Well, the results of the "Stress Tests" on major American financial institutions are in, and unbridled optimism runs wild in corporate media. Only $75 billion required to guarantee solvency! No more desperate pleas to the Federal Reserve or the Treasury for more money coupled with those annoying "restrictions" on salary or bonus pay! The unemployment rate "stabilizes" at 8.9%! Beyond the hoopla many economists and financial professionals still have some very pointed questions concerning the validity of the tests and the ongoing health of the economy in general. Economist's View's Mark Thoma wonders about the validity of the stress test "mean":
Depending on the "questions" they ask the balance sheets, and how the answers are scored, they can get whatever mean they desire (e.g. how are assets that cannot be valued in the marketplace are "scored' makes a crucial difference in the outcome) ... A big part of the problem with bank balance sheets is the things we cannot see, do not know about, and cannot predict. How were those things accounted for in the stress tests?
Think Progress's Fazid Shakir, citing an item in The Wall Street Journal, reveals the "accounting" procedure; they fudged it:
The Federal reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks, shortly before concluding its' stress tests, following two weeks of intensive bargaining. .... (T)he Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital defecits.
Not content to merely fudge capital defecits, the Fed in its' infinite wisdom also increased taxpayer risk. Wonk Room's Pat Garafolo describes a new "financial instrument" custom-made to transfer preferred stock to common-stock equity:
While the banks will presumably do their best to go out and raise capital from private investors ... they will have the option of converting the shares that the government bought with the initail round of TARP into a new financial instrument ... a "mandatory convertible preferred" share gives the banks the ability to create common equity as needed. The preferred shares convert to common shares when a bank or its regulator decides they should. ... (A)s Robert Reich points out "by this sleight-of-hand the public takes on more risk", moviing from a preferred creditor to a common shareholder.
Given the "Geithner paradigm" (throw trillions of taxpayer dollars at financial institutions judged "too big to fail" while alleviating risk to said institutions whenever possible) both the stress tests and the conversion of preferred stock to common equity constitue more of a public relations makeover than any tangible measure of financial solvency. For a big-picture look at the varieties of insolvency that continue to plague us we turn to an amazing overview pithily entitled Why We Are Absolutely Screwed by Karl Denninger:
1) There are 19 million empty homes in America and the builders are still building.
2)Prices were cranked far too high and still have not come down to historical norms in terms of price-to-income ratios. Until they do, a normal market cannot be restored.
3) Everyone in government has been attempting to prevent (the decline to normal p-t-i ratios) for the last 3 years, and have blown hundreds of billions attempting it. They have and will fail.
4) The boomers will not be needing all those extra homes. They're starting to retire. ... (A) 1 or 2-bedroom condo is just fine when all the kids are gone and you've retired.
5) There are only about 44 million " Gen-Xers" and they're stuffed to the gills with college loans. ... They can't afford the 4 and 5-bedroom houses.
... Steve Liesman gave us the "money" quote this morning (May 7th) on CNBC. None of these banks would survive on 11 or 12% unemployment. ... (T)he actual unemployment rate in the country - it includes those who are "discouraged" (they've given up) along with those who are working part-time because they can't find full-time work.
It is well over 12% right now!
Saturday, May 9, 2009
Tuesday, May 5, 2009
Sen. Schumer's "Compromise" - Killing The "Public Option"?
Echoing last week's "cramdown" mortgage reduction debate, where 11 Democratic senators crossed the partisan divide to vote gainst a bankruptcy reform bill that would have allowed judges to reduce the mortgage payments of homeowners facing foreclosure to 31% of their monthly income, today Sen. Charles Schumer of New York introduced a health care reform "compromise" to protect the "vulnerable" health insurance industry. To preserve private insurers' market share in the coming "reform" environment, Sen. Schumer's proposal would compel any government-run program to comply with all the rules and standards that private insurance companies must follow. Said rules include:
The public plan must be funded by premiums and co-payments ONLY. No tax revenue or government appropriations.
The public plan should pay doctors and hospitals MORE than Medicare pays. Medicare usually pays less than private insurers.
The government cannot coerce doctors and hospitals to participate in a public plan just because they accept Medicare reinbursement.
Officials who manage a public plan will have no stake in regulating the private insurance market.
Seems as if Sen. Schumer is bound and determined to create a public plan that is as unpalatable as the privatized insurance market. Way to go, Chuck!
For some background on what's at stake here let's turn to a recently published report by the Center For American Progress entitled The Erosion of Employer-Sponsored Health Insurance. After detailing how Chrysler retirees could lose their health benefits depending on how the current Chapter 11 proceedings shake out, the report goes on to note how since the start of the recession 2.4 million laid-off Americans have lost their health insurance coverage. In March 2009 alone 320,000 workers lost coverage, numbers that don't include wives and children of the newly unemployed. Call me a bleeding-heart, but I think these numbers tell a far more compelling story than the trials and tribulations of private health insurers. Will the American people be satisfied with inclusive mandated coverage which has proven only to drive up health insurance costs to the point that coverage becomes unsustainable? Do privatized insurers and the AMA give a damn? And why are single-payer advocates being arrested at Senate Finance Committee hearings? After the cramdown fiasco Sen. Dick Durbin remarked how banking interests "run this place". I guess private health insurer shills like Chuck Schumer prove that bankers aren't the only "special interest" that controls Congress.
The public plan must be funded by premiums and co-payments ONLY. No tax revenue or government appropriations.
The public plan should pay doctors and hospitals MORE than Medicare pays. Medicare usually pays less than private insurers.
The government cannot coerce doctors and hospitals to participate in a public plan just because they accept Medicare reinbursement.
Officials who manage a public plan will have no stake in regulating the private insurance market.
Seems as if Sen. Schumer is bound and determined to create a public plan that is as unpalatable as the privatized insurance market. Way to go, Chuck!
For some background on what's at stake here let's turn to a recently published report by the Center For American Progress entitled The Erosion of Employer-Sponsored Health Insurance. After detailing how Chrysler retirees could lose their health benefits depending on how the current Chapter 11 proceedings shake out, the report goes on to note how since the start of the recession 2.4 million laid-off Americans have lost their health insurance coverage. In March 2009 alone 320,000 workers lost coverage, numbers that don't include wives and children of the newly unemployed. Call me a bleeding-heart, but I think these numbers tell a far more compelling story than the trials and tribulations of private health insurers. Will the American people be satisfied with inclusive mandated coverage which has proven only to drive up health insurance costs to the point that coverage becomes unsustainable? Do privatized insurers and the AMA give a damn? And why are single-payer advocates being arrested at Senate Finance Committee hearings? After the cramdown fiasco Sen. Dick Durbin remarked how banking interests "run this place". I guess private health insurer shills like Chuck Schumer prove that bankers aren't the only "special interest" that controls Congress.
Tuesday, April 7, 2009
Obama Agonistes - The Empire Re-Ups
With nearly 3/4 of the Obama Administration's first 100 days behind us, it's now possible to gauge the political trajectory of our 44th President, and surely I'm not the only pundit, blogger, whatever to notice the similarity to Bill Clinton's first days in office. Just like the Big Dawg, Obama has been more than prone to making grandiloquent pronouncements only to backtrack towards the political center when actually implementing policy. First there was "I will close Guantanamo" (actually, it'll take a year provided we can find countries willing to take detainees {excluding Venezuela, of course} and obviously only after consultations with "my commanders on the ground"). Next there was "we will withdraw all fighting forces from Iraq in 16 (18?) months" (actually we'll leave a "residual force" of 50,000 troops whose mission will be reclassified leaving no "combat troops" in country. And if the aforementioned "commanders" see fit to break the Status Of Forces Agreement and remain in Iraq beyond 2011, well, that's the way it is.) Update 4/9/09 - Today President Obama asked Congress to approve an additional $83.4 billion to continue financing wars in Iraq and Afghanistan. This is the same type of "pay as you go" war funding resolution that Obama vehemently opposed when he was a senator. Recently the President was ready to flog AIG bonus-takers in the square of public opinion when that scandal became front-page news, even though the Administration had known for months in advance about the AIG payoffs. Funny how the far more egregious Merrill-Lynch bonuses were hardly mentioned 'till AIG hit the fans.
Okay, so Obama is a master of prevarication. But his centrist instincts truly falter when it comes to dealing with the global financial meltdown. By allowing Tim Geithner and Larry Summers to restart "the casino", AKA the housing bubble with the help of $12.8 TRILLION of the taxpayers' money Obama reveals just whose financial interests he's protecting, namely the shareholders and counterparties enmeshed in our biggest financial institutions. That's why even temporary nationalization of "too big to fail" zombie banks is so off the table, because any major restructuring of Big Finance would entail a nasty haircut for some very powerful individuals. However, this way forward is indeed perilous, which makes it absolutely critical for Obama to keep ahead of public outrage over Geithner's toxic asset bailout proposals. When average Americans get wind of the fact that PPIP is simply an acronym for nearly risk-free investing and profit-taking for hedge funds and wealthy private investors they will be righteously pissed. But wait, now comes news that ordinary joes will be able to invest in PPIP. I wonder if over 90% of their venture capital will be guaranteed just like the big boys!
Okay, so Obama is a master of prevarication. But his centrist instincts truly falter when it comes to dealing with the global financial meltdown. By allowing Tim Geithner and Larry Summers to restart "the casino", AKA the housing bubble with the help of $12.8 TRILLION of the taxpayers' money Obama reveals just whose financial interests he's protecting, namely the shareholders and counterparties enmeshed in our biggest financial institutions. That's why even temporary nationalization of "too big to fail" zombie banks is so off the table, because any major restructuring of Big Finance would entail a nasty haircut for some very powerful individuals. However, this way forward is indeed perilous, which makes it absolutely critical for Obama to keep ahead of public outrage over Geithner's toxic asset bailout proposals. When average Americans get wind of the fact that PPIP is simply an acronym for nearly risk-free investing and profit-taking for hedge funds and wealthy private investors they will be righteously pissed. But wait, now comes news that ordinary joes will be able to invest in PPIP. I wonder if over 90% of their venture capital will be guaranteed just like the big boys!
Thursday, March 26, 2009
No Plan B - "Cash For Trash" = Another Taxpayer Bailout/Gaming Geithner's Plan
If progressives haven't yet sussed out Barack Obama's hardline centrist ideology the Geithner version of Hank Paulson's "cash for trash" toxic asset bailout should make it abundantly clear; fix this momentary glitch in a perfectly acceptable financial "engine" with as much taxpayer debt as needed and move on, preferably into mortgage refinancing, and let the housing bubble re-inflate! If this doesn't work, then poof! we'll create another trillion out of nothing and try something else! Even if Geithner's hedge-fund enrichment program is on the money, the problem of scale remains; AIG alone still has 1.6 trillion of unsecured debt while TALF is only budgeted out to $500 billion, with an option for 1 trill.
In a March 24 column for Vox EU, economist Jeffery Sachs lambasted the FDIC "subsidy" that will be built into toxic asset purchases:
The investors will bid substantially more ...(than face value)... because of the massive subsidy implicit in the FDIC loan. The FDIC is giving a "heads you win, tails the taxpayer loses" offer to the private investors. Specifically, the FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds. ... In essence, the FDIC is transferring billions of dollars of taxpayer wealth to the banks.
Don't think this "nuance" has escaped Big Finance. On thursday the Wall Street Journal reported the curious phenomenon of Citigroup and Bank of America buying up big-time "toxic sludge" off the secondary markets. With FDIC asset price inflation guaranteed, Citi and BofA are just booking first-class passage on the PPIP gravy train. What suckers these taxpayers be!
Of course the bottom line is WILL PPIP loosen credit and restore lending? Economist James Galbraith doesn't think so. In his superb March 23rd article in the Washington Monthly, Mr. Galbraith is direct:
... The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed specualtion in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?
This kind of straight talk is verboten in the MSM, even for upscale liberal platforms like The New Yorker, where inferring that Geithner so far seems intent on saving Big Finance from any undue hardship at taxpayers' expense is "paranoid politics" according to George Packer. Your Humble Dissembler's assessment is if it looks like an asset-price-inflated FDIC-facilitated taxpayer bailout you can probably dispense with "smells like" and "tastes like".
In a March 24 column for Vox EU, economist Jeffery Sachs lambasted the FDIC "subsidy" that will be built into toxic asset purchases:
The investors will bid substantially more ...(than face value)... because of the massive subsidy implicit in the FDIC loan. The FDIC is giving a "heads you win, tails the taxpayer loses" offer to the private investors. Specifically, the FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds. ... In essence, the FDIC is transferring billions of dollars of taxpayer wealth to the banks.
Don't think this "nuance" has escaped Big Finance. On thursday the Wall Street Journal reported the curious phenomenon of Citigroup and Bank of America buying up big-time "toxic sludge" off the secondary markets. With FDIC asset price inflation guaranteed, Citi and BofA are just booking first-class passage on the PPIP gravy train. What suckers these taxpayers be!
Of course the bottom line is WILL PPIP loosen credit and restore lending? Economist James Galbraith doesn't think so. In his superb March 23rd article in the Washington Monthly, Mr. Galbraith is direct:
... The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed specualtion in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?
This kind of straight talk is verboten in the MSM, even for upscale liberal platforms like The New Yorker, where inferring that Geithner so far seems intent on saving Big Finance from any undue hardship at taxpayers' expense is "paranoid politics" according to George Packer. Your Humble Dissembler's assessment is if it looks like an asset-price-inflated FDIC-facilitated taxpayer bailout you can probably dispense with "smells like" and "tastes like".
Saturday, March 21, 2009
AIG - Necessary Bailout Or "PASS-THRU" Scam?
Now that the smoke is cleared, the "shock" wearing off of the mid-September meltdown of the financial industry (alleviated by heroic, if painful 'bailouts') to the point where informed people can analyze actions and consequences, it's painfully clear that the initial Paulson-Bernanke TARP bailouts where skewed to the will of an ultra-insider Fed-Goldman-Sachs clique. In retrospect Goldman seems to be on 3 sides of the bailouts at once, as adviser (Blankfein was allowed to oversee the negotiations which produced the initial AIG package), receiver of bailout funds, of course, and the recently revealed $12 billion counterparty paid off by AIG. Wow, GS, what's in your wallet? Oh, the President, the Treasury Secretary, the Fed Chairman, etc., etc.
My big question is since we now come to own 80% of it already, what if the government would have nationalized AIG? No "bonuses" controversy to obscure the real issue of tens of billions of dollars "passing through " AIG on their way to Societe' Generale, Deutsch Bank, Goldman, UBS (where the 'architect', Phil Gramm resides), and many more. Of course, none of these charity cases were paying taxes; the IRS during the Bush years would never prosecute them. And if AIG was in Federal receivership, the counterparties wouldn't get 100 cents on the dollar either.
This all goes round and round and costs the taxpayers more and more money with an ever-expanding bread line of "too big to fail" debtors. With the Fed now devoted to creating trillions out of thin air to single-handedly (no risk to investors) revive credit and lending, "pass-thru"gate probably won't have much of a shelf life; AIG's initial TARP money is long gone, and baring incredibly progressive "clawback" legislation that demands retroactive taxes on counterparties in the end it's just more of a tax burden on our grandkids.
My big question is since we now come to own 80% of it already, what if the government would have nationalized AIG? No "bonuses" controversy to obscure the real issue of tens of billions of dollars "passing through " AIG on their way to Societe' Generale, Deutsch Bank, Goldman, UBS (where the 'architect', Phil Gramm resides), and many more. Of course, none of these charity cases were paying taxes; the IRS during the Bush years would never prosecute them. And if AIG was in Federal receivership, the counterparties wouldn't get 100 cents on the dollar either.
This all goes round and round and costs the taxpayers more and more money with an ever-expanding bread line of "too big to fail" debtors. With the Fed now devoted to creating trillions out of thin air to single-handedly (no risk to investors) revive credit and lending, "pass-thru"gate probably won't have much of a shelf life; AIG's initial TARP money is long gone, and baring incredibly progressive "clawback" legislation that demands retroactive taxes on counterparties in the end it's just more of a tax burden on our grandkids.
Wednesday, March 18, 2009
Fed Creates $1.2 Trillion To Re-Inflate The Housing Bubble
The Federal Reserve today announced it would purchase $750 billion worth of government-guaranteed mortgage-backed securities (on top of the $500 billion it already owns), plus $300 billion of longer-term Treasury securities over a 6-month period. This action is expected to exert downward pressure on interest rates of all types, especially mortgage rates. Calculated Risk quotes David Greenlaw of Morgan Stanley in the March 18th Wall Street Journal:
...."The Fed's annoucement signals a clear intent to continue to drive mortagae rates lower and we expect them to meet this objective ..... (I)f the Fed brings 30-year fixed-rate mortgages to 4.5% and all homeowners are able (to) refi, the aggregate permanent cash-flow savings would be on the order of $200 billion/year."
Aside from the fact that not everyone can "refi" (obnoxious term) this seems like a transparent attempt to re-inflate the housing bubble. If a great majority of homeowners can refinance at 4.5%, it means taking on more personal long-term debt (albeit at a great rate!). Something tells me that if the public thinks the recession is easing, folks will take on even more credit-card debt, too. Any sane person can tell you that sooner or later, debt is either written-off or unsustainable. What'll it be, America?
...."The Fed's annoucement signals a clear intent to continue to drive mortagae rates lower and we expect them to meet this objective ..... (I)f the Fed brings 30-year fixed-rate mortgages to 4.5% and all homeowners are able (to) refi, the aggregate permanent cash-flow savings would be on the order of $200 billion/year."
Aside from the fact that not everyone can "refi" (obnoxious term) this seems like a transparent attempt to re-inflate the housing bubble. If a great majority of homeowners can refinance at 4.5%, it means taking on more personal long-term debt (albeit at a great rate!). Something tells me that if the public thinks the recession is easing, folks will take on even more credit-card debt, too. Any sane person can tell you that sooner or later, debt is either written-off or unsustainable. What'll it be, America?
Monday, March 16, 2009
The Worst Person In The World - In Perpetuity
Before we reveal our candidate for eternal damnation, a few thoughts about AIG and their indefensibly clueless decision to follow legal protocol and award millions in bonuses to the key players in their London "financial products" division:
1) As Gretchen Morgenson so aptly described today on Fresh Air (D.O.E. has a love/hate relationship with NPR) if the economy doesn't improve pronto we may have to give EVEN MORE MONEY to AIG, due to maturing credit-default swaps. Wether the American taxpayer then collectively storms the castle, torches and pitchforks in hand, is open to question.
2) I love how Obama's condemnation of AIG's bonus giveaway made Larry Summers look like such a pompous asshole for the remarks he made about "America, a nation of laws" and "the sanctity of contracts" on the Sunday pundit gab-fests. I predict both Summers and Geithner will be millstones around Barry's neck 'till he throws 'em overboard!
3) Dr. Doom has spoken! On Saturday uber-heavyweight economist Nouriel Roubini referred to last week's market "rally" as a "dead cat bounce", nothing to get your assets out of T-bills for.
And now, D.O.E. proudly nominates Joesph Cassano, president of AIG Financial Products, as the Devil himself. Back when housing prices were eternally on the rise and AIG's London affiliate was insuring Mortgage-Backed Securities to the tune of, oh, 400 times the net worth of AIG itself, Mr. Cassano was receiving a million-dollar-a-month bonus. Good thing, too, because when the criminal and civil lawsuits come rollin' in, Super Joe will have the best legal representation on Planet Earth. May you be eaten by dogs.
1) As Gretchen Morgenson so aptly described today on Fresh Air (D.O.E. has a love/hate relationship with NPR) if the economy doesn't improve pronto we may have to give EVEN MORE MONEY to AIG, due to maturing credit-default swaps. Wether the American taxpayer then collectively storms the castle, torches and pitchforks in hand, is open to question.
2) I love how Obama's condemnation of AIG's bonus giveaway made Larry Summers look like such a pompous asshole for the remarks he made about "America, a nation of laws" and "the sanctity of contracts" on the Sunday pundit gab-fests. I predict both Summers and Geithner will be millstones around Barry's neck 'till he throws 'em overboard!
3) Dr. Doom has spoken! On Saturday uber-heavyweight economist Nouriel Roubini referred to last week's market "rally" as a "dead cat bounce", nothing to get your assets out of T-bills for.
And now, D.O.E. proudly nominates Joesph Cassano, president of AIG Financial Products, as the Devil himself. Back when housing prices were eternally on the rise and AIG's London affiliate was insuring Mortgage-Backed Securities to the tune of, oh, 400 times the net worth of AIG itself, Mr. Cassano was receiving a million-dollar-a-month bonus. Good thing, too, because when the criminal and civil lawsuits come rollin' in, Super Joe will have the best legal representation on Planet Earth. May you be eaten by dogs.
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