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.

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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.

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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!

Sheperd Smith LOVES Glenn Beck!

About the Fiat Moneys...

Very interesting, very detailed newsletter from Hayman Advisors, crafty fund managers who have seen some hefty gains in the last few years. Hayman goes into great detail about the perils of fiat money. He quotes a 1966 paper by Alan Greenspan, written before he quite clearly lost his head:

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the bank accept in place of tangible assets and treat as if they were an actual deposit, i.e., the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government‐created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

One of the most interesting points the paper makes is that the US is in relatively good shape, that the rest of the world is even more leveraged than the US:

The silver lining in our research is that the U.S. is one of the least levered countries in the world! Just saying that puts a bit of fear into me, but it is true. The U.S. is less levered and less exposed to radical economic deterioration than Western Europe. It is also far less dependent than East Asia on worldwide trade that is a byproduct of the net aggregate demand that previously emanated from the U.S. and other parts of the developed world. East Asia is quickly catching up to Central and Eastern Europe as the most afflicted region of the global economy.

There is also this neat tidbit:

To the best of our knowledge, there has only been 160,000 metric tons of gold EVER mined in the world. At $950 per ounce, all of the gold in the world would be worth $4.887 trillion dollars. On the other hand, we estimate that there is roughly $60 trillion of fiat money (including currencies, deposits, savings, money markets and CDs) in the world. Given the fact that world governments are caught with so much credit market leverage and losses, we believe that they will – in true Keynesian color – attempt to print their way out of this mess. If this occurs, you have to ask yourself: How many of people do you think it will take to begin to question the value of paper currency when it is being debased in an attempt to save world governments? If a small fraction of them stop believing, where will they go to preserve their wealth? My guess is the U.S. dollar and precious metals.

Read the whole thing. It's not short, but it is chock-full of good stuff!

David Seaton, Great as Usual!

Just beautiful:

Universal health care, free university education for all, a more realistic foreign policy, freeing science from superstition... All of these Obama initiatives not only sound good, they sound wonderful, thrilling.

But somehow, at this moment, the new president and his government's lovely initiatives mostly remind me of the pediatricians and the nurses at a children's cancer ward organizing a big Christmas party... for the summer.

Aside from Santa Claus, the doctors don't know who else will still be around to decorate the tree, but at least thinking about the future goodies takes our minds off of our poor little, pale, bald heads.

For, truly, at this point it is not just "it's the economy, stupid", it is more like "it's the economy, dear Jesus".

Greenspan Still Soesn't Get It!

In a typically cryptic March 11 op-ed in the Wall Street Journal, Alan Greenspan, who most right-thinking people blame for a large part of the current economic crisis, attempts to defend his legacy:

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

In response, Tim Iacono, from The Mess That Greenspan Made, skewers him pretty good, as Friedman died in 2006 and therefore did not live to see how "difference of kind" it actually became:

That's just pathetic when you think about it...

Even after the recent admonishment from the late Milton Friedman's long-time partner Anna Schwartz as documented in "A 92-year old finger pointed squarely at the Fed", he has the chutzpah to cite favorable words from 2006.

Tom then quotes other folks who take issue with Greenspan's feeble defense, and who stick the knife in further. I particularly like this, from Ian Shephardson, quoted in the LA Times:

"Mr. Greenspan lauded lenders’ ‘innovations.’ The number of subprime ARMs rose more than ninefold from late 2000 until the peak in mid-2007, with three-quarters of the increase coming between mid-2003 and mid-2005.

"The delinquency rate on these loans, by the way, now stands at 24.2% and it is still rising rapidly. Prime fixed-rate deliquencies are at 3.92%.

"Mr. Greenspan ought to have used the pages of the Journal to apologize to the nation. Instead, his piece will stand as a testament to his hubris, or perhaps his delusions."

As Ralph very famously said in Groundhog Day, "I think both."

Jon Stewart Pwns Jim Cramer!

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The Kunstler Agrees!

James Howard Kunstler agrees that Obama has to do more, and soon, before events spiral out of control:

Meanwhile, if the buzz on the blogosphere is a measure of anything -- and I think it is -- then a new consensus is forming out there about where to start doing things differently. Unfortunately after less than two months in office, President Obama finds himself awkwardly behind-the-curve on this. It begins with the understanding that a general bank rescue is hopeless and, going a step further, that the people who caused the train wreck of "innovative" securities have to be prosecuted. The public's collective voice on this is muted but growing. It has been muted by the general air of blackmail that the banks have used to enthrall policy and opinion -- the "too big to fail" idea -- in effect holding the nation's future for ransom.

[snip]

The bigger question for now is whether any of these authorities will act effectively before the public simply goes apeshit and starts burning down Greenwich, Connecticut. The dangerous shift in public mood is liable to occur with shocking swiftness, in the manner of "phase change," where one moment you see a bewildered bunch of flabby clown-citizens vacuously enraptured by "American Idol," and the next moment they are transformed into a vicious mob hoisting flaming brands to the window treatments of a hedge funder's McMansion. The moment of opportunity for avoiding that outcome is looking sickeningly slim right now.
Another thing that President Obama can set into motion anytime -- and pull himself back to the head of the curve of leadership -- is to either by executive order or by proposal to congress, shut down the credit default swap system for a period of time while procedures are drawn up to place all these dubious contracts in a "clearing" market, where the holders of them will have to come clean about what they're sitting on. The lack of this procedure is allowing zombie banks to hold the United States hostage for never-ending bail-out ransoms. None of these banks are going to survive another six months anyway, so the basic blackmail motif that the whole money system will collapse if ransoms are not paid is a bluff that has to be called sooner or later in any case. So Mr. Obama might as well get on with it.
Once these two matters are dealt with -- an earnest start-up of prosecutions and disabling the credit default swap blackmail racket -- then perhaps a stressed-out and impoverished public might be induced to not go apeshit and instead get on with the mighty task of rebuilding our nation along lines that have a plausible future.

Exactly How and Why Credit Default Swaps S*ck So Incredibly Much!

Karl Denninger explains:

I buy a CDS (Credit Default Swap) on GE (a few weeks ago) for a couple hundred basis points ($200,000 per $10 million).

The SELLER of that CDS protects against possibly having to pay by shorting whatever he can against that short credit position. This means he buys PUTs, he shorts the common, he does whatever he needs to in order to lay off that risk. He does this because if GE goes bankrupt their stock would presumably go to zero; therefore, if he has a potential $10 million exposure on the CDS he will short $10 million face value of the common stock, or buy enough PUTs to pay him $10 million if the stock goes to zero.

The PUT writer (assuming he buys PUTs), being a market-maker, will in turn short the common to lay off the risk as well.

This hammers the stock price which then reflects into the pricing models for the CDS, driving them higher.

This cycle repeats; unfortunately credit rating models include market cap as one of their inputs, which causes a credit downgrade (eventually.)

That in turn adds more pressure.

This cycle is repeated until the company is destroyed.

Why is this not a problem with options and straight short sales?

Because with both straight short sales and PUT purchases the short side is required to post margin every night, and if the price goes the wrong way they get an immediate margin call and are required to buy that position back at a loss. That in turn puts pressure UPWARDS on share price and arrests the slide.

As such the people selling short (whether stock or listed options) do not dare short in unlimited amounts, because if they get caught on the wrong side of a squeeze they are dead.

The enforcement of risk against the people betting on a bankruptcy through regulated instruments puts a natural limit on their activity and prevents an unwarranted "death spiral".

But in the CDS world there is no mark-to-market margin supervision, because there is no central counterparty supervising exposure and demanding it.

As a consequence it is only the counterparty and the written document that can demand collateral posting and usually that is either on an infrequent schedule (monthly, quarterly, annually or on an "event") or in some cases not at all provided the writer maintains some specific credit rating criteria themselves!

Without nightly margin supervision on CDS short positions these vehicles have turned into the means to launch monstrous focused attacks on specific companies; the buyer has limited risk and virtually unlimited reward.

This is exactly like me buying fire insurance on your house, and in addition I can name the amount of insurance I want to buy, even exceeding the house's value!

How nervous will you get if I buy $10 million in "fire insurance" against your $100,000 bungalow and then start stacking up gasoline cans in my driveway?

As a direct and proximate cause of this ability to distort the market it becomes possible to create self-fulfilling prophecies almost on demand, with the people doing it profiting handsomely - at the expense of American workers and otherwise-sound companies.

What Obama Must Do Pt. 2

Karl Denninger thinks things are looking pretty bleak. He addresses Obama in his blog, Market Ticker:

Simply put, you must act now. If the SPX really does have a "3" handle in the next six to seven weeks your goal of "saving or creating four million jobs" will be immaterial, as half of the S&P 500 will collapse, we will have 20 million more Americans thrown out of work, unemployment will exceed 20% and we will have a Depression worse than the 1930s. The Government does not have the borrowing capacity to backstop this event - ergo, you must insure it does not happen if you wish to avoid this catastrophe.

Simply put all of the following must happen right here, right now, today:

* The CDS casino must be closed today. The AIG revelations are an outrage - we are sending tens of billions of dollars into AIG to prop up US and foreign banks as a consequence of these swaps? This can be stopped with the stroke of a pen and must happen now. Let the ISDA and bankers scream - suspend all CDS contracts until they are on an exchange with a central counterparty and margin has been established and proved. Those for which margin can't be established or proved are void as fraudulent upon issue; the money never existed to pay them off. This charade called CDS must end.
* You must pledge to send the FBI after everyone involved in the embezzlement during the previous ten and more years, whether they be borrowers, lenders, bankers or otherwise. Liars on mortgage applications, liars in marketing these securities, liars all around - all must be prosecuted.
* We must separate investment and commercial banking services. Banking is a utility function and it must be safe. We had it right with Glass-Steagall. Make it a priority to reinstate that law and force the breakup of the monsters that have led us to this cliff. If an investment bank wants to play "hedge fund" or "proprietary trading", fine - but if they blow up they must not be allowed to sink our economy and banking system.
* The Fed must be directed to open their kimono and disclose everything they are doing, daily, including what they're taking in, from whom, how it is being valued and how it is being "haircut" or margined. Equity investments made by The Fed are clearly unlawful under The Federal Reserve Act and must be immediately disgorged. If The Fed doesn't like living within the law, then Treasury must go around them and issue Treasury Notes itself; their franchise exists at our pleasure, not the other way around.
* The ongoing charade in our housing market must end. The FHA's rate of "first payment defaults" has tripled in the last year. Safe mortgages require a significant down payment - at least 10% and more commonly 20% - which means no seller-funded down payment assistance and the end of the 3% FHA down payment. Keep the VA program for our service people but the rest must be scrapped. FHA insured mortgages are a good thing but we must drive the fraudsters out of the mortgage system and prosecute them - we're not doing it, and it is dramatically exacerbating this crisis.
* Insist that every firm that is traded on a public exchange in The United States produce a consolidated balance sheet and financials without exception - no off-balance sheet games and no BS or tricks. ALL "assets" must be disclosed along with their pricing models. Any firm that refuses is delisted immediately.

[snip]

The underlying problem is confidence Mr. President, and that is something you can fix right here, right now, today.

Lock up the fraudsters, shut down the bad mortgage lending programs, close the CDS casino until it is placed under regulation and force the firms traded in this nation to produce truthful and complete financial statements.

Pledge to reinstate Glass-Steagall.

In short, remove The Bezzle and you restore confidence, breaking the back of this downward spiral.

This is all true. It is time to stop talking about taking bold steps and actually take some bold steps.

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Iceland Go Boom!

Funny, culturally insensitive article about the Iceland financial meltdown from Vanity Fair:

Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.

Interestingly, even after reading this, I'm not sure I understand exactly what happened.

Irrational Exuberance!

A T-Mobile ad filmed at Liverpool Street Station in London:

"Wealthy Idiots Meet Idiot Reporter"

Awesome post from The New Republic:

I've seen a lot of dumb news reports in my life, but I'm not sure anything can quite match this one from ABC News. The premise of the report is this: Barack Obama plans to raise taxes on people who make more than $250,000, so the reporter has gone and found people who earn a little more than that sum who plan to decrease their income so that they come in underneath the magic line.

Now, the obvious objection here is that the tax code doesn't work that way. A tax increase affects the marginal dollar that a person gains. That's means only every dollar over $250,000 is taxed at a higher rate. Obama is not proposing a tax system whereby somebody who goes from $249,999 to $250,000 suddenly becomes poorer. Nobody has ever enacted a tax hike like that in the history of the United States.

That doesn't stop ABC News' intrepid reporter. This story has to be read to be believed.

Great Krugman Piece

Krugman is none too happy with the lack of focus in the Obama response to the economic crisis, and quotes other people who are none too happy as well:

On this side of the Atlantic, Tim Geithner seems committed to the view that banks should stay private even if they’re bankrupt, because — well, just because. James Kwak is driven to exasperation:

To be blunt, it sounded like the “private is better” mantra we heard from the Bush administration, and (to a slightly less extent) the Clinton administration before them. Sure, most people agree you don’t want all individual lending decisions being made by bureaucrats in Washington, but that’s just a straw man. There are valid reasons to debate whether nationalization is the best solution; in particular, if you were to take over Citigroup, even for a short period of time, would that immediately weaken Bank of America so much that you would be forced to take it over the next day? And what about JPMorgan Chase? But that’s not what Geithner said. He said “private is better.”

And so is the extremely moderate Tim Duy, over the insistence of policymakers that the “true value” of assets is higher than anything the market is actually willing to pay:

Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply “bad.” For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.

And we have the spectacle of James Baker — James Baker! — attacking the Obama administration from the left, calling for temporary nationalization of zombie banks as part of the recapitalization process.

The sickening feeling of drift — the sense that policymakers are refusing to face hard facts, and are dithering while the world economy burns — just keeps getting stronger.

Et Tu James A. Baker, III?

Wow, even James Baker thinks the big banks should be temporarily nationalized. From an op ed in the Financial Times:

This approach is not pretty or easy. It will cost a lot of money, with the lion’s share coming from US taxpayers, at least in the short to medium term. But the alternative – a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road – could truly be historic folly.

Blast From the Past

From the San Diego Union-Tribune way back in 2004, a report on a meeting of the Institute for International Economics held here in San Diego:

Paul Volcker, former chairman of the Federal Reserve Board and a Republican, says we face a 75 percent chance of a financial crisis within five years. Robert Rubin, former economic chief under President Clinton, says we are confronting "a day of serious reckoning" and that "the traditional immunity of advanced countries like America to a Third World-style crisis isn't a birthright."

But perhaps Peter Peterson, former chairman of the Federal Reserve Bank in New York, chairman of The Blackstone Group and a moderate Republican, put it most succinctly. "We are not paying our own way," he says. "As a nation, we are running on empty. If the ultimate test of a moral society is the heritage it leaves to its grandchildren, I would say we are failing that test."

I did not know Volcker was so smart. Even Rubin saw storm clouds ahead. Nuts!

How Bank of America Screwed the Pooch With the Merrill Lynch Purchase

Cool article in Forbes looks at seven ways Bank of America failed its fiduciary duties to its shareholders in its purchase of Merrill Lynch:

By definition, these key decision makers are required to exercise a fiduciary duty to put the interests of shareholders first in all corporate decisions. When executives or boards fail to uphold this standard of loyalty, care and due diligence, shareholders can be financially harmed. Since the initial merger announcement last September, they have lost over $150 billion, and the sheer speed in which these sizable losses occurred, warrant further investigation.

And the people who blew it are still in charge!

"Produce the Note"

Found this clip from GMA on the website Blown Mortgage:



Blown Mortgage comments: Now, to me this just seems like a way to increase the costs of banks which in the end make home lending more expensive. And the woman who refinanced her home from $39,000 to almost $150,000 isn’t the shining example of responsibility; but when you’re desperate you’re desperate. Regardless if you’re behind on your payments or not you’re entitled to certain rights. One of those rights is the right to a copy of the note your signed.

Simple Splanation of the Financial Mess

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Exactly How AIG Came To Suck So Many Donkey Balls

Great article in the New York Times. A few interesting graphs:

To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.

Read all of it - it's pretty nuts!