Weekend Economists: The Inaugural Edition February 16-19, 2009

[Demeter]

My how the time flies! Not only is it Friday Night again, already, it is also a long weekend thanks to MLK Day, and also thanks to MLK, it is the weekend before we inaugurate the smartest President since I don't know when.

I don't care who says what--Obama is an American with smarts and education and ethics. My kind of Executive!

So let's see what shape the nation is in, as this Certified Adult takes over from Alfred E. Neumann "Two Shoes" Bush. Post them if you've got them, and remember, we are covering 4 days this time!

[Demeter]

1. how many chickens can get in a plane engine?

*** Simone used to be an aeronautical engineer; she worked on the development of the Airbus – the plane that just went down in the Hudson River.

“It’s safer for them to do a crash landing on water,” she explained. “Less of a risk of fire. And it takes a while for them to sink...so you have time to get out.

“When you land or take off, there is always the risk of birds getting in your engines. When I was at Airbus, we conducted extensive tests...in which we threw chickens into the turbine engines to see how many they could take. They had to be free-range chickens...the others are too soft. Trouble with birds is that they tend to flock together... but I don’t remember how many chickens an Airbus turbine can handle before it stalls.”

http://www.dailyreckoning.com/Issues/2009/DR011609.html

[tclambert]

91. "we threw chickens?" Not with your own hands, I hope.

Knew a guy who worked at GE in the wayback time. He told me about their "chicken cannon." An engineer somewhere actually designed and built an air-pressure cannon to blow chickens into jet engines. Humans do not want to be in the test chamber when a jet engine fires up. Sucking in birds is bad for jet engines; sucking in people is really bad for the engines.

One day, a workman accidentally left a tool box in the test chamber. Oh, yeah, it got sucked in, destroyed the engine, and wrenches and engine parts got thrown into the parking lot.

[Tansy_Gold]

92. Totally off topic but

because you posted this, tc, the thread hopped up to the top of the page and got me ALL CONFUSED (easy enough to do) because it has the wrong date.

Shouldn't this "Inaugural Edition" have been JANUARY 2009?


Tansy Gold, who probably would have noticed this a month ago but has been buried in work and actually has half a week-end off for a change

[tclambert]

93. That's two of us confused, then.

Obviously, since I posted to this thread that must be a month old. According to the date, though, it's from the future.

[Demeter]

2. The Growing Clout of the Nouveau Poor By Barbara Ehrenreich

http://www.thenation.com/doc/20090126/ehrenreich?rel=hp_picks

Ever on the lookout for the bright side of hard times, I am tempted to delete "class inequality" from my worry list. Less than a year ago, it was the one of the biggest economic threats on the horizon, with even hard-line conservative pundits grousing that wealth was flowing uphill at an alarming rate, leaving the middle class stuck with stagnating incomes while the new super-rich ascended to the heavens in their personal jets. Then the whole top-heavy structure of American capitalism began to totter, and--poof!--inequality all but vanished from the public discourse. A financial columnist in the Chicago Sun Times has just announced that the recession is a "great leveler," serving to "democratize the agony," as we all tumble into "the Nouveau Poor..."

The media have been pelting us with heart-wrenching stories about the neo-suffering of the nouveau poor, or at least the formerly super-rich among them. Foreclosures in Greenwich, Connecticut! A collapsing market for cosmetic surgery! Sales of Gulfstream jets declining! Neiman Marcus and Saks Fifth Avenue on the ropes! We read of desperate measures, like having to cut back the personal trainer to two hours a week. Parties have been canceled; dinner guests have been offered, gasp, baked potatoes and chili. The New York Times relates the story of a New Jersey teenager whose parents were forced to cut her $100 a week allowance and private Pilates classes. In one of the most pathetic tales of all, New Yorker Alexandra Penney relates how she lost her life savings to Bernie Madoff and is now faced with having to lay off her three-day-a-week maid, Yolanda. "I wear a classic clean white shirt every day of the week. I have about 40 white shirts. They make me feel fresh and ready to face whatever battles I may be fighting..." she wrote, but without Yolanda, "How am I going to iron those shirts so I can still feel like a poor civilized person?"

But hard times are no more likely to abolish class inequality than Obama's inauguration is likely to eradicate racism. No one actually knows yet whether inequality has increased or decreased during the last year of recession, but the historical precedents are not promising. The economists I've talked to-- like Biden's top economic advisor, Jared Bernstein--insist that recessions are particularly unkind to the poor and the middle class. Canadian economist Armine Yalnizyan says, "Income polarization always gets worse during recessions." It makes sense. If the stock market has shrunk your assets of $500 million to a mere $250 million, you may have to pass on a third or fourth vacation home. But if you've just lost an $8-an-hour job, you're looking at no home at all.

All right, I'm a journalist and I understand how the media work. When a millionaire cuts back on his crême fraîche and caviar consumption, you have a touching human interest story. But pitch a story about a laid-off roofer who loses his trailer home, and you're likely to get a big editorial yawn. "Poor Get Poorer" is just not an eye-grabbing headline, even when the evidence is overwhelming. Food stamp applications, for example, are rising toward a historic record; calls to one DC-area hunger hotline have jumped 248 percent in the last six months, most of them from people who have never needed food aid before. And for the first time since 1996, there's been a marked upswing in the number of people seeking cash assistance from TANF ( Temporary Aid to Needy Families), the exsanguinated version of welfare left by welfare "reform." Too bad for them that TANF is essentially a wage-supplement program based on the assumption that the poor would always be able to find jobs, and that it pays, at most, less than half the federal poverty level.

Why do the sufferings of the poor and the downwardly mobile class matter more than the tiny deprivations of the rich? Leaving aside all the soft-hearted socialist, Christian-type, arguments, it's because poverty and the squeeze on the middle class are a big part of what got us into this mess in the first place. Only one thing kept the sub-rich spending in the '00s, and hence kept the economy going, and that was debt: credit card debt, home equity loans, car loans, college loans and of course the now famously "toxic" subprime mortgages, which were bundled and sliced into "securities" and marketed to the rich as high-interest investments throughout the world. The gross inequality of American society wasn't just unfair or aesthetically displeasing; it created a perilously unstable situation.

Which is why any serious government attempt to get the economy going again--and I leave aside the unserious attempts like bank bailouts and other corporate welfare projects--has to start at the bottom. Obama is promising to generate 3 million new jobs in "shovel-ready" projects, and let's hope they're not all jobs for young men with strong backs. Until those jobs kick in, and in case they leave out the elderly, the single moms and the downsized desk-workers, we're going to need an economic policy centered on the poor: more money for food stamps, for Medicaid, unemployment insurance, and, yes, cash assistance along the lines of what welfare once was, so that when people come tumbling down they don't end up six feet under. For those who think "welfare" sounds too radical, we could just call it a "right to life" program, only one in which the objects of concern have already been born.

If that sounds politically unfeasible, consider this: When Clinton was cutting welfare and food stamps in the 90s, the poor were still an easily marginalized group, subjected to the nastiest sorts of racial and gender stereotyping. They were lazy, promiscuous, addicted deadbeats, as whole choruses of conservative experts announced. Thanks to the recession, however--and I knew there had to be a bright side--the ranks of the poor are swelling every day with failed business owners, office workers, salespeople and long-time homeowners. Stereotype that! As the poor and the formerly middle-class nouveau poor become the American majority, they will finally have the clout to get their needs met.

[Demeter]

3. Struggling states cut healthcare for poor before Obama can bolster coverage By Noam N. Levey

http://www.latimes.com/news/nationworld/nation/la-na-health14-2009jan14,0,3032028.story

The unprecedented reductions come as millions are losing their jobs and insurance. They are so steep that the federal rescue package may not be able to revive them.

January 14, 2009
Reporting from Washington -- Even as President-elect Barack Obama plans an ambitious push to expand health coverage nationwide, states are slashing health services to their poorest residents amid the economic downturn.

The unprecedented cuts in public assistance come as millions of Americans are losing their jobs and health insurance. In many cases, the cuts are so deep that even the massive federal rescue package being assembled on Capitol Hill may not be enough to restore services being eliminated in the burgeoning crisis, health officials warn.

And the faltering economy has all but killed trailblazing state campaigns to expand coverage for the working poor -- once seen as hopeful signs for national healthcare reform...

[Demeter]

4. Conspiracy Watch: The Wisest Guys in the Room: Did the Mafia kneecap Wall Street? By Elizabeth Gette

http://www.motherjones.com//news/outfront/2009/01/outfront-conspiracy-watch.html

the conspiracy: In the 1970s the Mafia started laundering its dirty money on Wall Street. With the help of unscrupulous hedge fund managers, the Mob gutted companies whose stock it had sold short, making a killing—the high-finance equivalent of taking out an insurance policy on a grocery store and then torching it. This "financial heist of monstrous proportions" eventually got so big that it triggered last October's stock market collapse.

the conspiracy theorists: In 2007 Patrick Byrne, ceo of Overstock.com, launched DeepCapture.com to expose "a scandal that may make Enron look like an afternoon tea." The site recently posted a nearly 40,000-word treatise exposing the alleged conspirators, who go beyond mafiosi to include former New York governor Eliot Spitzer, Mad Money host Jim Cramer, and Wikipedia, which has rubbed out entries that reveal details of the scheme. DeepCapture readers can support Byrne's "investigative reporting" by shopping on Overstock. And he's offered a whopping $75,000 to those who can "Crack the Wall Street Cover-Up."

meanwhile, back on earth: Byrne is part of multiple lawsuits charging that naked short selling—investors selling stocks they didn't own or intend to buy—cut into Overstock's share price. Naked short selling didn't affect only Overstock, and while it didn't help the ailing economy, it probably didn't kill it. (Regardless, the sec banned it in September. Byrne's response: "There. Was that so hard?") And that stuff about the Mafia whacking the world financial system? Fuhgeddaboudit.

I DON'T KNOW WHAT TO THINK ABOUT THIS

[Demeter]

5. WSJ Editorializes Against Social Security in News Section

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=01&year=2009&base_name=wsj_editorializes_against_soci

The Wall Street Journal has apparently abandoned any separation between its news and editorial section. In a news article, the paper referred to "the frightening long-term problems America was going to face anyway to pay for Social Security and Medicare in coming decades."

While the claim that Social Security and Medicare are unaffordable are consistent with the WSJ's editorial position, it is not consistent with the evidence. The Congressional Budget Office reports that Social Security will be fully solvent for the next 40 years with no changes whatsoever. Even after the program is first projected to run a shortfall in 2049 it will always be able to pay a higher benefit than current retirees receive.

Medicare is projected to face greater budget problems, but only because projections assume that the U.S. health care system becomes ever more uncompetitive. If U.S. health care costs were comparable to those in countries where people enjoy longer life expectancies, the projections show that the government would enjoy enormous surpluses.

While the article's assertions about SS and Medicare are not accurate, they are consistent with the WSJ editorial position, which calls for cuts in these programs and also supports protectionist measures to sustain the high profits/incomes of insurance companies, drug companies and highly paid medical specialists in the United States.

--Dean Baker

[Demeter]

6. The Citi (Corp) Beat

"Investors were rattled by announcement that it will buy the last $17.4 billion in assets held by its structured investment vehicles, which were among the first casualties when the credit crunch hit last year. ... As Citigroup's stock fell Wednesday, executives instructed traders, financial advisers and other employees to reach out to key clients to reassure them about the company's health. ... Tanya Azarch's, a credit analyst at Standard & Poor's, says the federal government had made a 'broad expression of support.' ... 'As we're watching the deterioration here of the market ... it makes us think that the mark-to-market writeoffs are not over yet,' she adds. Such write-offs, which reflect the dwindling value of assets Citigroup is holding, have already cost Citigroup tens of billions of dollars this year", David Enrich at the WSJ, 20 November 2008.

"The market is losing confidence in Citigroup. In the wake of some planned balance-sheet maneuvers, it isn't tough to see why. ... Largely overlooked in presentation materials released to investors was a disclosure that this quarter the firm would reclassify about $80 billion in assets. Those assets wouldn't have to be marked to market prices. Or they could be be held in way that keeps losses from hitting earnings. ... Mr. Pandit's rationale for the move: The assets could eventually bounce back in value. Investors have heard that one before and don't believe it. If anything, the move has only made investors more skeptical about Citigroup's ability to withstand mounting losses. The bank says its sufficiently capitalized", David Reilly at the WSJ, 20 November 2008.

http://skepticaltexascpa.blogspot.com/2008/11/bank-accounting.html

[Demeter]

9. Pandit: A More Than $800 Million Man?

http://www.nakedcapitalism.com/2009/01/pandit-more-than-800-million-man.html

We posted this in June:

The Wall Street Journal reports today that Citigroup is shutting down Old Lane Partners, a hedge fund started by Vikram Pandit that the bank acquired a mere 11 months ago. The bank decided it couldn't spare the capital to shore up the struggling hedge fund. The article noted:

Old Lane has essentially broken even since its inception. That isn't terrible, considering the perilous financial markets of the past year. But it fell far short of the highflying performance craved by hedge-fund investors. Citigroup never marketed Old Lane to new investors, even after the fund was designated by Citigroup as its primary hedge-fund vehicle last summer, replacing the struggling Tribeca Global hedge fund.


So that means that Citi in effect paid $800 million to secure the services of Vikram Pandit.

Believe it or not, that sort of deal isn't unheard of. In 2000, Chase acquired a merchant bank called Beacon Group for $500 million. The asset it really wanted was the firm's founder, Geoff Boisi, who had headed the Goldman M&A department during the 1980s and was considered a premier dealmaker. Beacon itself was focused on the energy business, which was not an area of expertise for Boisi personally, and oil industry hands I knew thought that the firm was overstaffed and not particularly astute in its investments.

However, this precedent does not bode well for Citigroup. Boisi joined Chase as vice chairman, and given the high aspirations for him versus his near invisibility after he joined, it's a safe bet that their return on the Beacon investment was not attractive.

[Demeter]

7. HSBC are thugs (sorry “partners”)

http://brontecapital.blogspot.com/2009/01/hsbc-are-thugs.html

HSBC has gotten a little aggro lately – an analyst dispute widely reported in the FT and other places. By the standards of the story I am about to tell you the behaviour is quite genteel.

I know relatively little about HSBC. I thought they paid an absurd amount for a Taiwanese bank I understood really well. I later met the guy who was responsible for the purchase and decided that I knew far more about the target than him. Fortunately I was not short the target.

I never much liked Household (indeed I lost money betting that HSBC might come to its senses and not consummate the Household deal.)

I also had a fairly aggressive argument once with a colleague who wanted to buy HSBC. But realistically I only knew about a few cockroaches and I wasn’t sure whether the place was infested.

This post is about a really nasty cockroach. I will leave determination as to whether this is an infestation up to my readers.

The Bally Total Fitness scam

Bally Total Fitness was a favourite of shortsellers. I sold it short myself and made good coin. It was a simple scam.

The company ran gyms which had seemingly attractively priced memberships. Running fitness centres is a notoriously tough business. Anyway these seemed to work – at least in an accounting sense.

In fact the company scammed the customer. Customers thought they were signing a month-to-month gym membership – but – and I am not joking here – they were signing a loan document – and there were huge penalties for not paying. The documents were often non-cancellable. The customers were misled.

There was a website called ballysucks.com (now defunct) which told the story. They were sued by Bally and lost. The story can still be found here and here amongst dozens of consumer rip-off reports on the web.

Bally managed to report not only overdue fees (for which the customer had falsely been induced to agree) as receivables – but they included penalties as per credit cards.

Obviously collection was a problem. Bally filed bankruptcy.

So what has this got to do with HSBC?

Well the Bally scam required a collection process. It required thugs to go chase the delinquent “loans”.

HSBC provided the thugs – and surprisingly – given the thuggish nature of the activity they have never been pulled apart in the financial press for it. They didn’t doing it using the glamorous HSBC name. No it was Orchard Bank. They used to ring up the customers and say they were a partner of Bally. Sometimes HSBC purchased this debt (according to Bally at par) which suggests that their due-diligence was lacking.

They were the debt collectors for Bally’s fraudulently obtained loans. Standover men if you will.

But I will use the word of the HSBC/Orchard debt collectors. They were “partners”. Indeed the partnership extended more widely and there were over 100 thousand credit cards issued by Orchard to Bally customers.

Do you judge someone by their partner? In this case it was Bally’s customers who were "consummated" in the relationship.

[Dr.Phool]

18. I don't think Bally's is long for this world.

I've had a membership for 20 years. It only costs me $60 a year to renew, so I'd be crazy not to, whether I use it regularly or not.

January is always their busiest month. New Years resolutions and all. I forced myself to go there last week, dreading the crowd that would be there. At noon, no less. The place was empty. I don't think there were 20 people in the whole place. I'll try to check it out again next week. I think I pulled an Achilles tendon the last time, and ain't walking too good right now.

HSBC on the other hand, is acting a little funny. I have my "Union Plus" credit card through them, and got a letter recently, wanting verification of my union member status, and talking about interest rate changes, and I didn't really understand the whole thing. I'll know on the next bill anyway. I have a small balance, and if they piss me off, I'll pay the damn thing off.

[AnneD]

52. I paid those suckers last year.......

and my most satisfying pay off to date. HSBC were the most deceptive creditors. I tried to rework another deal when I was trying to catch up. They did not tell me I was making another loan term. For almost 6 months-all the extra I was paying did not go to pay off the principle as I had asked and they jacked up my rate to boot. I called them on it and I guess they figured that at this point-I would be going over it with a fine tooth comb and the fact that I was reading from our states consumer debt code. I felt like a chain had been removed from my legs when I got rid of them. They gave me a good pay off deal but the thought I couldn't come up with the dough on such short notice. I moved heaven and earth to come up with that money believe you me.

They got their pound of flesh and I have the scars to prove it.

[Demeter]

8. The Money-Changers By Harold Meyerson

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/13/AR2009011302326.html


Wednesday, January 14, 2009; Page A17

As Barack Obama looks back to Franklin Roosevelt's first inaugural address -- the only other such address that came smack in the middle of an economic meltdown -- I hope he pays special heed to Roosevelt's words on America's bankers, who then as now had plunged the nation into an economic abyss.

"The money-changers have fled from their high seats in the temple of our civilization," Roosevelt proclaimed. "We may now restore that temple to ancient truths."

The quote, of course, is an allusion to Matthew's story of Jesus driving the money-changers from the temple. But "money-changing" is also a pretty fair description of what Wall Street has been about for the past several decades. As the real income of Americans stagnated and their debt mounted, the wizards of Wall Street grew rich by collecting commissions on derivatives of derivatives of derivatives. By 2007, when Wall Street's profits amounted to an astonishing 40 percent of all American profits, the business of American finance was no longer American business -- providing loans for domestic production, technological innovation, that sort of thing -- but swapping bets and hedges on bets and hedges, all for hefty commissions.

Save for devising more ways for Americans to go into debt, Wall Street had basically decoupled itself from the economy in which Americans live and work. While the nattering nitwits of CNBC hailed the stock market increases of the first seven years of George W. Bush's presidency as evidence that the U.S. economy had never done better, every other economic index made clear that the economy was in dismal shape. As Neil Irwin and Dan Eggen documented in Monday's Post, the rate of job creation and GDP growth during Bush's tenure is the lowest of any president of the post-World War II period. Somehow, our financial geniuses managed to miss this and built a vast financial edifice on the backs of consumers who eventually could consume no more.

[Demeter]

10. Weekend Economists Extension Course: Ethics Exam

http://nihoncassandra.blogspot.com/2009/01/ethics-exam.html

I have often wondered (never having been to business school myself) what happens in the interim between one's MBA ethics classes and the real world execution of fraud, cheating and malfeasance. Does one's conscience (if they ever had one) merely extinguish one day under the incessant pressure of keeping up with the Paul Tudor-Jones', Blankfeins and Fulds or does it die a slow but tortured death under the weight of repeated terms of Miss Porter's fees, and one's wife's Bergdorf Goodman bill?

Fortunately, Psycho-Ethical Testing Associates has been hard at work developing an Ethical Assessment Examination that they believe predicts the relative predisposition to the erosion of one's ethical values, with obvious use by boards and (D&O Underwriters!)in assessing the risk of future malfeasance.

I have been lucky enough to obtain a copy of their beta-examination (tuned for the financial sector) which I re-print for your perusal below.

Ethical Assessment Examination:

Instructions: Please read the questions thoroughly, and circle the letter of your chosen response. And NO CHEATING!!

1. A mortgage broker known to you only as "Big Mo'" offers you a package of loans for your securitisation operations. Your wife is high maintenance, and your kids' Exeter fees are due next week. Select the statement that best identifies your first sentiments

(a) "AIG will insure it for WHAT?!?!"
(b) The spotty kid at S&P says they're AAA.
(c) "How close are we to our budgeted P&L"
(d) "Who did the property valuations, how were they compensated, what percentage of the purchasers actually have jobs, who will these be on-sold to, and what representations will be made?"
(e) "Has anyone aggregated the retrospective underlying values over the past decade?


2. The Head of Investment Banking has asked the Director of Research to ask the Senior Energy Co. Analyst to ask you prepare an upbeat research report on "Blackhole Oil Exploration Ltd.", a company you've discovered is owned by the brother-in-law of the IB Head's sister, and which his wife is an interested party. Which statement best summarizes your sentiments:

(a) "Hellooooo promotion!"
(b) "Will my Porsche be "Fire-engine red" or or Silver like my words?"
(c) "This will make a great short for my brother's Hedge Fund - let me call him now"
(d) "Ummmm, wasn't this the guy who received the Wells Notice from the SEC?
(e) "The Peace Corps in Bangui or Ouagadagu would be a welcome change"


3. For your summer job, you have secured a gig selling ice cream on a three-quarter-mile-long beach. The position is "mobile" meaning you get to set-up whereever you want and you get a share of the profits above the cost of the goods. There are two other ice-cream sellers from other competing companies also permitted to sell on the beach. Where would you choose to locate?

(a) adjacent to the other ice cream sellers in order to collude and fix the highest tenable prices with the minimum amount of walking.
(b) nearest to the hippies to whom you might flog some higher-margin "weed"
(c) nearest to the group of sorority girls sunbathing by the entrance
(d) closest to the crowds to achieve highest volumes
(e) keep moving to stay fit and provide the best service for potential customers


4. You are a wealth manager. You discover that even when you're late putting in buy or sell orders for certain mutual funds, your orders are accepted - even AFTER the cutoff time which is meant to protect existing investors from being predated by new investors taking advantage of market-moving information. What is the best course of action?

(a)Set up a hedge fund to exploit the opportunity until it goes away.
(b) take advantage of the loophole infrequently, but in a big way, so you can profit but at the same time maintain plausible criminal deniability.
(c) trade frequently and in smaller size so as to not attract undue attention, but allow you to profit continuously.
(c) Anonymously inform the SEC to assuage your conscience, while simultaneously doing it from time to time.
(d) Just say No!, but don't be a whistle-blowing sissy.
(e) Call a reporter at the Wall Street Journal with a scoop.


5. You are a small-cap fund manager running a reasonably large-sized fund with a 60-odd stock portfolio. Many names are less-liquid and trading activity definitely impacts the price due their small cap and prodigious front-running by market-makers and micro-structure "arbs". Every month, quarter and year-end, you observe that many of your holdings, being value or contrarian plays, suffer from getting "whacked" and smashed into these critical valuation periods, causing your performance to be elevated during mid-month, but unnecessarily hurt during the times that matter causing your firm to lose bragging rights, and you, to lose performance bonus. Do you:

(a) use your power to buy more and attempt too offset the selling pressure
(b) ramp other stocks you hold to offset the negative performance of the ones being smashed
(c) Leave large "market-on-close" sell orders with several of your brokers and then cancel them 25 minutes before the close.
(d) Join the Pat Byrne Anti-Short-Selling Holders Organization for Long Equity Speculators (acronym =....)
(e) Don't sweat. Be content with being honest and poorer for it.


6. As a retail stock-broker you are paid a percentage of your customers transactions, and trailing commission of varying degrees depending upon what you flog and at what price. Your mother-in-law, who is objectively an unpleasant person, is looking for a conservative large-cap growth fund. You have 25 different funds to choose from. What do you recommend to her?

(a) The Smithfield New Century Growth which has bottom quartile performance over ten years but a 5% load of which you get 2.5 PLUS a 1% trail ad infinitum.
(b) The Fidelity Benchmark-Hugger Fund which has a reasonable trail, AND 50th percentile performance, for which your mother-in-law cannot find additional fault with you for in the future.
(c) A Fairfield-Sentry (Note: her house is fully-paid off and won't need to move in with you)
(d) You offer to manage it yourself (note: equal to 3 or 4% per annum in self-generated commissions)
(e) Vangaurd Windsor no-load 30bp mgmt fee, low expense ratio, but no trail.

(7) You are a senior trade-executor at a large buy-side money-manager. Your trades are often of significant size, and as such have enormous value to anyone apprised of them such as executing brokers who can front-run them or quietly pass the information to other hedge fund clients who pay premium commissions to the broker precisely for such information. Which statement best summarizes how you know your broker is being honest with your orders?

(a) He was a fraternity brother. He would NEVER do that.
(b) He allocated me lots of Hot Issues during the boom-times.
(c) He scored Miley Cyrus tickets for my daughter's birthday party in the Deluxe Box and even arranged pony rides for them IN THE BOX!.
(d) I've got dirt on him like the photos from that time he showed-up with those Russian hookers...
(e) We have our own post-trade analytics that factor-analyze the outcomes.


(8) Imagine you are a Fund-of-Funds manager, and you have the good fortune to get in early on "great" manager who has demonstrated stable returns and who is so amicable and magnanimous that he doesn't even charge management or performance fees despite his libor + 600 record. Even though you originally invested in good faith, you begin to suspect that all may not be as it seems. However, you get a 5% load on every new investment, and seemingly quite "real" management and performance fees of $182,000,000 PER YEAR. Yes, PER YEAR!!, for doing precious little. What is the best course of action for your suspicions?

(a) Never admit to suspecting anything. There is a statute of limitations and they won't be able to take all of it from you.
(b) Act surprised. Make sure you've the BEST lawyer on retainer.
(c) Payout as much as possible to family and friends as payroll for work undertaken. It will be hard to get that back.
(d) Kill the Golden Goose, and insure, at least, you won't go to the Big House.
(e) Seppuku with one of the samurai swords you've been collecting


9. As the Senior Manager of a large and highly profitable debt trading group within a bank, it is November and you discover an error in one of your traders pricing models and the accounting system that tracks it, causing it to overstate profit by a large margin. It is the same model and trader that was responsible for your $12mm bonus last year and the year before, and one you've been a champion of at the firm. With bonus season almost here, do you:

(a) Stay quiet. Take the money. Resign for "personal reasons"; Hire a good lawyer.
(b) Express shock and indignation and blame it on someone else.
(c) Express shock and horror when its discovered and take responsibility.
(d)'fess-up, take the lumps, claim you "lost" the money on the ponies.
(e)'fess-up, take the lumps, give back the money from prior years


10. As a successful hedge fund manager, you made 100% gross last year with leveraged concentrated bets in risky securities. Your family, friends, and alma-mater (whose new building at the business school is named after you) are invested. You collected NINE-DIGIT compensation (through a Cypriot holding company of a Maltese offshore Trust) tax-free. This year however, you were down 65% - not only wiping out all the "gains" but incurring significant losses. You've decided to liquidate the fund since the high-water mark is so far away, there is little motivation to make the journey from CT to NYC and since YOU don't want to be left with the illiquid crap you can't sell after you open the gate. Should you rebate investors the "performance" fees you earned last year, since, philosophically speaking, you didn't really earn them?

(a) No way Jose. My kids, and my kids' kids will forever fly private!
(b) No, last year was LAST year. THIS year. And in any event, it wasn't my fault, it was "a perfect storm".
(c) maybe, ummmmm, dunno really.
(d) Yes, but only to family, friends, and perhaps alma-maters.
(e) Yes. because kharma's a bitch if not properly tended.


11. As the Chief of a Global Insurance concern that you've built with sweat and cunning, you're company is very profitable. But, despite strong feelings to the contrary, you are not God, you cannot control the fact that occasionally "shit happens" that will negatively impact P&L. You've had a good run and your shareholders have come to love your above-average returns. They value stability, even if manufactured. You've had an embarrassingly good year on the heels of several prior outrageously good years. Do you:

(a) call an ART specialist and ask him to help you keep some for a rainy day?
(b) get a subordinate to do it with no audit trail to you, and deny all knowledge if depositioned?
(c) do nothing, and blame "a perfect storm" if the shit hits the fan?
(d) reserve as aggressively as possible within plausible limits of scrutiny?
(e) in the event "shit does happen", take your lumps and try to communicate to shareholders, as diplomatically as possible, that elevated returns come with elevated attendant risks?


12. You are the CFO of a profitable software company. The market has always valued your shares highly due the firm's attractive returns on equity and stellar growth. As a result, the company's shares remain eye-wateringly expensive, though according to bulls "justified" due to growth prospects. All the senior management team (who are your friends too) have large soon-to-vest options in addition to large additional stock option awards pegged to your firm's EPS growth. You foresee small delays in new a product launch that you forecast will cause the company to be light for the quarter causing the shares to torpedo, and for your award grants to be be reduced, and net-worth halved. Which of the following most closely describes the best course of action?

(a) Obviously implement an aggressive stock buyback plan to squeeze the float to make your numbers.
(b) offer aggressive discounts as required to "channel stuff" in order to crystallize awards and give management time to sell stock
(c) hedge by structuring a "collar" on your holdings to lock-in outrageously valued paper wealth bypassing SEC filing requirements
(d) To be safe do A, B & C, then phone a friend (from a payphone) at a hedge fund in which you are invested.
(e) Do nothing and update your CV.


13. As the COO of a bulge-bracket firm who makes copious amounts of money from securities lending and prime brokerage, the CEO is demanding growth growth growth. One of your MDs has pointed out that the "uptick" rule is real nuisance, and that its abolition would increase turnover, short balances and net profits to your firm. How do you proceed with this apparently savvy observation?

(a) enagage powerful lobbysists to campaign for repeal or amendment of historical "impediments" to maximizing profits
(b) increase campaign contributions to friendly lawmakers who can turn the screws on the SEC
(c) both A & B
(d) Let your customers know, off-the-record, you will no longer be policing current regulations
(e) Let independent unbiased academic researchers have access to all your (and exchange data) and let good science assist in the making of public policy.


14. You are a well-connected CEO and CIO of a major-league hedge fund. Your circle of influential and important friends extends far and wide, so you are privileged to much material non-public information about takeovers, business prospects, and other market-moving news. You take your responsibility of delivering above-market returns to your investors very seriously. Your firm has acted on such information and profited handsomely as a result, but insider-trader investigations have caused the regulators to begin asking uncomfortable questions. Do you:

(a) Publicly deny and dismiss any and all allegations
(b) Instruct staff to destroy email records
(c) Call Bill to call Charlie to have him call off the dogs
(d) Hire a former senior SEC counsel with dirt on the investigators to head your newly-beefed up Compliance Department
(e) Admit unintentional transgressions, pay the fine. Be more careful in future.

(15) You are the manager of a large and successful hedge fund. As a result you are one of the most important customers of a bulge-bracket firm with whom you prime, and can always be counted on to trade upon their ideas, where such ideas are based upon reasonably sound information, generating commissions for the brokerage firm, increasing debit balances, and contributing further to the fund's returns that will attract new subscriptions, and virtuously increase the debit balances and commissions at the brokerage firm. (Note: some of the employees in the brokerage firm also invest personally in the fund). One day, you receive a call saying one of the brokerage firm's less important, (and admittedly more embarrassing) clients) is **highly** leveraged, and concentrated in a handful of long and short names which they (wink wink nod nod) kindly supply to you. Do you:

(a) "gun them hard", pushing the market-to-market on positions through the margin threshold, forcing liquidation which the broker then kindly offers to you to close out your shorts
(b) "gun them hard", pushing the market-to-market on positions through the margin threshold, forcing liquidation which the broker then kindly offers to you to close out your shorts
(c) Both A & B
(d) thank them politely, but do nothing.
(e) thank them politely, call the FSA, who will do nothing and think about retirement.

Scoring:
Calculate your total using a=5 b=4 c=3 d=2 e=1

Ethics & malfeasance forecast potential:
15-17 = Very Low - Dalai Lama, Mother Theresa, Bishop Tutu etc.
18-20 = Low - Eliot Spitzer (Do as I say, not as I do...)
20-30 = Medium - Ken Lay (Who knows what one will until faced with the heat of the moment)
30-35 = Elevated - Bernie Ebbers cellmate potential
35-45 = Very High - I **heart** Jeff Skilling!

[Demeter]

11. Foreclosure Filings Rose 81% in 2008 ?

http://www.nakedcapitalism.com/2009/01/foreclosure-filings-rose-81-in-2008.html

One of the problems with trying to gauge foreclosure activity is that the data is pretty poor. We discussed this problem last year in "Foreclosure Stats: Pick a Number, Any Number":

We've noted more than once that quite a few government statistics near and dear to analysts and investors, such as GDP, inflation, and employment growth, are pretty iffy.

So you don't think we are unfairly singling out the government; some measures produced by the private sector are also questionable. A prime example is foreclosure statistics, which are of greater interest than usual, thanks to the soft housing market.

A story in the LA Times, "Getting a Fix on Forclosure Data," tells us how the two most widely cited sources of foreclosure information, RealtyTrac and DataQuick, are almost certainly incorrect. RealtyTrac counts every step in the foreclosure process as a foreclosure, and is also charged with not correcting its data for multiple liens on the same property, resulting in figures that are almost certainly too high. Experts charge that DataQuick's results are too low. And the differences are large. For the state of California, RealtyTrac reported 142,149 foreclosure filings in a February news release; DataQuick's figure was 12,672.

But it is well nigh impossible to arrive at a correct answer due to problems of definition....


The implication is that foreclosure data really does not tell you how many people are actually losing their houses in any time period. But trend data from a single service (in the case of today's update, RealtyTrac) is probably a pretty good indicator of trends and amplitude. And the picture is not pretty.

[Pale Blue Dot]

12. 2 bank failures tonight.

Bank of Clark County (WA) fails

The Bank of Clark County was taken over by the Federal Deposit Insurance Corp at the close of business on Friday, making it the first locally based bank to fail and the second that serves this community after Washington Mutual.

It will open on Tuesday as Umpqua Bank, which is taking over its insured deposits.

...

As of Jan.13, 2009, Bank of Clark County had total assets of $446.5 million and total deposits of $366.5 million. At the time of closing, there were approximately $39.3 million in uninsured deposits held in approximately 138 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Umpqua will not assume the approximately $117.8 million in brokered deposits. The FDIC will pay the brokers directly for the amount of their insured funds.

http://www.columbian.com/article/20090116/NEWS02/901169963

National Bank of Commerce in Berkeley, Ill

NEW YORK (CNNMoney.com) -- The National Bank of Commerce in Berkeley, Ill. was shuttered Friday by federal regulators according Federal Deposit Insurance Corporation.

National Bank of Commerce with total assets of $430.9 million, and total deposits of $402.1 million is the first bank to fail in 2009.

FDIC has entered into a purchase and assumption agreement with Republic Bank of Chicago, Oak Brook, Illinois, to assume all of the deposits of National Bank of Commerce.

Republic Bank intends to purchase about $366.6 million of National Bank of Commerce's assets at a discount of $44.9 million, according to the FDIC, which will retain the rest for later distribution.

The FDIC said that the National Bank of Commerce's two branches will reopen Saturday as branches of Republic Bank of Chicago.

http://money.cnn.com/2009/01/16/news/economy/bank_failure/?postversion=2009011619

[Pale Blue Dot]

13. Government Regulators Aided IndyMac Cover-Up, Maybe Others

A brewing fraud scandal at the Treasury Department may be worse than officials originally thought.

Investigators probing how Treasury regulators allowed a bank to falsify financial records hiding its ill health have found at least three other instances of similar apparent fraud, sources tell ABC News.

In at least one instance, investigators say, banking regulators actually approached the bank with the suggestion of falsifying deposit dates to satisfy banking rules -- even if it disguised the bank's health to the public.

Treasury Department Inspector General Eric Thorson announced in November his office would probe how a Savings and Loan overseer allowed the IndyMac bank to essentially cook its books, making it appear in government filings that the bank had more deposits than it really did. But Thorson's aides now say IndyMac wasn't the only institution to get such cozy assistance from the official who should have been the cop on the beat.

The federal government took over IndyMac in July, after the bank's stock price plummeted to just pennies a share when it was revealed the bank had financial troubles due to defaulted mortgages and subprime loans, costing taxpayers over $9 billion.

Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who allowed IndyMac to backdate its deposits, has been removed from his position but he remains on the government payroll while the Inspector General's Office investigates the allegations against him. Investigators say Dochow, who reportedly earns $230,000 a year, allowed IndyMac to register an $18 million capital injection it received in May in a report describing the bank's financial condition in the end of March

http://abcnews.go.com/Blotter/Economy/Story?id=6658365&page=1

[Demeter]

19. This Crook Earned HOW MUCH?

And this is a public servant?

Time to adjust the pay scale.

[Hugin]

23. I don't think a lower pay scale is going to yield better regulators.

Anyway, this Dochow guy was part of an overall plan... He was Keating's regulator also, if
you read down in the article.

[Hugin]

22. Wait! It gets better!

From the same article...

"Meanwhile, IndyMac customers who lost their savings are demanding answers and are further infuriated after learning Dochow was also the regulator in 1989 who oversaw the failed Lincoln Savings and Loan, a scandal that sent its CEO Charles Keating to prison.

"He's the person that claimed that he looked into Charles Keating's eyes and knew that Charles Keating was a good guy and therefore ignored all of the professional staff that told him that Keating was a fraud, and he produced the worst failure of the Savings and Loan Crisis at $3.4 billion. Now he's managed more than triple that," said Black, now an economics professor at the University of Missouri in Kansas City, Missouri.

Following the Lincoln scandal, Dochow was demoted and placed into a relatively obscure office, but later, inexplicably was brought back into the Office of Thrift Supervision."

Okay, it looks to me that Dochow was brought in explicitly to do what he was doing. So,
the Bank may not be as angelic as they would claim. Who? What? When? Where? and Why? is
Dochow the fall guy.

[DemReadingDU]

34. Fraud scandal at Treasury Department!

Obama needs to dismiss Paulson's protege Geithner, and get someone outside the banking/treasury areas.

[Joe Chi Minh]

72. Good Daily Mail cartoon called Demented by a Jacky Fleming.

CEO: "'We need LESS regulation now, not MORE.' (Translates: 'Just BACK OFF, I'm getting SERIOUSLY rich.')
"'A VOLUNTARY code of conduct is quite sufficient.' (Translates: 'Just BACK OFF, I'm getting SERIOUSLY rich.')"

[Hugin]

14. Since there are many who must work during the week I'm going to Open the Pool for the week-enders.

Yay! There's a loophole! :bounce:

The value of the Dow isn't going to change... Other than the futures values, In the interest of fairness and inclusiveness I'm going to Open the Pool here in the WE for those hard working
people who can't participate during the week. *cough*Demeter*cough*

But, please have your entries or any changes in by the Market's opening on Tuesday!


The Pool calls for your prediction on:

Where the Dow will be on Bush's last day and minute, 1/20/09, at 11:59am.

Note: Friday 1/16/2009 by the Market Close 16:00 ET Tuesday Morning by the Market opening at 09:30 EST is the deadline for submitting your target number.

Entries:

Ozymandius - 8,016.73
radfringe - 8,243.74
Prag - Up-side: 8,837.94, Down-side: 8,158.10
KoKo01 - Up-side: 9,000.00, Down-side: 8,100.00
Ghost Dog - 7,970.00
AnneD - Up-side: 8,395.00 or a sigh of relief Down-side of 7,890.00 (Finally heard from Jimmy.)
MsLeopard - 7,777.77 (Casino Style.)
CatholicEdHead - 7,863.56
DemReadingDU - 8,080.80 (A nice round number.)
UpInArms - 7,578.24 (Wants that in Trillions.)
TalkingDog - 7,500.00
PassingFair - 7,500.00 (Could have a tie here!)
natrat - 6,248.00 (Whoa, a new Cassandra!)
spinbaby - 7,992.44
DanaM - 8,999.99
spotbird - 8,516.00, 8,580.00 or there abouts.
GliderGuider - 7,650.00
Birthmark - 7,600.00
RetailSlave - 8,888.88 (Another round number.)
Gentle Giant - 8,317.69 (A little B-day magic.)
Wednesdays - 7,850.00
Tansy_Gold - 8248.24
InkAddict - 8,474.00
Roland99 - 8,449.00
dumpbush - 7,997.55
Karenina - 8,192.68
bain_sidhe - 7,979.79
tclambert - 8,350.00
lumberjack_jeff - 8,417.00

Dr.Phool - 10,000.00 (Pay no attention... Outlier.)

Please, get your entries in before the opening bell! (Thanks to tclambert for reminding me of this.)

[Dr.Phool]

15. In the spirit of competition, I'll take 10,000!

A Phool and his money are soon parted.

[Hugin]

16. Why you little outlier you!

You're just trying to break the nice curve we've got going!

:rofl:

Okay, but... You'll be sorry and Tansy_Gold will be saying ITYS!

[Demeter]

20. Thanks Prag, But I Don't Have a Clue

I didn't want to pull a number out of the air, so I didn't bet.

I'll think about it.

[antigop]

17. Bailed-out firms have offshore tax havens, GAO report finds

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011602602.html?hpid=topnews

Most of America's largest publicly traded corporations -- including several that are receiving billions of dollars from U.S. taxpayers to finance their recovery -- have set up offshore operations that could help them avoid paying U.S. taxes on their profits, a government study released yesterday found.

American International Group, Bank of America, Citigroup and Morgan Stanley are among the companies that are getting bailed out by U.S. taxpayers while having subsidiaries in locations where they can avoid paying U.S. taxes, according to the Government Accountability Office.

Of the 100 largest public companies, 83 do business in tax-haven hotspots like the Cayman Islands, Bermuda and the British Virgin Islands, where they can move their income into tax-free accounts.

It is all legal, but it could come to an end, given the dire condition of the U.S. economy and President-elect Barack Obama's campaign pledge to close this popular business tax loophole. The Treasury estimates that it loses $100 billion a year in tax revenue as a result of companies shipping their income off shore, and congressional leaders are vowing to introduce legislation forcing big companies to pay full freight.

The GAO did not independently review company transactions to see if the companies purposely created tax-haven businesses to avoid U.S. taxes. But it said that historically, offshore subsidiaries are used for reducing tax costs and shielding transactions from public view.

[Demeter]

21. Why Am I Not Surprised and Disgusted?

Conditioned to being a doormat, I guess.

[Hugin]

24. Bailed out firms are also seeking Supertankers.

There are several articles on it floating around. (Pun intended)

[ozymandius]

25. Circuit City Starts Going-Out-of-Business Sales at U.S. Stores

Jan. 17 (Bloomberg) -- Circuit City Stores Inc., the bankrupt consumer-electronics chain, starts going-out-of- business sales at its 567 U.S. stores today, the beginning of the end for a retailer that began selling televisions in 1949.

Revenue declines that started when Best Buy Co. and Wal- Mart Stores Inc. began offering TVs and computers at lower prices deepened as the U.S. entered a recession and vendors demanded that Circuit City pay up front for their goods. On Nov. 10, the Richmond, Virginia-based chain filed for bankruptcy protection after suppliers cut off credit.

At the time, Circuit City, which employs more than 30,000 people in the U.S., planned to continue operations after exiting Chapter 11. Negotiations with prospective buyers failed, and yesterday the company said it had agreed to hand its U.S. merchandise to a group of liquidators.

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

[CatholicEdHead]

73. Avoid most of the clearance items

The liquidator will jack prices up to MSRP and then discout them. They will often be higher than the previous price.

Some deals may be had with the building furniture and any Circuit City branded items as they cannot be sent back into the distributor sales channel.

[ozymandius]

26. Citigroup’s Pandit Tries to Save the Little That’s Left to Lose

Jan. 17 (Bloomberg) -- Citigroup Inc. shareholders aren’t buying Vikram Pandit’s attempt to salvage the bank by splitting it in two. Nor are they buying the stock.

Citigroup shares tumbled to a 16-year low on Jan. 16 after Pandit, the U.S. bank’s 52-year-old chief executive officer, said he would undo a decade of acquisitions by separating the bank into two units, Citicorp and Citi Holdings.

The problem: Nothing -- not $45 billion of U.S. government funds, not federal guarantees on $301 billion of debt, not a pledge to dump non-core assets -- can stave off the worst financial crisis since the Great Depression. Already crippled by trading losses on mortgage bonds, the bank faces credit-card losses that surged to a record in the fourth quarter.

.....

Relief isn’t in sight. North American credit-card losses, as a percentage of total loans, climbed to 8.04 percent in the fourth quarter from a third-quarter rate of 7.13 percent, the bank said. During the early 1990s recession, the losses peaked at 6.44 percent.

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aN81uQ4nU4e8

[ozymandius]

27. U.S. Economy: CPI, Industrial Production Tumble

Jan. 16 (Bloomberg) -- Consumer prices and industrial production tumbled in the U.S. as a record slide in retail sales destroyed companies’ pricing power and idled more than a quarter of factory capacity.

The cost of living fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said today in Washington. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, the Federal Reserve said. A private survey showed consumer sentiment little changed in January.

The figures indicate a deepening threat to earnings at businesses from manufacturers to retailers. A survey of chief executive officers today showed the lowest level of confidence in at least three decades. Further declines in prices would raise the danger of deflation, which would deepen the recession by making debts harder to pay off.

....

Consumer prices were forecast to fall 0.9 percent, according to the median estimate of 80 economists in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 1.5 percent.

For all of 2008, prices rose 0.1 percent after increasing 4.1 percent the previous year.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aobKTkkXc2V8&refer=home

[ozymandius]

28. A wonderful quote from one of my new book arrivals.

The book, The Great Crash 1929, by John Kenneth Galbraith arrived last week. So I've yet had the chance to crack open the book. Excerpts from this book are fairly common occurrences- extraordinary for a short read. Among them is this, found at The Big Picture, that feels really fitting for our time when any remedy to shore up the 'everything' crises does not seem to work:

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost.

[Dr.Phool]

29. Mini-Madoff? Fund manager gone and possibly $350 million with him

http://www.heraldtribune.com/article/20090116/BREAKING/901160241/2055/NEWS?Title=Fund_manager_gone_and_possibly__350_million_with_him

By John Hielscher, Michael Pollick & Kevin McQuaid

Published: Friday, January 16, 2009 at 7:05 p.m.
Last Modified: Friday, January 16, 2009 at 7:31 p.m.

Investors in a Sarasota-based hedge fund could be out $350 million, and the man behind it has vanished.

Managers of the fund are telling clients that their money is gone, and they do not know if any will be recovered.

Fund principal Arthur G. Nadel, a prominent player in Sarasota social and philanthropic circles, disappeared this week. His wife, Peg, filed a missing person report with law enforcement after finding a suicide note.

Investors — from individuals to the Sarasota YMCA Foundation — in the funds branded Viking, Valhalla and Scoop were stunned this week to learn they may be victims in what could become the largest investment swindle in Southwest Florida history.

(snip)
----------------------------------------------------------------

Hmmmm..........I just noticed the last paragraph above after I tracked down the original story. My wife has a small 401k with Sarasota YMCA. They had the privatized contract for foster care in some counties. They lost the contract last year, and she went with the new agency.

She wasn't there long enough to build up a significant amount. We kept it there, because just like Madoff, it was paying higher than average returns.

[DemReadingDU]

30. Mike Whitney: Fiscal Lifejacket or Money Down a Rathole

12/16/09 Fiscal Lifejacket or Money Down a Rathole

There's no guarantee that Obama's stimulus package will work, but there is growing consensus that something has to be done...and fast! The economy is contracting faster than anytime since the 1930s. Unemployment is soaring, consumer spending is plummeting, and the country appears to slipping towards another Great Depression. The Federal Reserve's near-zero interest rates and massive liquidity injections haven't helped at all. That's why the focus has shifted from monetary policy to Keynesian fiscal stimulus. When businesses and consumers cut back on spending, the government has to make up for the loss in aggregate demand. That's what Obama's $775 American Recovery and Reinvestment Act is really all about. It won't fix the economy; it's just a way to minimize the shock of a hard landing. Economists Lawrence Mishel and John Irons make the case for stimulus in their recent article "How Bad Can It Get"

"Almost 2 million jobs were lost from December 2007, when the recession began, through last November, and economists are forecasting that at least another 500,000 more will have disappeared in December 2008. If so, this will be the steepest rate of job losses in the first year of any post-war recession. Without swift intervention, similar or higher monthly losses are expected to mount well into next year, and continuing weaknesses in the labor market are likely to persist for another two to three years. More than 5.5 million jobs are likely to be lost during this recession unless a major job-creating stimulus plan is enacted....
.
.
Stimulus alone cannot fix the economy. It's just a way to avoid the full crushing-impact of a deep recession. The financial system will have to be re-regulated; the banks will have to write down the losses on their bad assets, restrictions will have to be placed on the amount of leverage that is allowable, and consumers will have to adjust to a world where interest rates are higher and credit a little less available. The stimulus is just a reminder that the system needs structural change so that present crisis is not repeated. That means, prosperity should be built on the solid foundation of wages that keep pace with production instead of credit-fueled speculative bubbles which end in disaster.

lots more...
http://www.informationclearinghouse.info/article21773.htm

[Demeter]

32. Europe launches antitrust attack on Microsoft

http://www.ft.com/cms/s/0/0bf124e6-e40c-11dd-8274-0000779fd2ac.html

By Richard Waters in San Francisco and Nikki Tait in Brussels

Published: January 16 2009 20:34 | Last updated: January 16 2009 20:34

European regulators have launched a surprise new attack on Microsoft over the company’s inclusion of the Internet Explorer browser in its Windows operating system, opening the way for rivals including Google to make inroads into a core part of its business.

The case is a direct echo of the first big Microsoft antitrust battle, when the US accused it of unfairly blocking internet pioneer Netscape during the “browser wars” of the mid-1990s. If the latest regulatory attack is successful, European internet users could find it more convenient to use browsers other than Internet Explorer, which emerged as the industry standard after Netscape was defeated.

The browser has returned to the forefront in the struggle for dominance on the web, given the ability of browser companies to steer users towards their own online services. Also, with software applications increasingly having both online and PC-based elements, the browser has come to be seen as a strategic piece of software, prompting Google to launch Chrome last year.

MORE GEEEKY GOODNESS AT LINK

[Demeter]

31. Today's Oliphant Joke

[Demeter]

33. Merrill to Pay $550 Million in Subprime Settlements (Update2)

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


Jan. 16 (Bloomberg) -- Merrill Lynch & Co. will pay $550 million to settle claims by the Ohio State Teachers Retirement System and other shareholders that it misled investors about assets backed by subprime mortgages.

Merrill, which was acquired by Bank of America Corp., will pay $475 million in cash to investors including the teachers union fund and $75 million in cash to settle claims by company employees who held stock in certain retirement plans, the company said today in a filing with the U.S. Securities and Exchange Commission. Claims in the suits focused on subprime- related losses and related disclosures between September 2006 and December 2008.

The company was accused of issuing false and misleading statements about collateralized debt obligations and other assets backed by subprime mortgages, artificially inflating Merrill Lynch’s shares, according to the complaints filed in federal court in Manhattan...

Merrill didn’t admit wrongdoing as part of the settlements, according to the filing. The settlements don’t cover derivative shareholder or bondholder claims. The company is defending those lawsuits, according to the filing.

“Although we vigorously disputed the allegations in these cases, we concluded it was best to avoid the uncertainty, distraction and costs of the litigation, and to try to achieve certainty through these settlements,” Mark Herr, a spokesman for Merrill Lynch, said in an e-mailed statement.

The U.S. government said today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening.

The board of the Ohio state teachers fund approved the settlement today. The accord must also be approved in federal court in Manhattan.

[Demeter]

35. British Banks Deemed "Technically Insolvent"

http://www.nakedcapitalism.com/2009/01/british-banks-deemed-technically.html

Of course, it takes one to know one. The no-doubt accurate call on the health of British banks comes from one of their own, Royal Bank of Scotland. Funny how no US bank is willing to make the same call.

From the Independent:

Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday...

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was "not unusual at this stage in the economic cycle".

However, it will add to pressure on the Government to provide more support for the country's banks...

The value of Barclays fell by a quarter in stock market trading yesterday, amid a series of wild rumours about its finances, although the bank said it saw no need to comment on the drop.

City analysts said the bank had been targeted by traders after regulators lifted a ban yesterday on the short selling of financial stocks. Barclays' share price, along with the value of other British banks, was also hit by dismal news from the international markets...

Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the wholesale markets that underpin mortgage and other loans.

Other possible measures being considered include state support to help Britain's largest companies raise their own funds. Another option is to launch a "bad bank" to remove tainted assets from the banks' balance sheets, though while this policy is under consideration, it is thought to remain some way off.

Other proposals include ring-fencing the toxic assets within bank balance sheets. Lord Mandelson, the Business Secretary, has also talked of easing the terms of the Government's £37bn bank bailout in order to kickstart lending. Downing Street made it clear yesterday that the Government remained committed to doing "whatever is necessary to help British businesses and families get through this global financial recession".

[Demeter]

36. Bernanke on the Fed's balance sheet

http://www.econbrowser.com/archives/2009/01/bernanke_on_the_2.html

In remarks in London today, Fed Chair Ben Bernanke let the world know how he views the risks and benefits of the recent dramatic changes in the assets and liabilities of the U.S. Federal Reserve.

One of Bernanke's goals was to reassure the public that the many new loans that the Fed is extending and assets it is purchasing do not pose a significant risk to taxpayers. From Bernanke's remarks:

Importantly, the provision of credit to financial institutions exposes the Federal Reserve to only minimal credit risk; the loans that we make to banks and primary dealers through our various facilities are generally overcollateralized and made with recourse to the borrowing firm. The Federal Reserve has never suffered any losses in the course of its normal lending to banks and, now, to primary dealers.

Left unsaid here is the fact any private lender could equally well have also extended said overcollateralized loans to these same borrowing institutions, but decided that the compensation for absorbing such a risk was inadequate. Bernanke's core assumption is thus that private lenders are currently mispricing risk, but the Fed can do it correctly. I'm prepared to believe that's true-- there is some degree of overcollateralization that might be inadequate for markets but should be sufficient for the Fed, but what is it? Are the underlying assets really worth 99 cents, 90 cents, or 50 cents on the dollar? Should the overcollateralization therefore be 1%? 10%? 100%? The devil is in the details, and whatever details we know about this aren't coming from the Fed.

Nor do I take comfort in Bernanke's observation that the Fed hasn't lost any money on the new facilities-- yet. Didn't the buyers of subprime MBS say the same thing? It was the wrong answer then for the same reason it's the wrong answer now-- when you drastically change the scale and rules of the game, you can't base your risk assessment on historical performance. The one thing of which we should be confident at the moment is that the future won't look like the past.

Bernanke also discussed some of the Fed's new plans:

In addition, the Federal Reserve and the Treasury have jointly announced a facility that will lend against AAA-rated asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in the latter facility will be minimal, because the collateral will be subject to a "haircut" and the Treasury is providing $20 billion of capital as supplementary loss protection. We expect this facility to be operational next month.

Here at least we have a number-- $20 billion-- that will give us some idea of what Bernanke assesses the ballpark risks to be. If, for example, we see that the Fed lends $100 billion in this program, I'd take that to mean he's thinking the underlying assets are really worth at least 80 cents on the dollar; if $200 billion, we're talking about 90 cents on the dollar. If this gets into the hundreds of billions, it's hard to see how $20 billion would be regarded as a significant equity cushion.

Bernanke also addressed the question of what's the exit plan for bringing the Fed's balance sheet back to normal size and safety:

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities....

As lending programs are scaled back, the size of the Federal Reserve's balance sheet will decline, implying a reduction in excess reserves and the monetary base. A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds-- including loans to financial institutions, currency swaps, and purchases of commercial paper-- are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down. As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy-- namely, by setting a target for the federal funds rate.

That sounds to me like an exit strategy for how to get out of this if everything works out just right and the problems all go away.

And what's the exit strategy if it doesn't work? I suppose more lending facilities.

[Demeter]

37. Yes, We Can Make the Stimulus More Stimulating By Dean Baker

http://www.truthout.org/011209R

President Obama could not find any economists who were able to see the housing bubble for his economic team. Fortunately, he indicated that he would be willing to listen to those of who did in designing his stimulus package.

In response to his request for ideas on how to make his economic recovery package more effective, I have put together the following list of 7 proposals. This is a mix or match list, intended to be added to the list of items already suggested, although given the severity of the downturn, all of them could probably be included without causing concern about excessive deficits.

1) Extend health insurance

Offer a $2,000 tax credit for any firm that gives health insurance to employees not currently covered. Match at a 70 percent rate any improvements in health care coverage (e.g. lower employee premiums) up to $1,000. If 20 million workers get coverage, this will cost $40 billion a year. If another 50 million workers get added benefits that average $800 per year, this will cost the government another $28 billion for a total cost of $68 billion a year.

This would be a great first step towards universal coverage. If President Obama also allowed employers and individuals to buy into a Medicare-type public plan, then he will have gone a long way towards reforming the health care system.

2) Publicly funded clinical trials

Start a system of publicly funded clinical trials. The point would be to take the conduct of trials out of the control of the drug industry so that doctors and researchers would have immediate and full access to all research findings. See this and this.

As a quid pro quo for paying for the trials, the government would get control of the licensing of the patent. The drugs developed through this system would all be sold as generics costing somewhere near $4 a piece at Wal-Mart. The payback from this would be enormous, instead of spending $330 billion a year on prescription drugs in 2012, we might spend closer to $30 billion. We’ll be paying $30 billion a year or so for clinical trials, and maybe close to that much in licensing fees, and getting much better medicine.

And, as a side-benefit, people in developing countries would get cheap drugs too. We could put an end to “free-trade” agreements that try to jack up drug prices in poor countries through stronger patent protections. Total cost $30 billion a year.

3) Cash for clunkers

Princeton economist Alan Blinder recently argued in the NYT for a program of buying back older, more polluting cars at a premium over their book value. This would get the most polluting cars off the road (raising average full efficiency) and put some money into the pockets of the people who own them. Most of these car owners will have low and moderate income, so we will be putting cash into the hands of people who need it and will spend it. Blinder calculated that we can get 5 million older cars a year off the road for a cost of less than $20 billion a year.

4) Subsidies for public transportation

People in the United States take more than 10 billion trips on public transportation each year. This has enormous environmental benefits. Not only are these people consuming much less energy by using public transit, but by not driving themselves, they are also reducing congestion, and therefore reducing the amount of energy wasted in traffic jams.

The government can encourage public transit and get money into the pockets of the people who use it (disproportionately low and moderate income people), by giving a $1 subsidy for each trip that gets directly passed on in lower fares. For someone taking a subway or bus twice a day, this will amount to savings of $500 a year. The government can include some additional funding to buy more buses and train cars. The cost would be approximately $13 billion a year.

5) Funding for writers/artists/creative workers

In the New Deal there was both a federal arts project and a federal writers project. These programs employed thousands of young artists and writers. A creative stimulus package can extend this idea for the Internet Age. Suppose that President Obama made $10 billion a year available for state and local governments to support various types of creative and artistic work. This could include music, movies, writing books, even journalism. The one condition for support is that all material be made freely available in the public domain. (Better yet, it could have copyleft protection.)

This funding would be sufficient to employ 200,000 people a year at an average of $50,000 each. This would put an enormous amount of creative work in the public domain that people all over the world could download at zero cost. In the first year or two, we could have this program administered through public agencies, but in later years we can have people choose for themselves which work they want to support through a tax credit. The cost would be approximately $10 billion a year.

6) Funding for the development of open software

In the same vein, the government can spend $2 billion a year to develop open source software. This money can be used to further develop and simplify open source operating systems such as Linux, as well other forms of free software. The payoffs from this spending would be enormous. Imagine that every computer buyer in the world would be able to get a computer for which the operating system was free, as was almost all the software that they would ever use.

This would surely save consumers an average of at least $200 per computer. With sales at close to 20 million a year, the savings in the United States alone could easily exceed the cost of supporting software development. Adding in the benefits (and presumably some contributions) from the rest of the world, we will be way ahead by going the route of publicly funded open software. The cost would be $2 billion a year.

7) Pay for shorter workweeks and more vacations

The United States lags the rest of world in that its workers are not guaranteed any vacation time, sick leave, or family and parental leave. In Europe, five or six weeks a year of paid vacation is standard. Also, all Western European countries guarantee their workers some amount of paid sick leave and paid parental leave.

The stimulus gives us a great chance to catch up with the rest of the world. The government could make up the pay for two years for any paid cutback in hours, up to 10 percent of total hours worked in a year and $3,000 per worker. This means that if a firm offered workers who previously had no paid vacation five weeks of vacation a year, the government would provide a tax credit to pick up the tab, up to $3,000 per worker. Similarly, if they extended 10 days of paid sick leave, the government would provide a tax credit for the amount actually used. If employers of 70 million workers (half of the labor force) received an average tax break of $2,500, the cost would be $170 billion a year.


There are undoubtedly other items that should be added to this list. As President Obama’s Chief of Staff, Rahm Emanuel, said, we should not allow this crisis to be wasted. We should not be trying to just bring the economy back to where it was before the housing bubble crashed. Rather, we should be looking to create a cleaner, fairer, better country. Not all of it will be accomplished with the initial stimulus package. Not everything will even be accomplished in President Obama’s first term.

The real question is whether the country can do better than the modest stimulus package that has been laid out thus far. President Obama knows that we can.

[Demeter]

38. HSBC sags on $30 billion capital raising worry By Steve Slater

http://www.reuters.com/article/innovationNews/idUSTRE50D1U820090114

LONDON (Reuters) - HSBC Holdings is likely to halve its dividend and may need to raise up to $30 billion in a rights issue, according to leading analysts, sending shares in Europe's biggest bank to a seven-year low.

Morgan Stanley slashed its earnings forecasts for HSBC for this year and next, and said its relative capital position is not as strong as in the past.

INFINITE DETAIL AT LINK

[Demeter]

39. Massive Taxpayer Backlash Over Pension Crisis Is Coming

http://globaleconomicanalysis.blogspot.com/2009/01/massive-taxpayer-backlash-over-pension.html


Pension plans are a bubble that is now bursting wide open. Five major factors contribute to the crisis: mounting stock market losses, optimistic plan assumptions, longevity (retirees living longer), overly generous payouts, and a surge of boomer retirements.

There are new stories out every day discussing these issues, yet few are aware of them. Let's take a look at a few recent headlines.

$865 Billion Loss Affects New Hires

State Pensions’ $865 Billion Loss Affects New Hires

State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires. Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.

After Philadelphia’s fund lost $650 million in the first nine months of last year, Nutter joined the mayors of Atlanta and Phoenix in writing a letter to Treasury Secretary Henry Paulson seeking financial help for U.S. cities. Their November letter cited investment deficits and rising pension costs.

The $865 billion in losses, which exceed the $700 billion Troubled Asset Relief Program that Congress approved in October, comes as states face budget deficits totaling $42 billion.

To return to 2007 actuarial funding levels by 2010, the 109 funds would need annual returns of 52 percent on assets, the analysis found. Annual returns of 18 percent would achieve the goal by 2013, the center said. The projections are based on a 5.7 percent annual increase in liabilities and a $50 billion increase in assets from contributions above annual payouts.

State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.

“I believe that our members will oppose such initiatives in collective bargaining or in state legislatures,” said John Adler, a director with the Capital Stewardship Program in New York for the Service Employees International Union, which represents public workers. The union’s 850,000 members were in retirement plans with more than $1.5 trillion in assets as of Jan. 1, 2008, Adler said.

[Demeter]

40. For More Pension Angst, check Out

http://www.pensiontsunami.com/

[DemReadingDU]

42. I remember that site

Except I forgot to bookmark it. Now, it is bookmarked, where I can check on it regularly.

antigop often posts pension articles. Hope s(he) finds this link.

[Demeter]

41. Riskiest companies look a little safer; Borrowing costs for high-yield issuers have tumbled though s

http://www.marketwatch.com/news/story/story.aspx?guid={EAB600CC-E739-45F7-ABD7-93E76D4E83E9}&siteid=rss


By Laura Mandaro, MarketWatch

SAN FRANCISCO (MarketWatch) -- An ebbing of investor fears has triggered a rally in junk bonds and a dip in credit spreads, tentative signs that central bank efforts to revitalize lending are starting to work even though borrowing costs remain steep.

Since mid-December, Merrill Lynch's index of U.S. junk bonds has returned 17% after having fallen 33% since the start of last year. Exchange-traded funds that track junk bond indexes, such as the iShares iBoxx $ High Yield Corporate Bond Fund and PowerShares High Yield Corporate Bond Fund, have also snapped back.

"Markets are getting much more comfortable that fiscal and monetary support are going to limit economic tail risk," said Gary Sullivan, head of high-yield bond portfolio management at DB Advisors, the institutional asset management arm of Deutsche Bank.

Alternatives such as stocks still have a lot of warts. The stock market, while off its November lows, hasn't been able to sustain a late-2008 rally. But the safest assets, such as U.S. Treasury bonds, are now carrying such low yields that buyers get very little return for locking up their money.
"High yield is catching part of this, where people are looking for limited downside with very high yields," he said in a call with reporters.

The recent rally adds to other signs, such as the drop in London interbank offered rates and retreat in mortgage rates, that the Federal Reserve's myriad liquidity programs are starting to make it cheaper for companies and consumers to borrow.

This corner of the bond market, however, has a long way to go before returns to mid-September levels...

Borrowing costs for junk bond issuers, or companies whose below-investment grade rating indicate they are more likely to default on their debt than other companies, are still more than double what they were a year ago.

The spread, or gap between yields and U.S. Treasurys, tops 1,600 basis points -- levels that investors deem distressed. That's down from record highs of 2,182 basis points in December, but still 1.8 times higher than they were at the start of 2008, according to Merrill Lynch data...

[Demeter]

43. Fox Business sues Fed for information on bailouts

http://www.reuters.com/article/bondsNews/idUSN1235009220090112


WASHINGTON, Jan 12 (Reuters) - News channel Fox Business Network sued the U.S. Federal Reserve on Monday, saying that the government has failed to release details on financial companies receiving federal funds.

Fox said it made an initial request on Nov. 10 last year under the Freedom of Information Act. The network asked for the identification of the financial institutions receiving funds and details on the collateral provided by these firms between August 2007 and November 2008.

The network made a second request on Nov. 18, asking for more information on financial firms that received lending from Fed programs. It also asked for the amount of collateral held by the Fed as of Nov. 14.

A Fed spokeswoman did not have a comment on the lawsuit...

[Hugin]

48. Interesting considering that I read somehow...

News Corp is receiving funds. They should look in a mirror.

[Demeter]

44. Auto bailout has already helped GMAC and GM sales

http://www.economicpopulist.org/?q=content/auto-bailout-has-already-helped-gmac-and-gm-sales

Emptywheel has looked closely at the numbers for December auto sales, and reaches a startling conclusion:

While GM and Ford still lost more sales across the year than Toyota and Honda (because they also tanked during the gas price crash of the summer), their performance against Toyota and Honda more recently demonstrates the degree to which recent sales are a credit driven issue, and not what Richard Shelby likes to claim is a failed business model. . . .

Both the Prius and the Tundra had worse than average declines last month, with the Tundra down 52% and the Prius down 45%. This isn't about gas prices anymore--it's about money.

Emptywheel also notes that Ford has managed to gain market share for three consecutive months now - for the first time since 2001 - again giving the lie to Shelby the Republicans.

But here's the really amazing thing, down in one of the updates:

Part of GM's less-bad-than-forecast sales were due to the GMAC deal put together at the end of the month.

"GM said its December sales were helped by a zero-interest financing offer that its GMAC finance unit was able to make during the last few days of the month after GMAC was granted status as a bank holding company by the Federal Reserve.

"This allowed GMAC to access money from the federal government aimed at helping banks and Wall Street firms. GMAC had essentially run out of cash to make auto loans earlier in the fall."

Shockers!! BushCo actually managed to free up credit somewhere!! And the entity involved actually offered that credit!!!

Zounds! That means that if you give money to companies that actually, you know, produce something, rather than like, Goldman Sachs, there is a positive result! Amazing! I say take back all the $350 billion already given to Wall Street and the banks, and give it to the auto industry instead!

Emptyhwheel ends with an update on Hyundai, which has a U.S. plant in Alabama: the numbers are as bad as the other companies,

which explains why they're doing the offer where they'll take your car back if you lose your job

[Demeter]

45. Credit Crunch Over? Best Week for Debt Sales in a Year Raises Hopes

http://blogs.wsj.com/deals/2009/01/12/credit-crunch-over-best-week-for-deals-in-a-year-raises-hopes/?mod=yahoo_hs


Posted by Heidi N. Moore

Is the credit crunch over?

Last week we wrote about some nascent signs. Now, the full week’s data are in, and it is looking certain at least that the credit markets are more open than they have been for at least a year and investor appetite is allowing for multibillion-dollar deals. Last week, companies raised $152.6 billion by selling debt to investors. That is the highest volume since the first full week of 2008, when volume was $176.3 billion, according to Thomson Reuters data.

It is a sign that investor nervousness has dispelled considerably since the near-total shutdown of the summer and fall, when bond investors were reeling from the unexpected collapse of Lehman Brothers Holdings and were reluctant to deploy their cash.

Now, big deals are packing the market. Of the 105 debt offerings last week, more than one-third, or 37, were bigger than $1 billion, according to Thomson Reuters.

It’s not a free-for-all quite yet. The five biggest debt offerings last week did have government fingerprints: Fannie Mae raised $10 billion and Freddie Mac $9 billion, while General Electric raised $9.9 billion and Germany’s Commerzbank $6.8 billion. These are offerings that probably wouldn’t have so readily found investors in previous months: Fannie and Freddie are struggling to get on their feet after last year’s takeover by the U.S. government, General Electric raised money through the government’s temporary liquidity guarantee program, and Commerzbank has received nearly $20 billion from the German government, including a $10 billion cash infusion on Friday designed to Commerzbank’s acquisition of rival Dresdner Bank.

Still, the appetite for big debt sales may augur well for Swiss pharmaceutical giant Roche Holdings, which needs to sell an estimated $30 billion of debt to finance its proposed takeover of the remainder of U.S. biotech concern Genentech. German utility RWE AG also has hired 10 banks to arrange EUR9 billion of debt to back its all-cash offer for Dutch utility Essent NV, people familiar with the situation told Dow Jones newswires colleague Carol Dean today.

Credit isn’t all the way back, however. The week’s data show that companies have learned to swallow their pride and sell their debt cheap. Cablevision Systems sold $844 million of high-yield bonds Thursday to refinance debt, pricing the convenant-lite debt at the benchmark London interbank offered rate plus 1.75 percentage points. Then the debt traded at about 87 cents on the dollar. In fact, prices in the “secondary” market where investors sell debt to each other still lag. Standard & Poor’s LCD data show that an old Charter Communications’ term loan, priced at Libor plus two percentage points, was trading at 73.5 to 74.5 cents on the dollar, while Harrah’s Entertainment’s B-2 term loan, priced at Libor plus three points, was trading at about 65 cents on the dollar on Friday. By way of comparison, look at the price on the bonds of Merisant TLB, the maker of sweetener Equal. Its debt was trading at about 55 cents on the dollar after it filed for Chapter 11 bankruptcy protection.

The real end to the credit crunch will be when many different types of debt can be sold. As it was, Cablevision was the only company to dare an offering of low-rated, high-yield “junk” bonds. Fitch, writing late last week, reminded its subscribers that 2008 was a “disastrous” year for high-yield offerings, during which total return on the Merrill Lynch High Yield Master II Index (Master II Index) was a negative 26.39%, sharply below the 2.19% rise of 2007. High yield issuance also declined sharply during the fourth quarter of 2008, falling to just $1.44 billion from $34.5 billion during the comparable 2007 fourth quarter, Fitch pointed out.

http://blogs.wsj.com/deals/2009/01/12/credit-crunch-over-best-week-for-deals-in-a-year-raises-hopes/trackback/

INTERESTING QUESTION! ANY OPINIONS OUT THERE? IS THE CREDIT MARKETPLACE OPEN FOR BUSINESS AGAIN?

[Demeter]

46. Serious Instances of Inflation Since WWII

http://jessescrossroadscafe.blogspot.com/2009/01/serious-instances-of-inflation-since.html

[Demeter]

47. Is Bush Tanking Stocks to Grab the Remaining $350 Billion TARP?

http://www.nakedcapitalism.com/2009/01/is-bush-tanking-stocks-to-grab.html

Remember the much decried end-of-Clinton- era pardons, the most controversial of which involved tax cheat and storied trader Marc Rich? Well, if I am reading the tea leaves right, those shenanigans pales compared to the nonsense Bush is trying to pull in his last week in office.

Bush is making it sound as if it is imperative that the remaining TARP funds be released, which is justifiable only if there is some disaster in the making that needs to be averted between now and noon on January 20. The only candidate that might fit that description is Citi, and investors obligingly ran the stock down 20% today (it recovered a tad before the close) and took the broader indexes with it.

I am mighty puzzled that the markets are taking badly to the spectacle of Citi hiving off a bit or two of its unwieldy self. We have said repeatedly that propping up the financial services industry in place will impede any economic recovery. It is simply throwing good money after bad. The industry needs price discovery, rationalization, and recapitalization. A Citi tidying-up, or something bigger, is a very good step for the economy as a whole. It admittedly may not be pretty for financial stock buyers who got in too early. However, it is a mistake to think that what is in the best interest of these firms (as defined by incumbent senior management who are wedded to hanging on to turf) is in the best interest of the economy or the stock market ex financial firms (particularly since CEO pay in financial services is directly correlated with bank assets).

I am as bearish as just about anyone, but there is a huge amount of cash sitting on the sidelines right now, and the normal course of events would be a wee bit of a rally somewhere along the line before things go lower (if you are of the "going lower" persuasion, that is).

So why would Bush want to grab the rest of the TARP money now? The only plausible explanation is to block the Obama crowd from imposing tougher standards like – hold your breath – accountability! And he could force a confrontation, which most believe would send stocks even lower. What a nice present for an incoming president.

But Obama is acceding to Bush's brinksmanship, which is truly disappointing, Unless he is shrewdly trying to engage the Bushies while running the clock out. But it certainly doesn't look that way.

From the Financial Times:

George W. Bush on Monday agreed to ask Congress to release the remaining $350bn of US bail-out funds, meeting a request from Barack Obama as the president-elect’s team tried to quell opposition to the move among legislators.

Congressional aides said at least one and possibly both chambers of Congress could vote against releasing the funds. The president could veto any disapproval legislation, ensuring the $350bn is disbursed, but such a spectacle would test market nerves and undermine hopes of a strong start under Mr Obama....

Analysts blamed the falls on fears of bad fourth-quarter earnings, a possible forced restructuring at Citi, and the prospect that the Obama administration – under pressure from Congress – would impose harsh conditions on banks receiving further government capital.

Mr Obama told reporters: “It is clear that the financial system, although improved from where it was in September, is still fragile and I felt it would be irresponsible for me – with the first $350bn already spent – to enter into administration without any potential ammunition.”....

In a bid to ward off a vote of disapproval, Lawrence Summers, incoming National Economic Council director, on Monday sent a letter to congressional leaders promising greater transparency and more restrictions on banks receiving bail-out funds – including constraints on dividend payouts and on takeover activity.


Note the formula that appears in the Times: "At Obama’s Urging, Bush to Seek Rest of Bailout Funds." I have some colleagues who have ringside seats, and this was staged. We have the appearance of bi-partisanship, but Obama is bending over backwards to prevent a slugfest. Or so I have been told. Key section:

The decision to request the money now reflects the calculation by Mr. Obama and his aides that it would be better to have both the incoming and outgoing presidents urging lawmakers to release the money, given the high level of anger and frustration on Capitol Hill over how the Bush administration has managed the bailout program.

[Demeter]

49. CEO Firings On the Rise As Downturn Gains Steam

http://online.wsj.com/article/SB123180675543775591.html

A deepening labor market downturn that cost 524,000 Americans their jobs last month is even swelling the jobless rate for chief executives.

William Watkins, ousted Monday at Seagate Technology LLC, is the sixth CEO of a publicly held company to be replaced in just the last eight days. His exit follows the departures last week of CEOs at Tyson Foods Inc., Borders Group Inc., Orbitz Worldwide Inc., Chico's FAS Inc. and Bebe Stores Inc.

Many experts view the changes as harbingers of significantly more turmoil in executive suites this year. Like other companies, these six corporations have been grappling with poor financial results, slumping stock prices and, in some cases, investor criticism....

[Dr.Phool]

50. On a brighter note: Maccaca Boy's arrogant asshole brother got fired yesterday.

Bruce Allen, GM of the Tampa Bay Buccaneers, and brother of former Senator George Allen, got the axe along with head coach Jon Gruden.

When talking about the criminal behavior and arrests of some of his players a couple of years ago, Allen said, "They didn't do anything worse than what Bill Clinton did".

On a sadder note, he'll collect millions on a contract extension he signed last year. :cry: :cry: :cry:

[Danascot]

51. Heckuva job, Bushie!

Reposted from yesterday's SMW because it so clearly illustrates Bush's legacy for the Stock Market (and for our savings, IRAs, 401ks ...)

The end of the Bush stock market

Today (yesterday) marks the end of the Bush stock market.

He has presided over the evisceration of more than $4.6 trillion of U.S. stock market wealth as measured by the S&P 500.



By comparison, the S&P 500 gained more than $9 trillion in value under the eight years of Bill Clinton’s administration.



http://blogs.reuters.com/globalinvesting/2009/01/16/the-end-of-the-bush-stock-market/

[Demeter]

53. The Shill Owns Up

http://www.financialarmageddon.com/2008/12/soulsellers.html

Everywhere you look nowadays, there are plenty of "experts": 1) claiming they "predicted" the current crisis; 2) making forecasts about what will happen next; and, 3) offering "solutions" they say can help return things to "normal."

No doubt some individuals can genuinely take credit for having anticipated the kind of unraveling I've been warning about since I first wrote "The Coming Disaster in the Derivatives Market" in November 2005. They and others may also have some intelligent ideas about where things go from here.

But they are the exception, rather than the rule.

More often than not, the ones who are out there in the public eye spouting "insights" and providing "advice" have no real interest in telling the truth or in giving listeners, readers and viewers the kind of information that can help them make the most of their situations.

Instead, many are charlatans with the gift of gab looking to jump on board the publicity gravy train to puff up their personal resumes, or, more likely, paid shills who dissemble, distort or mislead in the interests of their employers or other interests.

As it happens, the New Jersey Real Estate Report, in a post entitled "Realtor Chief Economist: 'I Spun,'" helps confirm the latter reality with a smoking gun admission (in the latest issue of Money magazine) by an individual who was, for many years, treated by the media and others as though he had something meaningful to say.

AKA: Why you should ignore your Realtor and everything the National Association of Realtors Says

David Lereah was the Chief Economist for the National Association of Realtors (NAR) up until April 2007, the time period otherwise known as the “Bubble”. His outrageously bullish forecasts earned him the name the title: Baghdad Bob of real estate.

His continually rosy forecasts, in the face of a rapidly deteriorating market even led some to start blogs to keep track of his spin, the David Lereah Watch was probably the most famous of these.

Criticism wasn’t coming from bloggers alone, mass media journalists routinely took aim at Lereah, and even his predecessor Larry Yun, one of the most scathing appeared in Slate:

Worst. Forecasters. Ever?
By Daniel Gross
Posted Monday, Dec. 10, 2007

As the housing decline began to take center stage, NAR forecasts were an important market event. This spurred investment research firm Investech Research to publish this gem:



Our own RentingInNJ came up with his own compilation, which spurred the wildly popular (one of the most widely linked and traffic’ed NJREblog posts ever):

Tracking Realtor Spin



1. “There’s no question there is a strong demand for housing from a growing population.” - David Lereah, NAR Chief Economist

2. “For the foreseeable future, the demand for homes will continue to outstrip supply” - Al Mansell, NAR President

3. “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.” - David Lereah, NAR Chief Economist

Which leads up to the January 2009 issue of Money Magazine, where Lereah admits what we’ve already known:

Former real estate bull admits, “I spun”
Working for realtors, David Lereah was famously optimistic. Not anymore.
By Donna Rosato

As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he’s abandoned what he calls the “positive spin.”

Q: Were you wrong to be so bullish?

A: I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right inline with most forecasts. The difference was that I put a positive spin on it It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Q: The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?

A: My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back to the peak prices we saw in many markets.

Q: Any regrets?

A: I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

[antigop]

54. Florida Fund Manager Missing; Clients Say Money Gone

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXB_2abb4MMQ&refer=home

Arthur Nadel, a hedge-fund manager in Sarasota, Florida, has disappeared and clients are concerned they may have lost hundreds of millions of dollars, according to law enforcement officials.

Nadel, 76, is president of Scoop Management Inc., which oversees funds including Valhalla Investment Partners LP. He was reported missing three days ago after he called his stepson, Geoff Quisenberry, and told him to go to his house where he had left a note, Lieutenant Chuck Lesaltato of the Sarasota County Sheriff’s Office said yesterday in a telephone interview.

Nadel’s wife, Peg, and Quisenberry, were “concerned about his welfare,” Lesaltato said. Nadel had sounded “distraught,” Lesaltato said, citing the note. Nadel’s partner, Neil Moody, said today he believes Nadel is alive and has spoken to his wife since then.

Scoop may have managed as much as $350 million, although “that may be high because performance results were exaggerated,” Moody said in an interview. He said he contracted with Nadel to manage three funds on his behalf, while Nadel alone had three others and did the trading for all six. Moody said he didn’t know anything was wrong until Nadel was reported missing Jan. 14.

[Demeter]

55. Heat Wave! We're Above 20F!

[DemReadingDU]

57. SW Ohio: 21F!

Good morning!

[Dr.Phool]

58. Don't forget to drink plenty of fluids, and maybe a salt tablet or two.

[ozymandius]

89. Wear loose clothing. I suggest cheesecloth, maybe an oversized body stocking.

This will allow the heat to dissipate quickly to avoid heat exhaustion and possibly heat stroke.

[DemReadingDU]

56. Martin Weiss: The NEXT Big Shock

1/18/09 By Martin Weiss

The Next Big Shock:
City and State Deficits Will Torpedo Your Income and Wealth in 2009

According to the Center on Budget and Policy Priorities (CBPP) …

* The number of states facing urgent fiscal difficulties has suddenlty surged to AT LEAST 45.

* Just for the coming fiscal year alone, initial estimates from the states add up to $80 billion in deficits. But as the full extent of their troubles are revealed, CBPP projects that their combined deficits will surge to $145 billion.

* And here’s the clincher: The states face staggering budget deficits through fiscal 2011 totaling at LEAST $350 billion — the worst in history by far.

Nearly every major state budget in the Union is a ticking fiscal time bomb. And since nearly all have laws forbidding deficits, they are scrambling to cut in every possible way — laying off state workers by the thousands, slashing spending on education, canceling construction projects, or worse.

The political resistance to cuts is huge. And yet, many states, like California, will run out of money even IF they can pass their most ambitious deficit-busting proposals.

Never before since the bankruptcy of the Confederacy after the Civil War have so many states faced the intensity of the financial doomsday now looming in fiscal 2009 and 2010!

City Governments in Even Worse Shape

Cities are typically unencumbered by the legal requirement to balance their budgets. So they are not under the same immediate pressure to resort to massive layoffs as the states.

But that only makes things far worse, encouraging them to borrow … postponing the day of reckoning … and sinking them deeper into the quagmire of unpayable debt and interest.

In New York City, for example, the deficit picture is far worse than Mayor Bloomberg estimated just weeks ago: The New York Independent Budget Office is now pegging it at $11.3 billion. But that didn’t seem to stop the mayor from announcing an ambitious effort to create 400,000 new jobs in his State of the City address yesterday.

This scene, repeated across the nation, could create a whopping $100 billion in new municipal deficits on top of the $350 billion in deficits at the state level.

Grand total: $450 billion in red ink flowing from state and local governments … in addition to the $2 trillion deficit at the federal level … compounding the latest woes of the nation’s megabanks … and all in the midst of a collapsing economy!

The Consequences

Here’s what to expect as the next shock waves hit:

1. Massive job losses — not only for employees of local and state governments, but also for those employed by private contractors, construction companies and thousands of corporations relying on state and local governments to maintain a semblance of economic and social stability in their area;

2. Giant new borrowing by local governments temporarily strapped for cash or trying to plug long-term gaping holes in their budgets;

3. Huge new supplies of municipal bonds hitting the market precisely when some of the biggest buyers of muni bonds — financial institutions like Citigroup, Bank of America and AIG — are being forced to dump munis to bolster their shattered portfolios;

4. New, major municipal bond defaults on the near horizon; and overall …

5. The biggest threats to your income and wealth in your lifetime!

more...
http://www.moneyandmarkets.com/the-next-big-shock-3-29303


P.S. Here is a link to a video conference, appx 1 hour, from 1/15/09.
“7 Startling Forecasts for 2009″

You need to register first. (It's free)
http://webcast.streamlogics.com/audience/index.asp?eventid=81655519&stage=2

[Demeter]

59. Happy Sunday, All!

The sun is shining, the snow has finally stopped for a bit, the drive is shoveled,

and the Ann Arbor News has decided that in honor of the momentous occasion, they will hold the presses for 2 hours on Tuesday in order to cover the Inauguration, meaning that I will be slopping around in the dark two hours later than usual, at least. Still, for a rag that endorsed Bush twice, that's pretty progressive. Too bad the carriers get punished for it, without any special compensation.

And Tuesday is Board Meeting, of course.

Still, the sun is shining with all its might, trying to melt all the fluffy white stuff that fell this past week...

[Demeter]

60. Who Wants to Kick a Millionaire? By FRANK RICH

http://www.nytimes.com/2008/12/21/opinion/21rich.html



...Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.

Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.

There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”

In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.

The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.

Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.

There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”

Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.

There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.

Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.

Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.

In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.

Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.

In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.

But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.

On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff...



This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.

[Demeter]

61. Dilbert For Irony

[Demeter]

62. Citi expected to show loss of at least $6bn

http://www.ft.com/cms/s/0/08789f34-e33e-11dd-a5cf-0000779fd2ac.html

By Francesco Guerrera in New York


The calm before the storm. That is how one Citigroup executives described the mood within the company ahead of Friday’s fourth-quarter results that are expected to show a loss of between $6bn and $10bn and provide details of its planned break-up.

Unfortunately for Citi, the markets were anything but calm on Thursday, hammering its shares on deepening fears that the government will have to come to the rescue of the troubled financial group less than two months after a $300bn bail-out.

Any further government intervention would bring Citi a step closer to nationalisation.

The US authorities already own the rights to become Citi’s largest shareholders through warrants to buy a 7.8 per cent stake in Citi. The injection of more capital, in the form of common or preferred shares, would only increase the government ownership in the company and probably cause sharp losses for investors.

Citi’s shares were down 15.5 per cent at $3.83 on Thursday, giving the once-mighty company a market value of just over $20bn – much less than smaller rivals by revenues, such as Goldman Sachs and US Bancorp. And although the cost of protecting against a default on Citi’s debt fell marginally after Wednesday’s spike, the move did little to dampen fears over the company’s future.

Citi declined to comment. But people close to the situation said Citi had not experienced any meaningful flight of capital from either prime brokerage accounts – the “hot money” held by hedge funds that is usually pulled from troubled banks – or ordinary savers.

But few doubt that changes are afoot...

[Demeter]

63. Merkin funds subpoenaed in Madoff case (GMAC Connection)

http://www.ft.com/cms/s/0/51a152ac-e31e-11dd-a5cf-0000779fd2ac.html

By Joanna Chung and Brooke Masters


Andrew Cuomo, the New York attorney-general, has issued subpoenas to three investment funds run by Ezra Merkin, former chairman of GMAC, General Motors’ financing arm, as part of a new probe related to the alleged $50bn fraud by Bernard Madoff.

The entry of Mr Cuomo’s office into the Madoff case creates new issues for investment managers who channelled money to the US financier. New York law gives him very broad subpoena powers and has a very broad definition of fraud.

Mr Merkin managed Gabriel Capital Group, mostly a hedge fund of funds, and two hedge funds, Ariel and Ascot Partners. All invested with or acted as “feeder” funds to Mr Madoff, who is accused by federal prosecutors of running a giant “Ponzi” scheme.

Mr Cuomo’s subpoenas to the three funds are seeking information on who invested with them, what they were told and where the money went, say people familiar with the investigation.

Mr Cuomo, whose office oversees charities, has also subpoenaed 15 non-profit groups that had money with Mr Madoff, and some institutions where Mr Merkin held board positions. Mr Merkin himself had been subpoenaed to testify, people familiar with the matter said.

Mr Merkin, a leading member of New York’s tightly knit Modern Orthodox Jewish community, has been on the boards of at least six major non-profit organisations. Most also invested with his funds. Several investors have sued him.

“We have facts and information that there are a large number of charities victimised,” Mr Cuomo said yesterday. “We regulate charities . . . so we have a particular interest in that regard.” Charities are likely to have lost more than $100m, he said, adding that his investigation could be criminal or civil “depending on the facts”.

New York state’s 1921 Martin Act allows cases to be brought even without evidence that the seller intended to commit fraud. That could prove problematic for those who recruited investors for Mr Madoff but say they did not know of his alleged fraud.

Mr Cuomo’s predecessor, Eliot Spitzer, was often accused of using his Martin Act powers to frighten his corporate targets into paying large settlements.

So far, Mr Madoff is the only person charged by federal prosecutors in connection with the alleged $50bn Ponzi scheme.

Andrew Levander, Mr Merkin’s lawyer, said yesterday: “We will fully co-operate with any investigation by the New York attorney-general’s office.”

He has previously said: “Mr Merkin is as shocked and pained as any of the investors who are his fellow victims of the Madoff fraud . . . Needless to say, Mr Merkin shares the sorrow of all the investors who have been cheated by Madoff.”

Mr Merkin recently stepped down as chairman of GMAC as part of conditions set under a $6bn government aid package extended to GMAC.

FORGET 6 DEGREES OF SEPARATION--WE'RE DEALING WITH INCEST!

[Demeter]

64. Steve Waldman: First, Let's Shoot All the Lenders

http://www.nakedcapitalism.com/2009/01/steve-waldman-first-lets-shoot-all.html


Steve Waldman offers a radical and unconventional cure to our financial mess.

Stop lending.

Waldman is deadly serious and thinks our attachment to lending is based on dangerously flawed premises:

I am glad that the banks, for all the hundreds of billions of dollars we are giving them, are not lending. That is not because I want banks to improve the quality of their balance sheets. On the contrary, I don't want banks at all, at least not banks anything like what we've had....

But credit is the lifeblood of a capitalist economy, right? I keep hearing that line. It's a dumb line.

Credit, also known as debt, is one of several arrangements by which a party with the power to command resources but lacking aptitude or interest in managing a productive enterprise delegates wealth to another party who is capable of creating value but unable to command sufficient resources. You would be forgiven for not noticing, given how habitually we misuse credit, but supplying credit is really just a subspecies of the practice that used to be called "investing". There are a variety of other arrangements that serve the same economic function. Perhaps you have heard the terms like "common stock" and "cumulative preferred equity"?

In fact, credit is to investing what heroin is to painkillers: Unusually appealing, in a certain way. Hard to kick once you're on it. Almost certain to, um, cause problems, eventually. Our overall goal ought not be to kickstart the credit economy, but to kick the habit and move towards financing arrangements that are more equity-like than debt-like. That's going to be hard to do, because historically, we've subsidized the hell out of debt financing, especially bank credit, and alternatives are underdeveloped.

But with the exception of war, no still-practiced human institution provokes catastrophe as regularly or as grandly as the misuse of debt. We ought to phase out banks as we've known them since before Bagehot's time, and move to a regime of what are lately referred to as "narrow banks" (banks that lend only to the government that issues the currency of their deposits). We should encourage the development fine-grained equity markets and local-market investment funds to replace bank financing.

The rush to ramp up "consumer credit" is particularly dumb. Usually, financial investing involves funding wealth generating projects in exchange for a share of the anticipated wealth. Consumer credit funds current consumption in exchange for a share of, um, what exactly?

In theory, there's a good answer: consumer credit funds current consumption in exchange for a share of anticipated future wealth that is believed to be endowed already. Economists talk about consumption smoothing, how it may be optimal for a consumer whose income is volatile to borrow during periods of low income and repay (or save) during periods of high income in order to maintain a constant standard of living. That's very well in models where consumers know the true distribution of their future income, where the spread between borrowing and lending interest rates is not very large, and where consumer preferences are time-consistent. In practice, none of these conditions hold even approximately...

There are obvious wrinkles and objections — What about credit for cars, or home mortgages, or education? The analysis changes when the borrowing is exchanging one pre-existing long-term liability for another. (We are born short basic shelter, and, in much of America at least, short a cheap car as well.) Education can be viewed as an ordinary, wealth generating investment project that in theory could be equity rather than debt financed, but that might be too tricky in practice. It's not my intention to suggest that consumer credit is always bad, only to defend the commonplace notion that for many people and under many circumstances, even loans that will be never be defaulted can be positively harmful, and as a matter of policy we should not be exhorting banks to issue or consumers to accept credit.


Note that in this deliberately provocative post, Waldman does not mention business borrowing. Presumably, business borrowing is to fund investment in profitable activities, be it financing inventory or the purchase of new equipment. But that may be more than a bit of a shibboleth. Consider this analysis from the New York Times' Floyd Norris:

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers....

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

As a group, shareholders were paid about $200 billion more than their companies earned over that four-year period. Suffering investors who held onto their shares during the 2008 plunge may want to reflect on the fact that investors who were dumping shares got roughly twice as much of the money as the loyal holders did.


In case you think this view is overstated, I heard repeatedly from people advising big corporations (lawyers, consultants) during the supposed good years that their clients were very reluctant to make investments of any kind, even expenditures that one would deem to be necessary to maintain brands and revenues, such as advertising. So while money is fungible, there is a lot of anecdotal evidence to suggest that big companies were non only not investing (in aggregate), they might have even been dis-investing.

Waldman does not elaborate on the need for more equity-like arrangements. One can argue that that comes from the fact that lenders take too much comfort from their status at the top of the capital structure, that it things come a cropper, they have the first crack at the carcass. But given the regularity with which banks rack up credit losses big enough to impair their survival, the due diligence is (over time) wanting. And to justify the cost and effort of more scrutiny, an investor would need more potential upside. But the flip side is a lot of businesses would be loath to give up equity (some of my lawyer buddies advise strongly against taking in angel investors if there is any way to borrow instead. If you have to go to the well too often, it is very easy for the founder group to wind up minority shareholders, and in every situation I have been close to save one, they have been forced out not long after that happens).

Now, the alert reading is thinking, if we let private borrowing shrink, we'll have a horrid deflationary collapse! But Waldman has another remedy:

But if we let consumer credit contract, and if investment demand is derived from consumption demand, doesn't that spell macroeconomic disaster? There is an alternative. It is called "transfers".....The world is full of human want, which we should strive to meet by working to increase our capacity to produce. Problems arise when want and purchasing power are misaligned. We can improve that by redistributing some of the purchasing power from those with lesser to those with greater use for current consumption. If that sounds Commie to you, note that is precisely the function that consumer credit traditionally serves, just without all the residual claims, a large fraction of which will prove to be illusory (at least in real terms). That is, transfers are just a more honest way of doing precisely what a credit expansion does, except without the trauma that comes from learning that much of the money lent to fund current consumption will never be repaid.

I'm trying to come up with a reasonable opposing view, a case for pushing consumer credit but opposing transfers. Perhaps you can help, because I just can't do it. One might argue on philosophical grounds against coercive transfers, but coercive transfers are a precondition of restarting bank lending, and we've already made transfers to banks on such a scale that banning them now would be like robbing a jewelry store, then piously arguing future looters should be shot. One might argue that bank lending is "smarter" than public transfers would be, that the patterns of consumption and investment that result from private sector credit allocation will lead to superior productive capacity and more sustainable patterns of consumption than direct transfers. Given the awful quality of aggregate investment this decade and the volatility now faced by consumers who were recently credit flush but who under any reasonable lending standard must now be credit constrained, it is hard to be enthusiastic about the special wisdom of bank-mediated credit allocation.

Of course, once we start redistributing purchasing power, there's the thorny question of who gets what. I have an answer to that, it is my new mantra. Transfer flat. Cut checks to every adult in the economy of interest, regardless of whether they pay taxes or have a job. Flat transfers are easy to understand and they pass the smell test for "fair"....


Yves here. I have no doubt some readers are patting themselves on the back. They have argued it would have been better to take the TARP money and just hand it out on a per capita basis (it come out to over $2000 per person). Unfortunately, it couldn't quite be that tidy, since some money would have to be spent to clean up the dead banks.

We want an economy that serves some people dramatically more than others, in order to preserve incentives to produce and excel. But we also want an economy that meets every person's basic needs, even those of people who are unable or unwilling to offer marketable goods or services. We won't let people starve, so why not fund a basic income, however miserly, rather than relying on an inefficient social services bureaucracy or taxing the virtuous by relying on charity?

Tax Pigou and progressive. Transfer flat. Encourage equity. Contain the banks.


Recall that Milton Friedman and Richard Nixon advocated a negative income tax, which is pretty close to this construct.

Unfortunately, there is a completely different set of reasons that we have (and are likely to continue to have) an overly large financial sector. As Niall Ferguson discussed in his book The Cash Nexus, access to credit has long been important to war-making ability. The reason that England was able to punch above its weight in the 1700s and 1800s was that it was able to borrow more cheaply than France, even though France was the bigger economy. The English had professional tax collectors, who were far more effective in gathering revenue than the often corrupt French tax "farmers". Thus there are reasons apart from the health of the economy to have an oversized credit machine at hand (although it isn't clear to me how the securitized mortgage apparatus could be repurposed for war finance.....). At a minimum, financiers will inevitably have the ear of the government, which gives them considerable advantage in pressing their agenda.

[Demeter]

65. How to Waste $350 Billion

http://www.nakedcapitalism.com/2009/01/how-to-waste-350-billion.html

As readers may recall, we have been skeptical of the TARP from the get-go. As the program ricocheted from one high concept to another, one had to wonder: were Paulson and the Treasury truly that incompetent, or was the seeming cluelessness, as some have suggested, a cover for a program to transfer funds to the financial sector, sort of a Hailiburton in Iraq version 2.0?

The damning Congressional Oversight Panel report on the TARP's activities to date, and the lame Treasury response, are instructive. And we have plenty of troubling incidents along the way: the Treasury strong-arming nine banks to take a total of $125 billion among them when some were obviously in greater need than others (by all accounts, JP Morgan's Jamie Dimon was furious over the move).

Now one can legitimately argue that having banks maintain or expand their bubble-era level of lending is a mistake. Putting that aside, the TARP was created with the notion that supporting the banks would lead to more lending, so one must measure its success against that goal.

Tonight's New York Times article, "Bailout Is a Windfall to Banks, if Not to Borrowers," not only indicates that banks are using the government largess for pretty much anything but lending, but even worse, the fund has provided money to banks in no need of government assistance.

From the New York Times:

Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it....

A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.

Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”...

For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things,” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy.

“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”


One issue the article raises is the use of TARP funds to support acquisitions. Since the financial services industry is badly in need of rationalization and consolidation, this activity is helpful to the extent that the purchased banks are troubled (note that Citigroup recently tried to buy Chevy Chase Bank, a healthy institution, so readers should not assume that any deal announced in this environment necessarily involves a floundering seller).

[Demeter]

66. REALLY HIGH MAINTENANCE WIFE SPENDS $53G A WEEK

http://www.nypost.com/seven/12192008/news/nationalnews/really_high_maintenance_144934.htm

By ANDY GELLER

The estranged wife of United Technologies Chairman George David says she has weekly expenses of $53,000 - more than what half the households in America earn annually and higher than the cost of attending an Ivy League school for a year.

Pity poor Marie Douglas-David, 36, a stunning Swedish countess in the middle of a divorce. She has no job, no assets and must depend on the largesse of her 66-year-old hubby for her well-being.

He is being kind.

At a hearing this week in Hartford Superior Court, he agreed to pay her $978,000 until their legal teams work out the terms of their divorce, including whether a $43 million post-nup she signed is still valid.

After six years of marriage, the eye-candy countess wants to keep the couple's 10,000-square-foot penthouse at 740 Park Ave., a source said.

She's willing to let David keep the weekend retreat in Sagaponack. It's a rental ($425,000 a year) anyway.

So how does Douglas-David, a former investment banker for Lazard Asset Management, manage to spend $53,000 a week?

Mortgage and maintenance fees and rent for the Park Avenue penthouse, the Hamptons retreat and properties in Sweden account for $27,300 a week, according to a financial affidavit she filed with the court. And then there's travel ($8,000), clothing ($4,500), a personal assistant ($2,209), horse care ($1,570), domestic help ($1,480), entertainment and restaurants ($1,500), health and skin care ($1,000), dry cleaning ($650), flowers ($600) and a trainer ($250).

And it must be noted after Douglas-David is cutting back.

A footnote to her affidavit said, "While recognizing that many of these expenses may seem high, most are lower than prior to the commencement of this case in August 2007."

A source said the footnote referred to the fact that while the countess and her husband, who used to be the CEO of United Technologies, were together, they spent $200,000 a week - or $10 million a year.

Douglas-David, the source said, only wants to live in the style to which she has grown accustomed. She has had no job since - with the backing of her husband - she quit her post at Lazard in 2003.

"It's all about her standard of living," the source said.

What about everybody else's standard of living?

According to the 2006 Census, 51.3 percent of American households earn less than $50,000.

And the cost of attending a year at Harvard, Princeton or Brown is about $50,000.

According to Douglas-David's affidavit, she has assets of $4.4 million, but debts of $5.7 million, including $2.9 million she owes her husband for loans he made.

In court testimony, David said he made several purchases of jewelry for his wife, including a $138,582 diamond engagement ring, $100,000 diamond earrings, and a pair of $255,000 diamond-earring studs. But he continued to own the bling - apparently to avoid gift taxes. That's why the countess lists the value of her jewelry as only $5,000.

The couple hobnobbed with the likes of Russian Prime Minister Vladimir Putin and took trips to China, Germany, Paris, London, the Bahamas and St. Tropez on United Technologies corporate jets and on a chartered yacht, The Hartford Courant reported.http://www.nypost.com/seven/12192008/news/nationalnews/really_high_maintenance_144934.htm

[Demeter]

67. Option ARMs for Dummies: Why 4.5 Percent Mortgages Rates will do Absolutely Nothing for these Toxic

http://www.doctorhousingbubble.com/option-arms-for-dummies-why-45-percent-mortgages-rates-will-do-absolutely-nothing-for-these-toxic-assets/

I’ve been sorting through numerous e-mails especially after the 60 Minute show looking at Option ARM mortgages. If anything, I think the show has caused more confusion and I have even seen some articles posted online that are incredibly off base on this one subject area. Some now think that the 4.5% mortgage rate is somehow going to save those in Option ARMs. It is not that simple. In addition, there is a difference between a re-cast (as in, re-calculating your loan) and a loan adjustment on more bread and butter adjustable rate mortgages. The thing about option ARMs is they fly under the umbrella of adjustable rate mortgages yet are insanely toxic. There are many implications that are being missed and I feel it warrants and article to clear up at least the most elementary components of the loan.

What is an Option ARM mortgages?

The option ARM is a loan that is an adjustable rate mortgage with the added flexibility of a variety of payment options on your monthly mortgage. The gist of these mortgages was to increase the flexibility of your monthly payment. These loans have a low introductory rate that allows you to make very low initial payments and the low qualifying rate also allowed many people to buy more home than they could otherwise afford with more conventional mortgages. When I show you a real case example of an Option ARM, you will completely understand why these mortgages had no place in the marketplace.

The option ARM has four major type payment options:

(a) Minimum payment - the initial minimum payment is set for the first 12 months usually with the initial interest rate. After that the payment changes on an annual basis with payment caps that limit increases or decrease each year. Keep in mind the minimum payment was selected by many borrowers during the initial months and many times did not even cover the full interest of the principal balance which was deferred and any unpaid interest was tacked on to the initial principal balance. In other words, your mortgage can actually grow.

(b) Interest-Only Payment - with this payment option the borrower avoids any deferred interest yet this option was not available on all loans if the interest only payment was less than the minimum payment option. This payment option does not result in any principal reduction. The payment is based on the ARM index used to determine the fully indexed rate (FIR) for the mortgage. I’ll get into how these rates are calculated since I think this is where people are simply missing the boat with the 4.5% mortgage argument.

(c) Fully Amortizing 30-year fixed payment - In this case, you are paying both the principal and interest and keep your loan on schedule.

(d) Fully Amortizing 15-year fixed payment - We should call this option the “why do we even have this on the menu” option. Here, you are actually accelerating and paying off your mortgage on a 15 year accelerated time frame.

The number of people selecting option “c” and “d” is practically non-existent in option ARMs. In fact, from surveys I have seen anywhere from 70 to 80 percent of option ARM borrowers elected to go with the minimum only payment option.

Fully Indexed Rate

I think this is where people get confused. You need to remember that many of the option ARMs are based on a blended rate system. That is, you have a variable index like the LIBOR or MTA and a margin rate. For example, let us use the MTA (12-month Treasury Average) for November 2008 which came in at 2.053%. A typical margin rate is 2.75%. So the fully-indexed rate is 4.803%. Normally the FIR is rounded to the nearest 0.125% so the rate in this case would be 4.75%.

Why is this important? Because I’ve been noticing some article with a weird fixation to the LIBOR index alone:

LIBOR

Okay, without a doubt the LIBOR has fallen drastically over the past year. This is excellent news for those in more conventional adjustable rate mortgages. In the case of options ARMs, first, not all are indexed to the LIBOR but more importantly the margin rate is fixed. So assuming the 2.75% margin rate and the .47 1-month LIBOR the new blended rate is 3.22%. A good deal for readjustments but not for re-casts. And for the purposes of option ARMs, this does very little because keep in mind most people are making the minimum payment only and even if rates went down to zero (which they may) it doesn’t remove the margin or the fact that the monthly payment will be going up no matter what. Why? Because they are on a negative amortization schedule and even with a zero percent rate, the principal and interest will amortize causing the payment to go up.

[Demeter]

68. Polaroid files for bankruptcy

http://www.ft.com/cms/s/0/4a08b038-cdd1-11dd-8b30-000077b07658.html

By Alan Rappeport in New York

Published: December 19 2008 13:46 | Last updated: December 19 2008 13:46

Polaroid, the US company that introduced instant photography 60 years ago, has filed for bankruptcy to restructure its business, which it said was compromised after the founder of its parent company was arrested earlier this year on fraud charges.

The iconic cameramaker said it filed for bankruptcy protection in Minnesota on Thursday as a result of the fraud investigation into Petters Group Worldwide, which has owned Polaroid since 2005. Polaroid said that it is not under investigation and that it does not expect to shut down.

“Polaroid’s financial condition was compromised by the apparent fraudulent acts perpetrated by the founder of Petters Group Worldwide, Polaroid’s parent company, and certain of his associates,” the company said in a statement.

The company said it has ample cash to finance the reorganisation and that it does not expect to seek additional debtor-in-possession financing.

“We expect to continue our operations as normal during the reorganisation and are planning for new product launches in 2009,” Mary L Jeffries, Polaroid’s chief executive, said in a statement.

In October Petters Group filed for bankruptcy after authorities began investigating an alleged $3bn fraud scheme. Tom Petters, the company’s founder, allegedly created false retail transactions to lure investors to give money to his subsidiary venture capital business.

Mr Petters remains jailed without bond. He denies the allegations made against him but four co-defendants have pleaded guilty in connection with the alleged fraud scheme...

[Demeter]

69. (DEBT CANCELLATION JUBILEE) The age of obligation By Niall Ferguson

http://www.ft.com/cms/s/0/85432b32-cd32-11dd-9905-000077b07658.html



In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.

This point is spelt out in Deuteronomy: “Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.”

Such injunctions may strike the modern reader as utopian. How could any sophisticated society function if all debts were cancelled twice a century – much less, as Deuteronomy seems to suggest, every seven years? Yet we know that such general cancellations of debt really did happen in the ancient world. In 1788 BC, for example, about 500 years before the time of Moses, King Rim-Sin of Ur issued a royal edict declaring all loans null and void, wiping out some of history’s earliest known moneylenders.

The idea of a generalised debt cancellation is not wholly unknown in modern times. The late Gerald Feldman, the world’s leading authority on the German hyperinflation of 1923, drew a parallel between the ancient Hebrew yovel and the wiping out of all paper mark-denominated debts as a result of the collapse of the German currency (though, as he was quick to point out, those whose savings were wiped out were far from jubilant).

In the hope of avoiding the mark’s meltdown, the economist John Maynard Keynes had repeatedly called for a general cancellation of the war debts and reparations arising from the first world war. Though no such intergovernmental jubilee was ever proclaimed, debt cancellation was effectively what happened after 1931, beginning with President Herbert Hoover’s one-year moratorium on both war debts and reparations.

As 2008 draws to a close, there are many people on both sides of the Atlantic who yearn for such a simple solution to the problem of excessive indebtedness. Parallels with the interwar period are not inappropriate. It is all but inevitable that we shall see serious political and geopolitical upheavals in 2009, as the recession takes its toll on weak governments (Thailand and Greece are already reeling) and raises the stakes in inter-state rivalries (India-Pakistan). In the words of Hank Paulson, the US Treasury secretary: “We are dealing with a historic situation that happens once or twice in 100 years.” The stakes are high indeed. Has the time arrived for a once-in-50-years biblical jubilee?

Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 342 per cent by the middle of this year.

With average household debt rising from about 75 per cent of annual disposable income in 1990 to very nearly 130 per cent on the eve of the crisis, a large proportion of American families are submerging under the weight of their accumulated borrowings. British households are in even worse shape.

.........................BIG CUT.................

At the very least, this would rescue many homeowners from the nightmare of negative equity. A similar operation might also be contemplated for the debts of those banks that have been partially or wholly recapitalised by the state. This would not add to the federal debt in net terms and would reduce the interest burden, if not the absolute debt burden, of households.

Such radical steps would naturally represent a haircut for creditors, notably the holders of mortgage-backed securities and bank bonds. Yet they would surely be preferable to the alternatives. And they would certainly be a less extreme solution than the general debt cancellation envisaged in the Old Testament.

Financially, 2008 has been an annus horribilis. The answer may be to make 2009 a true jubilee year.

The writer is a professor at Harvard University and Harvard Business School, a fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution, Stanford

[Demeter]

70. Federal Reserve is damned either way as it battles debt and deflation

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3834108/Federal-Reserve-is-damned-either-way-as-it-battles-debt-and-deflation.html

We know what causes a recession to metastasize into a slump. Irving Fisher, the paramount US economist of the inter-war years, wrote the text in 1933: "Debt-Deflation Theory of Great Depressions".


By Ambrose Evans-Pritchard
Last Updated: 6:34PM GMT 18 Dec 2008

Comments 75 | Comment on this article

"Such a disaster is somewhat like the capsizing of a ship which, under ordinary conditions is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but a tendency to depart further from it," he said.

Today we call this "Gladwell's tipping point". Once it goes, you can't get back up. This is why the Federal Reserve has resorted to emergency measures that seem mad at first sight.

It has not only cut rates to near zero for the first time in US history, it is also conjuring $2 trillion of stimulus out of thin air. This is Quantitative Easing, or just plain 'QE' in our brave new world.

The key is the toxic mix of high debt and deflation. An economy can handle one at a time, but not both.

The reason why it "departs further" from equilibrium is more or less understood. The burden of debt increases as prices fall, creating self-feeding spiral. This is what Fisher called the "swelling dollar" effect. Real debt costs rose by 40pc from 1929 to early 1933 by his count. Debtors suffocated to death.

Brian Reading from Lombard Street Research has revived this neglected thesis and come up with some disturbing figures. US household debt is now $13.9 trillion, down just 1pc from its peak last year. Meanwhile household wealth has fallen 14pc as property crashes, a loss of $6.67 trillion. The debt-to-wealth ratio is rocketing.

Clearly the US is already in the grip of debt-deflation. "The obvious conclusion is that the Fed should print money to purchase private sector assets so as to drive up their price," he said.

Fed chief Ben Bernanke does not need prompting. He made his name as a Princeton professor studying the "credit channel" causes of depressions. Now fate has put him in charge of the channel.

Under his guidance, the Fed has this week pledged to "employ all available tools" to stave off deflation - and damn the torpedoes. It will purchase "large quantities of agency debt and mortgage-backed securities." It will evaluate "the potential benefits of purchasing longer-term Treasury securities," i.e, printing money to pay the Pentagon.

Put bluntly, the Fed is deliberately stoking inflation. At some point it will succeed. Then the risk flips quickly to spiralling inflation as the elastic snaps back. There will be a second point of danger.

By late 2009, if not before, the bond vigilantes may start to fret about the liquidity lake. They will worry that the Fed may have to start feeding its holdings of debt back onto the market. The Fed's balance sheet has already risen from $800bn in September to $2.2 trillion this month. It will be $3 trillion by early next year.

"The bond markets could go into free fall," said Marc Ostwald from Monument Securities.

"The Fed went into this all guns blazing just as the Neo-cons went into Iraq thinking it was a great idea to get rid of Saddam, without planning an exit strategy. As soon as we get the first uptick in inflation, the markets are going to turn and say this is what we feared would happen all along. Then what?" he said....

[Demeter]

71. To Avoid Paying $25 Million, Insurance Co Claims Smoke Killing 3 In Fire Was "Pollution"

http://consumerist.com/5113770/to-avoid-paying-25-million-insurance-co-claims-smoke-killing-3-in-fire-was-pollution

An insurance company with a potential $25 million liability from a 2007 Houston office fire is claiming smoke that killed three people was "pollution" and surviving families shouldn't be compensated for their losses...

Great American Insurance Company is arguing in a Houston federal court that the section of the insurance policy that excludes payments for pollution — like discharges or seepage that require cleanup — would also exclude payouts for damages, including deaths, caused by smoke, or pollution, that results from a fire.

When he thought of that loophole, that insurance lawyer must have pumped his fist in the air and ran down the cubicles demanding high-fives from people on both sides of the aisle and then gone and rewarded himself with an extra candybar from the vending machine. As they stood there waiting for the circular arm to wind out and release the chocolate surprise, he bet himself he could find a way to count it as a business expense. Easy there, big guy, he thought to himself, pride comes before a fall.

BONUS FUN FACT: The fire was started by a nurse who wanted to conceal she didn't complete paperwork on time.

[Demeter]

74. Madoff Hosed Uncle Sam, Too: $17 Billion Going "Poof"

http://clusterstock.alleyinsider.com/2008/12/madoff-hosed-uncle-sam-too-17-billion-going-poof


Henry Blodget | Dec 18, 08 7:03 PM

berniemadoff.jpg

When your money manager sends you a statement at the end of the year saying you've just racked up 10% in short-term gains (the kind Bernie Madoff said he racked up for you), you do what all good citizens do: Pay your capital gains taxes. Anywhere between 15% and 50% of gains, depending on where you live, how much you make, etc.

And that means that over the years, Uncle Sam has funded some nice, fat government programs with Bernie Madoff profit-driven fantasy tax dollars. And now the folks who gave Uncle Sam those fantasy tax dollars are going to want them back. So add another $17 billion or so to next year's deficit.

AP: By some estimates, the Internal Revenue Service could be out as much as $17 billion in lost tax revenue.

"This is one more thing federal, state and local officials will have to deal with," said John Berrie, a tax partner at the law firm Bryan Cave in New York City. "It's another heavy box on their back."

In addition, investors may be counting on a federally mandated insurance fund to bail them out, but that program lacks the money to pay for all the claims that are likely to come.

The timing couldn't be worse. Unemployment has surged, meaning fewer workers are paying payroll taxes. And housing prices have dropped, reducing property taxes.

The recession so far has cost the federal government $200 billion in tax revenues for the 12 months that ended in November, according to estimates by Moody's Economy.com.

The Madoff case, which reportedly involves $50 billion, adds another layer to the fiscal crisis gripping the nation.

[Demeter]

75. The Fed Has Become a Prime Broker, Will Lend to Hedge Funds Under Consumer Loan Program

http://www.nakedcapitalism.com/2008/12/fed-has-become-prime-broker-will-lend.html

So where is my bailout? Now even hedge funds can borrow super cheap if they invest in securitized consumer loans.

Really, the Fed is going about this all wrong. Why let hedge fund have all the fun? Private citizens have perilous little to show for all the kazillions thrown at the financial system.

The Fed should launch a Bottom-Fishers Loan Facility. Administration would be outsourced to firms with retail brokerage operations. Every household would be eligible for a loan of up to $100,000, with investments restricted to US securities, mutual funds, and ETFs (except the "inverse" or short ETFs, and ones that play in currencies or commodities). The exact amount is determined by a score that looks at age, how underwater your investment portfolio is, and your FICO (being older, having significant investment losses, and FICOs that are low but short of simply dreadful are viewed favorably). If the Fed really wanted to encourage this sort of activity, it could also forgive the loans for the borrowers who achieved the top 1% performance among all program participants.

But in all seriousness, the Fed is going further and further down the path of buying every and any junky asset to try to stimulate lending. But the more it steps in, both on the funding and the distribution side, the more it crowds out private players and impedes the resumption of normal activity.

In addition, when the Fed finally succeeds in creating inflation, it will need to quickly sell assets from its balance sheet to reduce money supply (when the Fed sells assets, buyer payments have the effect of taking money out of circulation). Jim Hamilton points out that the Fed is going to be hard-pressed to find an exit:

My answer here would be the exact opposite in philosophy of the kind of purchases and loans that the Fed has been implementing over the last year. The Fed has been trying to sop up the illiquid assets that nobody else wants. But I think what the Fed should be doing is instead acquiring assets of a type that would allow it to quickly reverse its position if a sudden shift in perceptions causes inflation to come in above the intended 3% target. The Fed can't afford to dump the illiquid securities it's been taking on recently, and that leaves it with substantially less flexibility to ease out of an expansionary policy once it starts to be successful. My goal would therefore be to buy assets for the Fed that won't lose their value with a reversal of expectations and whose sell-off by the Fed wouldn't be itself an additional destabilizing force.

What specifically would such assets be? I'd start with those clearly undervalued TIPS. Next I'd buy short-term securities in the currencies relative to which the dollar has been appreciating. Here again if the Fed has to sell these off in a sudden change in perceptions, the Fed will have both made a profit and, by selling, be a stabilizing force. If we're still seeing no improvement, the Fed can start to buy longer-term Treasuries.


Unfortunately, as when Hamilton warned of a risk that the markets would test the implicit guarantee of Fannie and Freddie, no one seems in the officialdom seems to be listening...

[Karenina]

76. THREE THANKFUL CHEERS FOR OUR DEMETER!!!

:yourock::yourock::yourock:

:loveya:

[Demeter]

78. Aw, Shucks, I'm Blushing!

Thank you Karenina, which is what a neighbor of mine used to call me.

[Dr.Phool]

79. Make that four cheers!

And good morning all. Happy MLK Day.

Just a little over 30 hours of The Chimpolini Regime left.

[DemReadingDU]

80. and another cheer!

:applause:

[Hugin]

81. Yay!

:7

[antigop]

86. Thanks for the thread, Demeter! n/t

[ozymandius]

87. Hear! Hear!

:woohoo:

[Demeter]

77. Up to $20m at risk as American trader vanishes By James Thompson

http://www.independent.co.uk/news/business/news/up-to-20m-at-risk-as-american-trader-vanishes-1419354.html


UK investors could be nursing huge losses after being hit by a similar Ponzi scheme to that operated by Bernie Madoff.

Dennis Bolze, a stock trader from Tennessee who is being pursued by the US authorities, failed to attend a bankruptcy court hearing late last week.

About 100 unnamed investors, largely from the UK and other European countries, invested up to $20m in Centurion Asset Management, the company through which Mr Bolze said he was engaging in day trading.

The case follows that of Mr Madoff, the Wall Street fund manager who allegedly committed the world's biggest investment fraud of $50bn through a Ponzi scheme. Some of the biggest banks, HSBC and Royal Bank of Scotland, as well as the Hollywood actor Kevin Bacon have become embroiled in the scandal. Man Group, the world's biggest hedge fund manager, is considering legal action to recover losses from Mr Madoff's activities.

A US bankruptcy court has appointed an emergency interim trustee to oversee the assets and estate of Mr Bolze. Patricia Foster, attorney for the US Trustee, told Judge Richard Stair that his investment activities "appear to be a Ponzi scheme".

Three local investors sought the appointment of an interim trustee to force Mr Bolze into bankruptcy so that his assets could be seized and sold.

The interim trustee, the retired FBI agent Wayne Walls, has been authorised to take "whatever steps are necessary to locate and preserve the assets of property" of Mr Bolze, Ms Foster said.

Mr Bolze has not been seen since mid-December, when local investors' dividend cheques from his alleged day-trading operations stopped. His wife is thought to have no idea where he is, but reportedly stated that he had not engaged in day trading for four months prior to his disappearance.

Meanwhile investigators examining Mr Madoff's alleged fraud have turned their attention to the Wall Street fund manager's UK business, as they try to pin down how much, if any, of his clients' money is left.

The Serious Fraud Office has begun a formal investigation into Madoff Securities International, based in London, where associates say he managed £100m of his family's money.

Mr Madoff transferred $160m to the London business in the autumn of 2007, as the credit crisis was beginning.

[Hugin]

82. How many does this make... 5 or 6?

Keep in mind these are the widely reported cases.

Looks like Warren Buffet's line about finding out who's naked when
the tide goes out has never been truer.

Funny how none of the Corporate Traders have been outed yet. I shall
ponder this.

[Dr.Phool]

83. I shoulda majored in Ponzi in college.

I coulda been a contender.

[Hugin]

84. I went into the wrong business too.

It would've been worth the price to have a cosmetic conscience-ectomy.

But, it'd never work as I have facial hair and lack executive hair.

[antigop]

85. Krugman: Wall Street Voodoo

http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

[ozymandius]

88. Talk about bold! Jerome a Paris quotes Krugman, goes further.

Oh boy - TARP was not necessary and it's a trillion dollar robbery

....

Nationalisation is the solution

The current banking system is terminally bankrupt. Banks today will not lend, even to sound businesses, even if you give them the money to do so. So you have to compel them to lend. Banks (or more precisely, their shareholders, management and creditors) should not be saved: they should be repsectively wiped out, fired and made to take their losses. The banking infrastructure (including most employees, which had little or no responsibility in the crisis) can be diverted from its prior uses towards those now determined by government as part of the mopping up exercise of the hole that the very banking system created.

Financiers are part of the problem, not part of the solution, right now. Don't save them. But save the boring, utility bits of banks. Banks will not do that on their own. Government has to force them. Urgently.

[Demeter]

90. That's All, Folks! I'm BUSHED!

Giving new meaning to old slang....I'm out of here!

I thought I could finally empty the old inbox. Came close! If things would stop happening, and people were either less sneaky or better at concealing their crimes, I could keep up. Still, there's always next weekend. It's rather like Groundhog Day, the movie....

HAPPY OBAMA INAUGURATION DAY, EVERYONE! I'M KEEPING MY FINGERS, CROSSED, MICHELLE!

[antigop]

94. Ruined financiers committing desperate acts

http://www.msnbc.msn.com/id/29195955/

In the abyss of financial ruin, faced with sure disgrace and possibly prison, some of the newly scandalized rich have taken desperate measures in these despairing times.

The black hole of hopelessness can be overwhelming. A man who lost $1.4 billion to Bernie Madoff sits down in his Manhattan office and carefully writes a series of suicide letters to family and friends, then swallows a fatal dose of pills and conscientiously places a wastebasket under his bleeding arm, after slicing it with a box cutter.