"They Probably Won't Be Making a Lot of New Loans"

From Bloomberg.com comes further news that the abusive PPIP program so detested by Econblog Review may be unraveling, in Dudley’s TALF Comments Add Signs of a PPIP Stall:

The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated. . .

His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds. The Federal Deposit Insurance Corp. yesterday delayed a test sale of bad loans held by U.S. banks that had been billed as a tryout for its role. . .

“We still need more” than the capital that banks have raised to revive commercial-mortgage lending, Russ Appel, a managing director at Praedium Group LLC, a New York-based real- estate-investment firm, said during the conference. “Until they start clearing the old loans, they probably won’t be making a lot of new loans.”

After the apparent demise of the PPIP-FDIC program for loans, banks will probably try to mainly off-load commercial mortgages that investors would be “fools” to take on, because the debt would be more troubled than it seems, said Barry Sternlicht, chief executive officer of Starwood Capital Group Global, LLC, a real-estate investor in Greenwich, Connecticut.

“The only things they’re going to try to sell is stuff you probably shouldn’t buy,” Sternlicht said, speaking on the same panel as Appel.

DoctoRx here. Mr. Appel got it both right and wrong. Yes, they probably won't make a lot of new loans. That much he got right. What he got very wrong was that his business prospers when new loans are made. Whether they are good loans doesn't matter to him. The last thing this country needs is new investment in commercial real estate!

The article goes on to prove the point made at EBR over and over. The point is that the entirety of the machinations have been a giant pump 'n dump scheme to push security prices up:

The TALF and PPIP plans contributed to a rally among many types of home-loan bonds. Typical prices for the most-senior prime-jumbo securities jumped to about 83 cents on the dollar on May 14, from about 63 cents March 19, before steadying, according to Barclays Capital. Similar bonds backed by Alt-A loans with a few years of fixed rates rose to 45 cents, from 35 cents, according to the bank’s reports.

Case closed, in my humble opinion.

Please stay away from Big Finance as much as possible for the next economic cycle; and consider making a political statement by doing your banking with the good guys, the small community banks that have been penalized by the authorities, who overtly favor the continued formation of a financial oligarchy.

Copyright (C) Long Lake LLC 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

Knives Coming Out for Geithner (and Obama Gets a Scrape) as PPIP Delay is Quietly Announced

The Washington Post has published an important piece blasting Tim Geithner that also provides the first evidence I have seen that the Public-Private Investment Program (PPIP) is going to be delayed. In At Geithner's Treasury, Key Decisions on Hold, there is the statement that:

Announced in early February, it (PPIP) may not launch until July, officials say.

Here are some of the specific criticisms, some of which are body blows:

But some of the officials also cite the Treasury's ad-hoc management, which is dominated by a small band of Geithner's counselors who coordinate rescue initiatives but lack formal authority to make decisions. Heavy involvement by the White House in Treasury affairs has further muddied the picture of who is responsible for key issues, the officials add.

I list this first because the second sentence above is an indirect but specific criticism of the Obama style of micromanagement. Comparison to Jimmy Carter is obvious. More on Geithner:

In March, Treasury officials clashed over a $15 billion initiative to use money from the federal bailout package to free up credit for small businesses. Geithner's counselors pressed to announce the program quickly, despite protests from the career staff members who said it would not work. Unable to raise the issue with Geithner himself, the staff members appealed directly to the White House but were rebuffed, according to sources familiar with the episode.

President Obama announced the program two months ago, and it is still struggling to get off the ground. Officials are looking to overhaul the proposal.

The Post goes on to criticize Geithner for micromanagement which is also ineffective:

And in the wake of the public firestorm over bonuses paid by American International Group, senior Treasury officials have been meeting several times a week all spring to review, one by one, the payments to the company's executives. But the time-consuming discussions have never resolved whether any of the executives should get paid.

Extraordinary. These guys are wasting their time reviewing individual bonuses- and not even making decisions?

More:

Still, some lawmakers and government officials said Geithner needs to be a stronger manager.

"No one knows how to get decisions made," said a senior government official familiar with the Treasury's inner workings.

The Post resumes the themes of White House micromanagement and related neutering of Geithner:

. . . the difference between the Treasury of former secretary Henry M. Paulson Jr. and Geithner's has been stark. Under Paulson, the department nearly always made its own decisions. The Bush White House, nearing the end of its tenure, hardly intervened.

But now, even minor matters, such as Web site design or news releases, are reviewed by the White House. Staff members detailed from the National Economic Council, reporting directly to Obama senior economist Lawrence H. Summers, roam the Treasury building. Treasury staff members working on restructuring the nation's automakers took much of their direction from the NEC, sources said.

Serious stuff when some at least implicit if not explicit comments favoring Bush/Paulson over Obama/Geithner make it into a WaPo article.

The article finishes with devastating comments about Geithner:

"People think he's very, very smart, but he has not exerted a management presence yet," added a source familiar with the Treasury's inner workings.

"He has not exerted a management presence yet." Wow. Finally:

"He's being stretched in a thousand directions . . . but I don't know if that absolves him of responsibility for management."

Yesterday, the Post, which is an unofficial house organ of the Democratic Party, wrapped the Pak-ghanistan War in the Flag, as commented upon here in Economy Due to Suffer as War Drums Beat More Loudly. The op-ed referred to therein was clearly a message from the White House. So, largely, was this article. Timothy Geithner is in over his head. This article strongly suggests that the powers-that-be in the administration are dissatisfied with his managerial competence.

Will Mr. Geithner declare victory over the financial crisis and move on to a lucrative job in Big Finance?

Copyright (C) Long Lake LLC 2009

New Research from the St. Louis Fed Appears to Add Academic Credibility to the Battle Against PPIP

The St. Louis Fed has just released a working paper that joins its neighbor, the K. C. Fed, in pushing back against Fed and Administration policies. First, let us recall that the K. C. Fed's chief, Thomas Hoenig, pulled no punches in joining much of the blogosphere when he testified before Congress that policy toward financial institutions was tilted far too much in favor of the companies rather than the taxpayer, as well as that there had been far too much of the Japan rather than the Stockholm syndrome in creating and then nurturing zombie banks.

Now the St. Louis Fed has come out with "A Simple Model of Trading and Pricing Risky Assets Under Ambiguity: Any Lessons for Policy-Makers?"

The abstract almost says it all from a policy standpoint:

The 2007-2008 financial crises (sic) has (or, "sic" the verb) made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has taught us that distress and lack of active trading can jump “around” between seemingly unconnected parts of the financial system contributing to transforming isolated shocks into systemic panic attacks. We develop a simple two-period model populated by both standard expected utility maximizers and by ambiguity-averse investors that trade in the market for a risky asset. We show that, provided there is a sufficient amount of ambiguity, market break-downs where large portions of traders withdraw from trading are endogeneous and may be triggered by modest re-assessments of the range of possible scenarios on the performance of individual securities. Risk premia (spreads) increase with the proportion of traders in the market who are averse to ambiguity. When we analyze the effect of policy actions, we find that when a market has fallen into a state of impaired liquidity, bringing the market back to orderly functioning through a reduction in the amount of perceived ambiguity may cause further reductions in equilibrium prices. Finally, our model provides stark indications against the idea that policy makers may be able to “inflate” their way out of a financial crisis. (emphasis added)

Your humble blogger has slogged through the lengthy paper, skipping the equations that a non-economist finds more than a mite obscure. It would appear that the St. Louis Fed has two policy objectives, the more topical one taking dead aim at PPIP.

One of the most important set-ups in the paper involves the situation in which SEUs (subjective expected utility) maximizers own securities which become illiquid due to a financial crisis. AA's (ambiguity averse) then enter the market with government assurance against a worst-case scenario. The authors state (pp. 36-37) for example that:

The implication is that starting from situations of SEU-only participation, it will take large jumps in "mu"-min (=minimum projected return, I believe-though never specifically defined) for the equilibrium to be significantly affected; however, when this happens, one can also expect a detrimental effect on risky asset prices. Interestingly and realistically, as the fraction of AA investors "alpha" increases, the threshold level mu-min required for inducing participation reduces, since now each AA agent has to bear a lower amount of risk. This is relatively surprising; even though the policy action consists of ruling out the worst possible scenarios increasing mu-min, for an action of sufficient magnitude its eventual effect on equilibrium prices will be negative and the cost of enforcing a participation equilibrium will consist of a higher risk premium. This means that when a market has fallen into a state of disruption (a SEU-only equilibrium), bringing the market back to higher liquidity and orderly functioning through a reduction in the amount of perceived ambiguity may actually go through further reductions in equilibrium prices. (emphasis added)

Later on p. 37, the authors summarize the above:

As we have seen, when a market has already broken down in terms of participation, trying to affect the perceived uncertainty by increasing mu-min may actually depress prices and inflate risk premia, although this policy can eventually raise liquidity and induce full participation. (emphasis added)

The above appears to describe the current situation in which the largest holders of CDOs and the like are faced with an auction to sell to risk-averse buyers, with government intermediation. Lower prices for the securities are projected. That would appear to describe the Public-Private Investment Program to a PPIP!

Regarding the different problem of the Fed's expanded balance sheet and inflation risks, in addition to the strong language in the abstract, the paper specifically addresses inflation in section 5.5.3., which contains the following (page 40):

Once more, inflation as a policy tool seems ineffective or perverse because it may induce limited participation and depress equilibrium real asset prices. . .

Therefore low inflation has only virtues, leading to steady, widespread participation, steady liquidity, and (with high probability) even to higher risky asset prices in real terms. Therefore, it seems that a sensible policy-maker interested in supporting a well-functioning, non-segmented asset market ought to reduce inflation.

The heartland is making itself heard. Let us hope that being "from Missouri" means something to Team O and Gentle Ben.


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

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".  

Yves Smith Says Team Obama Uses "Big Lie" Technique, and Other Unpleasantries of the Day

Today is another busy news day.

The Economic Cycle Research Institute is out with its monthly U. S. Future Inflation Gauge.  ECRI has maintained this measure for over 60 years.  It has fallen massively over the past 18 months and is back near its lowest level in history at 79.3, at about a 51-year low.  Inflation probably averaged 1% in the next 5 years after sinking to that level, only rising after the guns-and-butter Viet Nam era (1964 onward).

ECRI also reports another marginal uptick in its Weekly Leading Indicator, which remains well below its very low level of November 2008 and still at a very severe 22% below year-ago level.  This suggests a continued slowing of the economy through year-end, with stabilization at very low levels of economic activity.  

I intend to do a post on the ECRI and its usefulness, or lack of such, to investors, in the near future.

Consistent with the above, there is truly bad news behind the headlines of the Labor Department's unemployment report.  Not headlined are two data points.  The average supervisory work week has shrunk to a record low since records began in 1964:  33.2 hours.  

And, consistent with the lack of work available and the very low USFIG, January's unemployment number was revised upward substantially, from 655,000 to 741,000.

Labor Department's broadest measure of unemployment is U-6, which can be found on Table A-12 of the basic unemployment report available at www.bls.gov, shows that almost 1 in every 6 members of the labor force is either unemployed, underemployed or too discouraged by labor market conditions to bother actively looking for work.  While comps are difficult to obtain, it would appear that the definition of unemployment used in the 1930s is more like U-6 than the headline U-3 (8.5% in March).  Given that the Obama "stimulus" program has no relation to FDR's emergency work programs, it is virtually certain that U-6 will hit 18% sooner rather than later.

(Note also that ADP's March non-farm job loss count was 742,000, exactly the current Labor Dep't count of Jan. job losses.  The ADP and Labor numbers have tracked each other very well for some months now (www.adpemploymentreport.com); expect further downward revisions in the Labor numbers for Feb. and March, I'm afraid.)

Moving along to the blogosphere, it is interesting to observe how certain passionate critics of the Bush-Paulson approach to the financial crisis have stayed objective after Mr. Obama became President, and others have kind of sort of joined "Team O" while trying at the same time to be interesting and objective.

Amongst the former, I would note Mish at www.globaleconomicanalysis.blogspot.com.  He has a series of posts excoriating the PPIP and has not fallen for Team Obama hype.  Mish is of the Austrian school of economics and has an amazing track record of forecasting the economic downturn and the low-inflation/deflation environment.  He also is a darn good market timer.

Another blogger who was definitely in the Obama hope-change camp is Yves Smith of www.nakedcapitalism.com.  She has definitively changed her tune, and her site is currently displaying a variety of well-informed opinions and reports.  Here is a quote from Yves herself from the conclusion of today's post, Treasury Trying to Defend Bank Gaming of Public-Private Partnership:

The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.

Well!  Obama-phile no more, it would appear.

Finally, also on NC is the overlooked report that Hedge Fund Bridgewater Says No to Public Private Partnership Program:

Now illustrating our (Ed:  Yves'/NC's) latest concern, that the Treasury may turn out to be the Gang That Can't Shoot Straight, our ongoing reservation, that there may be no way to make the program work for banks and investors even with hefty government subsidies, may be coming to pass. . .

The turndown by Bridgewater is particularly significant.  (Ed: They only manage $80 B!)

Is this the beginning of the end for PPIP?

What Nouriel Roubini recently called the "Made-Off" economy, with Ponzi schemes built into the system of much greater scale than the Madoff one, is currently on a glide path to a 1995 level of economic activity, if one takes the numerical ECRI weekly leading indicator as predictive.  Given potent deflationary forces and "crowding out" of private borrowing by the massive projected Federal deficits, the outlook for business remains unexciting, and when brilliant thought leaders such as Yves Smith start describing Team Obama as using a technique associated with Team Hitler, one should watch out for the public to gradually adopt that viewpoint.

Copyright (C) Long Lake LLC 2009 

News Review

In these consequential times, there continue to be any number of reports comments from across the Web upon which to report.  These are predominantly from yesterday.  

First, from a Japan the stock market of which is surging, some record-low business readings (from RGE Monitor, subscription required):

• The closely-watched quarterly Tankan survey (Japan business outlook), released in March, showed sentiment among Japan’s largest manufacturers fell to a record-low
• The BoJ index gauging sentiment among big manufacturers slid to minus-58, more than double the minus-24 in the previous quarterly survey 
  
• This signaled companies are likely to cancel spending plans and cut more jobs, pushing the economy further into recession
• Development in Tankan survey is consistent with a sharp contraction in the Japanese economy driven mainly by weak exports and corporate capital expenditures
• Big manufacturers expect to slash their capital spending by 13.2% in the year to next March, a much bigger drop than the previous year’s 2.4%
• Tankan suggests GDP will contract sharply in Q1.

Next, some disquieting commentary from the Online WSJ re the PPIP:

Treasury's Very Private Asset Fund

The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible.

But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks. . .

"This is ugly," says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm. "As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury."

We have no idea if Treasury is playing favorites, but it certainly doesn't look good. All the more so given that some of these big players may have consulted informally with the Obama Administration as it was writing the plan. Not to mention that the big asset management companies that are most likely to land plum fund-management jobs are also the ones that have been most vocally praising the Treasury plan. (Treasury declined to comment.)

None of this bodes well for the bank rescue.

The banksters appear ready to party again.  Bankster-in-chief Geithner already has had enough of conservatism:

Geithner’s remarks reflect the view of some analysts that the worst of the economic downturn may be past, even as some banks are likely to fail and unemployment is set to worsen. The Treasury chief said the main danger is that banks and investors take too little risk and refrain from betting on a recovery.

One wonders if this is prudent advice.  Outside of a truly innovative product, what is in short supply that requires "betting"?  What about old-fashioned investing rather than gambling?

Meanwhile, Bloomberg.com had an interesting slant re the old debate about how much did Greeenspan mess things up while running the Fed, in (title misleading; Hitler of no real relevance to the article):

Hitler’s Specter Inspires Bill White to Battle With Greenspan

April 1 (Bloomberg) -- William White’s tussle with Alan Greenspan is spilling into their retirements as world leaders meet in London to try to prevent the next financial meltdown.

White challenged the former Federal Reserve chairman’s mantra that central bankers can’t effectively slow the causes of asset bubbles when he was chief economist at the Bank for International Settlements.

As heads of state gather for tomorrow’s Group of 20 summit, several former central bankers and regulators are advising them to advance the same arguments White has made for more than a decade: raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.

“We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance” in 1996, said White, a Canadian who has remained in Basel, Switzerland, since retiring from the BIS in June. “The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t.” . . .

“There has never been an instance, of which I’m aware, that leaning against the wind was successfully done,” Greenspan, 83, said in a Feb. 27 telephone interview. He added that spotting a bubble is easy. What’s hard is predicting when it will pop.

In fact, Greenspan used to say that bubbles could only be recognized in hindsight.  The old Fed from the 1950s used to stop bubbles from forming and popping by famously taking away the punch-bowl before partiers got drunk.  But that was when America was an exporting power, both in terms of capital and physical products; in other words, financial engineering had been deemed a failure given the Depression experience.  Given the obvious incorrectness of what Sir Alan is reported above to have said that leaning against the wind has never been successfully done by the Fed, we can only hope that he is not suffering from the early stages of dementia.

  Meanwhile, back on the home front, not all is going as advertised with the administration's plans to prop up the economy:

Federal Plan to Aid Small Businesses Is Flawed, Lenders Say

Officials Call It a Work in Progress

Two weeks after President Obama announced a $15 billion initiative to spark lending for small businesses, every major provider of these kinds of loans says the plan will not work as designed.

The conditions attached to the program, which require these financial firms to surrender ownership stakes to the government and limit executive pay, are so off-putting that these companies say they will not participate.

Industry officials and congressional sources said these issues were raised with the administration before the small-business initiative was unveiled. Nonetheless, administration officials accelerated the announcement, moving quickly to show they were using financial rescue funds to aid not only big Wall Street firms but Main Street businesses as well, sources familiar with the matter said.

Administration officials acknowledge the initiative is not yet ready and say they are reworking the proposal.

On the day of the unveiling, Obama said: "We will immediately unfreeze the secondary market for SBA [Small Business Administration] loans and increase the liquidity of community banks."

Oh well.  Just so Big Finance gets its gifts.  

While some stabilization at very low levels of production is occurring in auto and home sales, this is at an amazing cost to the Feds re Fannie/Freddie subsidies and from auto makers and dealers, using our money as well:  (from a Bloomberg.com article today) -

Annualized industry sales of cars and light trucks in the U.S. are forecast to fall below nine million in March, compared with 9.12 million in February, which was the lowest sales figure since 1981.

To jump-start sales, U.S. auto makers offered, on average, a record $3,169 in incentives on each vehicle sold in March, said car-shopping Web site Edmunds.com. The figure represents a jump of $733, or 30.1%, from a year earlier and $171, or 5.7%, from February.

Meanwhile, it is harder and harder to find a bear remaining, now that Doug Kass has grown horns and is snorting away.  

Many is the earnings season that has disappointed the bulls.  One would want to think that all the bad news is priced into stock prices.  On that front, there will be greater clarity in the very near future.

Copyright (C) Long Lake LLC 2009

Just Following Orders

"Moral hazard" in financial systems refers to such things as encouraging risky behavior to recur by bailing out those who take risk and lose.  Here is a new form of it.  David Kotok, chief economist for Cumberland Advisors, a large investment firm, writes a column today ("PPIP:  Heads or Tails?) in "The Big Picture" which describes the Obama-Geithner latest bailout plan (The "PPIP") for the financial community in these summary terms:

 As a money manager for our clients, the Cumberland firm will look at PPIP and may use it on behalf of clients after we have reviewed an official form of an offering document. As a private citizen concerned about my country and its policy direction, I think this reeks and stinks.

I understand his reasoning.  Unfortunately, it is that of an underling and a weasel.  Presumably Mr. Kotok needs a job.  Otherwise he should resign rather than participate in what he knows is a reeking and stinking rip-off of America.

Copyright (C) Long Lake LLC 2009