The Dow is up again and the economy has been saved - just ask Ben Bernanke who managed it almost (cough) single-handed. But when Ben has to tell me how wonderfully both he and the economy are doing, I tend to get a little nervous. In spite of the brass band and the pom-poms the latest fluff-up in the market is more about the tanking dollar (which drives up the price of oil and other dollar-traded commodities) than about any real growth in U.S. companies.
But perhaps if they bang the drum loud enough we won't notice that the rest of the world is rapidly losing confidence in both the dollar and America's ability to maintain its status as the economic engine of the world. Word from a U.S. ex-pat living in Asia is that America and the dollar have become a laughingstock. It's so bad that the street-traders who used to love dollars won't even take them any more for fear that they will soon be worthless. Euros and the Yuan are fine, but dollars are a no-go.
So how come we're the last to know that our currency is on life-support? Maybe we just haven't been paying attention to the signs. China has been transforming dollars into commodities faster than you can say Chairman Mao, but they've been doing it slowly and subtly so they won't jeopardize the value of the rest of their dollars or compromise their trading position with their biggest customer (the U.S.). But recently something has changed.
China had been blithely buying our debt so that we could afford to buy more Chinese goods, but the sheer size of that debt made even the Chinese uneasy. Enter little Timmy Geithner who tried to smooth tings over by shuttling back and forth with his winning smile and puppy-dog eyes saying 'Please, pleeeeease take some more, and we promise we'll be more responsible in the future - really we will.' And for a time that seemed to work.
But President Obama's overtly confrontational stand over Chinese tires of all things makes me believe that the bloom may be off the rose. If the Chinese were still docilely buying our debt, the O-man would never have risked upsetting the apple cart over tires. Why suddenly change tactics?
I suspect that through private channels the Chinese have indicated that the party's over and the U.S. is going to have to go cold turkey. The White House couldn't risk that, especially when they are about to close the deal on a government health care plan. So what options does the President have?
This latest maneuver smacks of a little Chicago-style strong-arming: if you don't want our debt, then forget about shipping us more of your 'stuff' - tires, textiles, you name it. Chinese warehouses are going to be jammed with stuff that never makes it to Wal-Mart. The question is how are the Chinese going to respond?
If they decide to make nice and buy more of our worthless Treasuries, then I expect a trade agreement to materialize out of nowhere. If not, then at minimum a trade war or at worst a total financial collapse is in our not so distant future. I just hope our President is good at reading the tea leaves.
Tuesday, September 15, 2009
Saturday, May 9, 2009
Stress Tests: Drama, Delays and Rose Colored Glasses
Delays, leaks and high drama. The Stress Tests had Wall Street waiting with bated breath. But did the tests really deserve all the hoopla? Did the fact that the banks 'passed' mean that we can all breath a sigh of relief?
In spite of the fact that the Bulls have taken the test results as an 'all clear' for another run up on the markets, I tend to be more skeptical. Why? Because a test isn't a test if you can negotiate your own results.
To be honest, the fact that all the banks would pass was a foregone conclusion. The government couldn't risk a subsequent run on banks and loss of consumer confidence if they failed. So naturally, the criteria had to be massaged accordingly. Take a look at the scenarios: we have already reached the criteria outlined in the 'bad' outlook, as well as many of the criteria for the 'worst case' outlook. If that's so, then obviously the banks are already under capitalized, but how can these tests give us any information about future performance? The fact is that they can't. But even more alarming, from my point of view, is that the results really aren't the results anyway.
When the results of the tests were first compiled, the banks didn't like them. Instead of going public with their findings, the government then 'negotiated' the outcome with the banks (hence the delay in the release date). These negotiations allowed the banks to reduce the amount of capital requirements that the government was about to say that they needed. Pretty neat trick. I don't know about you, but in my 'school' a test isn't a test if the test taker can change their final score when they're unhappy about the outcome.
But even if the government had stood by their original findings, how reliable could they be? After all, they haven't had a great track record so far in predicting future outcomes based on 'stress scenarios'.
As William Black (an Associate Professor of Economics and Law at the University of Missouri and former bank regulator) says, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have "passed" much more stringent government stress tests before their respective failures.
Let's review the history:
* Fannie Mae and Freddie Mac: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. Then in August 2008 he stated, "even in [the] most severe stress tests, [Freddie Mac shows] losses ... less than $5 billion." What were the actual losses? They were 20 to 40 times greater.
* AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [Credit Default Swaps] transactions." AIG claimed in 2008. "Using a severe stress test ... losses could go as high as $900 million." And the actual losses? They were 200 times greater!
* IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests had indicated.
"The examinations and stress tests are shams," says Black.
Even the government's own results seem to be contradictory. We have to ask ourselves, if the government sees up to $599 billion in additional bank losses, then why are they requiring banks "only" raise $75 billion? That would suggest that the government thinks the banking sector is currently overcapitalized by $525 billion. That makes no sense.
According to Black, "It's in the interest of the financial community to send this propaganda out. [What's] remarkable [is] not that they do it but that it still works."
We've been lied to over and over again, but like an ingenue, we remain convinced that 'this time it will be different.' Perhaps it is just our attempt to make optimism triumph over reality.
But we had all better hold tightly to those rose colored glasses. Black predicts another wave of foreclosures and future bank losses that could total more than $2.5 trillion as opposed to the government's $599 billion estimate.
The question is, how will investors handle the huge losses to their college and retirement savings that could result from investing in banks that the government told them were safe?
"Once people learn they're being lied to, they react very badly," Black says. "And of course this is not the first lie."
In spite of the fact that the Bulls have taken the test results as an 'all clear' for another run up on the markets, I tend to be more skeptical. Why? Because a test isn't a test if you can negotiate your own results.
To be honest, the fact that all the banks would pass was a foregone conclusion. The government couldn't risk a subsequent run on banks and loss of consumer confidence if they failed. So naturally, the criteria had to be massaged accordingly. Take a look at the scenarios: we have already reached the criteria outlined in the 'bad' outlook, as well as many of the criteria for the 'worst case' outlook. If that's so, then obviously the banks are already under capitalized, but how can these tests give us any information about future performance? The fact is that they can't. But even more alarming, from my point of view, is that the results really aren't the results anyway.
When the results of the tests were first compiled, the banks didn't like them. Instead of going public with their findings, the government then 'negotiated' the outcome with the banks (hence the delay in the release date). These negotiations allowed the banks to reduce the amount of capital requirements that the government was about to say that they needed. Pretty neat trick. I don't know about you, but in my 'school' a test isn't a test if the test taker can change their final score when they're unhappy about the outcome.
But even if the government had stood by their original findings, how reliable could they be? After all, they haven't had a great track record so far in predicting future outcomes based on 'stress scenarios'.
As William Black (an Associate Professor of Economics and Law at the University of Missouri and former bank regulator) says, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have "passed" much more stringent government stress tests before their respective failures.
Let's review the history:
* Fannie Mae and Freddie Mac: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. Then in August 2008 he stated, "even in [the] most severe stress tests, [Freddie Mac shows] losses ... less than $5 billion." What were the actual losses? They were 20 to 40 times greater.
* AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [Credit Default Swaps] transactions." AIG claimed in 2008. "Using a severe stress test ... losses could go as high as $900 million." And the actual losses? They were 200 times greater!
* IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests had indicated.
"The examinations and stress tests are shams," says Black.
Even the government's own results seem to be contradictory. We have to ask ourselves, if the government sees up to $599 billion in additional bank losses, then why are they requiring banks "only" raise $75 billion? That would suggest that the government thinks the banking sector is currently overcapitalized by $525 billion. That makes no sense.
According to Black, "It's in the interest of the financial community to send this propaganda out. [What's] remarkable [is] not that they do it but that it still works."
We've been lied to over and over again, but like an ingenue, we remain convinced that 'this time it will be different.' Perhaps it is just our attempt to make optimism triumph over reality.
But we had all better hold tightly to those rose colored glasses. Black predicts another wave of foreclosures and future bank losses that could total more than $2.5 trillion as opposed to the government's $599 billion estimate.
The question is, how will investors handle the huge losses to their college and retirement savings that could result from investing in banks that the government told them were safe?
"Once people learn they're being lied to, they react very badly," Black says. "And of course this is not the first lie."
Monday, May 4, 2009
It's Spring and Collusion Is in the Air
Chrysler is currently in bankruptcy court. Why? Well to hear the administration tell it, it was because some money-grubbing hedge fund put all the other investors as risk by refusing to go along with the solution the government proposed. And now that the whole mess has been forced into bankruptcy court, the terms may have to be changed, because unequal treatment of specific parties or investors is not permitted under bankruptcy law.
So who was getting unequal treatment? Who was trying to skim the cream off of the top of the deal? Why the Obama Administration's major contributor the UAW, of course.
But what kind of unequal treatment are we talking about here? Well the government workout would have forced the major investors to take 30 cents on the dollar for the money that they had invested in Chrysler while making the UAW whole and giving them 55% ownership in the new Chrysler. Unfair? You bet! But one investor, a hedge fund, stood firm and refused to go along with the program. So why weren't the other investor's protesting? Simple. They got TARP funds. They were intimidated into compliance.
Harsh words? Perhaps. But they are describing even harsher actions. You see when the lone holdout in this deal tried to protect its investors and couldn't be leveraged by TARP, the government boys made it clear that they had better go along or they would have them destroyed in the media (threat about how many news outlets would do their bidding, yada, yada, yada...). The fund stood firm and forced Chrysler into bankruptcy and was immediately derided by the White House in the press (albeit not by name).
But that wasn't enough. The administration needed to make an example of them in order to assure compliance by anyone who might be considering crossing the government's will in future negotiations (can you say GM?). So the name was 'leaked' to the media and now the these guys are getting death threats, etc., from union thugs who see their gravy train being threatened.
It's ironic. The investors in this fund aren't a bunch of Wall Street Raiders. What they are is people who had retirement funds, 401k's and college funds that they put into corporate bonds because they were told that this was a less risky investment than stocks. These are people who were trying to make conservative investments to protect their capital and provide for their future. But apparently all retirement funds are not equal. They are being asked to take a 70% cut in their retirement savings so that the retirement fund of the UAW can be made whole.
This is a dangerous precedent. Even as we speak the government is trying to muscle the GM investors to go along with a similar plan, and the investors (not surprisingly) are extremely reluctant. The new workout would give the investors (who have 27 billion in equity) a 10% stake in the company while giving the unions (who have a 20 billion investment through pension plans etc.) 10 billion dollars in cash and 39% ownership in the company. What? Who thinks this is even close to being equitable? If the investors stand firm they will definitely do better in bankruptcy court.
This whole mess is becoming increasingly disturbing. The political paybacks for campaign contributions are now so blatant that the Administration is no longer even trying to hide it. Any government that is so secure in its absolute power that it no longer has any qualms about acting unilaterally outside of the law is dangerous. Yet the media in general is acting like a bunch of lap dogs and won't even mention it.
Perhaps we shouldn't attribute any ulterior motives to their apathy. Perhaps it's because it's just complicated enough that these media guys figure their viewers/readers would glaze over and lose interest and they'd lose ratings. But I'm starting to get the feeling that this spring there is a whiff of collusion in the air.
So who was getting unequal treatment? Who was trying to skim the cream off of the top of the deal? Why the Obama Administration's major contributor the UAW, of course.
But what kind of unequal treatment are we talking about here? Well the government workout would have forced the major investors to take 30 cents on the dollar for the money that they had invested in Chrysler while making the UAW whole and giving them 55% ownership in the new Chrysler. Unfair? You bet! But one investor, a hedge fund, stood firm and refused to go along with the program. So why weren't the other investor's protesting? Simple. They got TARP funds. They were intimidated into compliance.
Harsh words? Perhaps. But they are describing even harsher actions. You see when the lone holdout in this deal tried to protect its investors and couldn't be leveraged by TARP, the government boys made it clear that they had better go along or they would have them destroyed in the media (threat about how many news outlets would do their bidding, yada, yada, yada...). The fund stood firm and forced Chrysler into bankruptcy and was immediately derided by the White House in the press (albeit not by name).
But that wasn't enough. The administration needed to make an example of them in order to assure compliance by anyone who might be considering crossing the government's will in future negotiations (can you say GM?). So the name was 'leaked' to the media and now the these guys are getting death threats, etc., from union thugs who see their gravy train being threatened.
It's ironic. The investors in this fund aren't a bunch of Wall Street Raiders. What they are is people who had retirement funds, 401k's and college funds that they put into corporate bonds because they were told that this was a less risky investment than stocks. These are people who were trying to make conservative investments to protect their capital and provide for their future. But apparently all retirement funds are not equal. They are being asked to take a 70% cut in their retirement savings so that the retirement fund of the UAW can be made whole.
This is a dangerous precedent. Even as we speak the government is trying to muscle the GM investors to go along with a similar plan, and the investors (not surprisingly) are extremely reluctant. The new workout would give the investors (who have 27 billion in equity) a 10% stake in the company while giving the unions (who have a 20 billion investment through pension plans etc.) 10 billion dollars in cash and 39% ownership in the company. What? Who thinks this is even close to being equitable? If the investors stand firm they will definitely do better in bankruptcy court.
This whole mess is becoming increasingly disturbing. The political paybacks for campaign contributions are now so blatant that the Administration is no longer even trying to hide it. Any government that is so secure in its absolute power that it no longer has any qualms about acting unilaterally outside of the law is dangerous. Yet the media in general is acting like a bunch of lap dogs and won't even mention it.
Perhaps we shouldn't attribute any ulterior motives to their apathy. Perhaps it's because it's just complicated enough that these media guys figure their viewers/readers would glaze over and lose interest and they'd lose ratings. But I'm starting to get the feeling that this spring there is a whiff of collusion in the air.
Friday, April 24, 2009
Blood & Circuses
I know this is an economy-oriented blog, and believe me I will get there in just a moment. But there is something going on that's starting to feel (once again!) like the magician telling us to 'look over here' while the heart of the trick is going on somewhere else.
Diversion tactics. That's how the magician awes and amazes us. That's how the military gains the element of surprise. And that's how governments, like ancient Rome, diverted the population from their misery (unemployment, hunger, homelessness, etc.) by providing them with such riveting entertainment that everything else just fades into the background.
The Circus Maximus and the Coliseum were scenes of violent and bloody competition. Let's face it: blood sells...gore sells. That's why high-schoolers part with their allowances to pack the theaters and get chills and goosebumps watching the latest mayhem and mutilation on the silver screen. That's why traffic slows down at the scene of an accident so that the passersby can catch a better glimpse of the destruction.
Well it appears that the government is gearing up to give us their version of the Circus Maximus...their version of 'Nightmare on Elm Street'.
What is this spectacle that they have in store for us, you ask? Why the 'Show Trials of the Bush Administration' of course (McCarthy, you piker - you had nothing on these guys.).
I started to suspect it when President Obama made his sudden 180 degree turn on whether or not to pursue the previous administration on 'enhanced interrogation techniques'. Now whether you believe that what was done was torture or not can be argued by ethicists, lawyers, clergy and politicians from now until doomsday (and believe me it probably will). But this sudden policy change, especially coupled with the administration's sudden decision to release the photos of mistreatment of war prisoners to the ACLU got me to thinking.
Why was this happening now? Let's face it. Nothing riles up the population like pictures of 'atrocities'. You can talk about it. You can read about it. But once you actually see it, it engenders such an emotional response that all other reactions pale by comparison. These pictures are due to be released sometime in May and, believe me, there will be a huge public reaction, no matter how bad or how tame they are.
But the timing here seemed a little odd. To get the greatest bang for the buck (politically speaking) something like this should be done right before an election. The administration could have easily continued the legal battle to stretch this out until closer to election season, and politically it would seem to have been far more advantageous to be smearing the competition right before it was time for Americans go to the polls.
Now you can argue that Obama is such an ethical and moral man that he just couldn't, in good conscience, keep this stuff under wraps any longer. But he is also a politician -- a really good politician. He's even a Chicago politician, and believe me he didn't come up through the political ranks in Chicago without learning how to make political hay out of a scandal. 'Never let a good crisis go to waste.' Seems I've heard that somewhere before.
So there had to be something even more important that would be happening even sooner in order to urge the administration into action. What could possibly top an election in importance in the mind of a politician? It would have to be something REALLY big. Something HUGE.
Could it be the revelation of the government's Mafia tactics in bullying banks into taking TARP money or coercing them into committing fraud like Bank of America? Naw! That could all be blamed on Hank Paulson (who was part of the Bush administration, mind you), even though some of the other key players in this scheme, like Ben Bernanke and Tim Geithner, are still active in the government. Nope that couldn't be it. It must be something bigger.
But what could be bigger? Let's look at the government's rhetoric about the economy. Right after the inauguration it was all gloom and doom. We had to act in order to avert a catastrophe. Then we pumped trillions of dollars of taxpayer money into the financial sector to fix the problem. After that, everything was starting to look up. Things were getting better. Consumer confidence started to improve as soon as the government-speak started to veer away from the daily drumbeat of negativism. And that was good. But it wasn't good enough.
In spite of all the manufactured good news. In spite of all the cheerleading in the media and the near-canonization of the President for his performance during his first 100 days in office, the fundamentals of the economy are getting worse -- much worse.
The results of the bank stress tests will be coming out in May (Coincidence? I think not.). And in spite of the fact that the government will massage and reconfigure them in order to sugar-coat the implications, the results are bad. Really bad. The exposure in credit defaults and foreclosures is so huge that even changing the accounting rules to repeal 'mark-to-market' wasn't enough to cover it up. In addition it seems that massive fraud in the TARP program itself is beginning to come to light.
Add to that, GM and Chrysler are both going bankrupt (There! I've said it! The 'B' word). And no matter how the bankruptcy terms are worked out (looks like the taxpayers are going to pay for all of Chrysler's retirement and medical plans -- Why am I not feeling good about this?) it will mean massive layoffs. GM is already disclosing that they will idle almost all their plants for over two months this summer. And this is in addition to the record unemployment levels we are already seeing. Laid off workers are now taking, on average, over six months to find a new job, and that number is rising.
On top of all this, mortgage defaults (including Prime and Alt-A -- not just those nasty Sub-Primes that caused all the trouble in the first place) have doubled, so now people will not only be out of work, but homeless as well.
What we have is a confluence of events that will collide sometime this summer: banking crisis, massive unemployment and increased losses of homes, with not enough people to buy the foreclosures and not enough lending to finance the purchases. Neighborhoods will start to decay, and people will become angrier and angrier. It will be ugly. And it will be hot. And all it would take is a match to set off the powder keg.
We know what happens when people don't have enough work and don't have enough money. Look at France: 'Boss-nappings', strikes, sabotage of utilities, riots. And France is not alone. Germany is already bracing for unrest during the summer because of the predicted further deterioration of their banking system and their economy.
But what about the United State? Will we have unrest? Will we have riots? No! Of course not! Because we'll have bread and circuses. Roll out those show trials, and let the games begin!
These trials are planned to be even bigger than the O.J. trial. Even bigger than the Martyrs versus the Lions. Blood destruction and mayhem galore, sprinkled liberally with intrigue, deceit and corruption. It's the stuff of dreams (or nightmares) depending on your point of view. This heady mix should keep the population mesmerized for months, or at least long enough to get us through those risky dog days of summer.
At least that's what the government is hoping. We'll just have to see how well it works.
Diversion tactics. That's how the magician awes and amazes us. That's how the military gains the element of surprise. And that's how governments, like ancient Rome, diverted the population from their misery (unemployment, hunger, homelessness, etc.) by providing them with such riveting entertainment that everything else just fades into the background.
The Circus Maximus and the Coliseum were scenes of violent and bloody competition. Let's face it: blood sells...gore sells. That's why high-schoolers part with their allowances to pack the theaters and get chills and goosebumps watching the latest mayhem and mutilation on the silver screen. That's why traffic slows down at the scene of an accident so that the passersby can catch a better glimpse of the destruction.
Well it appears that the government is gearing up to give us their version of the Circus Maximus...their version of 'Nightmare on Elm Street'.
What is this spectacle that they have in store for us, you ask? Why the 'Show Trials of the Bush Administration' of course (McCarthy, you piker - you had nothing on these guys.).
I started to suspect it when President Obama made his sudden 180 degree turn on whether or not to pursue the previous administration on 'enhanced interrogation techniques'. Now whether you believe that what was done was torture or not can be argued by ethicists, lawyers, clergy and politicians from now until doomsday (and believe me it probably will). But this sudden policy change, especially coupled with the administration's sudden decision to release the photos of mistreatment of war prisoners to the ACLU got me to thinking.
Why was this happening now? Let's face it. Nothing riles up the population like pictures of 'atrocities'. You can talk about it. You can read about it. But once you actually see it, it engenders such an emotional response that all other reactions pale by comparison. These pictures are due to be released sometime in May and, believe me, there will be a huge public reaction, no matter how bad or how tame they are.
But the timing here seemed a little odd. To get the greatest bang for the buck (politically speaking) something like this should be done right before an election. The administration could have easily continued the legal battle to stretch this out until closer to election season, and politically it would seem to have been far more advantageous to be smearing the competition right before it was time for Americans go to the polls.
Now you can argue that Obama is such an ethical and moral man that he just couldn't, in good conscience, keep this stuff under wraps any longer. But he is also a politician -- a really good politician. He's even a Chicago politician, and believe me he didn't come up through the political ranks in Chicago without learning how to make political hay out of a scandal. 'Never let a good crisis go to waste.' Seems I've heard that somewhere before.
So there had to be something even more important that would be happening even sooner in order to urge the administration into action. What could possibly top an election in importance in the mind of a politician? It would have to be something REALLY big. Something HUGE.
Could it be the revelation of the government's Mafia tactics in bullying banks into taking TARP money or coercing them into committing fraud like Bank of America? Naw! That could all be blamed on Hank Paulson (who was part of the Bush administration, mind you), even though some of the other key players in this scheme, like Ben Bernanke and Tim Geithner, are still active in the government. Nope that couldn't be it. It must be something bigger.
But what could be bigger? Let's look at the government's rhetoric about the economy. Right after the inauguration it was all gloom and doom. We had to act in order to avert a catastrophe. Then we pumped trillions of dollars of taxpayer money into the financial sector to fix the problem. After that, everything was starting to look up. Things were getting better. Consumer confidence started to improve as soon as the government-speak started to veer away from the daily drumbeat of negativism. And that was good. But it wasn't good enough.
In spite of all the manufactured good news. In spite of all the cheerleading in the media and the near-canonization of the President for his performance during his first 100 days in office, the fundamentals of the economy are getting worse -- much worse.
The results of the bank stress tests will be coming out in May (Coincidence? I think not.). And in spite of the fact that the government will massage and reconfigure them in order to sugar-coat the implications, the results are bad. Really bad. The exposure in credit defaults and foreclosures is so huge that even changing the accounting rules to repeal 'mark-to-market' wasn't enough to cover it up. In addition it seems that massive fraud in the TARP program itself is beginning to come to light.
Add to that, GM and Chrysler are both going bankrupt (There! I've said it! The 'B' word). And no matter how the bankruptcy terms are worked out (looks like the taxpayers are going to pay for all of Chrysler's retirement and medical plans -- Why am I not feeling good about this?) it will mean massive layoffs. GM is already disclosing that they will idle almost all their plants for over two months this summer. And this is in addition to the record unemployment levels we are already seeing. Laid off workers are now taking, on average, over six months to find a new job, and that number is rising.
On top of all this, mortgage defaults (including Prime and Alt-A -- not just those nasty Sub-Primes that caused all the trouble in the first place) have doubled, so now people will not only be out of work, but homeless as well.
What we have is a confluence of events that will collide sometime this summer: banking crisis, massive unemployment and increased losses of homes, with not enough people to buy the foreclosures and not enough lending to finance the purchases. Neighborhoods will start to decay, and people will become angrier and angrier. It will be ugly. And it will be hot. And all it would take is a match to set off the powder keg.
We know what happens when people don't have enough work and don't have enough money. Look at France: 'Boss-nappings', strikes, sabotage of utilities, riots. And France is not alone. Germany is already bracing for unrest during the summer because of the predicted further deterioration of their banking system and their economy.
But what about the United State? Will we have unrest? Will we have riots? No! Of course not! Because we'll have bread and circuses. Roll out those show trials, and let the games begin!
These trials are planned to be even bigger than the O.J. trial. Even bigger than the Martyrs versus the Lions. Blood destruction and mayhem galore, sprinkled liberally with intrigue, deceit and corruption. It's the stuff of dreams (or nightmares) depending on your point of view. This heady mix should keep the population mesmerized for months, or at least long enough to get us through those risky dog days of summer.
At least that's what the government is hoping. We'll just have to see how well it works.
Thursday, April 23, 2009
Corruption, Collusion & Icebergs Ahead
When Bank of America recently posted its record profits I was skeptical. It was quite an achievement to go from needing a bailout from the Federal government to record profits in a single quarter. So I looked a little closer at the statement of earnings and it became clear that the 'profits' hadn't really been profits in the conventional sense.
They weren't making their money from loans. They weren't making their money from credit cards. The profits were all in the 'other' category. The 'profits' came first and foremost from legal (but questionable) changes in the accounting regulations that allowed Bank of America to change the valuation of their assets from 'mark to market' to 'mark to future'. It basically allowed them to change over from valuing their assets at the current market value, as had been the previous standard, to valuing them according to a formula of their own making. This new value would be based on the estimated value of the asset at some time in the 'future' when the real estate market would have 'recovered'. Wow! A stroke of the pen and a loss becomes a profit.
Another 'profit' was realized from the sale of a Chinese bank that they may or may not have purchased with TARP funds (after all, all of the money was mixed together and it's so hard to keep track of where it came from, you understand).
But Bank of America's ethical challenges weren't confined to their efforts to turn a profit, as shown by a story that has emerged from the office of New York Attorney General Andrew Cuomo.
It seems that when Ken Lewis and the Board of Bank of America was considering the acquisition of Merrill Lynch it became apparent that there had been a substantial deterioration in the assets of Merrill that had been covered up during the merger negotiations. When this was revealed prior to the consummation of the deal, B of A tried to back out of the merger under the 'Material Adverse Change' (MAC) clause, as they were bound to do to protect their investors.
But when Ken Lewis informed the Treasury (who had acted as the matchmaker for this shotgun wedding) that Bank of America wanted out of the deal, then-Secretary Hank Paulson, acting in concert with Ben Bernanke from the Federal Reserve, made it clear to Lewis that he and the board of B of A would all be replaced unless they went through with the merger (another testament to the unintended consequences of taking TARP funds).
In order to protect their jobs, Lewis and the Board completed the merger while failing to inform their shareholders that the condition of Merrill Lynch had been fraudulently misrepresented. (For more complete details, please read the letter posted at:
http://zerohedge.blogspot.com/2009/04/cuomo-letter-exposing-paulsons-and.html ). Apparently saving their jobs was more important than protecting the stockholders.
It's a sad time here in our country. Our financial system and our government has sunk to new lows in ethical relativism when, under the guise of 'protecting the system and the U.S. taxpayer,' our officials use mafia tactics and bank officials are willing to cover up fraud in order to keep their jobs. Unfortunately, this may only be the tip of the iceberg when it comes to corruption. I just hope that the next iceberg doesn't sink the ship of state.
They weren't making their money from loans. They weren't making their money from credit cards. The profits were all in the 'other' category. The 'profits' came first and foremost from legal (but questionable) changes in the accounting regulations that allowed Bank of America to change the valuation of their assets from 'mark to market' to 'mark to future'. It basically allowed them to change over from valuing their assets at the current market value, as had been the previous standard, to valuing them according to a formula of their own making. This new value would be based on the estimated value of the asset at some time in the 'future' when the real estate market would have 'recovered'. Wow! A stroke of the pen and a loss becomes a profit.
Another 'profit' was realized from the sale of a Chinese bank that they may or may not have purchased with TARP funds (after all, all of the money was mixed together and it's so hard to keep track of where it came from, you understand).
But Bank of America's ethical challenges weren't confined to their efforts to turn a profit, as shown by a story that has emerged from the office of New York Attorney General Andrew Cuomo.
It seems that when Ken Lewis and the Board of Bank of America was considering the acquisition of Merrill Lynch it became apparent that there had been a substantial deterioration in the assets of Merrill that had been covered up during the merger negotiations. When this was revealed prior to the consummation of the deal, B of A tried to back out of the merger under the 'Material Adverse Change' (MAC) clause, as they were bound to do to protect their investors.
But when Ken Lewis informed the Treasury (who had acted as the matchmaker for this shotgun wedding) that Bank of America wanted out of the deal, then-Secretary Hank Paulson, acting in concert with Ben Bernanke from the Federal Reserve, made it clear to Lewis that he and the board of B of A would all be replaced unless they went through with the merger (another testament to the unintended consequences of taking TARP funds).
In order to protect their jobs, Lewis and the Board completed the merger while failing to inform their shareholders that the condition of Merrill Lynch had been fraudulently misrepresented. (For more complete details, please read the letter posted at:
http://zerohedge.blogspot.com/2009/04/cuomo-letter-exposing-paulsons-and.html ). Apparently saving their jobs was more important than protecting the stockholders.
It's a sad time here in our country. Our financial system and our government has sunk to new lows in ethical relativism when, under the guise of 'protecting the system and the U.S. taxpayer,' our officials use mafia tactics and bank officials are willing to cover up fraud in order to keep their jobs. Unfortunately, this may only be the tip of the iceberg when it comes to corruption. I just hope that the next iceberg doesn't sink the ship of state.
Friday, April 3, 2009
Banks, Bunco and Bull Markets
Looks like the Dow is up for the fourth consecutive week in a row. That's the best 4-week increase in the market since 1933. That's pretty amazing considering the horrific job loss numbers that have surfaced since Wednesday. The national unemployment rate now stands at (drum roll please) 8.5%. But as the talking heads keep reminding us, it's not as it was back in the Great Depression when unemployment hit 25%.
In 1929, the year of the great crash, unemployment was below 5%. That's lower than our unemployment numbers were when our stock market hit the skids back in October of 2008. Currently, experts estimate that our unemployment could hit 10% by the end of 2009. Time frame-wise, if we get there by the end of this year we'll match the employment rate for 1930. But things did get worse during the Depression. In 1931 unemployment levels hit 16%, followed by 24% in 1932, and finally, in 1933, it peaked at 25%.
In 1929, the year of the great crash, unemployment was below 5%. That's lower than our unemployment numbers were when our stock market hit the skids back in October of 2008. Currently, experts estimate that our unemployment could hit 10% by the end of 2009. Time frame-wise, if we get there by the end of this year we'll match the employment rate for 1930. But things did get worse during the Depression. In 1931 unemployment levels hit 16%, followed by 24% in 1932, and finally, in 1933, it peaked at 25%.
When we look at those numbers it seems like we have a long way to go. After all, if unemployment continues apace we'll have to stay in a recession/depression for three more years for things to get that bad. And everyone's telling use that things are going to turn around by the end of the year - maybe - or in early 2010 at the latest. Except that the government's been fudging the numbers. The unemployment statistic that most closely reflects the way jobless numbers were kept back in the 1930's is the U6. And what is the March 2009 U6 unemployment number from the bureau of labor statistics? It's 15.6%. That puts us at about the same unemployment level as 1931.
The numbers are bad, really bad, but the news keeps telling us that the reason the stock market isn't reacting to them is because unemployment is a 'follower' indicator. But if they keep 'following' employment numbers that not only get worse and worse, but also keep being revised downward after the fact, where's the ray of sunshine? Where's the hope, the sunny outlook, that's driving the Bulls in the stock market?
Maybe the markets are looking at something else? Maybe they're looking at the financial sector - you know, the sector that drove the economy into the tank in the first place. On the surface, things don't look so promising there either. With Treasury Tim's tough talk about cleaning up the financial industry and creating tough new international regulations for the entire financial sector, the market should be cratering. But it's not.
Why? It's because Geithner's tough talk about cleaning up the financial mess is like closing the barn door after the horse is gone. Yesterday the FASB (Financial Accounting Standards Board), the designated private sector organization in the US that establishes financial accounting and reporting standards, made a big change in its rules. Banks and financial firms will no longer have to value their assets based on mark to market.
What does this mean? It means that instead of valuing assets based on their real worth if they had been sold today, financial institutions can value them based on creative formulas that assume the sort of unsustainable year over year price increases that created the original real estate bubble. Banks will now be able to set the asset values on what the property may be worth later on down the line during the life of the note with the built-in assumption that property values will recover. And they get to create their own formulas to arrive at those values. Wow! Complicated? Arcane? Opaque and undecipherable? You betcha! We'll never know how much those assets are really worth or how bad off the banks really are.
But I thought Tim Geithner and the Treasury were demanding more accountability and transparency from the financial sector? Apparently they won't be getting it, because this change in the regulations sets the stage for even more shenanigans.
The combined effect of the FASB's actions and the latest bail-out legislation is to allow 'toxic assets' to be auctioned off to new 'public-private partnerships' at new 'revised' (read artificially inflated) values. Miraculously, all those bad assets that were sucking the capital out of the banks are gone! But where did they go?
Why, they went to us, of course. At least the cost of paying for them went to us, because these new public-private partnerships will enable banks and financial institutions to buy back their own bad assets for about 5-10% of their value. The government then puts in matching funds and the balance is covered by loan guarantees that are not recoverable. In other words, the government eats all of the loss except for that original 5-10%, while the banks get a fresh shot of capital and clear all the bad debt off their books.
It's magic! Sort of. It looks a lot like what old time law enforcement used to refer to as 'bunco'. You see before bunco became a social dice game for women, it had a different meaning altogether. Webster's Dictionary calls it a 'swindling scheme', and we've been swindled all right. In spite of all of the tough talk from Tim Geithner and the G20, the prospect of all that nice new money just waiting to flow into the coffers of the very same financial institutions that caused this mess is driving the Bulls in the market toward a new stampede.
Monday, March 30, 2009
The Death of Giants
Many of you out there are probably too young to remember a saying that was popular when I was young - "What's good for General Motors is good for the U.S.A.". In those days GM was, quite literally, the engine of the economy. It not only employed a huge work force on it's own, but it was also responsible for keeping auto showrooms, parts manufacturers and the steel industry booming in the United States.
My Dad worked for General Motors all the way to retirement - first as plant security and later on in the office expediting special orders. When I was a kid we sometimes got to go to the plant on Sundays to see the idled line and check out the really cool mini fire engine. The plant was cavernous and dark and so huge that it had to have not only its own fire department, but also its own medical staff and cafeterias. It seemed like a small city. And I can still remember the way it smelled - a heady combination of 'new car' and motor oil.
As it happens, Dad passed away several years ago so he never had to see what happened to the company he loved so much. I'm not sure what would have been the hardest for him - watching his retirement investment in GM stock dwindle away or the mortification of seeing his much beloved company reduced to being run by government bureaucrats.
In fact, it's my opinion that today's stock market sell-off is actually the result of the realization that unprecedented government interference with the market is now the order of the day. Chrysler is being forced into selling out to a foreign car company and GM is now effectively being run by the Obama administration. The U.S. executive branch has fired half of the board of directors, canned the CEO and installed their own cronies to run day to day operations.
The era of direct micro-managment of the private sector has officially begun. The government is running the banks, insurance companies, and now the automobile industry. What industry is going to be next?
Today is a sad day indeed. It marks the death of giants of U.S. industry. Let us hope that there aren't more to follow.
My Dad worked for General Motors all the way to retirement - first as plant security and later on in the office expediting special orders. When I was a kid we sometimes got to go to the plant on Sundays to see the idled line and check out the really cool mini fire engine. The plant was cavernous and dark and so huge that it had to have not only its own fire department, but also its own medical staff and cafeterias. It seemed like a small city. And I can still remember the way it smelled - a heady combination of 'new car' and motor oil.
As it happens, Dad passed away several years ago so he never had to see what happened to the company he loved so much. I'm not sure what would have been the hardest for him - watching his retirement investment in GM stock dwindle away or the mortification of seeing his much beloved company reduced to being run by government bureaucrats.
In fact, it's my opinion that today's stock market sell-off is actually the result of the realization that unprecedented government interference with the market is now the order of the day. Chrysler is being forced into selling out to a foreign car company and GM is now effectively being run by the Obama administration. The U.S. executive branch has fired half of the board of directors, canned the CEO and installed their own cronies to run day to day operations.
The era of direct micro-managment of the private sector has officially begun. The government is running the banks, insurance companies, and now the automobile industry. What industry is going to be next?
Today is a sad day indeed. It marks the death of giants of U.S. industry. Let us hope that there aren't more to follow.
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