Sin of Self-Praise at the New York Fed

Calculated Risk blogged yesterday as follows: Some Praise for the Fed.

This well-respected senior financial blogger previously stirred up his readership by supporting Ben Bernanke for reappointment as Fed Chairman, not overly reluctantly either.

Now he approvingly quotes EVP of the New York Fed Brian Sack as patting the Fed on the back and them some with what I view as highly inappropriate self-praise. From Sack's remarks as quoted by CR:

With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: These programs were an unquestionable success. . .

It is impressive that the Fed was able to remove itself from such a large amount of credit extension . . .

This design worked incredibly well . . .

Where I come from, self-praise is unseemly. Brian Sack should let the independent bloggers and of course shareholders of the New York Fed, such as JPMorgan Chase, use whatever favorable language they wish to in favor of the brilliance of these guys.

So far as this blogger is concerned, the New York Fed engaged in improper activities in favor of Big Finance in 2008, Ben Bernanke was guilty of financial malpractice though the patient survived after an unnecessary stay in intensive care, and I am unsurprised and unimpressed that with the power of the printing press, massive influence in the White House under the Bushbama Continuity and effective ownership of both houses of Congress, Big Finance survived on the backs of millions of unemployed people and tens of millions of savers who have been forced to accept record low interest rates to satisfy the greed of the owners of the New York Fed.

Hitler and Mussolini may have made the trains run on time. Without meaning to compare the Fed to those dictators, the point is that we must look at the totality of the picture, not a pretty detail. The Fed did not see, or pretended not to see, the financial crisis even when it was clearly underway, it helped cause and exacerbate what Reinhard and Rogoff call the Second Great Contraction (since the Great Depression), so that printing vast amounts of money may have been a nice technical achievement, but that's small beer to the incompetence and outrageous insider dealing that the New York Fed and Ben Bernanke demonstrated.

And of course, the tax fiddler Tim Geithner who headed the New York Fed through its fateful decisions in 2008 now heads Treasury, having been succeeded as NY Fed head by the Goldman Sachs insider Steve Friedman, who was forced to resign after the news came out that he was double dipping between Goldman and the Fed.

Unlike the Washington Fed, the New York Fed is a privately owned institution. It acts on behalf of its owners, not you and me. When its EVP goes overboard to praise its brilliance, he makes it sound similar to the head of Goldman Sachs claiming to be doing God's work.

Not an attractive picture.

Copyright (C)Long Lake LLC 2010

Charming Timmy

Timothy Geithner has visited lettuce in order to rehabilitate his image, the WSJ is reporting.

Quite the look on his face, wouldn't you say? (Click on image to enlarge.)

Boy, am I glad that this key enabler of one of history's worst looting episodes and financial collapses is just another Mr. Mom or something.

It's downright inspiring.

Or something.

Copyright (C) Long Lake LLC 2010

Wherein the Media Gets Things Wrong

Bloomberg.com wants us to believe that the current post-bubble deflationary, weak economy state of this country that has led to record low Treasury rates is due to the great job that Tim Geithner is doing running Treasury (and note how little credit his boss or Gentle Ben get), in te sycophantic In-Geithner-We-Trust Bond Market Gets Lowest Yield:

Less than a week after deflecting calls for his resignation, Timothy Geithner sold bonds on behalf of U.S. taxpayers at the lowest yields on record in a show of confidence in the Treasury Secretary’s policies.

Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Geithner dropped 15 percent, the biggest decrease since before 1989, according to data compiled by Bloomberg. The Treasury auctioned $44 billion of two-year notes Nov. 23 at a yield of 0.802 percent, the lowest on record.

Rising demand shows investors believe Geithner, 48, is striking a balance between policies to promote growth and the borrowing needed to finance a $1 trillion deficit.

DoctoRx here. Wait! TG has no role in setting the budget. Where is the credit to Congress and the President for these wise policies? The conclusion here is that this article is a plant to fight back against calls for Mr. Geithner to leave (a position that EBR advocated before he was confirmed).

There is much more sycophancy in between the below-the-fold criticism from what we are led to believe are only Republicans:

For Representative Kevin Brady of Texas, the senior House Republican on the Joint Economic Committee, rising demand for bonds reflects the state of the economy and the inability of the Obama administration to turn it around. Former Connecticut Republican congressman Rob Simmons, who is seeking to unseat Democratic incumbent and Senate Banking Committee Chairman Christopher Dodd in the 2010 election, said earlier this month that Geithner should resign over his role in the AIG bailout.

Simmons cited a Nov. 16 report by the Troubled Assets Relief Program special inspector general that faulted the New York Fed, with Geithner at its helm, for making “limited efforts” to protect taxpayer funds during the rescue of AIG. . .

“For the sake of our jobs, will you step down from your post?” Brady asked Geithner at a hearing of Congress’ Joint Economic Committee on Nov. 19. “The public has lost all confidence in your ability to do the job,” and that “is reflecting on your president,” he said.

Geithner dismissed the suggestion and blamed policies of President George W. Bush for the financial crisis. Republicans “gave this president an economy falling off the cliff,” he told Brady. “I can’t take responsibility for the legacy of crises you bequeathed the country.” . . .

Actually, criticism of Mr. Geithner, both in his role as head of the N. Y. Fed and as Treasury Sec'y has come from many quarters. Yet this article transitions promptly from the above quotes to pointing out the good stuff:

Lower Treasury yields have helped to push down borrowing costs for companies, local governments and consumers.

No mention that banks and credit card companies nowadays primarily want to lend to those who don't need to borrow. You, I and small businesses hardly have the Treasury's borrowing costs.

The truth is that the Administration and Congress told the public 9 months ago that just give us "stimulus", and the unemployment rate would peak at 8.0%. It is this slack in the economy, with labor, real estate and industrial capacity currently in oversupply relative to demand, that has led by default to "demand" for Treasuries.

If there were really confidence in our economic policy, the dollar would not have been weakening against gold, and the 10-30 year part of the curve would be much lower.

This article is a disgrace.

Also misguided, though not a disgrace, is A world awash in debt by Canada's Globe and Mail. It somehow finds that the possibility that governments will shrink their deficits to be calamitous:

The financial crisis provoked a global front to stimulate economies through massive spending. But this was fuelled by a staggering amount of borrowing. Now governments are realizing that a new calamity looms - higher taxes and slashed social programs.

If you believe that per capita GDP of over $40,000 in the U. S. and Canada is a calamity and that people living longer and healthier lives is a calamity, well then, the Globe and Mail has it right.

The Globe and Mail is just scaring you. We have plenty of capacity to provide for the elderly, but yes, more retirees as a percent of the population has obvious implications for GDP. But what of it?

Maybe we should work either less hard or for fewer years, or some combination of the both.

The great achievements of the modern world in bringing longevity to the masses of course provide new challenges, but calamity? Hardly.

Copyright (C) Long Lake LLC 2009

Pressure on Tim Geithner Increasing

Courtesy of Naked Capitalism comes the good news that liberal/progressive Dems are catching on that Mr. Timother Geithner is a catspaw of Big Finance. Click HERE for the link to that post, which itself has a link to a video clip of Representative DeFazio of Oregon.

Sometimes the world just has to come to you. While TG is not a goner, his rep keeps declining.

When this blog began late 2008, Tim Geithner was a target because of this ties to Big Finance, with the tax troubles felt at EBR to be a sign of the inner water-carrier coming through.

Meanwhile, Gallup.com reports absolutely miserable polling data re hiring/not hiring and daily elective spending. For most people, it may be that the depression has not really ended. If the economy can't soar with a zero-ish Fed funds rate, that would be a Japan scenario. The real winner given the one-dimensional thinking of the Dems: gold, because then more "stimulus" would be baked in the cake.

Copyright (C) Long Lake LLC 2009

On a Good Screed, the Economy and the Markets

Barry Ritholtz at The Big Picture has a guest post by the former head of Fast Money, Dylan Ratigan. In Why Keep Geithner, he puts forward a nice screed. It is good to see a former MSM guy speak out in this way. Where I disagree(d) with him is that I always thought that Mr. Volcker was just an old guy who the Obama campaign kept around for show, that a President Obama was getting too many campaign contributions from Big Finance (but would have been a credible vice presidential candidate), and I opposed Mr. Geithner from the get-go, given his obvious central role in the financial scam(s) of last year plus his tax fiddlings.

Switching to the economy, the Institute for Supply Management reported strong numbers re manufacturing today. The manufacturing downturn is over for now; this is not a big part of the economy.
Jobs and consumer spending data are poor. Once again, gold prices went up more than stock prices. The data point in that ISM report that struck me as supportive of a fundamental reason for that trend is that many commodities were reported to have gone up in price, but no shortages were reported. In other words, this is looking like a sort of reply of the False Recovery from the 2001 recession. Total debt to GDP is at new record highs. One has to assume that lots of leverage has been underpinning the markets.

Too many market leaders since the March stock market lows have truly poor stock charts while the averages hold up to suit me. This is typical of an evolving correction. I am out of almost all stocks on a tactical basis. A suspicion is that this market is similar to that of 1975, with a halfway-completed structural bear market after a huge rise off of a scary bottom. Just as this market has retraced half its losses, it would be reasonable to expect it to retrace half this year's gains off the bottom. Assuming Citi does not follow CIT into bankruptcy in a Lehman-like manner, then it would be reasonable to look for a second and final leg up, as in 1976, as the toxic effects of leverage tend to get hidden until the Fed tightens. And if the economy is so weak that the Fed never tightens, I have no idea what things will look like.

In any case, market risk is very high in my opinion. Revelations re Mr. Geithner, Citi, BofA, Hank Paulson, or an unexpected source could cause at least a short-lived panic and could cause a gap opening. In the meantime, any disappointment on jobs may not benefit the Treasury market as that would imply the likelihood of yet more Federal debt issuance or obligations.

Copyright (C) Long Lake LLC 2009

Another Reason Why Tim Geithner Should Leave His Job

The WSJ points out in Treasury Bailout's Limits on Lobbyists Still Haven't Taken Effect that:

A plan by Treasury Secretary Timothy Geithner to limit lobbyists' influence over the $700 billion bailout program has yet to get off the ground -- even as the program nears an end.

Just a few hours after being sworn in last January, Mr. Geithner promised to craft rules preventing external influence over bailout decisions. More than six months later -- and 100 days before the financial-industry bailout program is scheduled to stop taking applications for aid -- those rules have yet to be finalized.

Treasury whines that it has been busy, but the obvious conclusion is that it has not been trying very hard on this matter, as shown by the following:

When the Treasury announced its plans to curb bailout lobbying earlier this year, a spokeswoman said the department intended to publish weekly communication logs showing contact between public officials and external entities -- such as lobbyists -- discussing rescue plans for specific institutions. No such logs have been made available.

We have Government run by the allies of Big Finance for the benefit of Big Finance.

The Special Inspector General of the TARP bailout (SIGTARP) has reported that there have been $23.7 trillion or so dollars spent or backstopped to the financial sector within the past year. In contrast, a pittance has been spent on the people. The trio of actors: the Fed, the President/Treasury, and the Congress have all followed Sutton's law and have gone where the money is (was).

This is why the economic downturn has gone on so long and has been so severe. The guilty have been rewarded; the needy and innocent have had little help.

Copyright (C) Long Lake LLC 2009

Terrible Tim: Expletives not Deleted

This was not going to be "pick on Team Obama" night (see post below); in fact, it was going to be a quiet go-to-bed-early night, but two L. A. Times articles (below, and this) were too important to pass up posting on.
It turns out that Econblog Review, which yelled from day one against Mr. Geithner's nomination to be Treasury Secretary, not only is a tool of the Street but also appears to be a foul-mouthed, bullying lout.
Per the L. A. Times, quoting the WSJ, in Geithner to regulators: 'Stop your (expletive) turf wars':

Treasury Secretary Timothy Geithner launched an "expletive-laced" tirade against top U.S. financial regulators in a meeting on Friday, demanding that they halt their turf battles over the administration’s proposed regulatory overhaul, the Wall Street Journal reports.

Frustration apparently has been building in the White House as individual regulators have publicly voiced objections to parts of the plan, including giving the Federal Reserve more oversight of the financial system and creating a new Consumer Financial Protection Agency to police lending products.

The regulators’ pushback could pose a threat to any overhaul by giving House and Senate leaders ammunition to challenge the plan.

From the Journal’s website:

Mr. Geithner told the regulators Friday that "enough is enough," said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.


Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Other attendees were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman.

Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Neal Wolin, Treasury's deputy secretary, told the Journal that Geithner wanted to make sure that turf battles didn’t get in the way of fixing a system that badly needed an overhaul.

Wolin wouldn’t comment on Geithner's tone or language, the Journal said.

Of course, unsaid by Mr. Wolin is that Treasury's plan for financial system "reform" was essentially written by the G30, which has been headed of late by an AIG V.P. This is "reform" without the reform. It's definitely not worth cursing and bullying about. Will this story hurt the Geithner career path?

One can always dream . . .

Copyright (C) Long Lake LLC 2009

Schadenfreude

Nobody is immune from the housing crash.

From Bloomberg.com comes Geithner Rents Westchester Home After Failing to Sell:

U.S. Treasury Secretary Timothy Geithner is renting his home in Westchester County, New York, for $7,500 a month after failing to find a buyer, according to data on the Westchester-Putnam Multiple Listing Service Inc.

Geithner, 47, was trying to sell the brick and stucco Tudor-style home, the listing shows. The house on Maple Hill Drive has five bedrooms, about 3,600 square feet, and an eat-in kitchen with Siematic cabinetry and black granite countertops.

“Careful attention has been paid to the design of every feature of this sophisticated home,” according to the listing.

The home was marketed in February for $1.635 million, according to Scott Stiefvater, president of Stiefvater Real Estate in Pelham, New York. The price was reduced to $1.575 million in May, he said.

The inventory of similar homes for sale in the area may have affected the property’s prospects, said Debbie Meiliken, a broker at Keller Williams Realty New York.

“There was a lot of competition,” Meiliken said. “Sometimes people will put the house for rent if they’re not prepared to sell it and take a loss.”

Home sales in Westchester County fell 41 percent in the first quarter from a year earlier, according to an April 27 statement from the Westchester-Putnam Multiple Listing Service. The county’s median home price fell 14.5 percent to $532,000, the organization said.

As regular readers of EBR know, I have consistently felt that Mr. Geithner was the "bad penny", showing up repeatedly at disastrous governmental/Fed decisions that always and forever benefitted Big Finance. No matter that the companies have since lost their pristine credit ratings, if they are not bankrupt or acquired or in government conservancies.

I suppose it was his AAA credit rating that let him afford such an expensive house!


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

Monday Morning Update: Good News Remains Scarce

This blog has since inception considered Tim Geithner to be the bad penny and asked that his nomination as Treasury Sec'y be withdrawn. Thus it is with positive emotions that an important blog from Naked Capitalism was seen this morning, titled Are the Knives Coming Out for Geithner? If you haven't, please read it.

That post by Yves Smith and the lengthy NY Times article that it keys off of, are not in conjunction with an apparent pandemic of swine flu enough to knock the stock market off its stride.

Yesterday, however, Larry Summers was reported on by Bloomberg as follows:

“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said yesterday on “Fox News Sunday.”

In conjunction with this downbeat comment from Dr. Summers, TrimTabs reported today via Email that:

- U.S. Economy in Much Worse Shape Than Wall Street Realizes: Income Tax Withholdings Drop 3.1% Y-o-Y in Past Four Weeks, and TrimTabs Online Job Postings Index Falls 4.2% in April.

In addition, the debt monster is back: Bloomberg reports that companies have sold a record $468 B in debt so far this year (presumably this is a record for this far into a calendar year).

The news remains poor, and a veteran market observer comments (courtesy of Zero Hedge and GreenLightAdvisor Views):

Richard Russell of Dow Theory Letters, provides the following note April 20, 2009:
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

To the above list one might add that around now is the time that a traditional honeymoon period ends for a media-favored new President. The Geithner lashing out of the leading Democratic organ, the Times, may signal a less gauzy picture of the new administration reaching the public, which in turn could lead to a less optimistic view of the future.

We shall see what we shall see.


Copyright (C) Long Lake LLC 2009

More on "The Big Lie"

This is the transcript from an explosive interview on Bill Moyers' journal with William Black, formerly a scourge of the S&L scandal and crisis, and now one of the prominent voices speaking clearly on the current, worse scandal and crisis involving the largest financial institutions in the Western world.  There is nothing to add, except that the number of sophisticated observers who were fooled by and are now disillusioned by Barack Obama continues to surprise EBR as that number grows.  Please read the entire transcript, reproduced below, if you did not happen to watch the show.

April 3, 2009

BILL MOYERS: Welcome to the Journal.

For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.

WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.

BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.

The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.

Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."

Bill Black, welcome to the Journal.

WILLIAM K. BLACK: Thank you.

BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.

BILL MOYERS: Yeah. Liars' loans--

WILLIAM K. BLACK: Liars' loans.

BILL MOYERS: Why did they call them liars' loans?

WILLIAM K. BLACK: Because they were liars' loans.

BILL MOYERS: And they knew it?

WILLIAM K. BLACK: They knew it. They knew that they were frauds.

WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.

BILL MOYERS: You think they really said that to borrowers?

WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

BILL MOYERS: Ninja?

WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.

BILL MOYERS: You're talking about significant American companies.

WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.

BILL MOYERS: Which company?

WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.

WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...

BILL MOYERS: But you're saying our system became a Ponzi scheme.

WILLIAM K. BLACK: Our system...

BILL MOYERS: Our financial system...

WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."

BILL MOYERS: Is there a law against liars' loans?

WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.

BILL MOYERS: Because...

WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?

WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...

BILL MOYERS: Who did?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?

WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...

BILL MOYERS: That's right.

WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

BILL MOYERS: What did AIG contribute? What did they do wrong?

WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

BILL MOYERS: And why...

WILLIAM K. BLACK: How mad is this?

BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

BILL MOYERS: The cover up?

WILLIAM K. BLACK: Sure. The cover up.

BILL MOYERS: That's a serious charge.

WILLIAM K. BLACK: Of course.

BILL MOYERS: Who's covering up?

WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.

BILL MOYERS: As?

WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.

BILL MOYERS: How is this happening? I mean why is it happening?

WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.

BILL MOYERS: What facts?

WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

BILL MOYERS: You--

WILLIAM K. BLACK: Taking away people's bonuses?

BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that's a law?

WILLIAM K. BLACK: That's the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated--

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

BILL MOYERS: This law, you're talking about.

WILLIAM K. BLACK: Yes.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

BILL MOYERS: Well, where's Congress? Where's the press? Where--

WILLIAM K. BLACK: Well, where's the Pecora investigation?

BILL MOYERS: The what?

WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: You are.

WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.

BILL MOYERS: A.I.G. did?

WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

BILL MOYERS: Even though Goldman Sachs had a big vested stake.

WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

BILL MOYERS: Yeah, like a conflict of interest, it seems.

WILLIAM K. BLACK: Massive conflict of interests.

BILL MOYERS: So, how did he get away with it?

WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

BILL MOYERS: Who's going to get the facts?

WILLIAM K. BLACK: We need some chairmen or chairwomen--

BILL MOYERS: In Congress.

WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.

BILL MOYERS: And we have to know that, in order to know what?

WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."

BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

WILLIAM K. BLACK: Yes.

BILL MOYERS: Why?

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.

BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."

Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.

So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

BILL MOYERS: William Black, thank you very much for being with me on the Journal.

WILLIAM K. BLACK: Thank you so much.

Copyright (C) Long Lake LLC 2009

EBR to Get Its Wish: Geithner Out?

Sometimes dreams do come true.

Geithner Out at the Treasury: Source

By PAUL JACKSON
April 1, 2009 8:31 AM CST

Despite assurances to the contrary, President Obama has personally asked Treasury Secretary Timothy Geithner to step down, sources told HousingWire early Wednesday morning. Geithner, who has seen a whipsaw of public opinion over his handling of bonuses at American International Group(AIG: 0.98 -2.00%) and the introduction of a so-called public-private investment program designed to clear bad assets off of bank balance sheets, has been the subject of strong criticism from Republicans and even a few prominent Democrats.

The stunning move comes after Geithner’s popularity on Wall Street has gained momentum in the past week, as investors have largely cheered a proposal to see the Treasury, Federal Reserve, and FDIC partner with private investors to clear toxic assets off of of the hands of troubled banks.

“It’s being done quietly, but the President has asked Geithner to step aside,” said a source close to the Cabinet with knowledge of the decision. “He feels there is too much of a lack of trust, and he was frankly expecting more of a bounce in financial markets from the PPIP than what’s been seen so far.”

The Geithner-led Treasury has had difficulty filling key positions since his appointment. After the fourth potential senior Treasury roster nominee dropped from the running earlier this month, sources told the Washington Post that under-staffing issues might hamper the Treasury’s ability to handle the financial crisis.

Gus O’Donnell, Cabinet Secretary for the British government, suggested to various British media in recent weeks that it has been “unbelievably difficult” to talk to people at the U.S. Treasury, saying “there is nobody there.”

Let's see if the above, reported by Housing Wire.com, is accurate or just a trial balloon that pops.

If it's true, and Paul Volcker comes in from the cold and takes over at least as interim Treasury Sec'y, one could expect a stock market pop as powerful but fleeting as those that greeted Michael Dell's and Howard Schultz's returns as CEO to Dell and Starbucks.

The worst news in the above would be if part of the reason for any dismissal of Mr. Geithner was that the stock market was not happy enough about the PPIP bailout plan for Citi and BofA.

The other worst news would be rehiring Hank Paulson or the equivalent.  What about someone on the side of the customers of Big Finance?

That would be change we could believe in!

Copyright (C) Long Lake LLC 2009

Thursday Evening Potpourri

Here are some snippets from articles and blog posts from the past day, with comments.  My takeaway from them is consistent with my conclusion from last night's post, which is that somehow, despite a Dow that is south of 8000, the bulls are feeling frisky.  Let's hope they are correct!

U.S. Economy: GDP Slumps 6.3% Before Possible ‘Turning Point’ 

By Shobhana Chandra

March 26 (Bloomberg) -- The U.S. economy shrank at a 6.3 percent annual pace in the fourth quarter, the worst performance since 1982, in what may be the depths of the recession.

The contraction in gross domestic product was larger than the previously estimated 6.2 percent drop, the Commerce Department said today in Washington. A report from the Labor Department showed the number of people collecting jobless benefit this month climbed to a record 5.56 million.

“We’re at a turning point,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said in an interview with Bloomberg Radio. “There are some glimmers of hope. By the fourth quarter, maybe even the third quarter, we’ll be pleasantly surprised by the economic data.”

Recent reports show retail sales, residential construction and home sales have improved, indicating last quarter’s slump may give way to smaller declines in growth. A let-up in the recession would set the stage for President Barack Obama’s stimulus plan and Federal Reserve measures to take hold in the second half of the year.

Stocks climbed, extending the biggest monthly rally since 1987, on mounting speculation the economy may be past the worst of the downturn. 

Comment:  Being past the worst of the downturn is both unlikely, per the ECRI weekly leading indicators; and almost irrelevant to the stock market.  For example, see (from where, I forget!):

Both the new and old fourth-quarter GDP readings were the worst since the first quarter of 1982, when the economy, hit by a severe recession, contracted at a 6.4 percent pace.

Comment:  Let us say that the economy will now contract more slowly than the 6.3% annual rate reported for Q4 2008.  Clearly in 1982, a 6.4% represented the bottom, though the economy stayed in recession into 1983.  When did the stock market bottom in 1982?  Was it in the first quarter, when the pace of recession weakened?  No.  Was it in the second quarter?  No.  It was actually halfway through the third quarter, in August 1982, when the Fed loosened their tight money policy to rescue Mexico.  Stocks soared, as did zero coupon bonds.  If one was safely invested in bonds, as I was, there was no rush to get into stocks (though I did rush in immediately, where I stayed for the next 18 years).  

By analogy, there is now no rush to buy stocks even if the pace of the economic decline has seen its worst.

What's going on fundamentally?  Here's a factual but non-cheery data point:

March 26 (Bloomberg) -- JPMorgan Chase & Co. will delay contributions to 401(k) retirement plans for salaried employees until the end of the year and may reduce the payments, according to a person who received a company memo on the changes. . .

U.S. companies are cutting back matching contributions to employee retirement plans to save cash, and the trend is growing, according to a survey by Spectrem Group. The survey of 150 U.S. companies found that 34 percent have reduced or eliminated retirement-plan contributions since January 2008. In the next 12 months, 29 percent intend to scale back or eliminate their match, the survey showed.

At least 148 U.S. employers have stopped or reduced 401(k) matching contributions since June 2008, including General Motors Corp., Eastman Kodak Co., Motorola Inc., Sears Holdings Corp. Hewlett-Packard Co. and Xerox Corp., according to the Pension Rights Center, which is pushing for retirement savings alternatives to the 401(k).

Comment:  So, if you are working for JPMorgan Chase, which allegedly is the strongest of the "big four" mega-financial companies still standing (AIG, Fannie/Freddie not really standing), and you see this A) sign of financial weakness by your employer and B) hit to your retirement, are you going to A) spend more or B) save more?  (No prize for the right answer, in keeping with the New Frugality . . .)

The same not only goes for employees of Hewlett-Packard, which supposedly is doing well, but for employees of almost every company that has not (yet) cut back on its pension contribution.

Somehow it just doesn't seem likely that Americans are, tomorrow or the next day, about to become free spenders again.  Au contraire.

Next:

The Nasdaq Composite is the first of the major three U.S. indices to blow the all-clear whistle, it seems. It touched being flat year-to-date today, which is fairly remarkable considering it hit its low not even a month ago. Granted, it never plummeted as far as the Dow and the S&P 500 -- it helps not to have financials in your index -- but its ascent has still been fairly remarkable.

Comment:  The above, from the estimable Paul Kedrosky at his Infectious Greed blog, is one in a series of recently bullish comments from an admitted bear.  Note the language, which implicitly suggests that the author believes that the other major indices (Dow 30 and S&P 500) will follow to breakeven at least.  He could just as properly have said somberly:  "The 'NAZ', that hotbed of speculative froth that only bothers to pay a dividend when, as with Microsoft, everyone and his brother knows that the company is no longer a growth vehicle, struggled back to breakeven on the year, even though broader and more important indices remain mired in negative territory, and all these indices have been horrible performers for investors on any time frame you care to name up to a dozen years."  But he didn't phrase it that way at all. 

Further comment on the comment:  This suggests to me that more and more bears have capitulated, having been worn out by the lengthy bear market, and that they are looking past the bottom.  

Further comment etc.:  How an index getting to neutral in any way sounds an "all-clear whistle" is a confusing concept.  

Next, from Barry Ritholtz's "The Big Picture" blog, is a skewering of the MSM's interpretation of the latest housing data.  Mr. Ritholtz has published some of the most incisive comments on the housing bubble for years.  He begins his post with the following quotes, then comments (all from him in italics).

WSJ: Sales of new homes rose in February for the first time in seven months, the Commerce Department reported Wednesday, another sign that the housing market is thawing

Bloomberg: Purchases of new homes in the U.S. unexpectedly rose in February from a record low as plummeting prices and cheaper mortgage rates lured some buyers. Sales increased 4.7 percent to an annual pace of 337,000 . . .

Marketwatch: The U.S. housing sector continues to see signs of improvement. The latest government data showed new home sales climbed in February for the first time in seven months, sending shares of home-building companies soaring. . .

(Ritholtz now writing):  Note that the month over month data at 4.7% — plus or minus 18.3% — is statistically insignificant. (i.e., meaningless). The reported data does not inform us if sales improved month-over-month or not. It is a range, from down -13.6% to plus 23%. Since “zero” is part of that range, we can draw no conclusion. As the Census Department itself notes, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”

The data does however, tell us that the year-over-year sales fell 41.1% plus or minus 7.9% gives us a range of -49% to -33.2%. The entire range is negative, therefore we can conclude sales fell year-over-year.

These are facts. This is data. This is how you interpret it. Most of the MSM reports (WSJ, Marketwatch, Bloomberg) were simply wrong. . .

(Ritholtz again (bolding his point)):  Let me remind (Ed:  you) that many of these folks incorrectly misinformed you that Housing wasn’t getting worse in 2006, 2007 and 2008 — just as Home sales and prices went into an historic freefall. Now, these same folks are misinforming you that Housing has turned around and is improving. That is simply unsupported by the data.

Comment from DoctoRx now:  Good for Barry.  The housing stocks peaked in spring 2005.  The market knew bad times were coming.  That it took 4 years from the stock peak for housing starts to finally go low enough to allow inventory to begin to align with demand is horrifying.  It would be a real failure of the free market - except that there is no free market in housing.  Rather, demand is artificially pumped up in a variety of ways.

Finally, a comment on what is happening in America (from a suscription-only site):

Third Willed

Emanuel Derman | Mar 26, 2009

I was reading Yahoo Finance and came across the following Associated Press release:

"Democrats are looking for a way to respond to the public's outrage over taxpayer money being used to bankroll big bonuses for financial executives without alienating an industry whose cooperation is crucial to the nation's economic recovery.The House Financial Services Committee planned to endorse on Thursday a bill that would let Treasury Secretary Timothy Geithner and financial regulators decide whether an institution was spending too much money rewarding its employees.

The measure would exempt institutions that agree to participate in a government-sponsored program aimed at buying up $1 trillion of bad debt, or "toxic assets," sitting on the books of major banks. Geithner proposed the new investment program on Monday."

This is the third-world stuff that dreams are Madoff: the threat that if you are not a GSE (Geithner Sponsored Enterprise) you will not be exempt from arbitrary legislation.

Comment:  The above Derman post states that he is from South Africa; he knows what it's like to live in a third-world regime.

That's enough for now, methinks . . .

Copyright (C) Long Lake LLC 2009

Geithner Going?

It is now all over the Internet that with the posturing of Congress and the President on the AIG bailouts, Timothy Geithner may resign given the revelation that he approved the bonus payments. Of course, the bigger news is the once-secret, tens of billions of dollars worth of payments to the counterparties that gambled with AIG on the credit default swaps that you and I have made through the Federal Reserve and the Federal Government, which is part of the reason that the Fed overtly announced quantitative easing (i.e., money-printing) today, as predicted here as soon as the Bank of England did the same thing recently. However, we should at least be grateful that the intelligentsia such as you and me understand the extent of the real scandal, and that for public consumption, a simple story can crystallize justifiable outrage but that stems from a more complex story.

In any case, EBR takes pride in joining with a few others in the media in opposing the Geithner nomination from the start. Here is our (brief) follow-up post from January 14 in "Geithner Must Go (Not Arrive):

The New York Times continues to push to make the appointment of Mr. Timothy Geithner appear inevitable. Its latest writeup is titled, "Geithner's Skill May Trump Tax Issue".

There is something wrong with this title. What is wrong is that everything important that Mr. Geithner has been involved with in the past year has failed. So where is the skill?

There is a howler in the Times article. What do you make of this part of it?

"On Oct. 17, at a New York hotel, Mr. Obama and Mr. Geithner met for an hour and talked about policy and personal matters, according to accounts of the session. . .""Obama advisers say the candidate “fell in love” with Mr. Geithner, in the words of one, while a Geithner associate said Mr. Geithner reported being “smitten” with Mr. Obama. “They both have that kind of quiet confidence in their demeanor,” the associate said."

DoctoRx here. "Fell in love" and "smitten"? Is this Brokeback Mountain come to the Potomac?

In any case, Mr. Geithner is a failure at his current job and a tax cheat. For him to become Treasury Secretary would be bad for the economy. It doesn't matter whether Mr. Obama loves him or how many Senators rally round him.

Mr. Geithner is now a failure in his current job, which includes preventing embarrassment to his boss and to the US of A. To paraphrase Senator Grassley, he should fall on his metaphorical sword and either work at State or find work at a large complex financial institution.


Copyright (C) Long Lake LLC 2009