In my college days, when I gave barbers little business, I came across a book by a radical thinker the premise of which was that controlling what words were used to describe matters was more important than almost anything else.
That said, we hear all the time about what to do about the banks.
Here is the first definition of a "bank" from Webster's Online Dictionary:
1. A financial institution that accepts deposits and channels the money into lending activities; "he cashed a check at the bank"; "that bank holds the mortgage on my home".
What does this have to do with the discussion about the banking crisis? Everything. Consider the quote from a Bloomberg.com article today, U.S. Plans New Bank-Capital Injections, Expanded Fed Program:
The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of the rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.
But what really is happening is that the holding companies that may happen to own a depository institution are going to be vetted.
(As a doctor, I am amused about the word "injections". Whose syringe is as big as Henry Paulson's bazooka?)
If the press reported that it is not really the banks that are being bailed out, but rather giant companies, the public mood would be even angrier than it now is. Most people have no idea that Citigroup, for example, happens to own Citibank, but that most of its business is (was) unrelated to plain vanilla depository and related lending functions.
In a related matter, here are quotes from the same article that are designed to obfuscate:
Officials are also considering ways to deal with the toxic assets clogging banks’ balance sheets . . .
A lesson from past experience with banking crises around the globe is that the removal of bad assets from bank balance sheets . . .
What if the article had said: "These conglomerates are insolvent; their assets exceed their liabilities"?
Instead the author makes it seem as though somehow some hairballs of "bad assets" got in the drain and need to be removed.
Newsflash: In what the IMF now calls a "depression", not a recession, the worst thing a lender can do is make a risky loan.
In equity, not in debt, lies the solution.
Copyright (C) Long Lake LLC 2009
Saturday, February 7, 2009
Friday, February 6, 2009
All Niall-ists Now?
One last post for today. Dr. Niall Ferguson has a fine summary of our debt situation and the Establishment's head-in-the-sand view of things, if I interpret his views correctly, in Keynes Can't Help Us Now. Here's the final paragraph first, followed by the first half of the article.
(Ending):
Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.
(Beginning):
It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.
Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.
I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better. There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.
The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.
The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.
Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.
Just how much more toxic waste is out there? New York University economist Nouriel Roubini puts U.S. banks' projected losses from bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.
Have a nice weekend.
Copyright (C) Long Lake LLC 2009
(Ending):
Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.
(Beginning):
It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.
Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.
I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better. There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.
The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.
The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.
Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.
Just how much more toxic waste is out there? New York University economist Nouriel Roubini puts U.S. banks' projected losses from bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.
Have a nice weekend.
Copyright (C) Long Lake LLC 2009
FInancial Crisis Good for Business?
In "Fed Calls Emergency Consultants to Treat AIG, Stricken Markets," some startling news. This crisis is a big revenue generator for financial companies:
In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.
Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. Blackrock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.
No comment.
All this while (also Bloomberg.com):
S&P 500 Dividends May Decrease 13.3%, Most Since 1942
Dividends for Standard & Poor’s 500 Index companies will probably plunge 13.3 percent this year, the steepest annual decline since 1942, S&P forecast.
Companies in the 500-stock index are on pace to make $214.7 billion in payouts in 2009, compared with $247.9 billion, S&P projected in a statement today.
This is not war-time in any way similar to 1942. What is going now is largely self-inflicted. It is a mess. Anyone who tries to pick a bottom in the economy or the markets is a gambler. Anyone who has a lot of confidence in the right things to do with money in these circumstances has a strong ego.
Copyright (C) Long Lake LLC 2009
In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.
Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. Blackrock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.
No comment.
All this while (also Bloomberg.com):
S&P 500 Dividends May Decrease 13.3%, Most Since 1942
Dividends for Standard & Poor’s 500 Index companies will probably plunge 13.3 percent this year, the steepest annual decline since 1942, S&P forecast.
Companies in the 500-stock index are on pace to make $214.7 billion in payouts in 2009, compared with $247.9 billion, S&P projected in a statement today.
This is not war-time in any way similar to 1942. What is going now is largely self-inflicted. It is a mess. Anyone who tries to pick a bottom in the economy or the markets is a gambler. Anyone who has a lot of confidence in the right things to do with money in these circumstances has a strong ego.
Copyright (C) Long Lake LLC 2009
It's Now or Never: Breaking the Debt Cycle
The banking crisis continues to elicit conflicting signals out of the Obama Administration as to its solution. One part of the solution will apparently not be to encourage thrift. The support of frugality is absent from the "stimulus" bill that apparently will pass the Senate today, perhaps having undergone cosmetic surgery to make its obesity less obtrusive.
The real heart of the matter, the functional insolvency of certain money center banks, remains without a plan. So many trial balloons have been launched by the Administration that plan fatigue has set in the blogosphere, and perhaps in the public at large.
Even those who feel that Mr. Obama is being too cautious on the stimulus plan agree with him that thrift is not a priority. For example, an antagonist on this matter is the Nobelist Dr. Paul Krugman, who pens in "On the Edge" in today's NYT:
It’s hard to exaggerate how much economic trouble we’re in.
DoctoRx here. I disagree. Bad as things are, one can always exaggerate their severity. Right now, I call this a Great Recession, not a Great Depression. We have not even reached the unemployment level of the depths of the 1982 recession, adjusted for population growth.
Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now.
The real heart of the matter, the functional insolvency of certain money center banks, remains without a plan. So many trial balloons have been launched by the Administration that plan fatigue has set in the blogosphere, and perhaps in the public at large.
Even those who feel that Mr. Obama is being too cautious on the stimulus plan agree with him that thrift is not a priority. For example, an antagonist on this matter is the Nobelist Dr. Paul Krugman, who pens in "On the Edge" in today's NYT:
It’s hard to exaggerate how much economic trouble we’re in.
DoctoRx here. I disagree. Bad as things are, one can always exaggerate their severity. Right now, I call this a Great Recession, not a Great Depression. We have not even reached the unemployment level of the depths of the 1982 recession, adjusted for population growth.
Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now.
Philosophically, this point is the crux of this matter. The growth-at-any-price crowd can't stand it that individuals are responding logically and prudently to a dangerous time and would rather strengthen their own fiscal situation than the amorphous, non-flesh and blood thing that Dr. Krugman studies, the economy. Perhaps he has forgotten that the original meaning of the word "economy" is "thrift"?
The meme all over the media and in elite circles such as Dr. Krugman's is the same thing I heard treating obese patients or those addicted to cigarettes. They wanted to stop smoking or lose weight- but just not now, doctor. There was too much stress right now, or something. But come a heart attack, and it is amazing how easy it can be to break the addiction to smoking! Or to lose weight.
If consumers can't break the cycle of debt when it's in their individual interest to do so, they will never do it. It's now or never.
This is the medical analogy to our debt situation. Americans, chastened by the Great Depression, foreswore debt for a generation. And the economy did great once we won WWII. (Of course, winning the deadliest war in history helps!) But the Merchants of Debt came back with a vengeance. They need to be routed again. Dr. Krugman certainly believes he is a populist. But the greatest victims of the debt culture are the poor, working class and "middle" middle class. Once, people used the term "usury" for the rates these people have to pay to become unsecured borrowers.
We are not exactly in a Marxian crisis of capitalism. We are in a crisis caused by the emergence of a finance-driven economy. Thus we are supposed to "love it" when the GDP rises. It will rise one day, but without real structural change, it will be just more of the same.
The "stimulus" bill is going to be financed by more debt, and thus is a "hair of the dog that bit you" strategy; or by printing money, which takes us straight back to the 1970s. The only good reason to "go there" is to help those needing acute help due to the recession, including numerous suffering individuals and states and localities, I believe.
Tending to those obvious and acute needs, plus finding funding to get through the banking crisis, is more than enough for any Administration to do and do right.
Copyright (C) Long Lake LLC 2009
Thursday, February 5, 2009
Bad News Cycle
The Bloomberg.com headlines look poor today:
Volcker Chafes at Obama Panel Delay, Strains With Summers Rise:
The story is that Volcker looks to be more of a figurehead than an influential person. TOO BAD.
Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps:
Some analysts said the new rules wouldn’t have much effect.
Obama, 47, “is not proposing to go back and get that $18.4 billion in bonuses back,” Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta, said of the cash bonuses New York banks paid last year, the sixth- biggest haul in history. “Right now, we have not clamped down” on pay at banks.
Huge Paydays
In addition, some executives may be compensated for the potential reduced salaries with restricted stock grants, which may result in huge paydays after the bank repays the government assistance with interest.
“They’re just allowing companies to defer compensation,” said Graef Crystal, a former compensation consultant and author of “The Crystal Report on Executive Compensation.”
The restrictions are “a joke,” he said, because “if the government is paid pack, you can be sure that the stock will have risen hugely.”
So yesterday's headlines by the president look to be mostly PR.
U.S. Automakers ‘Choking’ Without Credit Await Fed Loan Program
“This is what is choking us to death,” Mark LaNeve, GM’s sales chief, said in an interview Feb. 3 after the biggest U.S. automaker posted a 49 percent drop in January sales in its home market. “If you can’t get credit, you can’t sell vehicles.”
The comment here is that everyone in the industry has known for years that the "Big Three" were finance companies masquerading as manufacturers. The country has to get away from debt-financed production and consumption. A modest proposal: given how rapidly Big Three cars depreciate, ban auto loans for more than, say, half the value of the car.
Eventually supply and demand will come into balance. The demand, however, will be real demand. Environmentalists such as Barack Obama should be in favor of a lower trend-line auto sales chart.
GSK delivers EPS of 104.7p before major restructuring
Dividend increased 8% to 57p
(See GSK.com for above, not Bloomberg)
Not stated in the GlaxoSmithKline press release is the fact that earnings were actually down 40% year on year, the stock buyback program was cancelled to pay for the dividend increase, and a mysterious legal charge occurred in the quarter that apparently shareholders are not supposed to know anything about.
Back to Bloomberg.com:
Russia Fueling Ruble Tumble With Loans, Banks Say
Russia’s central bank is exacerbating the ruble’s 35 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, say Alfa Bank and UniCredit SpA.
And from their video section, this headline:
(Jimmy) Rogers Says Russia May Break Up
Cheery!
Worker Anger Sees Brown Facing Winter of Discontent
Spreading strikes, reduced workweeks and tens of thousands of job cuts are throwing British Prime Minister Gordon Brown back to the 1970s.
I have been saying for some time that what is happening is a toxic mix of the 1930s and 1970s.
Another Bloomberg article reports that the Bank of England lowered rates to a further record low of 1%.
Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears
Swiss Re Gets $2.6 Billion From Buffett After Loss
However, a man named Grodzki is pictured on Bloomberg.com's video section as saying that Buffett's stake in Swiss Re is "reassuring". Perhaps he was making a great pun. The truth is that Buffett is a shark. Perhaps he means that he is reassured that Buffett knows that Swiss Re lost its shirt venturing into derivatives in a vain search for growth and that Berkshire will probably prosper. It is not reassuring that the giant reinsurer Swiss Re joined the insurers Ambac, MBIA and others in forgetting that its role in society was to be a strong reinsurer, not to produce profits generated by gambling.
Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears
Closer to home, Republicans were allegedly making progress in getting the "stimulus" bill to eliminate non-stimulating spending. It appears that just as in the TARP bailout bill last fall, the Congress really just wants to borrow and spend more. The debt culture remains on top for now.
Perhaps you can be reassured that living in Japan in the 1990s post-bubble was not so bad. On the other hand, from the Leslie Howard movie The Scarlet Pimpernel is the great quote (which I attempt to repeat from memory): "There is nothing quite so bad as that which is . . . not so bad".
Have a good day.
Copyright (C) Long Lake LLC 2009
Volcker Chafes at Obama Panel Delay, Strains With Summers Rise:
The story is that Volcker looks to be more of a figurehead than an influential person. TOO BAD.
Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps:
Some analysts said the new rules wouldn’t have much effect.
Obama, 47, “is not proposing to go back and get that $18.4 billion in bonuses back,” Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta, said of the cash bonuses New York banks paid last year, the sixth- biggest haul in history. “Right now, we have not clamped down” on pay at banks.
Huge Paydays
In addition, some executives may be compensated for the potential reduced salaries with restricted stock grants, which may result in huge paydays after the bank repays the government assistance with interest.
“They’re just allowing companies to defer compensation,” said Graef Crystal, a former compensation consultant and author of “The Crystal Report on Executive Compensation.”
The restrictions are “a joke,” he said, because “if the government is paid pack, you can be sure that the stock will have risen hugely.”
So yesterday's headlines by the president look to be mostly PR.
U.S. Automakers ‘Choking’ Without Credit Await Fed Loan Program
“This is what is choking us to death,” Mark LaNeve, GM’s sales chief, said in an interview Feb. 3 after the biggest U.S. automaker posted a 49 percent drop in January sales in its home market. “If you can’t get credit, you can’t sell vehicles.”
The comment here is that everyone in the industry has known for years that the "Big Three" were finance companies masquerading as manufacturers. The country has to get away from debt-financed production and consumption. A modest proposal: given how rapidly Big Three cars depreciate, ban auto loans for more than, say, half the value of the car.
Eventually supply and demand will come into balance. The demand, however, will be real demand. Environmentalists such as Barack Obama should be in favor of a lower trend-line auto sales chart.
GSK delivers EPS of 104.7p before major restructuring
Dividend increased 8% to 57p
(See GSK.com for above, not Bloomberg)
Not stated in the GlaxoSmithKline press release is the fact that earnings were actually down 40% year on year, the stock buyback program was cancelled to pay for the dividend increase, and a mysterious legal charge occurred in the quarter that apparently shareholders are not supposed to know anything about.
Back to Bloomberg.com:
Russia Fueling Ruble Tumble With Loans, Banks Say
Russia’s central bank is exacerbating the ruble’s 35 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, say Alfa Bank and UniCredit SpA.
And from their video section, this headline:
(Jimmy) Rogers Says Russia May Break Up
Cheery!
Worker Anger Sees Brown Facing Winter of Discontent
Spreading strikes, reduced workweeks and tens of thousands of job cuts are throwing British Prime Minister Gordon Brown back to the 1970s.
I have been saying for some time that what is happening is a toxic mix of the 1930s and 1970s.
Another Bloomberg article reports that the Bank of England lowered rates to a further record low of 1%.
Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears
Swiss Re Gets $2.6 Billion From Buffett After Loss
However, a man named Grodzki is pictured on Bloomberg.com's video section as saying that Buffett's stake in Swiss Re is "reassuring". Perhaps he was making a great pun. The truth is that Buffett is a shark. Perhaps he means that he is reassured that Buffett knows that Swiss Re lost its shirt venturing into derivatives in a vain search for growth and that Berkshire will probably prosper. It is not reassuring that the giant reinsurer Swiss Re joined the insurers Ambac, MBIA and others in forgetting that its role in society was to be a strong reinsurer, not to produce profits generated by gambling.
Senate Adds Homebuyers’ Tax Cut to Stimulus as Final Vote Nears
Closer to home, Republicans were allegedly making progress in getting the "stimulus" bill to eliminate non-stimulating spending. It appears that just as in the TARP bailout bill last fall, the Congress really just wants to borrow and spend more. The debt culture remains on top for now.
Perhaps you can be reassured that living in Japan in the 1990s post-bubble was not so bad. On the other hand, from the Leslie Howard movie The Scarlet Pimpernel is the great quote (which I attempt to repeat from memory): "There is nothing quite so bad as that which is . . . not so bad".
Have a good day.
Copyright (C) Long Lake LLC 2009
Wednesday, February 4, 2009
Obama-mania Fading; Good News for the Economy?
Unfortunately for a blog focused on markets and economics, it's all politics all the time with the major issue of the day, the insolvent giant financial institutions. Herewith are two relevant articles from today. First, from perhaps the most unforgiving mainstream Bush-basher, Maureen Dowd, comes "Well, That Certainly Didn't Take Long":
On 9/11, President Bush learned of disaster while reading “The Pet Goat” to grade-school kids. On Tuesday, President Obama escaped from disaster by reading “The Moon Over Star” to grade-school kids.
“We were just tired of being in the White House,” the two-week-old president, with Michelle at his side, explained to students at a public charter school near the White House.
Even as he told the children his favorite superheroes were Batman and Spider-Man, his own dream of being the superhero who swoops in to swiftly save America was going SPLAT!
It just ain’t that easy.
Unlike W. and Dick Cheney, who heroically resisted acknowledging their historically boneheaded mistakes, President Obama summoned a conga line of Anderson, Katie, Brian, Chris and Charlie to the Oval Office to do penance, over and over.
“I think I messed up. I screwed up,” he confessed to Couric.
He told the anchors that the man who helped make him president, Tom Daschle, had made “a serious mistake” by not paying taxes on a car and driver. (It should have been a harbinger of doom when Daschle began sporting those determined-to-be-hip round red glasses.)
Mr. Obama admitted that “ultimately it’s important for this administration to send a message that there aren’t two sets of rules. You know, one for prominent people and one for ordinary folks who have to pay their taxes.”
It took Daschle’s resignation to shake the president out of his arrogant attitude that his charmed circle doesn’t have to abide by the lofty standards he lectured the rest of us about for two years.
Before he recanted, his hand forced by a cascade of appointees who “forgot” to pay taxes, his reasoning was creeping perilously close to that of the outgoing leaders he denounced in his Inaugural Address: that elitist mentality of “we know best,” we know we’re doing the “right” thing for the country, so we can twist the rules.
Mr. Obama’s errors on the helter-skelter stimulus package were also self-induced. He should put down those Lincoln books and order “Dave” from Netflix.
When Kevin Kline becomes an accidental president, he summons his personal accountant, Murray Blum, to the White House to cut millions in silly programs out of the federal budget so he can give money to the homeless.
“Who does these books?” Blum says with disgust, red-penciling an ad campaign to boost consumers’ confidence in cars they’d already bought. “If I ran my office this way, I’d be out of business.”
Mr. Obama should have taken a red pencil to the $819 billion stimulus bill and slashed all the provisions that looked like caricatures of Democratic drunken-sailor spending.
As Senator Kit Bond, a Republican, put it, there were so many good targets that he felt “like a mosquito in a nudist colony.” He was especially worried about the provision requiring the steel and iron for infrastructure construction to be American-made, and by the time the chastened president talked to Chris Wallace on Fox Tuesday, he agreed that “we can’t send a protectionist message.”
Mr. Obama protested to Brian Williams that the programs denounced as “wasteful” by Republicans “amount to less than 1 percent of the entire package.” All the more reason to cut them and create a lean, clean bill tailored to creating jobs.
The Democratic president has been spending so much time trying — and failing — to win over Republicans that he may not have noticed the disillusionment in his own ranks.
Betrayed by their bankers and leaders, Americans were desperate to trust someone when they made Barack Obama president. His debut has left them skeptical about his willingness to smack down those who would flout his high standards or waste our money.
If someone had told me a month ago that Maureen Down would be calling Barack Obama "arrogant" less than two weeks into his Presidency, I'd have said "Wow" - and so it is said! What will this do to Mr. Obama's plans for the economy? The Washington Post reports in "Senate Lacks Votes to Pass Stimulus":
Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.
Of course, all this is a charade to some extent. The items discussed in the Post article that may get cut but relate to health may well be funded in other bills. But overall, the quick take here is that matters are reminiscent of the early days of Bill Clinton's first term, when despite control of Congress by his party he had trouble getting his early priorities through, had to sharply lower his tax increases, and even in a good economy couldn't get his priority, the reshaping of the health care system, to a floor vote.
The belief here is that to the extent that the economy is allowed to recover on its own, with terminally ill financial institutions allowed to die in a managed manner, the better for the economy. We must recall that Herbert Hoover and his party helped cause the Great Depression by passing legislation known as Smoot Hawley. The Post article goes on to state:
Extensive Senate revisions would force lawmakers to work at a frantic pace to meet a self-imposed Feb. 13 deadline for completing a compromise bill with the House, which passed an $819 billion version last week. Obama reiterated his call for urgent action in a meeting Monday night with Democratic leaders . . .
We learned in internship some rules in responding to a medical emergency. Among them were:
In a code, the first thing to do is take your own pulse; and,
Walk, don't run to a cardiac arrest. You'll alarm the other patients. (Walk very fast.)
It is hoped here that the World's Greatest Deliberative Body, which appeared not to do much deliberating last year as the financial and economic mess was unfolding, will not lurch in the other direction and pass something unsound because it is frantic to meet a self-imposed deadline. There is only one thing wrong with the U.S. economy, and it is profound: too much debt and on a larger scale, to much "financialization" overall and not enough provision of real goods and services. There is probably nothing in the "stimulus" bill that will help that, and a great deal that would kick the can the wrong way down the road. Right now we are on a one-way road, but we can do a U-Turn and make the one way go in the other direction and get back, get back to where we once belonged.
Copyright (C) Long Lake LLC 2009
On 9/11, President Bush learned of disaster while reading “The Pet Goat” to grade-school kids. On Tuesday, President Obama escaped from disaster by reading “The Moon Over Star” to grade-school kids.
“We were just tired of being in the White House,” the two-week-old president, with Michelle at his side, explained to students at a public charter school near the White House.
Even as he told the children his favorite superheroes were Batman and Spider-Man, his own dream of being the superhero who swoops in to swiftly save America was going SPLAT!
It just ain’t that easy.
Unlike W. and Dick Cheney, who heroically resisted acknowledging their historically boneheaded mistakes, President Obama summoned a conga line of Anderson, Katie, Brian, Chris and Charlie to the Oval Office to do penance, over and over.
“I think I messed up. I screwed up,” he confessed to Couric.
He told the anchors that the man who helped make him president, Tom Daschle, had made “a serious mistake” by not paying taxes on a car and driver. (It should have been a harbinger of doom when Daschle began sporting those determined-to-be-hip round red glasses.)
Mr. Obama admitted that “ultimately it’s important for this administration to send a message that there aren’t two sets of rules. You know, one for prominent people and one for ordinary folks who have to pay their taxes.”
It took Daschle’s resignation to shake the president out of his arrogant attitude that his charmed circle doesn’t have to abide by the lofty standards he lectured the rest of us about for two years.
Before he recanted, his hand forced by a cascade of appointees who “forgot” to pay taxes, his reasoning was creeping perilously close to that of the outgoing leaders he denounced in his Inaugural Address: that elitist mentality of “we know best,” we know we’re doing the “right” thing for the country, so we can twist the rules.
Mr. Obama’s errors on the helter-skelter stimulus package were also self-induced. He should put down those Lincoln books and order “Dave” from Netflix.
When Kevin Kline becomes an accidental president, he summons his personal accountant, Murray Blum, to the White House to cut millions in silly programs out of the federal budget so he can give money to the homeless.
“Who does these books?” Blum says with disgust, red-penciling an ad campaign to boost consumers’ confidence in cars they’d already bought. “If I ran my office this way, I’d be out of business.”
Mr. Obama should have taken a red pencil to the $819 billion stimulus bill and slashed all the provisions that looked like caricatures of Democratic drunken-sailor spending.
As Senator Kit Bond, a Republican, put it, there were so many good targets that he felt “like a mosquito in a nudist colony.” He was especially worried about the provision requiring the steel and iron for infrastructure construction to be American-made, and by the time the chastened president talked to Chris Wallace on Fox Tuesday, he agreed that “we can’t send a protectionist message.”
Mr. Obama protested to Brian Williams that the programs denounced as “wasteful” by Republicans “amount to less than 1 percent of the entire package.” All the more reason to cut them and create a lean, clean bill tailored to creating jobs.
The Democratic president has been spending so much time trying — and failing — to win over Republicans that he may not have noticed the disillusionment in his own ranks.
Betrayed by their bankers and leaders, Americans were desperate to trust someone when they made Barack Obama president. His debut has left them skeptical about his willingness to smack down those who would flout his high standards or waste our money.
If someone had told me a month ago that Maureen Down would be calling Barack Obama "arrogant" less than two weeks into his Presidency, I'd have said "Wow" - and so it is said! What will this do to Mr. Obama's plans for the economy? The Washington Post reports in "Senate Lacks Votes to Pass Stimulus":
Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.
Of course, all this is a charade to some extent. The items discussed in the Post article that may get cut but relate to health may well be funded in other bills. But overall, the quick take here is that matters are reminiscent of the early days of Bill Clinton's first term, when despite control of Congress by his party he had trouble getting his early priorities through, had to sharply lower his tax increases, and even in a good economy couldn't get his priority, the reshaping of the health care system, to a floor vote.
The belief here is that to the extent that the economy is allowed to recover on its own, with terminally ill financial institutions allowed to die in a managed manner, the better for the economy. We must recall that Herbert Hoover and his party helped cause the Great Depression by passing legislation known as Smoot Hawley. The Post article goes on to state:
Extensive Senate revisions would force lawmakers to work at a frantic pace to meet a self-imposed Feb. 13 deadline for completing a compromise bill with the House, which passed an $819 billion version last week. Obama reiterated his call for urgent action in a meeting Monday night with Democratic leaders . . .
We learned in internship some rules in responding to a medical emergency. Among them were:
In a code, the first thing to do is take your own pulse; and,
Walk, don't run to a cardiac arrest. You'll alarm the other patients. (Walk very fast.)
It is hoped here that the World's Greatest Deliberative Body, which appeared not to do much deliberating last year as the financial and economic mess was unfolding, will not lurch in the other direction and pass something unsound because it is frantic to meet a self-imposed deadline. There is only one thing wrong with the U.S. economy, and it is profound: too much debt and on a larger scale, to much "financialization" overall and not enough provision of real goods and services. There is probably nothing in the "stimulus" bill that will help that, and a great deal that would kick the can the wrong way down the road. Right now we are on a one-way road, but we can do a U-Turn and make the one way go in the other direction and get back, get back to where we once belonged.
Copyright (C) Long Lake LLC 2009
Wednesday Morning Mix
Bloomberg.com reports, "Obama to Limit Executive Pay at Companies Getting (most) Aid".
Our response is that this is pure PR on the Obama Administration's part. Mr. Obama wanted the multi-million a year "earner" Tom Daschle to help him surgerize (as we say in medicine) the health care system, no matter that in addition when he finally got around to paying his back taxes, he forgot to pay the 2.9% Medicare surtax that he voted for when he was a Senator.
When Mr. Obama agrees that lawyers such as his high-earning wife, best-selling authors such as himself, actors and actresses, and athletes should all have pay caps of $500,000 per year, then we will be OK with government-mandated salaries for executives private companies.
In response to the above Obama pay proposal, Yves Smith at Naked Capitalism appears to find this not strict enough: "Obama's Executive Comp Proposals: Closing the Gate After the Horse is in the Next County". She points out ways that banks can get around this and raises a number of relevant points. She states that "banks appear to need to be reined in forcibly".
The viewpoint here is that depository institutions should be regulated similarly to utilities. Nassim Taleb has suggested in an interview that they could be government-owned. We would suggest that they could have private status, just like the many electric and water/sewer utilities, but be closely regulated. Implicit in this is the return of a version of Glass-Steagall, so that depository institutions are not part of a holding company that also "gambles". We would also want to limit FDIC insurance to only protect the small saver. The "rich" can buy Treasuries if they want a government guarantee. This would mean going back to a much lower level of insurance of bank deposits.
Mish has a hard-hitting attack on the bankers that comes from an angle that suits us here at Econblog Review. It is to let the institutions that are bankrupt fail. He clearly argues that Government should stay away from setting salaries. Please read this post. The only major point that Econblog Review does not have an opinion on is his for-now quixotic plea to abolish the Fed and fractional reserve lending.
Barry Ritholtz at The Big Picture appears to be having difficulty with the Obama Administration's trial balloons on the financial crisis, in today's post 'Bad Bank' versus 'Insurance Wrap'. His comments are also "right on" in our opinion. He was a vocal "Obamacan" = Republican for Obama. A non-Republican early supporter of Mr. Obama is George Soros, who has also been editorializing against the bad bank proposal. One wonders if there is discontent in the ranks.
It does appear that the flood of money-printing has been stabilizing the markets, as yield disparities between Treasuries and high-grade munis has, for example, begun to shrink. Some of that money has made its way into the stock market, which remains fundamentally risky, not fundamentally cheap as in the post-crash 1930's-1940's or the 1974-83 period. For example, Kraft reported down earnings today. It has a $39 B market cap and about a negative $16 B tangible book value.
And to end on a happier note, please read "Looking for the Sun" from CR at Calculated Risk, perhaps the dean of financial blogs. CR makes the point, with more detail, that this blog has made repeatedly, which is that we are in a cycle that will bottom on its own, so that we needn't panic; but we do need to reform the banking system and help those most hurt by the poor economy.
Copyright (C) Long Lake LLC 2009
Our response is that this is pure PR on the Obama Administration's part. Mr. Obama wanted the multi-million a year "earner" Tom Daschle to help him surgerize (as we say in medicine) the health care system, no matter that in addition when he finally got around to paying his back taxes, he forgot to pay the 2.9% Medicare surtax that he voted for when he was a Senator.
When Mr. Obama agrees that lawyers such as his high-earning wife, best-selling authors such as himself, actors and actresses, and athletes should all have pay caps of $500,000 per year, then we will be OK with government-mandated salaries for executives private companies.
In response to the above Obama pay proposal, Yves Smith at Naked Capitalism appears to find this not strict enough: "Obama's Executive Comp Proposals: Closing the Gate After the Horse is in the Next County". She points out ways that banks can get around this and raises a number of relevant points. She states that "banks appear to need to be reined in forcibly".
The viewpoint here is that depository institutions should be regulated similarly to utilities. Nassim Taleb has suggested in an interview that they could be government-owned. We would suggest that they could have private status, just like the many electric and water/sewer utilities, but be closely regulated. Implicit in this is the return of a version of Glass-Steagall, so that depository institutions are not part of a holding company that also "gambles". We would also want to limit FDIC insurance to only protect the small saver. The "rich" can buy Treasuries if they want a government guarantee. This would mean going back to a much lower level of insurance of bank deposits.
Mish has a hard-hitting attack on the bankers that comes from an angle that suits us here at Econblog Review. It is to let the institutions that are bankrupt fail. He clearly argues that Government should stay away from setting salaries. Please read this post. The only major point that Econblog Review does not have an opinion on is his for-now quixotic plea to abolish the Fed and fractional reserve lending.
Barry Ritholtz at The Big Picture appears to be having difficulty with the Obama Administration's trial balloons on the financial crisis, in today's post 'Bad Bank' versus 'Insurance Wrap'. His comments are also "right on" in our opinion. He was a vocal "Obamacan" = Republican for Obama. A non-Republican early supporter of Mr. Obama is George Soros, who has also been editorializing against the bad bank proposal. One wonders if there is discontent in the ranks.
It does appear that the flood of money-printing has been stabilizing the markets, as yield disparities between Treasuries and high-grade munis has, for example, begun to shrink. Some of that money has made its way into the stock market, which remains fundamentally risky, not fundamentally cheap as in the post-crash 1930's-1940's or the 1974-83 period. For example, Kraft reported down earnings today. It has a $39 B market cap and about a negative $16 B tangible book value.
And to end on a happier note, please read "Looking for the Sun" from CR at Calculated Risk, perhaps the dean of financial blogs. CR makes the point, with more detail, that this blog has made repeatedly, which is that we are in a cycle that will bottom on its own, so that we needn't panic; but we do need to reform the banking system and help those most hurt by the poor economy.
Copyright (C) Long Lake LLC 2009
Tuesday, February 3, 2009
Baby, It's Cold Everywhere
This blog has taken a special interest in former Majority Leader Daschle's nomination for Secretary of Health and Human Services, due to my background in actually providing health care for humans.
It was initially thought here that the coup de grace would be the revelation that even after Mr. Daschle paid his back taxes, he neglected to pay his Medicare surtax of 2.9%. Doesn't he know? He voted for that revenue raiser as a Senator.
Questions have been raised about both the thoroughness of the Obama team's vetting process and the President's interest in hewing strictly to his theme of ultra-high ethical standards.
Before Mr. Daschle resigned today, Nancy Killefer withdrew her candidacy for first chief performance officer for the federal government. Here is her situation, as reported by the Huffington Post.
The AP reported that on March 7, 2005, the D.C. Department of Employment Services slapped a tax lien on her home in the upscale Wesley Heights neighborhood. The local government alleged that beginning three years after she left the high-powered Treasury post she failed to pay unemployment compensation tax for a household employee. She failed to make the required quarterly payments for a year and half, the D.C. government said, whereupon a lien for $946.69 was placed on her home.
That sum included $298 in unpaid taxes, $48.69 in interest and $600 in penalties. Killefer didn't get the lien extinguished for almost five months, until July 29, 2005.
During that period, Killefer and her husband, an economics professor, had two nannies to help care for their teenage son and daughter, and she had a personal assistant to run things when she was on the road, she told Harvard business students back then.
Bobby Tucker, chief of D.C.'s unemployment insurance tax division, said filing tax liens is "not a common practice" for his office. D.C. law authorizes such liens when an employer "neglects and refuses" to pay the levy that helps pay for unemployment benefits for those laid off or fired. Tucker said his auditors have discretion to use tax liens based on "the number of attempts to collect contributions owed, whether or not the employer responds to written attempts, phone calls and-or in-person visits" to collect the tax.
From today's Huffpo update:
It wasn't clear whether the administration was aware of Killefer's tax errors before Obama named her. Gibbs refused to say what administration vetters knew about the problem or when. Gibbs maintained that Obama has confidence in the vetting system. But late on the day Killefer was first named, an administration official asked an AP reporter how the AP had found the tax lien against her.
Not encouraging. Here we have the Treasury Secretary, for whom Mr. Obama fought hard, overseeing the IRS despite being a tax chiseler/cheat/ignoramus; the health care czar/presumptive HHS Secretary, who had Mr. Obama's full and repeated support as recently as yesterday; and the first "chief performance officer" of the Federal Government, all bloodied over tax issues.
Both the "stimulus" program and the bank rescue program are floundering. Different trial balloons and senatorial proposals come and go. Gone are the heady days after the election in which giddy Democrats agreed to work day and night to get a stimulus bill to the new President on or around Inauguration Day.
This blog has consistently argued that on the core financial matters of the day, which are the Great Recession and the insolvency of the money-center financial institutions, the Obama Administration was going to be similar to the Bush team. So it has gone. There was no plan other than to follow the Bush-Reid-Pelosi plan of last year to give a one-time tax break and to fiddle while the banks burned, and to also include a large amount of spending that is both unfunded and for the most part in line with traditional and modern Democratic priorities but is not customized to stimulate. And so the markets continue to meander; the hoped-for Obama-mania/FDR-JFK-style inspiration peaked on or before Election Day, perhaps when Mr. Obama began acting like the economic affairs President before he was inaugurated, and as usual, economic reality drives the markets. Hope is rapidly fading that Barack Obama can make the recessionary tides recede other than on their own pace. In the meantime, please ask yourself what to do with your money when you just know that Citigroup and Bank of America are insolvent, and Wells Fargo and JPMorgan Chase may be as well.
Barack Obama said on the campaign trail that Americans would have to tighten their belts. He should continue on that theme, especially now that Mr. Bush still is blamed by the public for the economy. We need an old-style capitalist society built on saving, not consumption, and therefore on equity, not debt. If Mr. Obama, who by multiple accounts is quite a bright and well-informed President, can propound that theme over and over again, he will find a receptive public. The rest will fall in place, no matter exactly what is done to the banks.
Copyright (C) Long Lake LLC 2009
It was initially thought here that the coup de grace would be the revelation that even after Mr. Daschle paid his back taxes, he neglected to pay his Medicare surtax of 2.9%. Doesn't he know? He voted for that revenue raiser as a Senator.
Questions have been raised about both the thoroughness of the Obama team's vetting process and the President's interest in hewing strictly to his theme of ultra-high ethical standards.
Before Mr. Daschle resigned today, Nancy Killefer withdrew her candidacy for first chief performance officer for the federal government. Here is her situation, as reported by the Huffington Post.
The AP reported that on March 7, 2005, the D.C. Department of Employment Services slapped a tax lien on her home in the upscale Wesley Heights neighborhood. The local government alleged that beginning three years after she left the high-powered Treasury post she failed to pay unemployment compensation tax for a household employee. She failed to make the required quarterly payments for a year and half, the D.C. government said, whereupon a lien for $946.69 was placed on her home.
That sum included $298 in unpaid taxes, $48.69 in interest and $600 in penalties. Killefer didn't get the lien extinguished for almost five months, until July 29, 2005.
During that period, Killefer and her husband, an economics professor, had two nannies to help care for their teenage son and daughter, and she had a personal assistant to run things when she was on the road, she told Harvard business students back then.
Bobby Tucker, chief of D.C.'s unemployment insurance tax division, said filing tax liens is "not a common practice" for his office. D.C. law authorizes such liens when an employer "neglects and refuses" to pay the levy that helps pay for unemployment benefits for those laid off or fired. Tucker said his auditors have discretion to use tax liens based on "the number of attempts to collect contributions owed, whether or not the employer responds to written attempts, phone calls and-or in-person visits" to collect the tax.
From today's Huffpo update:
It wasn't clear whether the administration was aware of Killefer's tax errors before Obama named her. Gibbs refused to say what administration vetters knew about the problem or when. Gibbs maintained that Obama has confidence in the vetting system. But late on the day Killefer was first named, an administration official asked an AP reporter how the AP had found the tax lien against her.
Not encouraging. Here we have the Treasury Secretary, for whom Mr. Obama fought hard, overseeing the IRS despite being a tax chiseler/cheat/ignoramus; the health care czar/presumptive HHS Secretary, who had Mr. Obama's full and repeated support as recently as yesterday; and the first "chief performance officer" of the Federal Government, all bloodied over tax issues.
Both the "stimulus" program and the bank rescue program are floundering. Different trial balloons and senatorial proposals come and go. Gone are the heady days after the election in which giddy Democrats agreed to work day and night to get a stimulus bill to the new President on or around Inauguration Day.
This blog has consistently argued that on the core financial matters of the day, which are the Great Recession and the insolvency of the money-center financial institutions, the Obama Administration was going to be similar to the Bush team. So it has gone. There was no plan other than to follow the Bush-Reid-Pelosi plan of last year to give a one-time tax break and to fiddle while the banks burned, and to also include a large amount of spending that is both unfunded and for the most part in line with traditional and modern Democratic priorities but is not customized to stimulate. And so the markets continue to meander; the hoped-for Obama-mania/FDR-JFK-style inspiration peaked on or before Election Day, perhaps when Mr. Obama began acting like the economic affairs President before he was inaugurated, and as usual, economic reality drives the markets. Hope is rapidly fading that Barack Obama can make the recessionary tides recede other than on their own pace. In the meantime, please ask yourself what to do with your money when you just know that Citigroup and Bank of America are insolvent, and Wells Fargo and JPMorgan Chase may be as well.
Barack Obama said on the campaign trail that Americans would have to tighten their belts. He should continue on that theme, especially now that Mr. Bush still is blamed by the public for the economy. We need an old-style capitalist society built on saving, not consumption, and therefore on equity, not debt. If Mr. Obama, who by multiple accounts is quite a bright and well-informed President, can propound that theme over and over again, he will find a receptive public. The rest will fall in place, no matter exactly what is done to the banks.
Copyright (C) Long Lake LLC 2009
Morning Mix; Good News Is Out There Somewhere, but Where?
First, today's Market Review, then economic comments and references to relevant posts/articles:
Japanese stock market disappointing: Bank of Japan announced it will purchase stocks; Japanese stock market had a nice move up; then closed down. No buying power. Asia mixed.
Gold: Churning; more signs of sellers' exhaustion: Super Bowl gold-related ad; and today a Bloomberg.com article: Sprott Says U.S. at Start of Depression That Will Boost Gold.
Reading the article suggests a different interpretation. Mr. Sprott has correctly been bearish on financials and the U.S. economy. However, the article references his call of March 6, 2008. Since that time, gold is down 6.3%. The correct call, made by Mish and others, was to buy Treasuries for the coming deflation. Mr. Sprott may have done well shorting financial stocks.
But the fundamental problem for gold is that it is a truly worst-case product. Unlike in the 1930s, it is NOT money. Roosevelt's manipulated upping of the gold price could only be done because gold was money. A rise in the price of gold now would not do anything to reverse deflation, if we really get there. Should the financial system of the world completely collapse, gold is a more-or-less universal back-up currency. But what kind of world it would be is unclear. It may be that owning gold through an ETF is speculating; but owning physical gold is somewhat like building a backyard bomb shelter during the Cold War.
U.S. stocks esp. disappointing in that consumer stocks such as Pepsi, Procter & Gamble and others are breaking down, reflecting and perhaps accurately projecting further economic problems worse than "expected". It has been noted here that McDonald's is a key for the market. It is acting poorly and if it goes to a new reaction low, that could set up a move to new lows.
There are some excellent posts. Naked Capitalism links to a Milken Institute report, "The Rise and Fall of the U.S. Mortgage and Credit Markets". It is quite readable and belongs on the E-shelf of people who wish to be able to review this current problem from some future vantage point. NC also has some very interesting links today.
Nouriel Roubini has a subscription-only post comparing Japan to the U.S. He has raised his estimate of a 10% chance of us following Japan into stag-deflation from 10% to 33%. I have to suspect that the longer the Federal Government "dithers" (his term and mine; remember that Team Obama/Reid/Pelosi anticipated a stimulus bill to be signed on Inauguration Day) re "stimulus" and a fix for the banking crisis, he will follow the dire Asian data and up the risk to 50%.
Correlating economics with markets, the money-center financial stocks continue to be weak and to underperform a flat stock market. Weakness in JPMorgan Chase and Bank of America have presaged bad news on the economy. Dr. Roubini has been predicting for some time that the fundamental news on the economy would surprise on the downside this quarter. That has clearly been true out of Asia. The safety of government debt continues to appeal to this blogger, especially because it is so hated.
Copyright (C) Long Lake LLC 2009
Japanese stock market disappointing: Bank of Japan announced it will purchase stocks; Japanese stock market had a nice move up; then closed down. No buying power. Asia mixed.
Gold: Churning; more signs of sellers' exhaustion: Super Bowl gold-related ad; and today a Bloomberg.com article: Sprott Says U.S. at Start of Depression That Will Boost Gold.
Reading the article suggests a different interpretation. Mr. Sprott has correctly been bearish on financials and the U.S. economy. However, the article references his call of March 6, 2008. Since that time, gold is down 6.3%. The correct call, made by Mish and others, was to buy Treasuries for the coming deflation. Mr. Sprott may have done well shorting financial stocks.
But the fundamental problem for gold is that it is a truly worst-case product. Unlike in the 1930s, it is NOT money. Roosevelt's manipulated upping of the gold price could only be done because gold was money. A rise in the price of gold now would not do anything to reverse deflation, if we really get there. Should the financial system of the world completely collapse, gold is a more-or-less universal back-up currency. But what kind of world it would be is unclear. It may be that owning gold through an ETF is speculating; but owning physical gold is somewhat like building a backyard bomb shelter during the Cold War.
U.S. stocks esp. disappointing in that consumer stocks such as Pepsi, Procter & Gamble and others are breaking down, reflecting and perhaps accurately projecting further economic problems worse than "expected". It has been noted here that McDonald's is a key for the market. It is acting poorly and if it goes to a new reaction low, that could set up a move to new lows.
There are some excellent posts. Naked Capitalism links to a Milken Institute report, "The Rise and Fall of the U.S. Mortgage and Credit Markets". It is quite readable and belongs on the E-shelf of people who wish to be able to review this current problem from some future vantage point. NC also has some very interesting links today.
Nouriel Roubini has a subscription-only post comparing Japan to the U.S. He has raised his estimate of a 10% chance of us following Japan into stag-deflation from 10% to 33%. I have to suspect that the longer the Federal Government "dithers" (his term and mine; remember that Team Obama/Reid/Pelosi anticipated a stimulus bill to be signed on Inauguration Day) re "stimulus" and a fix for the banking crisis, he will follow the dire Asian data and up the risk to 50%.
Correlating economics with markets, the money-center financial stocks continue to be weak and to underperform a flat stock market. Weakness in JPMorgan Chase and Bank of America have presaged bad news on the economy. Dr. Roubini has been predicting for some time that the fundamental news on the economy would surprise on the downside this quarter. That has clearly been true out of Asia. The safety of government debt continues to appeal to this blogger, especially because it is so hated.
Copyright (C) Long Lake LLC 2009
Monday, February 2, 2009
Improving the Economy by Smoothing Oil Price Cycles
Much of the economic history of the past four decades relates to oil price volatility. This brief note suggests a way for the Obama Administration and others interested in stability of oil pricing to smooth out the pricing cycles, with benefits to the world at large. The recent wildness of oil pricing has ultimately been bad for both producers and refiners of petroleum as well as for users of the refined products.
The brief history of oil prices since 1970 is as follows. Around 1970, the "Seven Sisters" pushed prices of Arabian and other oil down from $3/barrel to around $1.80/barrel. In response, OPEC was formed. Taking advantage of the U.S. defeat in Viet Nam, shifting attitudes to "economic imperialism", the ability of Arab oil producers to embargo oil to the U.S. in response to the 1973 Israel-Arab was, and other factors, the price of oil imposed by OPEC rose to about $12/barrel by 1975. The U.S. and the Western world de facto supported that price by "persuading" their banks to lend to poor countries so they could continue to "pay" for the now very-pricy oil. By the early 1980s, the Iran-Iraq War allowed OPEC to triple the oil price to about $36/barrel. At the peak of the hysteria after that war erupted, it was said that the then-small spot market for oil spiked into the high $40's per barrel.
About 18 years later, despite general price inflation, the spot price of oil, which was then a large market, dropped not much above $10/barrel.
Oil then went on a decade-long rise, peaking at what now looks like a blow-off top in price near $150/barrel. In half a year, the price fell by at least $100/barrel.
It is submitted that as part of the excessive financialization of so much of the Western world, the oil market has also been excessively placed in the hands of traders. Oil is ideal for long-term, fixed price contracts. Oil fields require large, long-term investments before they become productive. They typically have long lives, and labor is not a high part of the marginal cost of production. Gross profit margins once a decent find is in production are very high. The price of the marginal barrel of oil in the world is irrelevant to an efficient market price.
We must remember that the cost of hedging, and the cost of volatility, are real costs.
We also are aware that market pricing signals are helpful to producers and consumers. These signals were not present when the Seven Sisters and then OPEC effectively formed a cartel. There is, however, no need for a gigantic market such as oil to primarily be priced off of the spot market.
This blog therefore raises the question of whether cooperative meetings should be held involving governments of oil importing and oil exporting countries, integrated oil companies, and other parties, with the goal of moving most oil contracts to long term, fixed price status, but retaining a futures market.
Benefits would include greater stability in the world economy, fewer dollars "lost" to frictional trading costs, and a greater ability to plan for a transition to a non-petroleum-based "green" energy system.
The concepts that apply to oil also apply to other commodities, especially those that have long lead times to generate production and that are readily stored, such as metals.
Copyright (C) Long Lake LLC 2009
The brief history of oil prices since 1970 is as follows. Around 1970, the "Seven Sisters" pushed prices of Arabian and other oil down from $3/barrel to around $1.80/barrel. In response, OPEC was formed. Taking advantage of the U.S. defeat in Viet Nam, shifting attitudes to "economic imperialism", the ability of Arab oil producers to embargo oil to the U.S. in response to the 1973 Israel-Arab was, and other factors, the price of oil imposed by OPEC rose to about $12/barrel by 1975. The U.S. and the Western world de facto supported that price by "persuading" their banks to lend to poor countries so they could continue to "pay" for the now very-pricy oil. By the early 1980s, the Iran-Iraq War allowed OPEC to triple the oil price to about $36/barrel. At the peak of the hysteria after that war erupted, it was said that the then-small spot market for oil spiked into the high $40's per barrel.
About 18 years later, despite general price inflation, the spot price of oil, which was then a large market, dropped not much above $10/barrel.
Oil then went on a decade-long rise, peaking at what now looks like a blow-off top in price near $150/barrel. In half a year, the price fell by at least $100/barrel.
It is submitted that as part of the excessive financialization of so much of the Western world, the oil market has also been excessively placed in the hands of traders. Oil is ideal for long-term, fixed price contracts. Oil fields require large, long-term investments before they become productive. They typically have long lives, and labor is not a high part of the marginal cost of production. Gross profit margins once a decent find is in production are very high. The price of the marginal barrel of oil in the world is irrelevant to an efficient market price.
We must remember that the cost of hedging, and the cost of volatility, are real costs.
We also are aware that market pricing signals are helpful to producers and consumers. These signals were not present when the Seven Sisters and then OPEC effectively formed a cartel. There is, however, no need for a gigantic market such as oil to primarily be priced off of the spot market.
This blog therefore raises the question of whether cooperative meetings should be held involving governments of oil importing and oil exporting countries, integrated oil companies, and other parties, with the goal of moving most oil contracts to long term, fixed price status, but retaining a futures market.
Benefits would include greater stability in the world economy, fewer dollars "lost" to frictional trading costs, and a greater ability to plan for a transition to a non-petroleum-based "green" energy system.
The concepts that apply to oil also apply to other commodities, especially those that have long lead times to generate production and that are readily stored, such as metals.
Copyright (C) Long Lake LLC 2009
Winter of Discontent
Perhaps it's time for Monopoly sets to reappear both on kitchen tables and on expensive dining room tables for twenty in Greenwich mansions.
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
Sunday, February 1, 2009
Mark to Market? Yes . . . But How?
Today's "Naked Capitalism" addresses in a direct and important way the core of the financial crisis, in the post "Fix the Accounting, Then Fix the System".
Your humble blogger has been saying for some time that efforts to prop up bank asset values are prolonging the financial crisis, and the the various incarnations of "bad bank" plans inevitably entail buying dud assets at above market prices. That has the ugly side effect, which some no doubt see as a virtue, of letting banks that hold similar assets mark them at phony prices. The mechanism is different, but failing to write down bad assets is straight out of the Japan playbook.
The financial system grew too large by lending money to people and businesses who could not afford them (at least, if anything remotely bad happened, and bad things happening is part of the human condition). That means it CANNOT be restored to status quo ante (unless you are willing to see it fall apart again in short order). But the plans in motion seem to be an effort to do just that.
Instead, we need a program for shrinking and rationalizing the financial system.
These comments by Yves Smith are sentiments that have been echoed here many times. The post then goes on to quote extensively from a post from Roger Ehrenberg's blog "Information Arbitrage". This blog has a number of recent posts with opinions on the ongoing and proposed plans for the financial bailout hat find complete agreement here. Yesterday's IA post, Fix the Accounting, Then Fix the System, quoted extensively in the NC post from today, would also find complete agreement if the implementation could be clarified. Here is the operative part of this post:
What needs to happen, right now, is to make EVERY financial institution apply mark-to-market accounting to their portfolios. No readily observable market? Have an administrator apply an independent third-party valuation that takes into account polling possible buyers. . .
On Monday, President Obama should get together with Mary Schapiro of the SEC and insist on a clean accounting of all financial institution balance sheets - IMMEDIATELY. We can then truly put a good bank/bad bank plan into motion . . .
DoctoRx here. Full agreement on the concept of mark-to-market. Yet how can an unknown, unnamed administrator come up with a market price? Which possible buyers of which quantity of inventory does one poll? How does polling produce a reliable market price? Here are certain points and questions in more detail:
Given the reality-based, taxpayer-friendly orientation of Mr. Ehrenberg, it would be valuable if he could flesh out his thinking regarding the implementation of his proposal. (It would also be interesting if he could comment on a somewhat different proposal, as follows.)
Econblog Review proposal:
Background: The Government is "all over" the troubled financial institutions and knows more than it can say about which are the most troubled. Treasury and the Fed currently have good knowledge of the approximate solvency of these institutions under a mark to market system.
Proposal: The Government should take into receivership or nationalize any probably insolvent institution that is too systemically important to go into an unsupervised bankruptcy. It should then expeditiously sell off the assets. The stock and bond-holders of these institutions will suffer the first losses (except for recent purchasers of Government-guaranteed securities, of course).
This proposal avoids the need for the Government to have a "bad bank" containing devalued securities come into existence. If, for example, an institution thought to be insolvent actually was shown to be solvent after sales of the Tier 3, difficult-to-value assets, great! Those that are insolvent can be shut down in an organized way and enter bankruptcy.
This proposal here is offered humbly, as the blogger is not a financial person by training. However, it perhaps is worthy of consideration. It relies on the principle that the only value for a security is an actual price when it is put up for sale, not estimates of value by possible buyers which have no money actually at risk. This plan perhaps can be implemented more-or-less immediately, perhaps by Executive/regulatory action, without waiting for a potentially lengthy valuation process that may be no better than current "estimates". Government has fiddled too long whilst Rome has been burning.
Copyright (C) Long Lake LLC 2009
Your humble blogger has been saying for some time that efforts to prop up bank asset values are prolonging the financial crisis, and the the various incarnations of "bad bank" plans inevitably entail buying dud assets at above market prices. That has the ugly side effect, which some no doubt see as a virtue, of letting banks that hold similar assets mark them at phony prices. The mechanism is different, but failing to write down bad assets is straight out of the Japan playbook.
The financial system grew too large by lending money to people and businesses who could not afford them (at least, if anything remotely bad happened, and bad things happening is part of the human condition). That means it CANNOT be restored to status quo ante (unless you are willing to see it fall apart again in short order). But the plans in motion seem to be an effort to do just that.
Instead, we need a program for shrinking and rationalizing the financial system.
These comments by Yves Smith are sentiments that have been echoed here many times. The post then goes on to quote extensively from a post from Roger Ehrenberg's blog "Information Arbitrage". This blog has a number of recent posts with opinions on the ongoing and proposed plans for the financial bailout hat find complete agreement here. Yesterday's IA post, Fix the Accounting, Then Fix the System, quoted extensively in the NC post from today, would also find complete agreement if the implementation could be clarified. Here is the operative part of this post:
What needs to happen, right now, is to make EVERY financial institution apply mark-to-market accounting to their portfolios. No readily observable market? Have an administrator apply an independent third-party valuation that takes into account polling possible buyers. . .
On Monday, President Obama should get together with Mary Schapiro of the SEC and insist on a clean accounting of all financial institution balance sheets - IMMEDIATELY. We can then truly put a good bank/bad bank plan into motion . . .
DoctoRx here. Full agreement on the concept of mark-to-market. Yet how can an unknown, unnamed administrator come up with a market price? Which possible buyers of which quantity of inventory does one poll? How does polling produce a reliable market price? Here are certain points and questions in more detail:
1. Consider, for example, John Paulson's Year-End Letter to clients, which was leaked to the New York Times and which can be found at Paul Kedrosky's Infectious Greed website at the hyperlink above. This letter makes it clear how research-intensive is the process of valuing each individual CDO and similar security; it states that of similar-seeming securities, some might be currently undervalued and be expected to pay off at par, whereas others might truly be valueless.
The house is burning; the time taken to value these securities could be lengthy, and the values may change rapidly.
2. A specific question is whether the securities would be valued as if they were parceled out in sections, let us say monthly, or whether they would all be placed on the market simultaneously.
The price can vary greatly depending on how much inventory is for sale.
3. Another specific point is that fair value is in the eye of the buyer or seller. Fair value to "sharks" such as Mr. Paulson's company may not be fair value to a financial institution that might be a buyer of the security but also holds some similar securities, and in no way wants the estimated market value of the currently-owned security marked down just so cheaper inventory can be acquired.
4. Another question is who would pay for all the administrative/valuation work. If the cost is dumped on the financial institution, then one ends up with a similar problem to the rating agencies being paid by the issuer of the security and coming up with a favorable rating.Given the reality-based, taxpayer-friendly orientation of Mr. Ehrenberg, it would be valuable if he could flesh out his thinking regarding the implementation of his proposal. (It would also be interesting if he could comment on a somewhat different proposal, as follows.)
Econblog Review proposal:
Background: The Government is "all over" the troubled financial institutions and knows more than it can say about which are the most troubled. Treasury and the Fed currently have good knowledge of the approximate solvency of these institutions under a mark to market system.
Proposal: The Government should take into receivership or nationalize any probably insolvent institution that is too systemically important to go into an unsupervised bankruptcy. It should then expeditiously sell off the assets. The stock and bond-holders of these institutions will suffer the first losses (except for recent purchasers of Government-guaranteed securities, of course).
This proposal avoids the need for the Government to have a "bad bank" containing devalued securities come into existence. If, for example, an institution thought to be insolvent actually was shown to be solvent after sales of the Tier 3, difficult-to-value assets, great! Those that are insolvent can be shut down in an organized way and enter bankruptcy.
This proposal here is offered humbly, as the blogger is not a financial person by training. However, it perhaps is worthy of consideration. It relies on the principle that the only value for a security is an actual price when it is put up for sale, not estimates of value by possible buyers which have no money actually at risk. This plan perhaps can be implemented more-or-less immediately, perhaps by Executive/regulatory action, without waiting for a potentially lengthy valuation process that may be no better than current "estimates". Government has fiddled too long whilst Rome has been burning.
Copyright (C) Long Lake LLC 2009
Hose of Morgan: A Run by the Bank
In case any reader has illusions about the ethics of the large financial institutions that have received massive amounts of direct taxpayer money, comes this bombshell from the New York Times Business section:
JPMorgan Exited Madoff-Linked Funds Last Fall
This appears damning. Some excerpts:
JP Morgan Chase says that its potential losses related to Bernard L. Madoff, the man accused of engineering an immense global Ponzi scheme, are “pretty close to zero.” But what some angry European investors want to know is when the bank cut its exposure to Mr. Madoff — and why.
As early as 2006, the bank had started offering investors a way to leverage their bets on the future performance of two hedge funds that invested with Mr. Madoff. To protect itself from the resulting risk, the bank put $250 million of its own money into those funds.
But the bank suddenly began pulling its millions out of those funds in early autumn, months before Mr. Madoff was arrested, according to accounts from Europe and New York that were subsequently confirmed by the bank. The bank did not notify investors of its move, and several of them are furious that it protected itself but left them holding notes that the bank itself now says are probably worthless.
Hmmm . . .
If you read the entire article and are not a lawyer, you may wish to focus not on the technical issue of liability for JP Morgan Chase but on whether the company lived up to the phrase it uses on its website ("Our Culture" sub-section) to describe itself:
"at all times the idea of doing only first-class business, and that in a first-class way".
Copyright (C) Long Lake LLC 2009
JPMorgan Exited Madoff-Linked Funds Last Fall
This appears damning. Some excerpts:
JP Morgan Chase says that its potential losses related to Bernard L. Madoff, the man accused of engineering an immense global Ponzi scheme, are “pretty close to zero.” But what some angry European investors want to know is when the bank cut its exposure to Mr. Madoff — and why.
As early as 2006, the bank had started offering investors a way to leverage their bets on the future performance of two hedge funds that invested with Mr. Madoff. To protect itself from the resulting risk, the bank put $250 million of its own money into those funds.
But the bank suddenly began pulling its millions out of those funds in early autumn, months before Mr. Madoff was arrested, according to accounts from Europe and New York that were subsequently confirmed by the bank. The bank did not notify investors of its move, and several of them are furious that it protected itself but left them holding notes that the bank itself now says are probably worthless.
Hmmm . . .
If you read the entire article and are not a lawyer, you may wish to focus not on the technical issue of liability for JP Morgan Chase but on whether the company lived up to the phrase it uses on its website ("Our Culture" sub-section) to describe itself:
"at all times the idea of doing only first-class business, and that in a first-class way".
Copyright (C) Long Lake LLC 2009
I Second That Evasion: Follow-Up You Could Not Make Up
The repeated ironies and hypocrisies are too delicious to resist, so herewith follows a brief post on the Daschle tax holiday flap. From Bloomberg.com's Daschle Raised Tax Question in June, Finance Report Says comes the detail that one could not invent:
Medicare Payments Due
The former senator has agreed that he will have to adjust again his 2005, 2006 and 2007 tax returns because he didn’t pay Medicare taxes on the additional taxable income he incurred with the use of the car, the Finance Committee staff reported.
As Health and Human Services secretary, Daschle would oversee Medicare, the insurance program for the elderly and disabled.
As a reminder, Mr. Daschle apparently consulted with his accountant in June 2007 because the former Senator suspected that the private use of a chauffered limo was in fact a taxable service, paid back taxes and interest in January 2008 after being nominated for Secretary of Health and Human Services, but no one noticed the continued underpayment (!?).
There is a wild and crazy pattern here. Mr. Obama feels that only a tax evader, Mr. Timothy Geithner, is the right person to run the Treasury Department; by far the greatest number of Treasury employees work for the Internal Revenue Service. Now, Mr. Obama feels that despite having no special expertise in healthcare policy, the right person to run HHS is Mr. Daschle, a lawyer who, despite having an accountant, was apparently unaware that there is a 2.9% surtax on earned income allegedly to finance Medicare.
Not to forget, but the new Secretary of State famously shot her Presidential candidacy in the foot when she repeatedly told the untrue story about landing in Bosnia under sniper fire as First Lady.
Next, to replace Mr. Gates as Defense Secretary, a draft dodger?
Copyright (C) Long Lake LLC 2009
Medicare Payments Due
The former senator has agreed that he will have to adjust again his 2005, 2006 and 2007 tax returns because he didn’t pay Medicare taxes on the additional taxable income he incurred with the use of the car, the Finance Committee staff reported.
As Health and Human Services secretary, Daschle would oversee Medicare, the insurance program for the elderly and disabled.
As a reminder, Mr. Daschle apparently consulted with his accountant in June 2007 because the former Senator suspected that the private use of a chauffered limo was in fact a taxable service, paid back taxes and interest in January 2008 after being nominated for Secretary of Health and Human Services, but no one noticed the continued underpayment (!?).
There is a wild and crazy pattern here. Mr. Obama feels that only a tax evader, Mr. Timothy Geithner, is the right person to run the Treasury Department; by far the greatest number of Treasury employees work for the Internal Revenue Service. Now, Mr. Obama feels that despite having no special expertise in healthcare policy, the right person to run HHS is Mr. Daschle, a lawyer who, despite having an accountant, was apparently unaware that there is a 2.9% surtax on earned income allegedly to finance Medicare.
Not to forget, but the new Secretary of State famously shot her Presidential candidacy in the foot when she repeatedly told the untrue story about landing in Bosnia under sniper fire as First Lady.
Next, to replace Mr. Gates as Defense Secretary, a draft dodger?
Copyright (C) Long Lake LLC 2009
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