Wednesday, May 27, 2009

Human Sacrifice Before the Altar of Big Finance

On Jan. 6, I posted Land of the Setting Sun, which began: "We are Japan."

Matters are going from bad to worse regarding the cause of the current economic problems, Big Finance. Please stick with this post, which grew from a planned brief one into something longer, due to breaking news.

Along that unfortunate theme of chronic depression or near-depression in real estate and other markets, yesterday I posted, Everybody Knows That Housing is Bottoming, Right? Today (Tuesday) there is some new commentary and news worth reviewing. First, the Case-Shiller house price data for March came out, per Calculated Risk:

The Composite 20 index is off 31.4% from the peak, and off 2.2% in March.

Prices are still falling and will probably decline for some time. The second graph shows the Year over year change in both indices. (Emph. added. CR is superb on real estate; what he predicts quite generally happens.)

The Composite 10 is off 18.6% over the last year.

The Composite 20 is off 18.7% over the last year.

OK, so this is "backward looking". Let's look forward toward the coming housing and economic recovery, which the global stock markets are ebulliently doing, per the San Francisco Examiner, also courtesy of CR: Signs of more trouble ahead for housing market. Excerpts include:

Warren Buffett and Alan Greenspan say the housing market is near bottom.

Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.

But an array of serious pending issues undercuts the turnaround theorists. . .

Here is a rundown of key problems that could continue to undercut real estate.

Demand still softens

-- Rising unemployment.

- - No "move-up" buyers.

-- Tight credit. (Ed.: Actually, back to normal old-fashioned credit, such as requiring 20% down. In the Great Depression, 50% down was standard, and cash purchases were common.)

-- Homes still overpriced.

Supply likely to surge

-- Foreclosure moratoriums end.

-- Shadow inventory.

-- Walk-away underwater homeowners. (This section is a "must-read". The couple referenced may elicit mixed reactions in you.)

-- Loan modification shortfalls.

-- Option ARM, Alt-A time bombs.

-- High end taking a hit. "The mid- to upper-end housing market is sitting on the exact precipice that the lower-end market was sitting on in early 2008 . . ."

OK. The article is worth a read, but who can stand more and more of the same old bad stuff. Time for good banking news, per Bloomberg: JPMorgan’s WaMu Windfall Turns Bad Loans Into Income.

JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income. . . (Emph. added)

“It (the accounting rule) will benefit these guys (many banks) dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

The discounted assets purchased by JPMorgan and Wells Fargo make the stocks more attractive because they will spur an acceleration in profit growth, said Chris Armbruster, an analyst at Al Frank Asset Management Inc. in Laguna Beach, California.

“There’s definitely going to be some marks that were taken that were too extreme,” said Armbruster, whose firm oversees about $375 million. “It gives them a huge cushion or buffer to smooth out earnings.”

Let's translate. Banks that went bust, more or less, were taken over by politically-favored bank holding companies (BHCs). These BHCs were bailed out and are scheduled to have all the bad assets they want removed from their possession at unrealistically high prices with more massive taxpayer subsidies (via PPIP, see below). Now in a cynical sleight of hand, these same politically favored BHCs are scheduled to meet Wall Street's demanding standards for "acceleration in profit growth" or less demanding standards to "smooth out" alleged earnings simply because they undervalued the assets they purchased. NO economic earnings will have been created via this "accounting rule".

Like magic, the same guys who caused this global disaster are going to be able to pretend to be managers of growth stocks. Yet in the real world, there is no real recovery in residential housing, and commercial real estate, which is typically a late-cycle actor, is imploding, with NYC sublets down up to 67%.

Even at this hour, the news is coming fast and furious. Once again courtesy of CR, I see while writing this that the WSJ is reporting: Banks Aiming to Play Both Sides of Coin:

... Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program....

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.Federal officials haven't specified whether banks will be allowed to both buy and sell loans ...

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases...."

The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts," said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

Mr. Priore is being polite. The entire purpose of PPIP was to corruptly recapitalize the banks using, inter alia, the fiction that hundreds of billions of dollars of inventory that they own as assets/capital are suddenly "illiquid" rather than the truth that these assets have lost vast amounts of value that the BHCs and Mr. Obama (like Mr. Bush before him) don't wish to admit. That the BHCs want in on both sides PPIP proves the fact that the financial community wins coming and going from PPIP. The taxpayer loses. Period. Abe Lincoln would turn over in his grave. Government of, by and for the bank holding companies.

This is beyond revolting. The idea that Barack Obama is a populist is absurd. For the banks to even lobby for this concept shows how in control they are. The President has surrounded himself with hedge fund types such as Larry Summers. Tim ("triumph of the will") Geithner is such an incompetent tool that the WaPo has dumped big time on him, and his staff has gone over his head to the White House.

The economy, and more than the economy, of the United States are being sacrificed upon the altar of Big Finance, using voodoo economics and the Big Lie technique. A bleeding country cries out for relief.

Copyright (C) Long Lake LLC 2009

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