Happy Days Are Here Again?

Barry Ritholtz at The Big Picture passes on a rumor of enormous profits at Goldman Sachs for Q1 in Taxpayer Funded GS Profits:

Karl Denninger notes that a nasty rumor is circulating about Goldman Sachs amongst observers of the Street. Allegedly, GS is about to report their second-best quarter in history, +$12 billion or so…

In this era of financial disasters, credit crisis, and recession, how is that possible?

Easy. You — and your grandkids — are the ones who paid for it:

“The fact that they (like so many others) are being paid by the taxpayer through AIG’s “conduit” for losses that didn’t (yet) happen at 100 cents on the dollar might be the basic math.

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were “fully hedged” against a potential counterparty default by AIG. One wonders - was that “hedge” to be short the equity on AIG itself, perhaps?

Why is this important?

Because if that’s how Goldman hedged they got paid twice and the taxpayer literally got robbed. Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not “polite inquiries.”

DoctoRx here. If these rumors are more or less true, then the Street will try to tell us that the past year was just a bad dream. Those who know better will know that political influence is everything, and the Government remains committed to a healthy financial sector uber alles, no matter how many tent cities spring up across from state Capitols. This was precisely the Hoover strategy.

However, now the Federal Reserve notes that are the medium of exchange for cash transactions are increasingly backed by junk bonds, and unlike in the Great Crash, the U. S. Government is heavily indebted, both to foreign powers and via all sorts of explicit promises to its own population.

It is said that a financial crash seems to take forever to occur, and then it occurs suddenly. The sham "stress tests" and the injustice of PPIP appear to be taking forever to be finalized/announced, but please consider what actually happens when the Administration can't keep the lid on the (likely) fact that if it takes its SIVs back on-balance sheet, then Citi is insolvent even on a discounted cash flow basis re its CDOs and related assets? Will there be a run on Citi? BofA?

As Elizabeth Warren, head of the Congressional Oversight Panel re TARP, keeps pointing out, per the interview Keeping Tabs on the Bailout (thanks to NC link), Treasury is unresponsive to oversight and has no clear plan for its actions. Things are just kind of happening . . . or not happening . . .the opposite of the decisive way FDR dealt with the banking crisis, or even the way the U. S. dealt with the S&L crisis when it finally could not be ignored.

At this time of shrunken profitability for the nation, the idea that the industry- Big Finance- that led the country into this mess would be subsidized to have in some cases record profits, just to continue the same charades, is unconscionable. But if appearances are correct- which they may well not be- it is in fact happening.


Copyright (C) Long Lake LLC 2009

Everything Necessary

Before getting to the largely-ignored big news of the week, please consider the following quote from Nicholas Sarkozy around the time of the G20 meeting:

 We must do everything necessary for world growth.

One must ask:  Why?  There is a big picture question, which is why "world growth", whatever exactly that is, is so necessary.  The more practical question is, why must we "do everything necessary" for this growth?  Does 'everything' mean complete debasement of the currency?  Does it mean a real risk of national bankruptcy?  

The mind rebels.  Certainly, richer beats poorer, but 'everything' for the world?  Is it so horrible if the world rests for a year and only produces the same as the year before?  The "Greens" would say, great, and in fact, some commentary is that Britain should shed half its population to be ecologically correct.

In this vein of questioning the received words from on high (PPIP and supporting Big Finance at (almost?) any cost), the Congressional Oversight Panel ("COP") has released its April Oversight Report:  Assessing Treasury's Strategy:  Six Months of TARP.

It is clear from key sections of the report, from the Executive Summary, and from the emphasis of the video remarks of the Chair, Elizabeth Warren, that she is sympathetic to nationalization of insolvent banks or at least receivership, rather than PPIP and subsidies without end (the Japanese response for years).

There is a lot here, and the report is actually fairly brief.  For those who would like a review of 

bank crises going back to the Great Depression, this report has a cogent and very readable summary.  There are also minority (Republican) reports, which I have not read because a summary of them made them seem to be overly industry-friendly, and since we have an industry-friendly Treasury Secretary and President, who needs a Republican critique?

Finally, the New York Times reports tonight that the Administration is trying to defuse complaints about TARP by letting investors in on the deal.  In one sense, great!  I can take advantage of my fellow taxpayers, because I have investable funds.  But wrong is wrong, and PPIP is a disgraceful giveaway of a free option to investors, who will share the upside with the Government/FDIC but will share little of the downside.  Also, PPIP completely corrupts the FDIC in a variety of ways and is grossly unfair to small financial institutions that only or primarily do banking rather than financial supermarket stuff a la the big bad subsidees.

In the meantime, is the stock market climbing a wall of worry?  Certainly even bears must remember the several large rallies the Japanese stock market had before it fell recently to almost a 30 year low.

Copyright (C) Long Lake LLC 2009

"Something Really Awful in Washington"

Who is Elizabeth Warren and what has she been saying?

First question.  Ms. Warren is Chairperson of the Congressional Oversight Panel watching the TARP bailout funds.  She is a law professor at Harvard.  She was a blogger for, first, the Huffington Post and then TPMMuckraker, both definitively left-of-center websites, so one can assume that, as Howard Dean once said, she belongs to the Democratic wing of the Democratic Party.  

Second question.  What has she been saying about Treasury and her mission to watch the TARP program (and presumably PPIP)?

Ignoring leaks of what an upcoming report may say and recommend, here is a report of an interview she did with (liberal) interviewer Rachel Maddow (from TPMMuckraker):

Warren: Is AIG Bailout Money Going To Pay Off "Speculators"?

By Zachary Roth - March 11, 2009, 12:31PM

Looks like you can add Elizabeth Warren to the growing list of people who want the federal government to tell us more about that latest AIG bailout.

Warren, who chairs the panel that's monitoring bailout spending on behalf of Congress, went on MSNBC's Rachel Maddow Show last night, and all but demanded more disclosure from Treasury Secretary Tim Geithner.

Maddow raised the fact that AIG has reportedly passed bailout money onto its counterparties on those credit default swaps, and that it currently has four PR firms on its payroll. In response, Warren, appearing perhaps more frustrated than in any of her other numerous media appearances over the last few most (Ed: typo:  "months"?), responded:

"It doesn't seem strange to me, and the fact that it doesn't seem strange to me tells you something really awful about what it's been like to be in Washington for the last few months.

These financial institutions have figured out that they're bleeding red ink, and their best solution is to persuade the Treasury Department to give them lots of money. And when the Treasury Department starts to say, there may be some problems here, the American people don't want to go along with this, then lets see if we can spin the American people on it.

The Treasury Department has not asked for the critical information about where this money has gone, from AIG. We've poured the money into AIG, and it has somehow poured it out the other end. The Treasury Department has not asked, and has not revealed, what it is that's happening with that money.

And so as long as that's the case, maybe some of the money is going to other financial institutions. Maybe some of the money is going to pay off these credit default swaps that are essential for saving other institutions that have counted on it for credit and insurance. And maybe some of where this money is going is just off to speculators, who just played the game of speculation, and would now like to collect a hundred cents on the dollar form their speculations, and collect it indirectly from the American taxpayer. . ."

(TPM CONTINUING):  . . . Reports by Warren's panel have grown increasingly critical of Treasury's level of transparency and accountability in regard to the bailout.  (Emphasis added)

This is disconcerting.  We know that AIG itself (not Treasury) released data on where it funneled its bailout money, and as soon as it released this info (on a Sunday afternoon!), the President and Congressional leaders stirred up a faux outrage to divert the public from that scandal and instead made villains of some AIG employees who received bonuses of a trivial amount relative to the tens of billions of dollars that went to Deutsche Bank and Goldman Sachs et al.  Thus we can be certain that Treasury is working in concert with the Establishment to deceive the public on the extent of the looting.  This is of a piece with the post yesterday displaying the entire transcript of William Black on the Bill Moyers show.

Here is a strange situation.  A President was elected who was rated the most liberal Senator in the year 2007.  He embraces every liberal orthodoxy re climate change, Guantanamo, embryonic stem cell research, deficit spending, etc., except the policies which are core for the allegedly discredited Bush policies:  foreign wars and financial cronyism.  He ramps up the war in Pak-ghanistan and gives the banksters all they want.  The critics of these Big Finance giveaways now come from his left flank:  Ms. Warren, Paul Krugman, Yves Smith of Naked Capitalism, or from people of uncertain political leanings (so far as I know) but not known to be conservatives, such as Simon Johnson and Kenneth Rogoff.

His early actions suggest that Barack Obama was sold to America as a new face by the Establishment to perpetuate its interests.  He has, however, the thinnest resume of any President in memory.  What happens next is therefore even more uncertain than usual.

Most of us who are active in the markets cannot wait for politics to "go away" as it did throughout most of the Reagan-Bush I-Clinton years, when investors and speculators focused primarily on the markets, the economy, the Fed, etc.  So long as the White House and Congress, with their obvious immense power to affect sentiment in the short run and to affect the economy, are so massively involved in so many aspects of the economy, along with the most politicized and manipulative Fed in over 30 years and perhaps in history, an old saw may be relevant:

"Making predictions is difficult, especially about the future." 

If Elizabeth Warren cannot get good information out of the agency she is overseeing, then you should consider NOT TRADING the markets.  "Anything goes."  Right now what is going, going, gone is the core of democracy:  openness and fair dealing.  Trying to guess the price of anything from day to day or week to week is impossible in such an environment.  Perhaps that's what Nouriel Roubini is signaling with his post from 2 days ago that he is essentially invested in nothing but cash, along with the report that Ray Dalio of Bridgewater is ignoring stocks from either the long side or the short side for the nonce.

Copyright (C) Long Lake LLC 2009

Warren Commission Redux: Tim's Time Coming Close?

Courtesy of Jesse's Cafe Americain comes notice of this blockbuster out of the Guardian in the UK that the Harvard lawyer Elizabeth Warren is going to blast one of Harvard Law's own, Barack Obama (through the vehicle of Timothy Geithner) in (no link as the article is provided in its entirety:

US watchdog calls for bank executives to be sacked

• James Doran in New York
• The Observer, Sunday 5 April 2009

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

If the article is true, this is the first bit of common sense to come out of (semi-?) officialdom, but nonetheless it may be difficult for the powers that be to ignore the second Warren Commission's findings.

More to the point, Timothy Geithner was certainly the worst NY Fed-head in many years, if not the worst ever.  He recently groveled before Congress rather than defend his regulatory record as Wall Street ran riot since he took over the NY Fed in 2003.  He is certainly the worst Treasury Secretary since Hank Paulson (!); and in a more serious vein, the PPIP is a disastrous plan that is clearly only good for the financial community.  PPIP corrupts FDIC and disadvantages banks that are solely banks by forcing them to subsidize financial supermarkets that happen to own banks, such as Citigroup and BofA.  At least Paulson could claim in the late summer and fall that he had a sudden set of catastrophes.   Geithner cannot claim anything of that nature and cannot claim that he needed time to get up to speed. 

Barack Obama is no longer Senator Obama.  Mr. Obama does not happen to just live at 1600 Pennsylvania Avenue while Tim Geithner makes financial policy.  In a crisis, the President makes policy.  The policy buck and the bailout bucks stop with the President.  As stated at EBR several times, Barack Obama is no FDR.  FDR came to the White House prepared for the immensity of the crisis and took actions immediately.  Those actions were successful.  Talk that his 1932 election might be the country's last subsided, the stock market tripled in 4 years, and we know the rest of the story.  That story is that the banksters came back and in 1999 were where they were in 1929 (or so), but this time they stayed around and gave us a second act with a second and worse set of bubbles popping in the past 2 years. 

The PPIP bailout is Barack Obama's policy.  Mr. Geithner is obviously just a tool.  Let us hope for change in the administration's policies toward Big Finance.  That agent of change should be Barack Obama, who may, if the Guardian report is accurate, have a chance to reinvent himself by promptly firing Timothy Geithner and saying, as did Humphrey Bogart when told that he was wrong to have come to Casablanca for the waters, that he was "misinformed".