Saturday, October 24, 2009
The Real Reason That - For the First Time Ever - More Women are Working Than Men
For the first time ever, at least half of all American workers are women. In addition, mothers are the primary breadwinners or co-breadwinners in nearly two-thirds of families.
These are the findings from a new report called The Shriver Report: A Woman's Nation Changes Everything, put out by Maria Shriver, wife of Arnold Schwarzenegger.
The Shriver Report will receive widespread media coverage this upcoming week.
While the mainstream media is heralding these findings as showing that women have achieved gender equality with men, the true meaning of these statistics is actually quite different.
As Wendy Norris, an investigative reporter based in Denver pointed out in a recent interview, the "equality" of women in the workforce is the result of the severity of the financial crisis and the resulting unemployment among men. Specifically, it is well-known that men have suffered the majority of job losses from the rising tide of unemployment hitting America.
Norris also points out that these are lower-paying jobs, as women typically earn less then men.
So what is being celebrated as a sign of progress and equality is actually an indication of the severity of the unemployment crisis in America.
Friday, October 23, 2009
More Stress Test Shenanigans
AFP reports:
The Federal Reserve will expand its so-called stress tests of the banking system to ensure they have enough capital during difficult periods, Fed chairman Ben Bernanke said Friday.
Bernanke highlighted the positive impact of stress tests conducted earlier this year on major banks, a move aimed at ensuring their financial health and building confidence.
"Building on the success of this initiative, we will conduct more frequent, broader, and more comprehensive horizontal examinations, evaluating both the overall risk profiles of institutions as well as specific risks and risk-management issues," Bernanke told a conference organized by the Boston Federal Reserve.
The highly publicized stress tests conducted earlier this year focused on 19 major banks, and indicated 10 needed additional capital.
Bernanke said the Fed would step up efforts to review bank capital requirements to avoid a recurrence of the credit crisis that has spread around the world.
"Additional steps are necessary to ensure that all banking organizations hold adequate capital," he said.
He noted that the Financial Stability Board -- a global watchdog made up of senior representatives of national financial authorities -- had called for "significantly stronger capital standards," and that the Group of 20 "has committed to develop rules to improve both the quantity and quality of bank capital."
"The Federal Reserve supports these initiatives. The structure of capital requirements should also be reviewed," Bernanke said.
Should we be reassured by the new round of stress tests?
Well, let's take a look:
- Time Magazine called the previous stress tests a "confidence game" and Geithner a "con man" for running them deceptively
- Paul Krugman called the stress tests a mere "self-esteem class" for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests "fail the basic criterion of a reality check"
- William K. Black called them "a complete sham"
- FDIC head Sheila Bair didn't believe they were credible
- The stress tests were a P.R. stunt devised by the banks themselves
In addition, AFP quotes Bernanke as saying:
"For example, to reduce the tendency of current capital requirements to promote credit growth in booms and to restrict credit during downturns, the Federal Reserve has supported international efforts to develop capital standards that would be countercyclical," or require firms to build larger capital buffers in good times and allow them to be drawn down in times of stress.
But as I have previously noted:
One of the Fed's main justification has been that it can provide a "counter-cyclical" balance. In other words, during boom times it can put on the brakes ("take the punch bowl away right as the party gets started"), and during busts it can get things moving again. But as economist Jane D'Arista has shown, the Fed has failed miserably at that task:
Jane D'Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as "leaning against the wind." By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed's job, a former chairman once joked, is "to take away the punch bowl just when the party gets going." Economists know this function as "counter-cyclical policy."
The Fed not only lost control, D'Arista asserts, but its policy actions have unintentionally become "pro-cyclical"--encouraging financial excesses instead of countering the extremes. "The pattern that has developed over the last two decades," she wrote in 2008, "suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function--its raison d'être--and its attempts to do so may exacerbate instability."...
The new stress tests will be a meaningless P.R. stunt, just like the originals. The Fed largely caused the financial crash, and shouldn't even be given an electric razor, let alone financial or economic oversight.
”It Has Got All the Hallmarks of a Financial Collapse about to Happen in America ...The US Dollar Is Almost Becoming like Junk Bonds”
Guess who said the following:
Far from turning around the [George] Bush legacy of deficits and debt, [US president Barack] Obama has made it worse. It has got all the hallmarks of a financial collapse about to happen in America...
The US dollar is almost becoming like junk bonds.
A senior Senator from Australia.
Leading Australian paper The Age adds:
The Nationals Senate leader Barnaby Joyce is openly canvassing an economic upheaval that would dwarf the current global financial crisis, triggered by the US defaulting on its sovereign debt within the next few years.
In unusually pessimistic comments for a senior political figure, Senator Joyce said the US Government was running such large deficits and building up so much debt that it was in a similar position to Iceland or Germany before World War II.
On a related note, in the for-what-it's-worth department, Peter Schiff has issued an urgent warning to get out of the dollar:
However, some smart people think the dollar will rally at the next stock market crash.
Elizabeth Warren Suspects Fraud As Cause of Financial Crisis
Elizabeth Warren - like many other financial experts - thinks that fraud played a role in causing the financial crisis.
As she told Michael Moore:
I want to know who did what. Responsibility is about making sure we fix this, and that it will not happen again.
Warren is calling for an investigation, and suspects that an investigation would have serious legal ramifications:
I was talking to someone who spent many years as a prosecutor, and he said when that much money disappears it's usually because somebody broke some laws somewhere.
Thursday, October 22, 2009
Labor Unions to Participate in Bank Protests
I don't know how many rank and file members of the giant labor unions will show up, but the President of the AFL-CIO and the Secretary-Treasurer of the SEIU have both called for people to attend the bank protests in Chicago on October 25-27.
Everyone from PhD economists to professors of economics have also supported the protests.
Michael Moore Promotes Public Banking
In an article which is quickly going viral, Michael Moore says the American people should demand public banking:
Each of the 50 states must create a state-owned public bank like they have in North Dakota. Then congress MUST reinstate all the strict pre-Reagan regulations on all commercial banks, investment firms, insurance companies -- and all the other industries that have been savaged by deregulation: Airlines, the food industry, pharmaceutical companies -- you name it. If a company's primary motive to exist is to make a profit, then it needs a set of stringent rules to live by -- and the first rule is "Do no harm." The second rule: The question must always be asked -- "Is this for the common good?" (Click here for some info about the state-owned Bank of North Dakota.)
For more on public banking. See this and this.
Barofsky: "Absent Meaningful Regulatory Reform, Tarp Runs the Risk of Merely Reanimating Markets That Had Collapsed [Due To] Reckless Behavior"
TARP Inspector General Neil Barofsky says in a new report that TARP has allowed the too big to fails to get even bigger, and that:
Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior.TARP . . . reanimating not only zombie banks, but also zombie markets.
Herding the Sheep
Financial insider and commentator Yves Smith wrote an essay last week entitled "MSM Reporting as Propaganda" arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and - therefore - no one should get upset:
Is Smith right? And even if she is, isn't "propaganda" too strong a word?The message, quite overtly, is: if you are pissed, you are in a minority. The country has moved on. Things are getting better, get with the program...
Per the social psychology research, this “you are in a minority, you are wrong” message DOES dissuade a lot of people. It is remarkably poisonous. And it discourages people from taking concrete action.
Think Positive
Sure, William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").
Admittedly, 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency.It's true that Business Week wrote on May 23, 2006:
President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.I can't deny that the Tarp Inspector General said that Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not.
Okay, the government and Wall Street have traditionally tried to dispense happy talk when there is an economic crash, and Arianna Huffington recently pointed out:
But that's not propaganda . . . its just positive thinking, right?
The Other Guy
And the whole word propaganda is a Nazi, communist kind of thing which has no place in the same sentence as America. Right?
Granted, famed Watergate reporter Carl Bernstein says the CIA has already bought and paid for many successful journalists.
And sure, the New York Times discusses in a matter-of-fact way the use of mainstream writers by the CIA to spread messages.
True, a 4-part BBC documentary called the "Century of the Self" shows that an American - Freud's nephew, Edward Bernays - created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques (but the BBC isn't American, so it doesn't count).
I won't deny that the Independent discusses allegations of American propaganda (but that's a British paper, doesn't count).
And (ho hum) one of the premier writers on journalism says the U.S. has used widespread propaganda.
And (are we still talking about this?) an expert on propaganda testified under oath during trial that the CIA employs THOUSANDS of reporters and OWNS its own media organizations (the expert has an impressive background).
And (I can't believe we're still talking about this) while the U.S. government has repeatedly claimed that it was launching propaganda programs solely at foreign enemies, it has actually used them against American citizens. For example:
- In 2002, the Pentagon announced that it was considering spreading false propaganda in the foreign press. However, the military has spread propaganda within the U.S. in an operation so aggressive that one participant, a military analyst, called it "psyops on steroids"
- Raw Story confirmed yesterday the use of propaganda on Americans
The U.S. government long ago announced its intention to "fight the net".
- As revealed by an official Pentagon report signed by Rumsfeld called "Information Operations Roadmap":
And (when's the next episode of American Idol on?) CENTCOM announced in 2008 that a team of employees would be "[engaging] bloggers who are posting inaccurate or untrue information, as well as bloggers who are posting incomplete information."The roadmap [contains an] acknowledgement that information put out as part of the military's psychological operations, or Psyops, is finding its way onto the computer and television screens of ordinary Americans."Information intended for foreign audiences, including public diplomacy and Psyops, is increasingly consumed by our domestic audience," it reads.
"Psyops messages will often be replayed by the news media for much larger audiences, including the American public," it goes on.***
"Strategy should be based on the premise that the Department [of Defense] will 'fight the net' as it would an enemy weapons system".
And (who do you think will win the playoffs?) the Air Force is also engaging bloggers. Indeed, an Air Force spokesman said:
"We obviously have many more concerns regarding cyberspace than a typical Social Media user," Capt. Faggard says. "I am concerned with how insurgents or potential enemies can use Social Media to their advantage. It's our role to provide a clear and accurate, completely truthful and transparent picture for any audience."And (did you see that crazy photo?) it is well known that certain governments use software to automatically vote stories questioning their interests down and to send letters favorable to their view to politicians and media (see - as just one example - this, this, this, this and this). The U.S. government is very large and well-funded, and could substantially influence voting on social news sites with very little effort, if it wished.
The Bottom Line
Yeah yeah, people say this or that, whatever, I'm too busy to think about it.
Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal.
Perhaps "herding the wayward sheep" would be better . . .
Wednesday, October 21, 2009
Top French Official: U.S. Trying to Inflate Its Way Out of Debt
A top advisor to French President Nicolas Sarkozy - Henri Guaino - said on Tuesday that hat the United States was "flooding the world with liquidity" to try to inflate away its debt.
But as UBS economist Paul Donovan, prominent economist Michael Hudson and others have shown, it is a myth that governments can inflate their way out of debt traps.
As I have previously noted, trying to inflate our way out of debt is like a monkey trying to outrun a lion.
How Did America Fall So Fast?
In 2000, America was described as the sole remaining superpower - or even the world's "hyperpower". Now we're in real trouble (at the very least, you have to admit that we're losing power and wealth in comparison with China).
How did it happen so fast?
As everyone knows, the war in Iraq - which will end up costing $3-5 trillion dollars - was launched based upon false justifications. Indeed, the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.
And the financial system collapsed last year due to looting and fraud.
How Empires Fall
But Paul Farrel provides a bigger-picture analysis, quoting Jared Diamond and Marc Faber.
Diamond's book 's, Collapse: How Societies Choose to Fail or Succeed, studies the collapse of civilizations throughout history, and finds:
Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power...
One of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions
And PhD economist Faber states:
How [am I] so sure about this final collapse?
Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline.
[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world's greatest civilizations has been 200 years progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage"
[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical "society cycle." ... The U.S. is somewhere between the phase where it moves "from complacency to apathy" and "from apathy to dependence."
In other words, America's rapid fall is not really that novel after all.
How Consumers, Politicians and Wall Street All Contributed to the Fall
On the individual level, people became "fat and happy", the abundance led to selfishness ("greed is good"), and then complacency, and then apathy.
Indeed, if you think back about tv and radio ads over the last couple of decades, you can trace the tone of voice of the characters from Gordon Gecko-like, to complacent, to apathetic and know-nothing.
On the political level, there was no courage in the White House or Congress "to practice long-term thinking, and to make bold, courageous, anticipatory decisions". Of course, the bucket loads of donations from Wall Street didn't hurt, but there was also a religion of deregulation promoted by Greenspan, Rubin, Gensler and others which preached that the economy was self-stabilizing and self-sustaining. This type of false ideology only can spread during times of abundance and complacency, when an empire is at its peak and people can fool themselves into thinking "the empire has always been prosperous, we've solved all of the problems, and we will always prosper" (incidentally, this type of false thinking was also common in the 1920's, when government and financial leaders said that the "modern banking system" - overseen by the Federal Reserve - had destroyed instability once and for all).
And as for Wall Street, the best possible time to pillage is when your victim is at the peak of wealth. With America in a huge bubble phase of wealth and power, the Wall Street looters sucked out vast sums through fraudulent subprime loans, derivatives and securitization schemes, Ponzi schemes and high frequency trading and dark pools and all of the rest.
Like the mugger who waits until his victim has made a withdrawal from the ATM, the white collar criminals pounced when America's economy was booming (at least on paper).
Given that the people were in a contented stupor of consumption, and the politicians were flush with cash and feel-good platitudes, the job of the criminals became easier.
A study of the crash of the Roman - or almost any other - empire would show something very similar.
Congressmen Grayson, Clay and Miller Introduce CFPA Amendment to Help Reduce Looting
Congressmen Grayson, Clay and Miller are introducing an amendment to the Consumer Financial Protection Agency bill:
Is this a good amendment or a bad amendment?Today we will offer the “Financial Autopsy” amendment. The Grayson/Clay/Miller amendment is essential to attacking the root problem of consumer bankruptcy and foreclosure because it requires the CFPA to do a financial audit of products that have caused the highest rates of bankruptcy and foreclosure annually. Not later than March 31st of each calendar year, the CFPA will list these anti-consumer products, submit their conclusions on why these products “fail” consumers, the companies and employees that underwrote these products, and authorizes the CFPA to take action to restrict these products.
Financial Autopsy Amendment:
- Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.
- Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.
- Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections
- The bottom line is to highlight destructive products based on if they are making people “broke”. Thank you for your consideration, we hope you will join us in supporting this amendment.
Sincerely,
Alan Grayson Wm. Lacy Clay Brad Miller
It is a great amendment.
Why?
Instead of trying to pass a one-size-fits-all bill prohibiting certain specified conduct, it will force an annual analysis of what financial products are sticking it to the consumer.
Remember, credit default swaps didn't bring down the economy because they are toxic while all other financial vehicles are pure as the driven snow. CDS brought down the economy because they were the choice du jour of the looters.
If we outlaw CDS (which I have argued for in the past), then the looters would create some other instrument for looting.
The Grayson/Clay/Miller amendment would help to force an annual review of the tool-of-trade of the rip-off artists.
Note: Given the huge incentives for financial "innovation", the armies of lawyers, mathematicians and other footsoldiers employed by the financial giants, the pressure that the "too big to fails" to earn their way out of the hole, and the rapidity with which imbalances in the modern financial system can build up when alot of people are making the same kind of trade, an annual review is probably not enough.
So my only suggestion for Congressmen Grayson, Clay and Miller is that the amendment require:
(1) Annual reviews generating formal written reports
Plus ...
(2) Monthly informal reviews. If a review reveals a large number of bankruptcies or foreclosures caused by a specific type of financial product, this would trigger a formal reportTrust me . . . the boys can still cause the economy to thoroughly crash if their actions are not examined for a year at a time.
Call your congressional representatives and demand that they support the Grayson/Clay/ Miller amendment.
Million Baby Crawl
I was asked to post this and - because I've got kids myself - will do so as a public service announcement.
For more information, click here.
Tuesday, October 20, 2009
Biden: "It's a Depression For Millions of Americans"
Joe Biden said yesterday:
My grandpop used to say ... "When the guy in Minooka's out of work, it's an economic slowdown. When your brother- in-law's out of work, it's a recession. When you're out of work, it's a depression.”
[Asked how he views it, Biden responded:] Well, it's a depression. It's a depression for millions of Americans, through no fault of their own.
Before you decide whether Joe is just shooting his mouth off or he's onto something, read this, this and this.
Hussman: Average Americans Are Getting Scalped So That Bondholders Can Be Saved from Taking a Haircut
PhD economist John Hussman has some great quotes in his current market comment:
For background, see this and this.It appears to be wishful thinking to believe that the credit crisis is over. Most likely, what we've witnessed in recent months is little more than the combination of a lull in the [mortgage] reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.
My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps. Presently, this slack has allowed banks some time, but the question is, time for what? The rules encourage banks to neither modify loans nor foreclose, both which would trigger a restatement of value on the mortgage asset. Meanwhile, banks are reluctant to allow “short sales” in lieu of foreclosure (where a homeowner sells a home to avoid foreclosure, but at a price less than the residual loan value, so the bank has to essentially eat the loss). This again defers the restatement of asset values for a while, but makes business sense only if home prices are expected to recover faster than the foregone interest that could be earned on new loans.
So if you talk to people who oversee these assets, including people who work with the FDIC, you'll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance...
Our policy makers bailed out bank bondholders instead of focusing on debt restructuring. The bad assets are still in the banking system, millions of families will still lose their homes, the Treasury and Fed have jointly issued trillions in new government obligations, but the bondholders of Bear Stearns will still get 100% of their principal and interest.
Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.
Technical note: Hussman thinks that stocks are extremely overbought.
Einhorn: The Real Lesson of 1937-8
David Einhorn - President of Greenlight Capital, which manages around $5 billion dollars - says that people claiming that the lesson of 1937-8 is not to withdraw stimulus too soon are wrong:
An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.
Monday, October 19, 2009
Tavakoli: "We Should Impose a 95% Excess Profits Tax—Or Windfall Profits Tax—On Certain Financial Institutions... Enriching Themselves" at Our Expense
The following is an advanced copy of an essay by Janet Tavakoli to be released tomorrow. Reprinted with permission of Tavakoli Structured Finance.
Warren Buffett’s Wall Street War
By Janet Tavakoli
October 20, 2009
In a January 2009 interview with NBC’s Tom Brokaw, Warren Buffett criticized leveraging “to the sky,” and creating “phony instruments [RMBSs, CDOs, et al.] that fool other people so you stick money in your pocket.” In 2002, he claimed over-the-counter derivatives are “financial weapons of mass destruction”1 and participants who account for them have “enormous incentives to cheat.” 2
Warren Buffett, the blogosphere’s “Oracle of Omaha,” often chastises the financial community. If you cost him money, he’s liable to write an expose. He posts annual shareholder letters on a low-tech website and seems to labor under the assumption that rational people eagerly read his blog. Congress and regulators are dismissive of Buffett’s hyperbolic rhetoric; it is fit only for a banana republic.
In 2003, Buffett wrote of the manufactured housing industry’s “business model centered on the ability…to unload terrible loans on naïve lenders…The consequence has been huge numbers of repossessions and pitifully low recoverie[s].” 3 Buffett alleged that the manufactured housing industry’s consumer financing practices were “atrocious,”4 and securitizations provided the money to fuel the financing.
Berkshire Hathaway’s investment in the distressed junk debt of Oakwood Homes lost money after the designer and manufacturer of modular homes went bankrupt in 2002. Buffett claimed “Oakwood participated fully in the insanity.” 5
Warren Buffett’s diatribe suggested that most of the manufactured housing industry was involved along with several Wall Street firms that underwrote the securitizations. Using money from new investors to pay returns to old investors in unsupportable investments is called a Ponzi scheme.
Oakwood’s loans to purchasers of manufactured homes were made possible by a line of credit from Credit Suisse First Boston (Credit Suisse). The credit line was similar to a credit card except that Oakwood had to put up the home loans as collateral. Credit Suisse earned fees for the loans and further fees when it packaged (securitized) Oakwood’s loans. Credit Suisse (the old investor) bought the securitized loans and then sold them to new so-called sophisticated investors.
Sales of manufactured homes declined. Loan delinquencies (late payments) and repossessions rose. Oakwood Homes had crushing debt and falling income for at least three years before it filed for bankruptcy in November 2002. But securitizations had temporarily inflated the bubble for the collapsing enterprise. A June 2008 court opinion said Oakwood’s aggressive lending practices led to the high number of repossessions and a debt load that Oakwood could not support. Oakwood’s liquidator said the transactions it did with Credit Suisse were “value destroying.”6
Someone should have muzzled Warren Buffett back in 2003. The Slumbering Esquires’ Club might have believed Buffett’s preposterous theory that after private securitizations became popular, the “industry’s conduct went from bad to worse.” 7 Buffett’s wacky warnings could have jeopardized Wall Street’s subsequent mortgage lending securitization Ponzi scheme.
The SEC might have investigated Lehman Brothers’ questionable shenanigans, especially after it was held liable in 2003 by a California jury for allegedly helping FAMCO cheat borrowers. The SEC might have looked into the unsavory practices at Goldman Sachs Alternative Mortgage Products, Bear Stearns, Merrill Lynch or the entire private securitization industry, and their mortgage lending subsidiaries.
While the SEC slept inside a collapsing debt bubble, the Omahaconspiracy theorist spooked Goldman Sachs into believing it needed his money. In the fall of 2008, Buffett closed a deal for $5 billion in Goldman Sachs’s preferred stock paying a 10% annual dividend. Goldman even gave Buffett warrants to buy $5 billion in common stock at a price of $115 anytime before October 1, 2013. [The Fed let Goldman buy back its warrants for chump change.9] Buffett’s warrants are now about $3 billion in-the-money and worth much more—a sweetener for his crispy calamari.
Hank Paulson, Ben Bernanke, and Tim Geithner10 ignored the historic ravings of the most successful living investor, and fueled some of the bombers piloted by Wall Street before finance’s Pearl Harbor. After they used taxpayer money to save the system and enriched the culpable with no strings attached, Buffett said “it could have turned out a lot differently,” and called each of them a four-letter word. The label was undeserved.
Four-letter words aside, Warren Buffett raised a good point. It could have—and should have—turned out a lot differently. But it’s not too late. Buffett called the crisis an economic Pearl Harbor and said that “Wall Street owes the American people one at this point.”8 During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees.
Adapted from Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street (Wiley 2009) by Janet Tavakoli
Disclosure: Janet Tavakoli is an investor in Berkshire Hathaway Inc.
1 Berkshire Hathaway Inc. 2002 Annual Report, 15.2 Ibid., 13.
3 Berkshire Hathaway Inc. 2003 Annual Report, 5.
4 Ibid.
5 Ibid.
6 OHC Liquidation Trust, et.al v. Credit Suisse First Boston et al., U.S. Bankruptcy Court, Delaware. Civil Action No. 07-799 JJF (Chapter 11 Case No. 02-13396) Memorandum Opinion June 9, 2008. (Partial Summary Judgment)
7 Ibid. [1]
8 Warren Buffett on ABC’s Good Morning America, July 9, 2009.
9 The Treasury got a paltry 23% return on its $10 billion investment in preferred shares and warrants in Goldman Sachs. The Fed accepted only $1.1 billion for warrants that had more than nine years to run during a quarter when Goldman Sachs was awash in cash and profits and would report record earnings made possible only by taxpayer intervention. The Fed gave up the right to buy 12.2 million shares of Goldman for $122.9 per share. [As of Oct 16, the warrants were in-the-money by around $750 million and would have been worth much more with just over nine years to the original October 26, 2018 expiration date.] This does not include ongoing near zero-cost funding, relaxation of accounting terms, temporary protected status as a bank holding company (guarding against a run on Goldman) before switching its status to a protected financial holding company on August 14, 2009 [The Treasury may designate it a Tier 1 Financial Holding Company], and issuance of $25.15 billion (as of June 2009) unsecured FDIC guaranteed debt [GS is allowed $35 billion outstanding prior to Oct. 31, 2009. Goldman’s first issuance was for $5 billion of 3.35% maturing in 2012 on November 25, 2008; at the time its stand-alone debt traded at 8.25% for a comparable maturity].
10 In the fall of 2008, Henry (“Hank”) Paulson was Treasury Secretary (Paulson was formerly CEO of Goldman Sachs), Ben Bernanke was (and currently is) the Chairman of the Federal Reserve, and current Treasury Secretary Timothy Geithner was the Chairman of the New York Fed. [Geithner was succeeded by Stephen Friedman as Chairman of the NY Fed. Friedman was a former Goldman Sachs co-chairman and owned shares of Goldman Sachs and was a member of Goldman’s board while he held his influential Fed position, a conflict of interest and a violation of Fed policy. Friedman resigned the Fed position in May 2009.]
Is David Bloom Wrong About the Dollar?
As I have previously noted, HSBC currency chief David Bloom doesn't think that the dollar will rally when the stock market next tanks:
The dollar rallied last year because we had a global liquidity crisis, but we think the rules have changed and that it will be very different this time [if there is another market sell-off].
Is he right?
I have argued that the new dollar carry trade could very well unwind during the next crash, which could create an enormous need for dollars.
Now, Tyler Durden has written a must-read summary of a new report by BIS which shows that the real liquidity crisis last year was among European banks, which were hugely overexposed to the dollar (in amounts many times greater than their GDPs, in some cases), and so they were desperate to raise dollars last year when the market crashed.
The Fed became the world's lender of last resort, extending huge swap lines to foreign central banks so they would have dollars to be able to cover their currency positions.
Durden quotes from the BIS report:
The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.
...
The analysis shows that between 2000 and mid-2007, the major European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by interbank borrowing, borrowing from central banks and FX swaps. We argue that this greater transformation across counterparties in fact reflected greater maturity transformation across these banks’ balance sheets, exposing them to considerable funding risk. When heightened credit risk compromised sources of short-term funding during the crisis, the chronic US dollar funding needs became acute, particularly in the wake of the Lehman Brothers bankruptcy.
Durden notes that this same currency imbalance may be rebuilding:
We are now back at a time when the only gains in the stock market are at the expense of dollar destruction, with a concomitant funding for dollar denominated assets. In one short year since the collapse of Lehman we have gone back to the same dollar funding risk exposure as was on the books in these days before Dick Fuld's empire unraveled. While whether or not the Federal Reserve stepped beyond its bounds in practically bailing out not just Goldman Sachs, but as this paper has proven, virtually the entire world, is not up to us to decide. However, a critical topic is have we learned anything from the implications of an unprecedented dollar funding gap, which is likely back to record levels once again.
As the H.4.1 discloses weekly, the Fed's liquidity swaps are now back to almost zero. This means that foreign Central Banks believe that have the FX swap and dollar maturity situation under control. They thought the same before Lehman blew up. And they were wrong. As the DXY continue tumbling every lower to fresh 2009 lows, the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive short squeeze. If and when an exogenous event occurs, not even a trillion in Fed swap lines will be sufficient to bail out the world economy. It is time someone in Congress asks the Chairman all the pertinent questions that evolve from this analysis and how he is prepared to handle its next, much more vicious, and likely terminal, iteration.
I asked Durden whether he thinks the BIS report proves that Bloom is wrong, and whether he thinks the dollar will rally at the next market crash.
He responded:
Depends where in the circular argument you catch the dollar. I think the take home message from the above article is actually simple: if the global CB system nearly collapsed due to dollar funding concerns when the dollar was not the carry currency, imagine what will happen when you have a dual quest for funding: 1) from structural asset/currency mismatch and the FX swap's propensity to evaporate when most needed; and 2) from the need to cover the shorts that themselves are allowing the funding of US denominated assets (it takes a while to filter through). What has happened is that we are doubly on the hook now to the Fed to provide perpetual dollar funding to anyone who needs it.
As to a direct answer, I think the next market crash will be critical whether it is a liquidity, counterparty or simply driven by momentum with everyone unwinding at the same time (Oct 19, 1987). If it is a combination of all three, the Fed will be unable to restore the system, absent it printing several dozens of trillions of dollars overnight which would devalue the entire dollar denominated asset base (which accounts for roughly 400% of Europe's GDP).
I have written to David Bloom, but am still waiting for a response.
Congress Actually Stands Up to Banks . . . But What About the Senate?
My friend on the Hill has confirmed the Washington Post's claim that the big banks have lost their bid for exemption from state regulations.
But only in the House. My friend says that the too big to fails are going to try to kill the bill in the Senate.
As the Post summarizes the battle in the House:
The House Financial Services Committee is expected to vote Tuesday to let state governments protect bank customers by imposing restrictions that go beyond existing federal laws, according to congressional and industry sources.
The move would roll back a doctrine called preemption that has allowed big banks to answer solely to federal regulators. The banks argue that operating under a single set of rules is more efficient and results in lower prices for customers. But the Obama administration, which is pushing for the change, regards preemption as a cause of the crisis because it prevented state regulators from quashing obvious abuses.
The change essentially would unleash 50 additional regulators on the largest banks.
Large banks have fought bitterly against the proposal, which they regard as one of the most problematic components of the administration's financial reform plan, but they have been unable to sway House Democrats.
Call your Senator and demand that state banking regulations be allowed to be as tough as the state wishes.
Shiller: "Look up 'Bubble' in an Economic Textbook and It's Not There. [People] are Living in a 'Pretend-and-Extend' Environment"
Robert J. Shiller is one of the most prominent American economists and is one of the 100 most prominent economists in the world.
Shiller recently confirmed two points that alternative financial writers have been making for years:
(1) Mainstream economists don't pay any attention to bubbles - even though bubbles always burst, causing recessions or depressions
and
( 2) People are in an extend-and-pretend environment, trying to paper over the severity of economic problems and kick the can down the roadAt the Buttonwood economics conference a couple of days ago, Shiller said:
While criticism of American economists' blind spot towards bubbles may be news to Americans, even BIS and the head of the World Bank have previously slammed the Federal Reserve for blowing bubbles and then trying to clean up the mess once they burst."Look up 'bubble' in an economic textbook and it's not there." (Referring to the shortcomings of the traditional economic curriculum.).
People "are living in a 'pretend-and-extend' environment, waiting for the economy to recover." (Referring to the precarious state of the commercial real estate market and the wave of resets coming due between 2011 and 2013.)
[Quotes and related parenthetical comments are both courtesy of Michael Panzer, who attended the conference].
Sunday, October 18, 2009
Has the Government Sowed the Seeds for Green Shoots or Another Depression?
Note: To those who think that keeping quiet about bad news and gloomy forecasts will help the economy recover, or that talking about them is unpatriotic, please read this.
You probably heard that Nicu Harajchi - CEO of N1 Asset Management - told CNBC on Friday that we're heading into a full-blown depression.
You may have heard that Paul Krugman said a couple of days ago that the collapse in global trade is worse than during the Great Depression.
But surely the worst is over, and the government has done what is necessary to help our economy recover. Right?
Well, if you get most of your financial news from the nightly news, you might not know what other experts have been saying.
As I wrote in February:
As I wrote in June:The International Monetary Fund (IMF) is the organization that audits the books of countries world-wide to determine their real financial health. The IMF is also responsible for bailing out countries in trouble, and stabilizing the world's economic systems.
The IMF has also performed a complete audit of the whole US financial system, and therefore has a clearer idea of American finances than just about any other organization.
So the fact that the head of the IMF is saying that the world's advanced economies are already in a depression carries great weight.
He is not alone. The following people have also said we are already in a depression:
- Nobel economist Joseph Stiglitz
- The former Secretary of Labor
- Leading investment advisor Ray Dalio
- Well-known investment advisor Doug Casey
- And many others.
- On May 11th, U.S. News & World Report pointed out that bank loan loss rates will be much higher than during the Great Depression
- On May 7th, Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb said "The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent."
Am I saying that there is definitely another Depression ahead?The following experts have said that the economic crisis could be worse than the Great Depression:
- Fed Chairman Ben Bernanke
- Economics professors Barry Eichengreen and and Kevin H. O'Rourke (updated here)
- Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb
- Former Fed Chairman Paul Volcker
- Nobel prize winning economist Joseph Stiglitz
- Economics scholar and former Federal Reserve Governor Frederic Mishkin
- Well-known PhD economist Marc Faber
- Former Goldman Sachs chairman John Whitehead
- Morgan Stanley’s UK equity strategist Graham Secker
- Former chief credit officer at Fannie Mae Edward J. Pinto
- Billionaire investor George Sorors
- Senior British minister Ed Balls
I hope not.
What I am saying is that the government's actions to date have not fixed the underlying problems or helped stabilize the economy. The government has been doing all of the wrong things and made the situation worse by, among other things:
(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent
(2) Undermining trust of nations all over the world in the American economy
(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system
(4) Attempting to restart high levels of leverage and securitization
(5) Failing to take real measures to decrease employment and increase manufacturingAs Stephen Roach - Chairman of Morgan Stanley Asia and former chief Morgan Stanley economist for the U.S. - said a couple of days ago:
(6) Creating an enormous debt overhang and trashing our currency
Those who are looking for a “V”-shaped recovery are in for “a rude awakening."
“The imbalances going into the crisis were large to begin with. Now, they are bigger than ever.”
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