How Screwed is Your Town?

Interesting piece from McClatchy shows when employment in different parts of the country is expected to recover. Looks piss-poor for SoCal!

Sell Sell Sell!

From Reuters:

Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market.

Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.

Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.

Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.

Gold Rollercoaster

Here's Prof. Lewis from Minyanville explaining the volatility in gold:

I suppose some gold bulls are upset that a story in the Wall Street Journal said the Federal Reserve is unlikely to boost its purchases of Treasury bonds, so some might think this has removed a near-term upside catalyst. Who knows? (I’m not sure I buy that story’s message either, incidentally).

But let me emphasize: Gold is a long-term play. The US government has only 2 options: default or debase. Both lead to more inflation. What the Fed “wants to do” is irrelevant. What it will be forced to do is all that matters, and it will be forced to monetize more government debt this year. Whether that's in June, July, or August doesn’t really matter. The picture hasn't changed.

Gold bulls need to always be prepared to take violent swings, just as short-sellers in the financials did last year. Like those sellers of financials, gold bulls will get paid off big at the end of the day if they stick to their convictions.

He's Gay!

The Daily Show With Jon Stewart	M - Th 11p / 10c
Dan Choi Is Gay
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

Meredith Whitney Thinks We're Screwed!

And I agree! No green shoots for you!

Geithner Discusses Stress Test on SNL (Not!)

Business in Front, Party in Back

Head Over Heels: Literal Video Version - watch more funny videos

Dick Cheney - How'd He Do?

Letterman tears "Evil Dick Cheney" a new one!

Rational Exuberance

This is super-super-cool:

Step away from your Google search for a moment and consider the following scenario: What if a search engine, instead of giving you a long list of Web pages, simply computed the answer to whatever question you threw at it?

What was the average temperature in Chicago last year? What is the life expectancy of a male, age 40, in New Zealand? If you flip a coin 10 times, what is the probability that four of the flips will come up heads.

This scenario will become reality later this month with the highly anticipated launch of Wolfram Alpha, a free Web site that is the result of years of secret work by a British mathematician—Stephen Wolfram—and his team of 250 colleagues. The project set the tech world on fire last week after a sneak preview at Harvard Law School, and may present the most powerful challenge yet to the Google behemoth.

The Genesis of the Debt Disaster

Gillian Tett of the Financial Times on the origins of the financial crisis:

The first sign that there might be a structural problem with the innovative bundles of credit derivatives that bankers at JP Morgan had dreamed up emerged in the second half of 1998. In the preceding months, Blythe Masters and Bill Demchak – key members of JP Morgan’s credit derivatives team – had been pestering financial regulators. They believed that by using the new credit derivative products they had helped create, JP Morgan could better manage the risks in its portfolio of loans to companies, and thereby reduce the amount of capital it needed to put aside to cover possible defaults. The question was by how much. (Though these bundles of credit derivatives later went under other names, such as collateralised debt obligations [CDOs], at that time these pioneering structures were known as “Bistro” deals, short for Broad Index Secured Trust Offering). Masters and Demchak had done the first couple of Bistro deals on behalf of their own bank without knowing the answer to their question for sure. But when they were doing these deals for other banks, the question of reserve capital became more important – the others were mainly interested in cutting their reserve requirements.

It's well worth reading the whole thing!

Regarding the Bank Stress Tests

The usual suspects think they're a bunch of hooey:

Yves Smith: The fact that the stress tests took place at all was an admission of regulatory failure. Financial firms are subject to oversight, most important, of safety and soundness, on an ongoing basis. The notion that a one-shot effort is a substitute for insufficient supervision is spurious. Given that the minders were badly behind the curve thanks to years of believing that the industry could manage itself prudently, a crash effort to catch up was not a bad idea. But this should have taken place a year ago, when Bear Stearns exposed that no one really knew what was up at these firms. The fact that a bailout package was crafted based on a cursory emergency weekend review of complex trading exposures clearly demonstrated the dangers of ignorance.

But the stress tests fell far short of the needed level of review. First, they were administered by the industry based on scenarios provided by the industry. Most observers found the “adverse” case to be too optimistic. Even worse, banks got to use their own risk models, the same ones that got them into trouble. And there was no independent verification of the quality of the accounting. The number of examiners per bank was well short of what you’d need to probe a single business, much less an entire firm.

Second, the industry got to negotiate the results. This is simply unheard of. That suggests both a lack of confidence in the process and a lack of belief on the part of the key actors (Treasury Secretary Timothy Geithner, in particular) that the government needs to set the parameters and demand compliance.

Excess "E"s

From VoiceOfSanDiego.org:

This is a big week for Vantage Pointe, downtown's biggest condo building.

Next weekend is circled on the calendars of as many as 72 contracted buyers there, people who signed up in 2004 for a chance to own a piece of the then-hypothetical high-rise.

That's the date -- Saturday for a couple, Sunday for the rest -- that comes 42 months after they reserved their condos with 5 percent deposits in 2005. If the developers fail to make their units ready for move-in by then, some buyers could walk away from their contracts, their deposits in hand.

[snip]

The building is unprecedentedly large for San Diego, comprising 679 units in 40 stories, built with the largest private sector construction loan -- $210 million -- for a single building in county history. It takes up the entire block between 9th and 10th Avenues and A and B Streets. In Vantage Pointe, buyers have signed contracts to buy about 290 condos -- less than half the building's total.

The building's success as it moves through the next several months is being watched by market analysts and downtown planners.

It is unclear even yet what effect the building's opening will have on the rest of the downtown real estate market, already weighed down by more than 850 finished unsold units, according to MarketPointe Realty Advisers. The homes at Vantage Pointe and another 148 at another under-construction project downtown will double that number.

[snip]

Brian Stoddard, president and chief operating officer of Pointe of View, said on Friday the company has not yet officially split the project into the three phases, and so it is too early to tell if the Fannie Mae conditions will be met before the first buyers' deadlines next weekend.

Wow! 679 units and only 290 sold! Pretty crazy! However, the craziest part of the article is the affinity of the developers for all those excess "E"s. Vantage Pointe? Pointe of View? Way affected!

Remember This Guy?

"They (The Banks) Own The Place."

That's Senator Dick Durbin, talking about Congress. Karl Denninger has a devastating post today about the continued corruption in DC:

Well well well Senator Durbin:

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Now that had to be uncomfortable.

Oh by the way, its not just The Senate either; Barney Frank seems to have a revolving door in his office that goes between his front door and Goldman's along with SIFMA, a big industry group.

The amusing part of this is that the article appeared in Salon, a notoriously left-leaning rag. The not-so-amusing part of this is that nobody is bothering to try to hide the blatant corruption and fraud any more - $100+ billion in so-called "CDS" written by AIG that were "made good" by Treasury so as to avoid people having to take an economic loss that was properly theirs for getting involved with someone in a transaction when their counterparty didn't have any money!

And then there's this:

The Wall Street Journal, on A-1 (that'd be the top page) this morning is pointing out something much more uncomfortable - The Federal Reserve Bank of New York's Chairman, who was sitting on Goldman Sachs' board, continued to serve after they converted to a bank holding company and was in fact buying their stock.

Things are completely out of control. The cheating continues unabated, and it won't stop until people demand it stops. When people get angry enough to care, it's going to get ugly!

True That!

Cool Profile of Brooksley Born

From Stanford Magazine:

Shortly after she was named to head the Commodity Futures Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal Reserve chairman Alan Greenspan.

The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.

Smoking the Crack!

The New Yorker's James Surowiecki bought himself some awesome crack, smoked it, then wrote this:

Oddly, this simple explanation—that Barack Obama, Tim Geithner, and Ben Bernanke have adopted their strategy because they think it has the best chance of getting the economy back on track while taking the least systemic risk, rather than because they’re stupid, or corrupt, or “cognitively captured”—is one you rarely hear floated these days, even though it is, I think, almost certainly true.

Really?

Janet Tavakoli on C-Span Q&A

Stiglitz Tears The Obama Economic Team a New One!

From Bloomberg:

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent."

Or both!

"A Most Unusual Agreement"

From Salon:

Apr 17th, 2009 | SALT LAKE CITY -- In a highly unusual bankruptcy outcome, the developer of a luxury golf community near Park City bought it back for pennies on the dollar Friday because the leading creditor was unable to scrap together a bid and nobody else was interested.

Promontory, valued at $560 million before the recession took hold a year ago, was sold for just $30 million to a developer who walked away from $350 million in loans packaged by Credit Suisse and sold to hedge funds and other investors.

A Credit Suisse spokesman didn't dispute the loss but wouldn't comment. Dallas-based Highland Capital Management, a hedge fund that owns about 40 percent of the loans, didn't return calls from The Associated Press.

[snip]

"It was a most unusual agreement," said Richard Aaron, a retired University of Utah bankruptcy-law professor and Promontory's auctioneer.

Why is Obama Acting Like Such a Dumbsh*t?

From Bloomberg:

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

Regarding Asset Bubbles

Excellent article from Harpers back in February 2008, talking about the Dot Com and real estate bubbles, and predicting the coming cluster-f*ck. Here's a quick history of how FIRE (Finance, Insurance, and Real Estate) came to dominate the US economy:

The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”

The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control. Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.

A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.

Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.

More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.

David Seaton on Pakistan

David Seaton on what should be done with Pakistan:

The first thing to remember is that the Pakistan army, which basically runs the country still considers - and will always consider - India, not Afghanistan the major threat. Therefore if Pakistan's cooperation is desired don't let Afghanistan be a pawn in the struggle between India and Pakistan. Any India-weighted shift in America's foreign policy dooms any Af-Pak strategy to failure.

Settle the Kashmir question. Pressure India to allow the inhabitants of Kashmir to decide their future in a UN supervised referendum. Support the results.

America's efforts should not be directed toward the internal social questions of Pakistan, but should be directed toward bringing peaceful relations between the India and Pakistan

The US should not make any speculative alliances against any of the countries in the region and should not attempt to play India against Pakistan or China or any of them against Iran.

The object should be to defuse the entire area. Getting involved in local religious, geopolitical and social disputes is constantly re-lighting the fuse.

And of course, in order to make any progress at all in dealing with extremist Islam anywhere in the world, it is essential that the United States be more evenhanded in dealing with Israel and the Palestinians so that Muslims anywhere in the world who might be well disposed to the USA are not made to feel like damn fools or quislings. The United States should not allow Israel to drag it off a geopolitical cliff... if it hasn't been permanently dragged off it already.

More Change You Can Stick in Your Crack Pipe and Smoke it! Pt. 3

From Friday's New York Times:

The Obama administration said Friday that it would appeal a district court ruling that granted some military prisoners in Afghanistan the right to file lawsuits seeking their release. The decision signaled that the administration was not backing down in its effort to maintain the power to imprison terrorism suspects for extended periods without judicial oversight.

Stiglitz on the PPIP

Obviously, he doesn't like it, and nicely explains why:

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

[snip]

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Good Question...

At the end of an article about how the recession is affecting businesses in Berkeley, comes this very pertinent question:

Why is President Obama going along with all these Wall Street bailout fiascoes? Want to know my own personal theory? The guy is either the Hamlet of the 21st century -- or else its Dr. Faustus.

Is Obama like Hamlet, unable to step up to the plate and act in the face of obvious injustice? Or is he more like Dr. Faustus, having made a deal with the devil in order to get elected and then discovering too late that he doesn't particularly like having his soul owned by Mephistopheles -- but knowing that in order to get out of his contract with America's economic mafia, he would probably be dooming himself to becoming the next JFK.

Surprise! The Banks Are Fine!

Yves Smith from Naked Capitalism fisks today's overly credulous NYT article about the Treasury Department's bank stress tests. I've reprinted Yves' posting in full, because it bears reading:

Quelle Surprise! Bank Stress Tests Producing Expected Results!

Should this even qualify as news? From the New York Times:

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

The whole point of this charade exercise was to show the big banks weren't terminal but still needed dough, and I am sure it will prove to be lots of dough before we are done. But they now have the Good Housekeeping seal, so the chump taxpayer can breathe easy that the authorities are taking prudent measures to make sure his money is being shepherded wisely.

If you believe that, I have a bridge I'd like to sell you.

We said from the beginning the stress tests were a complete sham. Just look at the numbers. 200 examiners for 19 banks? When Citi nearly went under in the early 1990s, it took 160 examiners to go over its US commercial real estate portfolio (and even then then the bodies were deployed against dodgy deals in Texas and the Southwest). This is a garbage in, garbage out exercise. The banks used their own risk models to make the assessment, for instance, the very same risk models that caused this mess. And there was no examination of the underlying loan files.

The Times story does slip in some shreds of doubt, but a casual reader is likely to read past them. Consider these statements:

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it...

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

Yves here. So did you get that? They all will be declared to pass in some form, no matter how dreadful they really are (if the remedy is putting in more Federal dollars, rather than a receivership, then the fiction that the money is not being wasted must be preserved). But so as to look sufficiently tough, some banks will be treated harshly. If it winds up being, say, Fifth Third (which I am told by John Hempton is a very well run bank, publishes much more honest financials than its peers, but is in simply terrible geographies, Michigan, Ohio. Florida) and not Citi, then we know the process is not just hopelessly politicized, but shamelessly so. Back to the article:

The state of the industry will come into sharper focus next week, when big banks like Citigroup and JPMorgan Chase start reporting first-quarter results. Many analysts predict the reports will show banks are on the mend, with help from low interest rates, fat lending margins, dwindling competition and profits from trading in the financial markets in January and February. In the last six weeks, financial shares have soared on hopes that the worst for the industry is over.

But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate.

“Nothing has changed with the fundamentals,” said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

Yves here, Note the failure to point out that Whitney has been the most accurate in calling bank performance during this downturn. No, she is instead a mere bear. And the article also fails to mention that Leon Black, a distressed investor who has long been active in the real estate industry, is forecasting $2 trillion in real estate losses. I doubt the stress tests have that factored in. Consider the worst case scenario:

The tests, led by the Federal Reserve, rely on a series of computer-generated “what-if” projections in the event the economy deteriorates. Those include unemployment rising to 10.3 percent by next year, home prices falling an additional 22 percent this year, and the economy contracting by 3.3 percent this year and staying flat in 2010.

Based on the work of Carmen Reinhart and Kenneth Rogoff on financial crises, the expected trajectory for this crisis is for unemployment to peak in the 11-12% range, a fall in GDP of 5%, with it taking three years after the bottom for growth to return to normal levels, and housing takes over five years to bottom. And that is the typical trajectory for crisis countries, none of whom faced a backdrop of a global contraction. Whitney is calling for real estate prices to fall another 30%. So the worst case falls short of even likely outcomes, let alone a real disaster.

And the theater continues:

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

How does one parse tripe like this? First, the public private partnership program, aka cash for trash, is voluntary. Banks are not being compelled to sell. The idea that the banks "have to sell" is a canard. Second, the gaming of the program has already started (notice no lecture from Geithner about that?), so there is pretty much no risk that anyone will take a loss on the values they have in their books. The best summation of how bad this will get is from Rortybomb, who expects all the old Enron tricks to be employed (notice the terms of the PPIP prohibit the fund managers from gaming the process, not the banks trading among themselves. You can drive a truck through this oversight. And the Treasury has remained silent as the banks themselves have been loading up their balance sheets with toxic sludge, paying more than private investors are willing to bid).

I'm sure all the bankers understand full well the massive disconnect between talk and action, and are dutifully following Treasury's lead in maintaining appearances.

What The Heck Is Going On?

The New York Post reported two weeks ago that the big banks are buying up lots of legacy assets in the secondary markets, for much more than other investors are willing to pay for them:

One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The questions is: are the big banks buying these assets to keep the prices high on their balance sheets, or are they buying them to sell them at a huge profit via the PPIP? As has been widely reported in the right-thinking financial blogs, the PPIP has huge, on-purpose loopholes which make it easy to the big banks to form shell companies which will then buy these legacy assets from the big banks with a non-recourse loan 93% financed by the government. For example, let's say Citi Bank forms a shell company, called Shitty Bank, and capitalizes it with $70 million, which likely came from TARP funds. Shitty Bank can then borrow $1 billion from the PPIP with the $70 million as collateral, and then buy $1 billion worth of legacy assets, at 100% face value, from Citi Bank. Shitty Bank can then file for bankruptcy at any time, and default on the loan, leaving the taxpayer holding a $930 million PPIP bag in addition to the $70 million TARP bag. This scenario can be repeated over and over, until the taxpayer is on the hook for most of the estimated $4 trillion of toxic assets on the banks' balance sheets. There is no reason for anyone but the banks to invest in these assets, as neither the government or the banks have done the forensic accounting analysis necessary to inform serious investors as to what the underlying MBS assets are actually worth. We'll have to see how this all plays out over the next few months...

Ridiculously Good Article About the Crash

Two economists ask, in The Wall Street Journal, why the Dot Com bubble, which wiped out $10 trillion dollars in equity, did not crash the economy, while the housing bubble, which wiped out $3 trillion in equity, did crash the economy:

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.

There's other interesting tidbits in the article, such as how the government underestimated the rate of inflation by miscalculating the consumer price index (CPI), keeping interest rates too low for too long:

In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.

Comparing the US Financial Crisis to Those of Emerging Markets

Simon Johnson, IMF chief economist from 2007 to 2008, writes in The Atlantic that the US government is in bed with the financial elites that precipitated the crisis, just like in a banana republic:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Makes Me Want to Vomit Into My Own Mouth!

Glenn Greenwald discusses the government/private sector revolving door as it applies to the financial crisis:

Last night, former Reagan-era S&L regulator and current University of Missouri Professor Bill Black was on Bill Moyers' Journal and detailed the magnitude of what he called the on-going massive fraud, the role Tim Geithner played in it before being promoted to Treasury Secretary (where he continues to abet it), and -- most amazingly of all -- the crusade led by Alan Greenspan, former Goldman CEO Robert Rubin (Geithner's mentor) and Larry Summers in the late 1990s to block the efforts of top regulators (especially Brooksley Born, head of the Commodities Futures Trading Commission) to regulate the exact financial derivatives market that became the principal cause of the global financial crisis. To get a sense for how deep and massive is the on-going fraud and the key role played in it by key Obama officials, I highly recommend watching that Black interview (it can be seen here and the transcript is here).

[snip]

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC (Commodities Futures Trading Commission - Jose) from regulating these derivative markets. More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

China to Best the US Again!

From Naked Capitalism:

A New York Times article tonight reports that China intends to become a world leader in electric and hybrid cars:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today....

To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.

The article then goes on to discuss the advantages (cleaner air) and difficulties (lack of public recharging centers, consumer worries about the safety of lithium ion batteries, disincentive of current cheap oil prices).

However, it fails to mention Detroit was once a leader in this technology.

Big GM Bondholders to Screw the Taxpayer?

This is pretty crazy:

Back on Monday I wrote about the Automakers and said this in closing:

And then there's the nearly $1 trillion in CDS that will trigger. There is no accurate way to know what the net exposure is on those, but I'd take the "over" on $100 billion, focused in you-know-where.

Here's the problem - I'm willing to bet that a huge percentage of those were written by AIG.

The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don't default. In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.

So in this case the winning play, if you're a big bondholder, is to tell GM to suck eggs; you'll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.

In other words you could conceivably get more than 100 cents if you hold those bonds - so long as you also hold a CDS as a hedge.

It must be nice to be able to screw the taxpayer for more than a 100% payout, right?

The bondholders "committee" is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their "thought process" - if not the controlling factor.

Small bondholders on the other hand (who have no hedge, unless they were smart enough to buy lots of PUTs a few months ago) are just going to get plain old-fashioned screwed.

Since the only way GM survives is for it to get the bondholder committee to agree to restructuring it therefore follows that the only way this can happen is if the administration (and Fed!) makes very clear that all funding to AIG has been cut off and therefore no further "pass through" payments will (or can) occur.

That is, The Obama Administration has to bankrupt AIG to save GM, or we will instead see the banks again rip off the American Taxpayer through yet another "passthrough" CDS payout stream AND GM will go bankrupt.

Get ready America - you're about to get it in BOTH holes this time.

This is analysis and deduction based on the available and public facts - I have no proof - but I'll bet this is exactly how this deal will go down, and why.

PS: Every firm in America that has a significant amount of CDS outstanding is potentially subject to this same attack. It's all very nice that our government is permitting banks to rob the citizens like this, isn't it?

Matt Taibbi Responds to Jake DeSantis' Resignation Letter

AIG Financial Products mamanger, Jake DeSantis wrote a public resignation letter to AIG Chairman Edward Liddy, over the "retention bonus" flap. I blogged about the original letter here. Matt Taibbi doesn't buy it:

For a guy like this, his worth as a human being is wrapped up in buying a bag of beans for $10 and selling it for $11. He states this like it's a law of nature: he was a good equities-and-commodities trader, therefore he should make a lot of money.

Only a person with a habitually overinflated sense of self-worth could think he deserves a $700,000 retention bonus, even if it has to be paid by taxpayers, when in reality no one "deserves" that much money. It may be that some people do get paid that much, but most people who make that much money have enough sense to realize their cushy lifestyles are an accident of fate, of birth, of class, not something that is "supported" by some unwritten natural law of compensation.

Hey Jake, it's not like you were curing cancer. You were a f*cking commodities trader. Thanks to a completely insane, horribly skewed set of societal values that puts a premium on greed and severely undervalues selflessness, communal spirit and intellectualism -- values that make millionaires out of people like you and leave teachers and nurses, the people who raise your kids and clean your parents' bedpans, comparatively penniless -- you made a lot of money.

Good for you. Consider yourself lucky. But your company went belly-up and broke, almost certainly thanks in part to you, and now you don't get your bonus.

So be a man and deal with it. The rest of us do, when we get bad breaks, and we've had a lot more of them than you. And stop whining. Jesus Christ.

Geithner Plan is Fatally Flawed Pt. 4

Great dissection by an Carolyn Betts, an RTC veteran:

If non-performing assets are to be sold to private investors, those private investors will only pay the best possible price if they have access to reliable data upon which to base their bids. I talked to a senior partner in a DC-based law firm who knows everything there is to know about what goes on in Washington having to do with mortgages. He said he is unaware of any significant efforts to hire government contractors to undertake the type of loan due diligence, review, data collection and valuation that would have to be done to conduct sales of the “TARP” assets that have been talked about since the fall of last year and earlier.

I talked to a national legal temp firm and asked whether there was any work available in toxic asset review. The recruiter said that her firm had expected to see a lot of that type of work coming down the pike, but there is nothing of that type out there so far. By all accounts, government regulators like FDIC and SEC are short of funds, and FDIC is hiring a lot of bank examiners. If you go on USAJobs and look for job openings with FDIC and the Commodity Futures Trading Commission, there are few or no openings for experts in valuing or otherwise dealing with non-performing loans.

We have been talking about the bursting of the housing bubble for over a year now, and there seems to be no one taking any initiative in categorizing, stress-testing, quantifying, defining, analyzing, valuing or otherwise collecting information to define the problem. And if any of this is going on secretly and behind closed doors in Washington, then shame on them. Real estate is all local. And if we don’t know what the problem is, any proposed solution will fail.

The plan is a sham. The only people with any incentive to buy distressed assets of unknown value are the banks themselves, especially when for 6% down they can get billions of Dollars of bad loans off their books, at taxpayer's expense.

It Sounds So Purdy, in the Queen's English, As He's Telling You to go F*ck Yourself!

Daniel Hannan, conservative MP, lets Gordon Brown have it, in public:



Of course, I would not agree with Mr. Hannan that the private sector is always productive, as the last few months have clearly shown, or that you can't spend you way our of a recession. You clearly can, but it's dangerous when you have to add to an already massive debt in order to do so. You risk debasing your currency, which has already happened in the case of the Pound. That's the same state the US is in - it's hard to believe that the UK is even worse off than us. Anyway, the clip's gone viral on YouTube., and you can read Mr. Hannan's blog here.

Look At My Slow-Mo Pecs

Under The Bridge - Literal Video Version

Under The Bridge: Literal Video Version - watch more funny videos

The Other Side of the Coin

Interesting letter sent to the New York Times by a disappointed AIGFP manager:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

More Change You Can Stick in Your Crack Pipe and Smoke it! Pt. 2

From Counterpunch, a devastating critique of Obama's business as usual:

I was ready to add Michelle Obama’s Spring Equinox planting of a Kitchen Garden at the White House to the positive change list – an idea I fully support. But, then Alexander Cockburn immediately pointed out the idiocy of advocating fresh, home-grown vegetables while appointing a Monsanto whore as Secretary of Agriculture.

The appointment of former Iowa governor tom Vilsack, the first 2008 presidential primary contender to withdraw (and then go on to support Hilary Clinton) represents no change at all from the pattern of appointing Agriculture Secretaries from a pool of former farm state administrators – every one tied to the Genetically Modified food giants.

[snip]

Vilsack, Geithner, Emmanuel et al., at least got their jobs. Even the inept Janet Napolitano now heads up Fatherland, er Homeland Security. What about the rest of President Obama’s appointments?

Retired four-star Marine General Anthony C. Zinni, former Imperial commander in the Middle East and a fierce critic of the original Iraq Invasion plan, was promised the job as Ambassador to Iraq in late January. He even met with Secretary of State Clinton and she promised the job. VP Joe Biden, a guy who’s “I’m smarter than you” hubris is in the same league with Geithner and Summers, sent his congrats.

The general, who had the audacity to call for the resignation of Secretary of Defense Donald Rumsfeld back in the run-up to the invasion, was ultimately bounced from consideration. The out-spoken general, not one to go down without a fight, wrote in an e-mail “As a sorry offer to placate me, they offered ambassador to Saudi. I told them to stick it where the sun don’t shine.”

Charles Freeman was ousted as candidate to head the National Intelligence Council. The bleating from some of the braver Dems (read: non-office holders or ones from safe Districts) is that Freeman was another victim of the always-odious Israel Lobby. True enough. Yet, a quick examination shows that Freeman must not have been vetted. He was already under investigation by the Office of National Intelligence’s Inspector General due to his unsavory financial ties to China and Iran.

Freeman had been serving on the International Advisory Board of CNOOC, China’s state-owned oil company. During the election, the Obama Campaign made noise about Charlie Black, a senior McCain advisor. The lobbyist Black held CNOOC as one of his clients, which led to condemnations from the Obama Campaign that "many of his (McCain’s) top advisors lobbied for companies (CNOOC) doing business with Iran or otherwise have a vested interest in Iran."

Yet, while Freeman sat on the advisory board just last year, CNOOC was given sanctions by the US Treasury Department due to its involvement with drug trafficking and worker abuse in Burma.

At the same time that Freeman was cut loose, we found out that Obama’s aptly-named “Urban Czar” nominee Adolfo Carrion accepted free home remodeling from architects and contractors while he served as Bronx borough president. Once again, it’s hard to see how he was vetted, given the issue surfaced as far back as November 2006.

Really Bleak!

Not surprising, given the 0% family savings rate until late last year, but it's still jolting to see the statisctics in print. From Dr. Housing Bubble:

MarketWatch has an article looking at the fact that many Americans are one or two paychecks away from financial ruin:

“A MetLife study released last week found that 50% of Americans said they have only a one-month cushion — roughly two paychecks — or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

And it’s not just low-income earners who would find themselves financially challenged. Twenty-nine percent of those making $100,000 or more a year said they would have trouble paying the bills after more than a month of unemployment.

Meanwhile, more than four in 10 respondents told pollsters in a recent Pew Research Center study that job-related issues were the nation’s most important economic problem.

“Since October, mentions of other major economic issues have declined, as the public is increasingly focused on the job situation,” according to the Pew study.

Since July, the study noted, there was been a striking spike in the numbers of families making $100,000 or more who said it was difficult to find local jobs — 73% compared with 40% eight months ago.”

Read the above carefully. 1 in 2 Americans are 2 paychecks away from massive financial trouble. 1 in 4 would be on the financial edge after 2 weeks only. These are fully employed people. This is what I talked about in the silent depression that many are facing. If you look at the 8.1 percent headline unemployment number things don’t look so bad. But when you dig deeper into the data, you realize something is amiss. In fact, the study above highlights what many are feeling. Things are much worse than we are being led to believe. Why else would the Fed be printing money to the tune of trillions of dollars? You will also see in the survey that those with relatively good incomes are also worried about the economy. Over 1 in 4 with incomes of $100,000 said they would have trouble paying their bills after one-month of unemployment. How can that be you say? Well think about the bubble homes here in California. Say you bought a $500,000 home in California and make $100,000. You went no money down on some toxic mortgage that is now recasting. What does your balance sheet look like?

Monthly Net Pay: $6,022 (Married with no kids)

PITI: $3,000 to $3,500 depending on interest rate

Let us assume each person makes $50,000 a year. What if one person loses their job? That is it. You are now in the negative with only your PITI! What about your car payment? Food? Health insurance? Utility bills? You get the picture. And now that we know the bigger picture of the California employment situation, you can see why prices will now be falling because of more historical measures like the health of the economy instead of low interest rates.

Let us take a quick glance at the current situation:

February 2009 California employment data:

116,000 jobs lost in month (biggest number in 19 years)

1,950,000 million unemployed (up 824,000 from 1 year ago)

768,762 collecting unemployment insurance (up from 480,504 from 1 year ago)

You tell me how this is good for the housing market? The government through bailouts, fiscal stimulus, monetary programs, and every other imaginable bailout has committed over $9 trillion to the cause. You know how many $50,000 a year jobs we can buy with that for one year? 180,000,000. Even with the $1.2 trillion committed by the Fed with the TALF and buying treasuries to lower the interest rate, we could have literally bought 24,000,000 jobs at $50,000 for one year. We could have put everyone back to work for the price of making mortgages go back down to 4% and giving Wall Street another crony capitalist present. Money well spent right?

Matt Taibbi on the Financial Crisis

For once he's not making fun of Thomas Friedman:

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Geithner Plan is Fatally Flawed Pt. 3

The G Spot:

And, like Paul Krugman, I despair not merely because of the continuing A.I.G. follies, or the ongoing bailout debacle. I despair because, despite everything we now know, and despite the depth of rage that has been expressed from Americans of every conceivable type and ideology, the Obama administration seems determined to go forward with basically the same shitty bank rescue plan that the Bush administration tried, and failed, to foist upon us. It basically amounts to taking piles of money of earned by ordinary working Americans and forking it over by the shovelful to many of the most greedy, out-of-control, and dangerous corporate assholes in our nation.

Obama was this country's one great hope, but now I see all too clearly the potential that this administration could soon be going down in flames. Universal health care, the Employee Free Choice Act, an energy bill, court appointments -- all of that could be fading away in a puff of smoke, all too soon.

And it's all because Timmeh, and Larry, and most important of all, Barack -- have minds that have been warped by corporate propaganda, or souls that have been corrupted by power, or spirits that, for whatever reason, are pathetically timid -- and thus are unable to do the right thing. And not merely the right thing, but the only reasonable thing. Which is, of course, to tell the corporate elites to go fuck themselves, and start nationalizing the banks ASAP.

I pray that I am wrong. But the administration is rapidly heading in a very dangerous direction, and there's not a lot of time to change course. As of now at least, as Atrios says, it certainly looks as if all this is going to end very badly indeed.

Geithner Plan is Fatally Flawed Pt. 2

Animal Spirits' Bleak View:

The markets for toxic assets are frozen because they’re waiting for their bailout. The commercial banks couldn’t afford to mark their toxic assets down or sell them. Now the feds are going to provide for the banks to get somewhat higher than “market value” prices with their non-recourse leverage, but as Rolfe Winkler points out, who else without access to the funny money will be able to afford to pay the same prices? This newly liquid market could calcify quickly. Thus, the feds will have to pump up all the markets for the next several years to help the hedge funds find suckers to sell this stuff to. Lots of luck. The current market prices are probably entirely rational, looking ahead to the tsunami of rate resets and probable defaults over the next twenty-four months.

This is financial fascism, perpetrated by the New York and Washington financial oligarchy centered on Goldman Sachs. If history rhymes, as these folks bankrupt the country and send the vast majority of Americans into heavily taxed wage-slave immiseration, with no sense of control whatsoever over their country’s government, the oligarchs will be looking for a war to send the youth of America off to fight and die in. Look for that in about ten years. But they may get themselves a revolution instead.

We now know that Barack Obama is no Franklin Roosevelt.

Geithner Plan is Fatally Flawed Pt. 1

Karl Denninger believes the potential for fraud is a design feature, not a flaw:

Let's say that I am a bank ("financial institution") with $100 billion in "toxic assets". I have them on my balance sheet at 80 cents on the dollar. The market has them marked at 30 cents. We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let's assume that they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss - perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action. I therefore will not sell for 30 cents so long as I have any belief whatsoever that the cash flow - or any government subsidy - will exceed that value.

If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable loss:

• I become a "bidder" and "bid" on my own assets at 75 cents.
• I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.
• The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all.

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these assets are allowed to bid either directly or indirectly as it provides a means for banks to intentionally dump bad assets at a certain loss that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or more in losses onto the taxpayer, not through the operation of "bad luck" but rather through what amounts to a bid rigging operation.

The Smart People Do Not Like The Geithner Plan

Paul Krugman:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Ives Smith:

The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper.

Kinda Like Alien vs. Predator

From Karl Denninger's blog, The Market Ticker:

This promises to get amusing; two headlines:

"Countrywide sues AIG unit over its failure to cover loan losses"

and

"AIG Sues Countrywide for Misrepresenting Mortgages"

You can't make stuff like this up.

The New Face of Crime

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AIG Chupa!

Nice, technical article by "A Credit Trader" about how AIG screwed the pooch:

The broad outlines of the story are the following. As part of an effort to expand its insurance underwriting business, AIG (more precisely, London-based AIG Financial Products) began writing protection on supersenior (senior to AAA) ABS (Asset-Backed Securities) CDOs (Collateralized Debt Obligations). By the time lax underwriting standards led AIG to get out of this business in 2005, it had sold some $560bn of protection.

By 2007 spreads had widened enough that counterparties started to demand that AIG post collateral on the trades, which by mid 2008 totaled over $16bn. Following its first and second quarterly losses of $5.3bn and $7.8bn, AIG, under pressure, adjusted the valuation methodology for its CDO portfolio (word at the time was the company was not mark-to-marking the trades) - leading to a further $8bn writedown. On September 15th - the Monday following the Lehman default, AIG’s rating was cut, effectively guaranteeing a bankruptcy of the company. Concernerned about the effect on world markets, the government stepped in with a bailout.

After some technical analysis of AIG's risk management, he concludes that AIG's insurance was worthless, and asks:

Did the banks realize the value of its protection held against AIG was zero? Of course they did - they aren’t as dumb as the media suggests. The reason they continued to pay the full market CDS offer (rather than a much lower level due to AIG’s massive wrong-wayness) to AIG was because they considered it a cost that allowed them to continue originating CDOs. If they could not offload super-senior risk to someone, their originating desks would be effectively shut down.

So, while the trading desks continued to buy super-senior protection from AIG, the risk management desks, realizing that the protection was effectively worthless, bought protection on AIG itself from the street and clients in large size. In fact, I would imagine the size they needed to buy was too large and they likely ended up buying puts on the AIG stock or just shorting outright. Let’s hope the Fed unwinds of AIG’s trades took into account the huge gains these banks took on the AIG hedges.

Good stuff!

About AIGFP

From a Talking Points Memo article about Joseph Cassano, the guy in charge of AIG Financial Products when they were nuking the world economy:

Michael Daly, at the NY Daily News, has put together the numbers. And as AIGFP was collapsing into hundreds of billion dollars of losses that the US taxpayer had to pick up, he managed to walk away with a cool $315 million.

[snip]

But here's an interesting little nugget I'd like to hear more about ...

Company auditor Joseph St. Denis became concerned about the Financial Products unit, but Cassano barred him from checking.

St. Denis later quoted Cassano as saying, "I have deliberately excluded you ... because I was concerned that you would pollute the process."

Kept the auditor from reviewing the books? If that's even close to true, that's a real problem.

Contracts Not Always "All That" to AIG

Talking Points Memo has been all over the AIG bonus story, with wonderful tidbits like this one, which shows that AIG has not always respected contracts with its employees in the past:

AIG was being sued for breach of contract by a former employee, Rob Feilbogen. Feilbogen claimed that when the unit he worked for, AIG Trading, was put under the control of Cassano's AIG Financial Products, he was informed in writing by an AIGFP executive that the company's previous guarantee to pay him a bonus of $1.3 million would no longer be operative. Feilbogen said he was told he would still be eligible for a bonus, but the $1.3 million figure would not be guaranteed.

In a letter to Cassano, Feilbogen insisted on receiving his $1.3 million bonus. In response, Cassano played hardball, telling Feilbogen he could agree to the new deal, or resign. Feilbogen continued to resist, and was soon informed by an AIGFP lawyer that his employment had been terminated "as a result of his decision to resign."

The lawsuit was eventually settled out of court. But the case suggests that whatever bonus agreement Feilbogen had, or claimed he had, with AIG, Cassano and his colleagues weren't inclined to treat it with much respect.

Warming Up the Printing Presses

Jack McHugh explains what it all means:

After months of threats, the Fed finally pushed the monetization button. Federal Reserve Chairman Bernanke and the rest of the FOMC decided today to embark upon the one strategy central bankers have always considered the dreaded last option — Quantitative Easing. It’s one thing for the Fed to push the “Easy” button and lower rates or temporarily inject reserves into the banking system, but to push the “QE” button (creating currency out of thin air with which to purchase assets) is an action reserved for only the direst of circumstances. If such a device truly existed in the Board room of the Eccles building, it would be a red button under glass with a “Press Only in Case of Emergency” warning stenciled underneath. That market participants responded to this monetary jolt by buying stocks, bonds, and precious metals while thumping the dollar is not a surprise. How investors react over the longer term to these actions and the inevitable unintended consequences will be far less easy to predict.

Orlov Gloom & Doom

Hard-Working, Good at Math...

In direct counterpoint to the preceding post, Asia Times sees an impending Dollar collapse:

For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.

Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.

Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.

Run!