still a little bit confused as to why Paulson had to back into this instead of asking for it in the first place. Maybe because he thought President Bush would never sign a bill to nationalize the banks? Just a thought.

Treasury prepares for a TARP-and-switch. And it's a good thing, too

Labels: economy

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

* LIBOR bid only, no offer.
* Commercial paper market shut down, little trading and no issuance.
* Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
* Brokers are increasingly not dealing with each other.
* Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs

Labels: economy

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments. ...

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. ...

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk

No wonder the bailout package is so poorly crafted: The same genius, Hank Paulson, that helped us to get into this, and has utterly failed to see this coming until it was all but on top of is, is trying to get us out. He is uniquely unqualified for this task. How this guy hasn't honorably fallen on his own sword yet is beyond me.

SEC Deregulation Let Banks Leverage Up

Labels: economy

The $700 Billion bailout bill failed yesterday. Meanwhile:

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

Fed Pumps Further $630 Billion Into Financial System

Responding to ongoing strain in credit markets, the Federal Reserve, European Central Bank, Bank of Canada, Bank of England, Bank of Japan, Denmark's National Bank, Norges Bank, Reserve Bank of Australia, Riksbank and Swiss National Bank announced plans to increase funding operations worldwide. ...

The Fed announced that its swap agreements have been increased to $620 billion from $290 billion, with the European Central Bank accounting for $240 billion, $120 billion from the Bank of Japan, $80 billion from the Bank of England, $60 billion from the Swiss National Bank, $30 billion from the Bank of Canada, 20 Billion from the Reserve Bank of Australia, $30 billion from the Swedish Riksbank, $15 billion from the Norges Bank, and $15 billion from the Denmark's National Bank.

Global Central Banks Increase FX Swap Facilities With Fed

The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. ...

The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks.

Federal Reserve Press Release

The revolution will not be right back after a message
about a white tornado, white lightning, or white people.
You will not have to worry about a dove in your
bedroom, a tiger in your tank, or the giant in your toilet bowl.
The revolution will not go better with Coke.
The revolution will not fight the germs that may cause bad breath.
The revolution will put you in the driver's seat.

The revolution will not be televised, will not be televised,
will not be televised, will not be televised.
The revolution will be no re-run brothers;
The revolution will be live.

The Revolution Will Not Be Televised

Labels: economy

A majority of Democrats voted for this bill.

A majority of Republicans voted against this bill.

The Dow is down about 500 600 700 777 points on the day.

I'm not that big a fan of this bill (but it seems we do need to do something) and maybe this will help us get a better bill (although my expectation is we will get this bill or something worse).

Labels: economy

Update: Republican Thaddeus Otter on the Paulson Splurge:


Update: Sarah Palin on the Bailout:

Labels: economy

For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets. ...

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess. ...

How the Democrats Created the Financial Crisis

Wow! I guess John McCain is really a reforming, regulator, after all? And despite the common wisdom, it is Democrats that want less regulation ("small government") and Republicans that want more regulation ("big government")? Maybe not.

1. The article is written by an adviser to the McCain campaign. Not exactly an unbiased source. Of course, that does not prove it is not true.

2. Some analysis that I have read of the bill is that despite it's name, it would have worsened the lack of oversight, not made it better. Other analysis says the opposite. It is a long bill and I have no opinion at this time. But, let's just assume for the sake of discussion that it would have been good, added needed regulation and would have helped to stop the recent problems with Freddie Mac and Fannie Mae.

3. The article points out that John McCain was a cosponsor and implies that therefore he was leading the fight to get this bill passed and he was a reformer and tried to add regulation to Freddie and Fannie and that would have saved us from the current mess!! Except, that is not how it went down. Is John McCain a cosponsor of the bill? Why, yes he is, look here: S.190 Sponsors and Cosponsors. But look at the dates. He joined as a cosponsor 14 months after the bill was introduced and after it was dead in the water. I think the technical term for this is "political stunt."

4. If McCain had helped with this bill when it was introduced he might have been able to help get it to a vote and passed by the (Republican Majority) Senate in 2005:

Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

"We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed," Mr Oxley says.
Oxley hits back at ideologues

So McCain did not help with the bill when it was introduced; it was Bush, not Democrats, that kept it from succeeding in the (Republican Majority) Senate and McCain did not sign on until after the fact.

McCain did not lead on this. He followed Bush's lead. The Bush administration was responsible for this bill dying, not Democrats.

Ok. What other banking and mortgage bills did John McCain sponsor or cosponsor in this time frame? This is the only bill sponsored or cosponsored by McCain in the last two sessions of Congress that deal with mortgage or banking reform.
S. 190
Sponsors and Cosponsors
S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005

What about Barack Obama? Here is the list of bills sponsored or cosponsored by Obama in the same timeframe dealing with mortgage or banking reform:
S. 98
Sponsors and Cosponsors
S. 98 [109th]: Community Choice in Real Estate Act

S. 2280
Sponsors and Cosponsors
S. 2280 [109th]: STOP FRAUD Act

S. 1356
Sponsors and Cosponsors
S. 1356: Industrial Bank Holding Company Act of 2007

S. 1181
Sponsors and Cosponsors
S. 1181: Shareholder Vote on Executive Compensation Act

S. 1222
Sponsors and Cosponsors
S. 1222: STOP FRAUD Act

S. 2452
Sponsors and Cosponsors
S. 2452: Home Ownership Preservation and Protection Act of 2007

S. 2595
Sponsors and Cosponsors
S. 2595: S.A.F.E. Mortgage Licensing Act of 2008

John McCain Tuesday September 23, 2008 on Paulson's Bailout Plan:


Barack Obama on the Economy:

Maybe Sarah Palin can help John McCain out here?

(about the 4:50 mark)
COURIC: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.

PALIN: He's also known as the maverick, though. Taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about — the need to reform government.

COURIC: I'm just going to ask you one more time, not to belabor the point. Specific examples in his 26 years of pushing for more regulation?

PALIN: I'll try to find you some, and I'll bring them to you.

Draw your own conclusions.

Labels: economy

March 2008:

Pretty good story on the coming fight over financial regulation. But it lets the Bushies off way too lightly, by suggesting that lack of coordination between agencies led to the awesome failure of regulators to take action against the bubble:
...
The lack of oversight, in short, was no oversight: it was part of the plan.
Hiding behind the invisible hand

December 2007:

Meanwhile, during the bubble years, the mortgage industry lured millions of people into borrowing more than they could afford, and simultaneously duped investors into investing vast sums in risky assets wrongly labeled AAA. Reasonable estimates suggest that more than 10 million American families will end up owing more than their homes are worth, and investors will suffer $400 billion or more in losses.
...
It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.
...
Of course, now that it has all gone bad, people with ties to the financial industry are rethinking their belief in the perfection of free markets. Mr. Greenspan has come out in favor of, yes, a government bailout. "Cash is available,” he says — meaning taxpayer money — "and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this."
Blindly Into the Bubble

July 2003:

The agencies-the FDIC, Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration-announced they have formed a joint task force to undertake a three-year review of 129 separate rules. The review will focus on finding more streamlined and less burdensome ways to regulate banks.

"We are calling on bankers to help us determine how to improve and streamline the regulatory process," Reich continued. "We are serious about this effort, we are committed to it, and we intend to achieve results." he said the three-year time frame would allow sufficient time to solicit "substantial and significant" input from bankers as well as consumer groups and other interested parties.
Federal agencies plan three-year review of regulatory burden

Sneaking Suspicion

My sneaking suspicion is that they started with a determination to throw money at the financial industry, and everything else is just an excuse.
A sneaking suspicion

Labels: economy

Craig Ferguson on Capitalism and Democracy


Bailout Proving to Be Tough Sell on Capitol Hill


Cafferty wants to know why McCain doesn't want to debate


Craig Ferguson on McCain suspending his Campaign

Labels: economy

Where did all that money go?

Auditors:

"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street [ed: and auditors] liability for aiding and abetting fraud."

Auditor: Supervisors Covered Up Risky Loans

(Remember Arthur Andersen and Enron:

Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs.

Since the ruling vacated Andersen's felony conviction, it theoretically left Andersen free to resume operations. However, as of 2008 Andersen has not returned as a viable business even on a limited scale. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies.
Arthur Andersen)

Rating Firms:

In 2000, Standard & Poor's made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a "piggyback," where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.

While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America's home-loan industry: a boom in "subprime" mortgages taken out by buyers with weak credit.

Six years later, S&P reversed its view of loans with piggybacks. It said they actually were far more likely to default. By then, however, they and other newfangled loans were key parts of a massive $1.1 trillion subprime-mortgage market.

How Rating Firms' Calls Fueled Subprime Mess

Wall Street Compensation:
Billions went into excessive compensation to senior executives based on profits that were an illusion. (The compensation is not "excessive" because it was large. It is excessive because it was based on profits and revenue that we now know did not accurately reflect the toxic waste on their books). Some might call that fraud. If there was fraud (they knew) or negligence (they should have known) then some of that money may be recoverable back to the firms/their shareholders.

2007:

...bonuses split among employees of Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns will in fact add up to about $38 billion, beating last year's record. And all that despite each firm (besides Goldman) losing all their market value!

Wall Street Bonuses Biggest Ever, Again!

They needn't have worried. Wall Street bonuses totaled $33.2 billion in 2007, down just 2 percent, by the estimates of the New York state comptroller's office.

Seven of Wall Street's biggest firms boosted their total compensation and benefits to a combined $122 billion, up 10 percent since 2006, despite seeing their net revenue collectively fall 6 percent, according to Equilar, an executive-compensation research firm based in California. Mortgage-related losses reported by the seven firms totaled $55 billion and wiped out more than $200 billion in shareholder value.

The Bonuses Keep Coming

2006:

All told, this year's bonus pool for Wall Street executives hit $23.9 billion, the New York State Comptroller's office estimates.

To a great extent, Wall Street's biggest banks are prospering because they've all expanded beyond their traditional businesses into the trading of complex financial products.

And yet, some observers doubt that the big firms can keep breaking one earnings record after another.

"There's a disconnect between the economy and the financial system," says Richard Bove, who tracks the financial services industry for Punk Ziegel. "Income has to be generated somewhere. The financial sector has taken on a life of its own not connected to what's going on in the economy and, ultimately, that has to be addressed."
It's a Wall Street bonus bonanza

2005:

Early estimates of the 2005 bonus pool reach as high as $19 billion.

Please, Sir, I Want Some More.

December is the month for year-end bonuses for Wall Street’s traders, brokers and investment bankers and this year the top layers are expected to pocket some $17 billion in incentive payouts

Billions in bonuses for Wall Street execs, mayor denounces “selfish” transit workers

Treasury Secretary Paulson Grabs about $500 Million from Goldman Sachs:

The incoming Treasury secretary, Henry M. Paulson Jr., was awarded an $18.7 million cash bonus for half a year of work as the chief executive of the Goldman Sachs Group, the company said yesterday.

Goldman filed with regulators last Thursday for a sale of Mr. Paulson's 3.23 million common shares, worth $491.6 million based on that day's closing price.

It said Mr. Paulson also owned restricted stock worth $75.2 million, plus options to buy 680,474 shares. His holdings were equal to 1.02 percent of Goldman's common shares, the investment bank said.

Goldman awarded Mr. Paulson about $38.8 million of compensation for its 2005 fiscal year, mainly in restricted stock, making him Wall Street's highest-paid chief executive.
Goldman Gives Ex-Chief $18.7 Million Bonus

“This financial crisis is a direct result of the compensation practices at these Wall Street firms,” said Paul Hodgson, a senior analyst at the Corporate Library, a governance research group.

In Bailout Furor, Wall Street Pay Becomes a Target

Its time to start talking about a clawback provision as the grounds of any bailout. As I have argued in the past, I have no problem with people making millions or billions IF THEY EARN IT.

But these guys above? If every man woman and child in the USA is going to be on the hook for a Wall Street Incompetence Tax of $5-10k each, then the folks who brought us this mess, and took bonuses under the false pretense that the profits they generated were real, should also shoulder some of the costs . . .
CEO Clawback Provisions in the Bailout?

In a negotiation between a government official and banker with a bonus at risk, who will have more clout in determining the price? The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses. ...

Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

Why Paulson is Wrong (pdf)

Labels: economy

(at about the 5:25 mark)
Egbert (W.C. Fields): Was I in here last night and did I spend a $20 bill?
Bartender Joe (Shemp Howard): Yeah.
Egbert: Oh boy, what a load that is off my mind! I'd thought I'd lost it.

You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them.

Press Gaggle Via Conference Call with Deputy Press Secretary Tony Fratto on the Economy

I thought the banking system and the economy was in a crisis and there was an emergency need for this bailout. But many of the banks we want to give truckloads of money to are doing just fine. They don't actually need the money but might be willing to take it if we said "please." We will have to talk the banks into taking the $700 billion. Crisis, what crisis?

Oh boy, what a load that is off my mind! I'd thought we'd lost it.


more animals

We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all.

Radicals

Wall Street Reckoning! Rep. Marcy Kaptur goes for the pitchforks and torches:

You have perpetrated the greatest financial crimes ever on this American Republic. You think you can get by with it because you are extraordinarily wealthy, and the largest contributors to both presidential and congressional campaigns in both major parties.

Obama's rational and thoughtful statement:


McCain's experience in financial crisis and scandals:

Labels: economy

Oh Lord, won’t you buy me a Mercedes Benz ?
My friends all drive Porsches, I must make amends.
Worked hard all my lifetime, no help from my friends,
So Lord, won’t you buy me a Mercedes Benz ?

Oh Lord, won’t you buy me a color TV ?
Dialing For Dollars is trying to find me.
I wait for delivery each day until three,
So oh Lord, won’t you buy me a color TV ?

Oh Lord, won’t you buy me a night on the town ?
I’m counting on you, Lord, please don’t let me down.
Prove that you love me and buy the next round,
Oh Lord, won’t you buy me a night on the town ?

Mercedes Benz

Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify today before Congress on their massive bailout program.

Here are some questions I would like to hear asked:

1. You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Indeed, you two have been wrong about nearly everything since this crisis began years ago. Why should we trust your judgment on the largest bailout in American history?
13 Questions for Paulson & Bernanke

Use the form below to submit bad assets you'd like the government to take off your hands. And remember, when estimating the value of your 1997 limited edition Hanson single CD "MMMbop", it's not what you can sell these items for that matters, it's what you think they are worth. The fact that you think they are worth more than anyone will buy them for is what makes them bad assets.
Click Here.

I’ve had more time to read the Dodd proposal — and it is a big improvement over the Paulson plan. The key feature, I believe, is the equity participation: if Treasury buys assets, it gets warrants that can be converted into equity if the price of the purchased assets falls. This both guarantees against a pure bailout of the financial firms, and opens the door to a real infusion of capital, if that becomes necessary — and I think it will.
Daddy doesn’t know best

Is watching everyone rush off to read Chris Dodd’s proposal, and rather than read it and judge it on the merits of the proposal, read it and compare it to the ridiculous opener from Paulson. Instead of reading the Dodd proposal and saying “this is a good idea” or “this sucks hard,” we will be treated to a few days of “well, it was better than what Paulson suggested.” Which, no doubt, will be true, because what Paulson asked for was completely ridiculous- “Give me a trillion dollars and then piss off.”

... one of the real and fair knocks against Dodd is that he is wholly in bed with the banking and insurance industries? But somehow, because we are a nation of morons, we will judge giving 700 billion to someone with no strings unacceptable, but giving 700 billion to someone with a few caveats about CEO pay is somehow teh awesome. And who will be the white knight to bring us this reform? The guy in the Democratic party most in bed with the people who screwed up.
The Next Thing That Will Piss Me Off

What Gingrich's wish list tells us is that the dumping of private debt into the public coffers is only stage one of the current shock. The second comes when the debt crisis currently being created by this bailout becomes the excuse to privatize social security, lower corporate taxes and cut spending on the poor. ...

We have seen this many times before, in this country and around the world. But here's the thing: these opportunistic tactics can only work if we let them. They work when we respond to crisis by regressing, wanting to believe in "strong leaders" ...

So let's be absolutely clear: there are no saviors who are going to look out for us in this crisis. Certainly not Henry Paulson, former CEO of Goldman Sachs, one of the companies that will benefit most from his proposed bailout (which is actually a stick up). The only hope of preventing another dose of shock politics is loud, organized grassroots pressure on all political parties: they have to know right now that after seven years of Bush, Americans are becoming shock resistant.
Now is the Time to Resist Wall Street's Shock Doctrine

Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.
Paulson Debt Plan May Benefit Mostly Goldman, Morgan

When I get to the bottom
I go back to the top of the slide
Where I stop and turn
and I go for a ride
Till I get to the bottom and I see you again
Yeah, yeah, yeah
Do you don't you want me to love you
I'm coming down fast but I'm miles above you
Tell me tell me come on tell me the answer
and you may be a lover but you ain't no dancer

Go helter skelter
helter skelter
helter skelter
Yeah, hu, hu
I will you won't you want me to make you
I'm coming down fast but don't let me break you
Tell me tell me tell me the answer
You may be a lover but you ain't no dancer

Look out
Helter skelter
helter skelter
helter skelter
Yeah, hu, hu
Look out cause here she comes

The Beatles - Helter Skelter

Labels: economy

Email from Treasury Secretary Paulson via Chris Hayes:

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

Labels: economy

Nighttime on The City of New Orleans,
Changing cars in Memphis, Tennessee.
Half way home, we'll be there by morning
Through the Mississippi darkness
Rolling down to the sea.
And all the towns and people seem
To fade into a bad dream
And the steel rails still ain't heard the news.
The conductor sings his song again,
The passengers will please refrain
This train's got the disappearing railroad blues.

Good night, America, how are you?
Don't you know me I'm your native son,
I'm the train they call The City of New Orleans,
I'll be gone five hundred miles when the day is done.

The City of New Orleans by Steve Goodman

A notable voice that predicted much of the current mess is Nouriel Roubini. Here's Nouriel:
The shadow banking system is unravelling:

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies.

Thus the financial crisis of the century will also envelop European financial institutions.

Say Goodbye To The Investment Banks

The era of the independent investment bank appears to be over.

Goldman Sachs and Morgan Stanley, the only two major investment banks left standing, sought and won Federal Reserve Board approval to become bank holding companies late Sunday.

The moves come on a weekend when the Treasury Department proposed a sweeping and controversial $700 billion bailout of the U.S. banking industry. The Treasury has asked for broad powers and little oversight to buy mortgage-related assets from U.S. banks over the next two years to alleviate the strain on the lending markets, which are choked with bad assets.

I guess this will enable them to get a share of the $700 billion?

Wall Street in crisis: Last banks standing give up investment bank status

In a statement released overnight, the Fed said its board had approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and authorised credit to the two firms "against all types of collateral" that commercial banks can use to get loans from the central bank.

Dollar May Get `Crushed' as Traders Weigh Up Bailout

``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,''

``The fact that they mentioned taxpayer money implies that they're going to issue debt. If there's going to be a huge new supply of Treasuries, this will be dollar negative. It's too much for the dollar to take.''

Another drawback for the dollar is that the Fed's key rate is 3.4 percentage points less than the rate of inflation, the most since 1980, so investors lose money by investing in short- term U.S. fixed-income assets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States. NY Times

And raises the national debt ceiling to $11.3 trillion which is over $35,000 for every man, woman and child in the United States.

Morgan Stanley freezes merger talks with Wachovia: Report

US investment giant Morgan Stanley has frozen talks on a merger with Wachovia bank but is pressing on with talks for CIC of China to end up with a big stake in it, a media report said on Monday.

But Morgan Stanley continued to pursue talks to sell a big slice of its capital to Chinese sovereign wealth fund China Investment Corporation (CIC), the report said.

Media reports have suggested that CIC could end up with 49 percent of Morgan Stanley.

So, US taxpayers will bail out a company that may be 49% owned by the government of China?

It gets better:

Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.
...
If a battle does develop in Congress over foreign participation, UBS, among others, is poised to make just these arguments.Foreign Banks Hope Bailout Will Be Global

Former Texas Sen. Phil Gramm has emerged as the key behind-the-scenes economics/Wall Street guy for John McCain and is being touted as the treasury secretary in waiting. link

U.S. Sen. John McCain's presidential campaign faces questions regarding a top economic adviser's work for Swiss banking giant UBS Warburg.

Economist and former U.S. Sen. Phil Gramm is vice chairman of UBS Investment Bank and has lobbied Congress on the company's behalf. link

Of course, the Swiss deserve their fair share too! And, isn't it nice to see the man that may be the next U.S. Treasury Secretary shoveling U.S. Taxpayer money to a foreign bank?

Mitsubishi UFJ Financial Group Inc (MUFG), Japan's largest bank, said on Monday it planned to acquire as much as 20 percent of U.S. investment bank Morgan Stanley as part of a broader strategic alliance. link

We have said more than once that the the US in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It looks like we will have the opportunity to see how those two assets influence the end game. Why You Should Hate the Treasury Bailout Proposal

Nukes may be our saving grace economically? "Nice little country you got there. I'd hate to see anything bad happen to it." Tony Soprano would be so proud.

As we quoted Paul Krugman in yesterday's post:

Anybody that knew what was going on would be in a bomb shelter by now.

I see Krugman's comment as half-joke and half-hyperbole. There are real economic problems in the US and in the world and they have been brewing for some time. These problems require rational and thoughtful responses instead of knee jerk $700 billion handouts to the people that caused or contributed to the problems or stood idly by as they festered.

It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution. Open Letter To Congress

Meanwhile, what is an investor to do? Here's your piece of the America Pie:

And in the streets: the children screamed,
The lovers cried, and the poets dreamed.
But not a word was spoken;
The church bells all were broken.
And the three men I admire most:
The father, son, and the holy ghost,
They caught the last train for the coast
The day the music died.

Don McLean - American Pie

Labels: economy

“we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

That's great, it starts with an earthquake, birds and snakes, an aeroplane and Lenny Bruce is not afraid. Eye of a hurricane, listen to yourself churn - world serves its own needs, dummy serve your own needs. Feed it off an aux speak, grunt, no, strength, the Ladder start to clatter with fear fight down height. Wire in a fire, representing seven games, and a government for hire at a combat site. Left of west and coming in a hurry with the furys breathing down your neck. Team by team reporters baffled, trumped, tethered cropped. Look at that low playing. Fine, then. Uh oh, overflow, population, common food, but it'll do to Save yourself, serve yourself. World serves its own needs, listen to your heart bleed dummy with the rapture and the revered and the right, right. You vitriolic, patriotic, slam, fight, bright light, feeling pretty psyched.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

R.E.M. - It's The End Of The World

Or is it just another money grab and power grab?

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Text of Draft Proposal for Bailout Plan

Economist Paul Krugman explains:

Anybody that knew what was going on would be in a bomb shelter by now.

[Krugman's money is] in a money market fund which I felt was safe but that might not be safe either at this point.

Probably we don't have everything melt down in two days, which is really what could've happened.

The best scenario is the economy's probably going to get worse for another year and the housing market is going to get worse for another two years.

This is not the answer, this is just avoiding disaster.

We really need a better Government than we've got.

And where is Paul Krugman?

I'm in basement classroom with some crepe paper over the windows.

What? No bomb shelter available?

Krugman: No Deal.

If Wall Street gets away with this, it will represent an historic swindle of the American public

Labels: economy