Tuesday, December 7, 2010
Reuters: Republicans Are Trying to Intentionally Bankrupt California and Illinois to Weaken Unions
The New York Times points out that some states like California and Illinois are at risk of default, and that a default could spread to other states:
While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.
***
Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.
***
The finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.
***
Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.
Douglas Borthwick of Faros Trading writes:
And see this, this and this.The most important thing missing from the tax extension was the expected extension of the Build America Bond program.
The Build America Bond program has been the municipal market's saviour over the past 18 months.
***
We are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece.
Reuters' columnist James Pethokoukis claims that the failure to extend the Build America Bonds program is an intentional plan by the GOP to bankrupt states such as California and Illinois, as a way to weaken unions:
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.
That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”
In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.
***
Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy.***
From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.
And see this.
My friends on the right hate unions.
My friends on the left love unions.
But I hope that people on both sides of the aisle can agree that intentionally bankrupting any state is as stupid as cutting of one's nose to spite one's face.
There is no United States without the states. And the unintended consequences intentionally driving a state into bankruptcy would be enormous.
WikiLeaks, WikiDrama and WikiGossip
What should we make of the Wikileaks story?
Obviously, the Swedish "sex crime" charges are ridiculous, as are the death threats against Wikileaks founds Julian Assange. See this, this and this.
Some leading first amendment advocates support Wikileaks as a vital resource. For example, John Perry Barlow - founder of the Electronic Frontier Foundation (a great organization with a long and proven track record in fighting censorship) says:
The first serious infowar is now engaged. The field of battle is WikiLeaks. You are the troops.Likewise, the ACLU has been fighting for Wikileaks for years.
And Daniel Ellsberg and Noam Chomsky think Wikileaks is the real deal.
However, many savvy observers argue that that Wikileaks is not what it seems.
For example, former U.S. National Security Adviser under President Carter (and top foreign policy advisor) Zbigniew Brzezinski doesn’t think all the leaked information coming out of Wikileaks is a result of Army PFC Bradley Manning, and suspects a foreign intelligence service may be providing the more embarrassing leaks for their own political reasons.
As Brzezinski told PBS:
The real issue is, who is feeding Wikipedia on this issue — Wiki — Wiki — WikiLeaks on this issue? They’re getting a lot of information which seems trivial, inconsequential, but some of it seems surprisingly pointed.Other smart people point out that - while there is pointed information challenging the actions of other countries - the information coming from Wikileaks about the U.S. is more of the nature of gossip, and doesn't actually challenge U.S. foreign or domestic policy is a direct manner. For example, the information disclosed to date doesn't challenge the narrative of the "War on Terror" itself, the government's handling of the economic crisis, or any other central American policy.
***
For example, there are references to a report by our officials that some Chinese leaders favor a reunified Korea under South Korea.This is clearly designed to embarrass the Chinese and our relationship with them. The very pointed references to Arab leaders could have as their objective undermining their political credibility at home, because this kind of public identification of their hostility towards Iran could actually play against them at home…
***
It’s, rather, a question of whether WikiLeaks are being manipulated by interested parties that want to either complicate our relationship with other governments or want to undermine some governments, because some of these items that are being emphasized and have surfaced are very pointed.
And I wonder whether, in fact, there aren’t some operations internationally, intelligence services, that are feeding stuff to WikiLeaks, because it is a unique opportunity to embarrass us, to embarrass our position, but also to undermine our relations with particular governments.
For example, leaving aside the personal gossip about Sarkozy or Berlusconi or Putin, the business about the Turks is clearly calculated in terms of its potential impact on disrupting the American-Turkish relationship.
***Seeding — seeding it is very easy.
I have no doubt that WikiLeaks is getting a lot of the stuff from sort of relatively unimportant sources, like the one that perhaps is identified on the air. But it may be getting stuff at the same time from interested intelligence parties who want to manipulate the process and achieve certain very specific objectives.
So whether Wikileaks is a first amendment champion or an intelligence service psychological operation aiming to persuade and embarrass, so far it has mainly been a bunch of gossip in terms of leaks about America.
If you don't believe me, read some of the actual cables which have been released. While there have been some stunners about foreign countries, the ones regarding U.S. actions have been nothing but idle chatter about well-known people or events, providing interesting but wholly irrelevant details about what people were wearing or who they slept with. No breakthrough revelations which actually challenge core U.S. policy.
(Many people are saying that the disclosure that the U.S. has spied on the United Nations shows the value of Wikileaks. But it has been known for years that the U.S. spies on the U.N. See this, this and this.)
As the very mainstream, Murdoch-owned Herald Sun notes:
We're told the leaks are "explosive" and "sensational", revealing America's "dark face".As the head of long-time whistleblower Cryptome (and former Wikileaks supporter - John Young - argues, Wikileaks has been more hype than substance:
Rubbish. In fact, the WikiLeaks dump of more than 250,000 classified cables from US diplomats reveals little more than gossip on the embassy circuit.
***
These leaks expose no crime and nail no US lie.***
Yet Assange may also have done the US an inadvertent favour, just as he did with his earlier dump of documents on Iraq, which showed there was actually no conspiracy and no war crimes being hushed up.
***[It] all confirms the world is as menacing as the US grimly says.
***
Overall, then, there is more in these leaks to confirm the US view of this world than there is to comfort its critics.
Cryptome does not seek publicity or media coverage. Wikileaks does by issuing press releases, taunting the media, orchestrating bombshell releases, glamourizing Julian Assange, behaving mysteriously, ... exaggerating the value of what it publishes, editorializes about its publications excessively -- all the methods used by those who believe excessive valuation is a good thing.So far - despite the media frenzy - it's more like WikiGossip than WikiLeaks.
Don't get distracted by the WikiDrama ... Unless WikiLeaks releases something which discloses criminal behavior by a large American bank, more damning information about the government's actions than the Fed's own data release, or facts which undermine the false war on terror narrative - Brzezinski himself told the Senate that the war on terror is "a mythical historical narrative" - such as previously unknown false flags, then it's mainly a publicity-seeking melodrama more than an authentic challenge to American power.
Remember that the corporate press tends to be pro-war. The more cynical might argue that the fact that the corporate press is publishing all of the cables released by Wikileaks could imply that the material is not fundamentally of an anti-war nature.
The more cynical also point out that many credible whistleblowers - including former high-level government officials - have been ignored over the last 10 years by the corporate media when they have disclosed facts which challenged core U.S. policy. But Wikileaks is getting 24/7 coverage. I'm strongly for whistleblowers ... I'm just not convinced that WikiLeaks is as hard-hitting as other whistleblower groups out there.
All people of good faith agree that freedom of information and freedom of speech are vital in a free society. The real question is whether this particular organization is made up of WikiHeroes, WikiPublicityHounds, WikiDupes, or WikiDisinfoAgents.
Only time will tell.
Monday, December 6, 2010
How Effective Would a Payroll Tax Holiday Be In Spurring Employment and Stimulating the Economy?
Obama's tax deal with Republicans extends the Bush tax cuts for the wealthy for another 2 years.
As Bloomberg notes, Obama said that "he still believes the nation can’t afford to permanently extend the top tax rates".
But as Mish points out:
Of course the last extension was "temporary" and the next extension will be "temporary" as well.
Obama's plan would also extend aid for the long-term unemployed for another 13 months.
And the payroll tax (which funds Social Security and Medicare) would be cut by 2 percentage points during 2011 in an effort to help spur hiring.
Will cutting the payroll tax really help to spur hiring?
The Center on Budget and Policy Priorities argued in January 2009 that it wouldn't.
(Obama is proposing a year-long payroll tax holiday, not the 2 months discussed by CBPP. I'm not sure how much difference CBPP would find in an additional 10 months).Suspending employees’ payroll taxes would immediately translate into higher take-home pay for workers. Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity. Indeed, according to the Congressional Budget Office [here's the CBO report], suspending employer’s payroll taxes is “not a particularly cost-effective method of stimulating business spending: Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output”. In other words, firms will not hire (or retain) more workers than it takes them to produce the goods and services they can sell. Simply giving them a general tax break is unlikely to affect their hiring or investment in most cases, and thus would be largely ineffective as stimulus.
Standard economic analysis suggests that over the long run, a permanent reduction in the employer payroll tax would increase wages, as competition forced employers to pass on the benefits of the tax cut to their workers. But a two-month holiday on the employer share of the payroll tax would not have that effect: according to the Congressional Budget Office, “[s]uspending the employers’ portion of the tax for a short period of time is unlikely to alter wage rates by very much and so would not alter consumers’ resources very much.” Firms generally would not raise wages for two months and then cut them, and the reduction in wage costs would be too brief to make it worthwhile for employers to increase hiring. Instead, businesses would likely retain all or nearly all of the benefits from the tax holiday.
Would infusing cash into businesses in this manner constitute effective stimulus? Probably not. The primary problem that employers face in a recession is a shortage of demand for their products, not a shortage of cash. Therefore, most firms would likely keep much or all of any tax windfall they receive — or pass it on to shareholders and business owners, two groups that tend to have higher incomes and thus quickly spend relatively little of any additional income they receive.
***
The Urban-Brookings Tax Policy Center estimated that in 2006, 51.2 percent of payroll taxes were paid by the top 20 percent of tax units.
But as Annie Lowrie noted in September:
The Congressional Budget Office examined (PDF) the effectiveness of a variety of tax cuts this winter [in an updated report], and found payroll tax cuts to be a good option, compared with, say, extending tax cuts for the wealthiest Americans. Moreover, they have positive impacts on employment — and the sustained high rate of joblessness remains the biggest drag on the American economy and a pressing public-policy issue.
According to the CBO, a payroll tax cut is about 25 to 33 percent more stimulative than providing a refundable tax credit for lower- and middle-income households, for instance.
As I noted in 2008, Mark Zandi - chief economist for Moody's - calculated which stimulus programs give the most bang for the buck in terms of the economy:
Zandi lists a cut in payroll taxes as being less stimulating to the economy than food stamps, unemployment benefits (which Obama extended), infrastructure, and aid to the states, but more stimulating than tax cuts and tax rebates.
The Washington Post's Ezra Klein turned to Zandi in July for updated figures on the effects of a payroll tax holiday:
Zandi's most recent number estimate of the per-dollar economic impact of a payroll tax holiday is $1.24. This is a relatively high figure, but there are a number of better options, including expanding food stamps, work share programs, direct aid to states and a jobs tax credit.Klein ran a back-of-the-envelope cost-versus-benefit analysis of a partial payroll tax:
As Zandi's numbers suggest, the stimulative benefit is just slightly greater than the budgetary cost.
***
With better options, such as work sharing or food stamps expansion, available, it's not clear to me that the focus should be on payroll tax relief.
And see this.
Nouriel Roubini Confirms Double Dip In Housing
I noted last week that there is a double-dip in housing.
Today, Nouriel Roubini agreed:
The country’s real estate problems are “underappreciated,” and banks could face another $1 trillion in housing-related losses, Mr. Roubini said in a phone interview with DealBook on Monday. At the same time, he played down the issues in Ireland, Greece, Portugal and Spain, calling the matter “contained” for now.
The United States “real estate market, for sure, is double dipping,” Mr. Roubini said. “The apparent increase in prices has been fully reversed, demand is falling, and supply is going to increase.”
As I've previously pointed out:
The failure to prosecute fraud and the stubborn drive to prop up the too big to fail banks at all costs is what has prevented real action that would have helped stabilize the housing market. See this, this, this, this, this, this, this, this and this.PhD economists John Hussman and Dean Baker (and fund manager and financial writer Barry Ritholtz) say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.
Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this and this).
Sunday, December 5, 2010
No, The Big Banks Have Not "Paid Back" Government Bailouts and Subsidies
The big banks claim that they have paid back all of the bailout money they received, and that the taxpayers have actually made money on the bailouts.
However, as Barry Ritholtz notes:
Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid.
So far, 938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned.
Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater.
Moreover, as I pointed out in May, the big banks have received enormous windfall profits from guaranteed spreads on interest rates:
Bloomberg notes:
“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.
Harry Blodget explains:
The latest quarterly reports from the big Wall Street banks revealed a startling fact: None of the big four banks had a single day in the quarter in which they lost money trading.
For the 63 straight trading days in Q1, in other words, Goldman Sachs (GS), JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) made money trading for their own accounts.
Trading, of course, is supposed to be a risky business: You win some, you lose some. That's how traders justify their gargantuan bonuses--their jobs are so risky that they deserve to be paid millions for protecting their firms' precious capital. (Of course, the only thing that happens if traders fail to protect that capital is that taxpayers bail out the bank and the traders are paid huge "retention" bonuses to prevent them from leaving to trade somewhere else, but that's a different story).
But these days, trading isn't risky at all. In fact, it's safer than walking down the street.
Why?
Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What's more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits--by borrowing from the taxpayer and then lending back to the taxpayer.
The government's zero-interest-rate policy, in other words, is the biggest Wall Street subsidy yet. So far, it has done little to increase the supply of credit in the real economy. But it has hosed responsible people who lived within their means and are now earning next-to-nothing on their savings. It has also allowed the big Wall Street banks to print money to offset all the dumb bets that brought the financial system to the brink of collapse two years ago. And it has fattened Wall Street bonus pools to record levels again.Paul Abrams chimes in:
There is another type of guaranteed spread that allows the giant banks to make money hand over fist. Specifically, the Fed pays the big banks interest to borrow money at no interest and then keep money parked at the Fed itself. (The Fed is intentionally doing this for the express purpose of preventing too much money from being lent out to Main Street.)To get a clear picture of what is going on here, ignore the intermediate steps (borrowing money from the fed, investing in Treasuries), as they are riskless, and it immediately becomes clear that this is merely a direct payment from the Fed to the banking executives...for nothing. No nifty new tech product has been created. No illness has been treated. No teacher has figured out how to get a third-grader to understand fractions. No singer's voice has entertained a packed stadium. No batter has hit a walk-off double. No "risk"has even been "managed", the current mantra for what big banks do that is so goddamned important that it is doing "god's work".
Nor has any credit been extended to allow the real value-producers to meet payroll, to reserve a stadium, to purchase capital equipment, to hire employees. Nothing.
Congress should put an immediate halt to this practice. Banks should have to show that the money they are borrowing from the Fed is to provide credit to businesses, or consumers, or homeowners. Not a penny should be allowed to be used to purchase Treasuries. Otherwise, the Fed window should be slammed shut on their manicured fingers.
And, stiff criminal penalties should be enacted for those banks that mislead the Fed about the destination of the money they are borrowing. Bernie Madoff needs company.
The newly-released Fed data shows that the Fed also threw money at many of the big banks at ridiculously low interest rates.
And as I also pointed out, the government gave tax subsidies to the too big to fails:The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies).Indeed, the Wall Street Journal noted this week:
And as I've previously reported:A series of tax relief measures is saving companies bailed out by the government billions of dollars at a time when concern over tax revenues has risen.
Although the Treasury Department first provided the tax guidance in the fall of 2008, the magnitude of the tax savings has become clearer in the past year ....
"The agencies are literally throwing gratuities at banks and other companies," said Christopher Whalen, a bank stock analyst at Institutional Risk Analytics.
Too Big As Subsidy
The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
***
The fact that the giant banks are "too big to fail" encourages them to take huge, risky gambles that they would not otherwise take. If they win, they make big bucks. If they lose, they know the government will just bail them out. This is a gambling subsidy.
The very size of the too big to fails also decreases the ability of the smaller banks to compete. And - since the government itself helped make the giants even bigger - that is also a subsidy to the big boys (see this).
The monopoly power given to the big banks (technically an "oligopoly") is a subsidy in other ways as well. For example, Nobel prize winning economist Joseph Stiglitz said in September that giants like Goldman are using their size to manipulate the market:
"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."
Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorted the markets - making up more than 70% of stock trades - but which also let the program trading giants take a sneak peak at what the real (aka “human”) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).
Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways". The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.
In addition, the giants receive many billions in subsidies by receiving government guarantees that they are "too big to fail", ensuring that they have to pay lower interest rates to attract depositors.
Derivatives
The government's failure to rein in derivatives or break up the giant banks also constitute enormous subsidies, as it allows the giants to make huge sums by keeping the true price points of their derivatives secret. See this and this.
Toxic Assets
The PPIP program - which was supposed to reduce the toxic assets held by banks - actually increased them, and just let the banks make a quick buck.
In addition, the government suspended mark-to-market valuation of the toxic assets held by the giant banks, and is allowing the banks to value the assets at whatever price they desire. This constitutes a huge giveaway to the big banks.
As one writer notes:
By allowing banks to legally disregard mark-to-market accounting rules, government allows banks to maintain investment grade ratings.
By maintaining investment grade ratings, banks attract institutional funds. That would be the insurance and pension funds money that is contributed by the citizen.
As institutional money pours in, the stock price is propped up ....
Mortgages and Housing
PhD economists John Hussman and Dean Baker (and fund manager and financial writer Barry Ritholtz) say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.
Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this and this).
Foreign Bailouts
The big banks - such as JP Morgan - also benefit from foreign bailouts, such as the European bailout, as they are some of the largest creditors of the bailed out countries, and the bailouts allow them to get paid in full, instead of having to write down their foreign losses.
When all of the different bailouts and subsidies given to the big banks are added up, it is obvious that they have not come anywhere close to "paying back" what we gave to them.
Does Bernanke Look Like a Man Who is Confident About the State of the Economy and the Prospects for Recovery?
There is a lot to say about Bernanke's comments on 60 Minutes today.
Bernanke's statement that unemployment is the biggest impediment to economic recovery is ironic, given that Bernanke's policies have increased unemployment. See this and this.
Harry Blodget notes that Bernanke implied that inequality is destroying America. Tyler Durden hones in on Bernanke's statements that the economic recovery may not be self-sustaining, and that the Fed may buy even more bonds. Daily Bail picks on Bernanke's claim that the Fed is not printing money.
There are certainly a lot of interesting things to say about Bernanke's words.
But I think the real story is how nervous Bernanke appears.
Listen to his voice, and watch his lips quaver:
Ignore his words ... does this look like a man who is confident about the state of the economy and the prospects for recovery?
Does this sound like a man who is sure that history will judge his actions kindly?
Saturday, December 4, 2010
David Stockman: The Only Job Growth In the Last Year Has Been In Part-Time Jobs Averaging $20,000/Year
The former director of the Office of Management and Budget under Ronald Reagan - David Stockman - just gave some stunning statistics on unemployment.
Stockman told CNBC that two-thirds of the jobs which have been created in the last year - the jobs which everyone talks about each month - are only part-time jobs, averaging $20,000 per year.
Stockman pointed out that that type of salary is not enough to raise a family, let alone to allow the type of spending which would lead to a recovery.
Stockman also said:
- "The job outlook as a trend is a lot worse than people think"
- Zero "breadwinner jobs" (full-time jobs paying enough to raise a family with) have been created in the last year
- For the first time ever, the government sector is shrinking: "the reason is that governments are broke... we are going to have to cut back government employment."
Watch the interview:
Friday, December 3, 2010
Double Dip In Housing Largely Caused By Failure to Prosecute Mortgage Fraud
There's a double-dip in housing prices (and see this and this).
As CNN points outs:
Much of the massive shadow inventory of homes is due to the fraud involved with mortgage documents.U.S. home prices fell 2% in the third quarter after having gained steadily since early 2009.The S&P Case-Shiller Home Price Index has recorded gains in four of the previous five quarters, including a 4.7% jump between April and June 2010. That leaves national home prices down 1.5% year over year and off 2% compared to the second quarter, according to the Index, which was released Tuesday.
***The inventory of homes is high with nearly 3.9 million on the market in October, according to the National Association of Realtors. That means it would take 10.5 months to sell through all of the current inventory. In a normal market, there is usually a six-month supply.Plus, there's a massive shadow inventory of homes waiting in the wings. These are homes that are deeply in the foreclosure process or even repossessed by banks but not yet put back on the market.
CNN notes in a second article:
Reuters reports:Big banks are having trouble restarting the foreclosure process after this fall's "robo-signing" scandal, and the once booming market for foreclosed homes has been hit hard as a result.According to ForeclosureRadar, the number of properties coming to auction in hard-hit western states -- Arizona, California and Nevada -- has dropped more than 30%.
***Investors had been doing brisk business, buying distressed properties on the cheap, sprucing them up and flipping them. But now they are being far more cautious."Their concern is that homeowners will be more aggressive in fighting foreclosures even after the auction sale," said Sean O'Toole, CEO of ForeclosureRadar.For vulture investors, speed is essential -- they do not want to tie up investments for months while attorneys argue.They are also worried about being able to unload the property.
***Pressure on the market for distressed properties could last if delinquent borrowers are less likely to give up on their homes, according to Duane LeGate, CEO of Georgia-based House Buyer Network.***
LeGate says his business dropped more than 30% the week after news of the robo-signing scandal broke, and has stayed down since. His theory: homeowners think the bank will have a tough time kicking them out in this environment, and that they can live for free for a while. He says he's got two friends who intend to do just that.
And Zack's Investment Research writes:Shadow inventory is seen as one of the chief threats to the fragile housing market that is showing new signs of weakening.
***
Adding to the problems are errors in processing tens of thousands of foreclosure cases at Bank of America Corp, the largest U.S. mortgage servicer, and other financial institutions.
The massive failure to provide proper documentation in court has resulted in delays to an already lengthy processes of repossessing homes, leading to a backlog in paperwork and repossessions as the companies fix their procedures. The banks are also facing a nationwide probe by state attorneys general.
***What's more, buyers of distressed properties have become gun shy due to the foreclosure processing problems, according to a Campbell/Inside Mortgage Finance survey of real estate agents.
The poll found 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October.
Foreclosures have slowed recently, but that is only because of the fraudclosure scandal, where the banks have proved to be exceptionally incompetent in handling the paperwork related to securitized mortgages. Basically, they can’t really prove that they hold the mortgage, and thus don’t have the right to foreclose.For those who doubt that fraud is rampant in the mortgage paperwork mess, see this, this, this, this, this and this .
It remains to be seen just how big a problem that will prove to be. It could just be a technical glitch that will gum up the works for a few months, or it could be a HUGE problem that once again undermines the solvency of the entire banking system.
***
What is clear is that what [Bank of America, Wells Fargo and other big banks] were doing was illegal and at least technically constituted fraud and misrepresentation to the courts.
There should be more than a handful of bankers who end up with long terms in prison as a result. Just because there should, however, does not mean that there will be. White-collar crime is simply not taken seriously in this country relative to blue collar or street crime, even though the amount stolen with a pen far exceeds the amount stolen with a gun.
There are obviously other factors responsible for the softening housing market, such as the end of government stimulus programs regarding housing, and poor employment conditions. But as I've pointed out early and often, these problems are all interrelated. See Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won't Recover.
Forget "Keynesians" Versus "Deficit Hawks" ... The Real Fight is Between Economic Policy Which WORKS and Policy Which DOESN'T WORK
Unemployment is rising again.
This updated chart from Calculated Risk tells the story:
Mish provides the following summary of the new job numbers:
Check out these Grim Job Details courtesy of Bloomberg.
- Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed today in Washington.
- The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated.
- The unemployment rate was forecast to hold at 9.6 percent, according to the median prediction of 83 economists surveyed by Bloomberg. Estimates ranged from 9.4 percent to 9.7 percent.
- Overall payrolls were forecast to climb by 150,000, according to the survey median, with estimates ranging from 75,000 to 200,000.
- Manufacturing payrolls dropped by 13,000 in November, the most in three months. Economists had projected an increase of 5,000.
- The report also showed an increase in the number of long- term unemployed Americans. The number of people unemployed for 27 weeks or more increased as a percentage of all jobless, to 41.9 percent, the highest since August.
The stock market is higher, but things are not improving, at least in the real economy. The stock market is up, because profits are up. Profits are up because of unsustainable stimulus spending, and because corporations are not hiring.Karl Denninger writes:
Moreover, China and India are overheating, and Europe is in shambles.
Looking ahead, there is no driver for jobs. States are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. However, those state and local government cutbacks will weigh on employment and consumer spending for quite some time.
***
Last month I said "Retail hiring is not sustainable. Nor is the rise in manufacturing. We might see a few more months of this (or not), but this is highly unlikely to be the start of something big or sustainable. I still expect to see the unemployment rate back up above 10% in this cycle. While today's report may not be as good as it gets, it certainly is close to as good as it gets on a sustainable basis."
***
Sticking with a message I said on August 18, 2009 "Expect to see the unemployment rate structurally high for a decade."
On the annualized basis the employment trends data has now turned downward again.Mish and Denninger - who I both respect enormously - are against Keynesian stimulus. I am not really pro- or anti- any school of economics ... I am simply for doing what will work and against doing what won't work.
***
What's worse, the employment rate is now threatening the lows:
That's the important number as it comprises the tax base.
Our government has squandered the opportunity to do the right thing by forcing the bad debts into the open and closing the institutions responsible. Instead they have chosen to lard up more than $4 trillion in additional debt on the Federal Balance sheet on the backs of the American People with the claim that we can and will "grow out of it."
No we can't, no we're not, and this BS dog and pony show crap along with the embedded lies in corporate and bank balance sheets must stop as the employment base has failed to turn around.
We're playing Japan but do not have the buffering to do it and we no longer have the margin to add more debt in order to try to "stimulate" our way out.
That path was taken and now we know for a fact it has failed.
As I pointed out on August 11th:
In truth and in fact, the government's policies are not only not working to stem the rising tide of unemployment, they are making it worse."Deficit doves" - i.e. Keynesians like Paul Krugman - say that unless we spend much more on stimulus, we'll slide into a depression. And yet the government isn't spending money on the types of stimulus that will have the most bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturing base. See this, this and this. [Indeed, as Steve Keen demonstrated last year, it is the American citizen who needs stimulus, not the big banks.]
***
Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measures were implemented to plug the holes in a corrupt financial system. The gaming of the financial system was decreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to some extent.
As such, the economy had a chance to recover (even with the massive stimulus of World War II, unless some basic level of trust had been restored in the economy, the economy would not have recovered).
Today, however, Bernanke, Summers, Dodd, Frank and the rest of the boys haven't fixed any of the major structural defects in the economy. So even if Keynesianism were the answer, it cannot work without the implementation of structural reforms to the financial system.
A little extra water in the plumbing can't fix pipes that have been corroded and are thoroughly rotten. The government hasn't even tried to replace the leaking sections of pipe in our economy.
Forget the whole "Keynesian" versus "deficit hawk" debate. The real debate is between good and bad policy.
The following articles provide details:
Thursday, December 2, 2010
Arrest Warrant for "Sex Crimes" Against Wikileaks Founder Julian Assange Is for "Sex Without a Condom", NOT Non-Consensual Rape Using Force
Interpol has issued an arrest warrant for Wikileaks founder Julian Assange for "sex crimes".
Everyone assumed it was for rape.
But it turns out it was for violating an obscure Swedish law against having sex without a condom.
As Newsweek wrote in August:
A Swedish lawyer representing two women whose allegations triggered a sexual-misconduct investigation of WikiLeaks founder Julian Assange has given [Newsweek column] Declassified the first on-the-record confirmation of the allegations that led to the issuance—and then rapid cancellation—of a warrant on a rape charge and to a parallel investigation into alleged “molestation." Claes Borgstrom of the Stockholm law firm Borgstrom and Bostrom, who is representing two women who said they had sexual relationships with Assange, said his clients complained to the police of Assange's reluctance to use condoms and unwillingness to be tested for sexually transmitted disease.
***
Borgstrom said that specific details about the the allegations had not yet appeared in Swedish media. But he acknowledged that the principal concern the women had about Assange’s behavior—which they reported to police in person—related to his lack of interest in using condoms and his refusal to undergo testing, at the women’s request, for sexually transmitted disease. A detailed, chronological account of the women’s alleged encounters with Assange—which in both cases began with consensual sexual contact but later included what the women claimed was nonconsensual sex, in which Assange didn’t use a condom—was published on Tuesday by The Guardian; a Declassified item included a more explicit reference than The Guardian to Assange’s declining to submit to medical tests.
Similarly, the Daily Mail reported in August:
'When they got back they had sexual relations, but there was a problem with the condom - it had split.
'She seemed to think that he had done this deliberately but he insisted that it was an accident.’
Whatever her views about the incident, she appeared relaxed and untroubled at the seminar the next day where Assange met Woman B, another pretty blonde, also in her 20s, but younger than Woman A.
***The [second] woman admitted trying to engage her hero in conversation.
Assange seemed pleased to have such an ardent admirer fawning over him and, she said, would look at her ‘now and then’. Eventually he took a closer interest.
***What he did not tell her was that the party was being hosted by the woman he had slept with two nights before and whose bed he would probably be sleeping in that night.
***‘The passion and attraction seemed to have disappeared,’ she said.
Most of what then followed has been blacked out in her statement, except for: ‘It felt boring and like an everyday thing.’
One source close to the investigation said the woman had insisted he wear a condom, but the following morning he made love to her without one.
This was the basis for the rape charge. But after the event she seemed unruffled enough to go out to buy food for his breakfast.
Today, a former attorney for Assange - James D. Catlin - has confirmed that the charges are for having sex without using a condom. He notes that:
The consent of both women to sex with Assange has been confirmed by prosecutors.
He also accuses the prosecutors of "making it up as they go along", and said that Sweden's justice system is destined to become "the laughingstock of the world" for pursuing the case against Assange.
And Assange's current London attorney - Mark Stephens - told AOL news that he doesn't even know what the charges against Assange are, but that they are not rape:
So Assange might be a cad for sleeping with 2 women within a couple of days, and he might be irresponsible for having sex without a condom and then failing to submit to HIV tests afterwards.Stephens, told AOL News today that Swedish prosecutors told him that Assange is wanted not for allegations of rape, as previously reported, but for something called "sex by surprise," which he said involves a fine of 5,000 kronor or about $715.
***
"We don't even know what 'sex by surprise' even means, and they haven't told us," Stephens said, just hours after Sweden's Supreme Court rejected Assange's bid to prevent an arrest order from being issued against him on allegations of sex crimes.
"Whatever 'sex by surprise' is, it's only a offense in Sweden -- not in the U.K. or the U.S. or even Ibiza," Stephens said. "I feel as if I'm in a surreal Swedish movie being threatened by bizarre trolls. The prosecutor has not asked to see Julian, never asked to interview him, and he hasn't been charged with anything. He's been told he's wanted for questioning, but he doesn't know the nature of the allegations against him."
The strange tale of Assange's brief flings with two Swedish women during a three-day period in mid-August -- and decisions by three different prosecutors to first dismiss rape allegations made by the women and then re-open the case -- has more twists, turns and conspiracy theories than any of [Swedish novelist] Stieg Larsson's best-sellers.
But he has not been accused of rape under any traditional meaning of that term.
Of course, this wouldn't be so surreal if the Department of Justice hadn't launched a criminal probe of Wiklileaks, Assange didn't face potential espionage charges, representative Peter King wasn't asking that Wikileaks be designated a foreign terrorist organization like Al Qaeda, and some people hadn't called for Assange's assassination (and see this, this and this).
Indeed, Reuters provides some bizarre details courtesy of Assange's current lawyer:
Tuesday, international police agency Interpol said it had issued a "red notice" which allows arrest warrants issued by national police authorities to be circulated to other countries to facilitate arrests and help possible extradition. "There is no arrest warrant against him. There was an Interpol red notice, which is not a warrant, alerting authorities to monitor his movements," Stephens told Reuters. *** "We are in this position where we have never been told what the allegations are against him, we do know that he hasn't been charged, we do know that he has only been asked for as a witness," he said. "We know that ... the offence is one of 'sex by surprise', which is not an offence known in England. He has not been given the evidence against him." "We are in a very, very surreal situation at the moment it's like a Swedish fairytale."
The Fed "Used The Vagueness In The Wording Of The Law To Weasel Out Of Fulfilling Their Duty To The American People"
The Fed released a lot of data yesterday.
But as Bloomberg points out, the Fed still held back a lot of information:
The Federal Reserve withheld details on individual securities pledged as collateral by recipients of $885 billion in central bank loans, denying taxpayers a measure of the risks they faced from its emergency aid.
***
July’s Dodd-Frank law required the Fed to disclose the names of borrowers, the size and interest rates of loans, and “information identifying the types and amounts of collateral pledged or assets transferred.”For three of the Fed’s six emergency facilities, the central bank released information on groups of collateral it accepted by asset type and rating, without specifying individual securities. Among them was the Primary Dealer Credit Facility, created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed.
“This is a half-step,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “If you were going to audit the facilities, then would this enable you to do an audit? The answer is ‘No,’ you would have to go in and look at the individual amounts of collateral and how it was broken down to do that. And that is the spirit of what the requirements were in Dodd-Frank.”
***It is “specifically impossible” to know how much risk taxpayers were taking by looking at pools of collateral grouped by asset class and rating, said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press.
“I need to know the individual composition because a $2 billion pool can be one asset of $2 billion, which would be very risky, or 2,000 assets of $1 million each, and that’s not risky at all,” Raynes said. “The spirit of Dodd-Frank was not respected, and they used the vagueness in the wording of the law to weasel out of fulfilling their duty to the American people.”
***
The central bank also omitted details on individual securities pledged as collateral under its Term Auction Facility and its Term Securities Lending Facility, which was announced on March 11, 2008, as the first program under which the Fed planned to lend to non-bank dealers.
And the Economic Policy Journal notes:
[The Fed released] no data [concerning Maiden Lane] prior to Sep 30, 2008 (ML was funded in June, 2007). It remains to be seen, then, if BlackRock was simply stuffing the SOMA.
What's the Fed hiding? Why no purchase and sales numbers for the Maiden Lane transactions? Why no Maiden Lane data at all for the period June 2007 to September 30, 2008?
From the "Wealth of Nations" to the "Debt of Nations"
As everyone from Paul Krugman to Simon Johnson has noted, the banks are so big and politically powerful that they have bought the politicians and captured the regulators (and see this).
But it's not just a question of regulatory capture and corruption. It's actually a loss of sovereignty.
As Damon Vrabel wrote in July:
It seems ridiculous to point this out, but sovereign debt implies sovereignty. Right? Well, if countries are sovereign, then how could they be required to be in debt to private banking institutions? How could they be so easily attacked by the likes of George Soros, JP Morgan Chase, and Goldman Sachs? Why would they be subjugated to the whims of auctions and traders?
A true sovereign is in debt to nobody and is not traded in the public markets. For example, how would George Soros attack, say, the British royal family? [Vrabel is presumably referring to Soros' currency speculation against the British pound and other currencies.] It’s not possible. They are sovereign. Their stock isn’t traded on the NYSE. He can’t orchestrate a naked short sell strategy to destroy their credit and force them to restructure their assets. But he can do that to most of the other 6.7 billion people of the world by designing attack strategies against the companies they work for and the governments they depend on.
The fact is that most countries are not sovereign (the few that are are being attacked by [the big Western intelligence services] or the military). Instead they are administrative districts or customers of the global banking establishment whose power has grown steadily over time based on the math of the bond market, currently ruled by the US dollar, and the expansionary nature of fractional lending. Their cult of economists from places like Harvard, Chicago, and the London School have steadily eroded national sovereignty by forcing debt-based ... currencies on countries.
We long ago lost the free market envisioned by Adam Smith in the “Wealth of Nations” [the book widely considered to be the foundation of modern economic theory]. Such a world would require sovereign currencies.... Only then could there be a “wealth of nations.” But now we have nothing but the “debt of nations.” The exponential math of debt by definition meant that countries would only lose their wealth over time and become increasingly indebted to the global central banking network.
An obvious example of a nation which has lost it's sovereignty and gone from the "wealth of nations" to the "debt of nations" is Ireland. The Irish bailout won't really help the Irish people, but will help the big banks which invested in Ireland. See this and this. Ironically, German banks may actually be more at fault for the Irish crisis than the Irish banks themselves. See this, this and this.
And the EU is now arguably trying to tell Ireland what to do (while using pleasantries and niceties to appear not too pushy), and somewhat ignoring Ireland's status as a sovereign nation. See this, this and this.
Similarly, Americans - without their knowledge or consent - are bailing out banks all over the world . See this, this and this.
Of course, there is no bright line between private and central banks, since big banks own the Fed, and the world's central banks - in turn - own the BIS.
Central bankers are not elected by - or accountable to - the people of the nations in which they sit, nor are the IMF or World Bank. The IMF often loans money to countries and then imposes draconian austerity packages.
Sure, Irish and American politicians were irresponsible and corrupt, and both peoples were spendthrifts.
But - as I've repeatedly pointed out - the game has also been rigged in favor of the banks and against the sovereign nations.
For example, economist Michael Hudson points out that debt grows exponentially, while the economy only grows in an s-curve. So the amount of debts will always surpass the size of the real economy. If private banks have the power to create debt, then the biggest banks will always eventually win out over the sovereign nations, especially when the amount of credit which can be created (i.e. the size of the monetary base) is not limited by real assets, but is simply based on a system of fiat currency.
As I wrote in October, in a post entitled "The Founding Fathers' Vision of Prosperity Has Been Destroyed":
And see this.The ability for America and the 50 states to create its own credit has largely been lost to private bankers. The lion's share of new credit creation is done by private banks, so - instead of being able to itself create money without owing interest - the government owes unfathomable trillions in interest to private banks.
America may have won the Revolutionary War, but it has since lost one of the main things it fought for: the freedom to create its own credit instead of having to beg for credit from private banks at a usurious cost.
But - whatever one thinks about public banking or paper currencies - one thing should be clear to everyone: the giant banks are rapidly chipping away at the sovereignty of virtually all of the world's nations.
Fed Trying to Make It Harder for Homeowners to Fight Mortgage Fraud by Gutting Truth In Lending Laws
As reported by the Washington Post, the Fed turned a blind eye for years and allowed massive fraud in the mortgage market.
After Alan Greenspan changed his mind and admitted that financial players commit fraud unless laws are enforced (see this and this), many hoped that the Fed would start cracking down on fraud a little bit.
Unfortunately, the Bernanke Fed is continuing to try to sweep fraud under the rug. As just one example, the Fed has been consistently trying to downplay the significance of mortgage fraud, claiming it's not widespread and that nothing much really has to be done about it.
Now, the Fed is proposing a change to the Truth in Lending laws which would make it harder for homeowners to fight mortgage fraud. The Fed's proposal can be read here, starting on page 58541.
As McClatchy noted yesterday:
You can submit a comment opposing the Fed's proposed change to the Truth In Lending Act by clicking here.The Federal Reserve is considering making it much harder for homeowners to stop foreclosures and escape predatory home loans with onerous terms.
The Fed's proposal to amend a 42-year-old provision of the federal Truth in Lending Act has angered labor, civil rights and consumer advocacy groups along with a slew of foreclosure defense attorneys, [who point out that] any future changes to the law [should not be proposed by the Fed, but should instead] be handled by the new Consumer Financial Protection Bureau, which begins its work next year.
***
"At the depths of the worst foreclosure crisis since the Great Depression, we are surprised that the Fed has proposed rules that would eviscerate the primary protection homeowners currently have to escape abusive loans and avoid foreclosure: the extended right of rescission."
[T]he public comment period on the Fed's proposal is still open until Dec. 23 ....
***
Since 1968, the Truth in Lending Act has given homeowners the right to cancel, or rescind illegal loans for up to three years after the transaction was completed if the buyer wasn't provided with proper disclosures at the time of closing.
Attorneys at AARP have used the rescission clause for decades to protect older homeowners stuck in predatory loans with costly terms. The provision is also helping struggling homeowners to fight a wave of foreclosure cases in which faulty and sometimes-fraudulent disclosures were used.
The violations must be of a material nature to invalidate a loan under the extended-rescission clause. To do so, homeowners — usually those facing financial problems or foreclosure — hire an attorney to scour their mortgage documents for possible violations regarding the actual cost of the loan or payment terms.
If problems are found, a notice of rescission is sent to the creditor, which can either admit to the alleged violation or contest it in court.
Creditors that end up rescinding a loan are then required to cancel their "security interest," or lien, on the property.
Once that occurs, the homeowner must then pay the outstanding loan balance back to the lender — minus the finance charges, fees and payments already made.
Dropping the lien provides homeowners with a defense against foreclosure and allows them to refinance to pay the outstanding loan amount.
Critics say the proposed change by the Fed would render the rescission clause useless. The Fed proposal would require homeowners who seek a loan rescission through the courts, to pay off the entire loan balance before the lender cancels the lien.
"This, of course, would be almost impossible for most consumers to do because they can't come up with the money until they get out of the loan. And they can't get out of the loan until the lien is released," said Barry Zigas, director of housing and credit policy at the Consumer Federation of America. "None of us are quite sure what purpose is being served by this proposal or what prompted it."
***
Requiring homeowners to pay what remains of the original loan before a rescission can proceed is tantamount to a "verdict first, trial later" philosophy, Keest said.
Wednesday, December 1, 2010
Fed Data Shows Foreign Banks Huge Beneficiaries of Emergency Lending Programs, Hedge Funds, McDonald’s, Harley-Davidson and Others Also Bailed Out
Under orders from Congress pursuant to the Dodd-Frank financial legislation, the Fed has finally released details of its emergency lending starting in 2007.
As Bloomberg notes:
Bank of America Corp. and Wells Fargo & Co. were among the top borrowers from the Term Auction Facility [TAF]...
Bank of America had three loans for $15 billion each outstanding from the facility as of Jan. 15, 2009, while Wells Fargo had three loans for $15 billion each on Feb. 26 ...
Citigroup Inc. and JPMorgan Chase & Co. also availed themselves of the TAF. Citigroup’s Citibank NA subsidiary had three loans under the facility totaling $20 billion on Jan. 15, 2009. JPMorgan’s JPMorgan Chase Bank NA had two loans totaling $25 billion on Feb. 26, 2009.
Bloomberg notes that foreign banks borrowed heavily from TAF as well:
Banks with headquarters outside the U.S. were among the first to begin using the facility in December 2007 and were also among its heaviest borrowers. These included the U.S. affiliates of banks such as Manama, Bahrain-based Arab Banking Corp., Madrid-based Banco Santander SA, and Paris-based Societe Generale SA. Beginning on June 18, 2009, Barclays Bank Plc had two loans totaling $23.45 billion outstanding.In a second article, Bloomberg points out that despite Goldman's statements that it would have survived even without help from the Fed, Goldman was a big borrower as well:
Goldman Sachs Goup Inc., which rebounded from the financial crisis to post record profit last year, was a regular borrower from two emergency Federal Reserve programs in 2008 and early 2009, new data show.
The firm borrowed from the Fed’s Term Securities Lending Facility most weeks from March 2008 through April 2009, data released by the Fed today show. Two units of the New York-based firm borrowed as much as $24.2 billion from the Fed’s Primary Dealer Credit Facility in the weeks after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, the data show.
Chief Executive Officer Lloyd Blankfein, 56, was quoted by Vanity Fair last year as saying the company might have survived the credit crisis without government help. The firm’s president,Gary Cohn, was more definitive, according to the magazine: “I think we would not have failed,” he was quoted as saying. “We had cash.”
Business Insider quotes the Fed to show that many banks tried to avoid the stigma attached to discount window borrowing by using the TAF program:
Many banks were reluctant to borrow at the discount window out of fear that their borrowing would become known and would be erroneously taken as a sign of financial weakness.Business Insider also notes that, "Morgan Stanley, Citi, and Merrill were the biggest users of the PDCF [the Primary Dealer Credit Facility]."
***
The PDCF functioned as an overnight loan facility for primary dealers, similar to the way the Federal Reserve's discount window provides a backup source of funding to depository institutions. By providing a source of liquidity to primary dealers when funding was not available elsewhere in the market,
CNBC points out that foreign banks used the PDCF as well:
In addition to Barclays, BNP Paribas Securities , Daiwa Securities America, Deutsche Bank Securities, Mizuho Securities USA, Dresdner Kleinwort Securities and UBS Securities all received support from the PDCF.In a third article, Bloomberg reports that foreign banks were also among the biggest users of the Fed's emergency commercial paper facility:
The U.S. subsidiaries of European financial institutions, led by Zurich-based UBS AG and Brussels- based Dexia SA were among the largest users of a government program to provide emergency short-term funding to U.S. companies and banks during the credit crisis.
Six European banks were among the top 11 companies that sold the most debt overall to the the Commercial Paper Funding Facility. They sold a combined $274.1 billion, according to data made public today by the U.S. central bank. UBS sold $74.5 billion, the most among all borrowers. The largest U.S.-based user was insurer American International Group, selling $60.2 billion.
UBS’s figure of $74.5 billion represents the company’s total sales over the life of the program. The bank’s CPFF borrowings peaked at $37.2 billion, an amount the firm rolled over, or re-sold at maturity, once. Other companies rolled over debt in the program as well.
Zero Hedge writes:
One may be forgiven to believe that ... the Fed only bailed out foreign Central Banks, which in turn took the money and funded their own banks. It turns out that is only half the story: we now know the Fed also acted in a secondary bail out capacity, providing over $350 billion in short term funding exclusively to 35 foreign banks, of which the biggest beneficiaries were UBS, Dexia and BNP. Since the funding provided was in the form of ultra-short maturity commercial paper it was essentially equivalent to cash funding. In other words, between October 27, 2008 and August 6, 2009, the Fed spent $350 billion in taxpayer funds to save 35 foreign banks....
Zero Hedge also reports that California pension giant Calpers was the largest user of the TALF program, and provides details on the big foreign central bank users of the Fed's emergency swap lines:
- Looking at the TALF data, we see that the biggest borrower by subscription is Calpers, with a total of about $5.4 billion
- More curiously, now disgraced and embroiled in an insider trading scandal hedge fund FrontPoint seems to have been a very active borrower on the TALF facility, having received $4.136 billion on subscription, the bulk of it going to a FrontPoint Michigan Strategic Partnership Investment entity, which has borrowed $2.6 billion
- Foreign central bank borrowings
- ECB [European Central Bank] - 271 borrowings for gross rolling total of just over $8 trillion.
- SNB [Swiss National Bank] - 114 borrowings, for a gross rolling total of $465 billion
- BOE [Bank of England] - 81 borrowings for a gross rolling total of $918 billion
Huffington Post is providing an excellent live-blogging round up as new discoveries are made from the Fed's data release. Here are some of the more interesting insights:
Huffington Post also reports that many of these banks borrowed at ridiculously low interest rates.Mutual funds, hedge funds and bond funds borrowed more than $71 billion from the Fed's Term Asset-Backed Securities Loan Facility, the WSJ reported. This includes $7.1 billion borrowed by the massive bond fund PIMCO, run by veteran investor Bill Gross. Gross's involvement in the details of the bailout, which included a campaign for public-private partnerships to unwind toxic assets, raised more than few eyebrows from critics.
***
Two European Megabanks Got A Windfall From The Fed ... Two European megabanks -- Deutsche Bank and Credit Suisse -- were the largest beneficiaries of the Fed's purchase of mortgage-backed securities. The Fed's dollars also flowed to major American companies that are not financial players, including McDonald's and Harley-Davidson, through unsecured short-term loans.
***
Wall Street firms teetering on the verge of collapse pledged more than $1.3 trillion in junk-rated securities to the Federal Reserve for cheap overnight loans....
The fact that Wall Street was able to pledge junk to the Fed in exchange for cheap financing is likely to enrage lawmakers who view the Bush and Obama-era crisis programs as largely benefiting Wall Street while "Main Street" has been left behind.
Adding insult to the perceived slight, banks have ramped up their requirements for new loans to borrowers, making it ever more difficult for cash-strapped households and businesses to take out new commitments.
Karl Denninger argues that the fact that the Fed took stock in two of AIG's largest foreign insurance subsidiaries violates Section 14 of the Federal Reserve Act, which prohibits the Fed from taking an equity interest in a company irrespective of the means or terms.
While Bank of America and Wells Fargo were the biggest TAF recipients, AP reports that - when total government loans and aid are added up - other American banks borrowed much more:
New documents show that the most loan and other aid for U.S. institutions over time went to Citigroup ($2.2 trillion), followed by Merrill Lynch ($2.1 trillion), Morgan Stanley ($2 trillion), Bear Stearns ($960 billion), Bank of America ($887 billion), Goldman Sachs ($615 billion), JPMorgan Chase ($178 billion) and Wells Fargo ($154 billion).However, it may be too early to call the horse race in terms of totals and rankings for emergency loans and aid to the banks. Because of the way that the Fed presented the data, there is a possibility of double-counting across different program categories, or failing to take into account that loans were repaid and then new loans taken out. So it may take a couple of days for a definitive analysis.
Posts
