Zombie Regulation
Posted: September 10, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy | Tags: bank regulation, banker pay, Goldman Sachs Comments Off on Zombie Regulation
Public Policy chaos is hard to miss these days. One moment it’s which health plan will make its way through the blue dogs in the Senate and the liberals in the house. The next moment it’s escalation of military actions in Afghanistan; probably where the original quagmire reference was developed at the dawn of time. Look this way!!! No look that way!!! Then there’s the forgotten war against financial risk excess. I could create a pretty good argument that much of the chaos might be to distract us from the rumblings still coming from the Wall Street fault line. Good thing the Europeans are looking, because it seems that we’re certainly not. That means they’ll be at least one safe place to put your money, eventually. Unfortunately, it won’t be here.
The Chief Executive of the Vampire squid was in Germany this week telling the Europeans exactly what they wanted to hear (h/t to myiq2xu). This should’ve elicited the “D’oh” heard round the world. Problem is, no one in the U.S. is listening. We have yet to see any serious proposal to regulate and standardize the types of complex financial derivatives that nearly brought the world economy to it’s knees less than a year ago.
Lloyd Blankfein, chief executive of Goldman Sachs, on Wednesday admitted that banks lost control of the exotic products they sold in the run-up to the financial crisis, and said that some of the instruments lacked social or economic value.
In a speech to the Handelsblatt banking conference in Frankfurt, he also repeated an attack, first made in the spring, on Wall Street compensation practices, calling the furore over bankers’ pay “understandable and appropriate”.
The startling message from the head of the world’s most high-profile investment bank echoes comments by Lord Turner, chairman of the Financial Services Authority, the UK regulator, who provoked controversy last month when he questioned the social value of much investment banking activity.
Mr Blankfein said: “The industry let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them.”
This is so true. When it takes an army of lawyers to work on one tranche and the contracts it involves, when it takes 
math that requires physicists turned financiers to price the silly things, and when the resolution process is so whacked that it can take months to figure out who owns what, you’ve got control problems. Even more true is the fact that investments in these products doesn’t really create anything of value. It ties capital up in arbitrage and speculation rather than placing it the hands of entrepreneurs that actually create products and services. Top it off with cash out flows via bonuses from stock holders to what amounts to a professional gambling class and you’re bound to create a major clusterfuck eventually. So, given the clusterfuck last year, why aren’t we rewriting financial law?
The Blame Game
Posted: September 7, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Bonus Class, The DNC, The Great Recession, The Media SUCKS, U.S. Economy, Voter Ignorance | Tags: Congressman Alan Grayson, Fannie Mae, Franklin Reins, Freddie Mac Comments Off on The Blame Game
It’s amazing to me that so many people can get so worked up about one mid level bureaucrat in the White House who is a repentant communist and says he accidentally signed a 9-11 truther petition thinking it was just a request for more information on what the White House knew prior to those terrorist attacks. Meanwhile, we have a Secretary Treasury whose taken gifts from banks, underpaid his taxes by more money than I personally see in years, and seems completely captured by Wall Street and unable to draft decent regulation containing their gambling addiction. Then, there is the fact that I continually write about the same people in Wall Street and the Investment Banking community cooking up death derivatives and going about their merry way, subsidized, unpunished, and totally unrepentant over causing the worst financial crisis since 1929.
I just have to scream: WTF is wrong with you people? Why are we punishing some one for his venture into social activism while completely ignoring people that are making off with our national treasure and the lifeblood of our mixed market economy? These are folks that drove your house prices down, ruined your pension plans and your 401k, and are taking bailouts by the billions. Where’s the sense of balance? How does this resemble justice?
Here’s a REALLY good example from today’s NY Times. Written by Gretchen Morgensen, it’s called “Fair Game-They Left Fannie Mae, but we got the Legal Bills.” It’s all about the government having to bail out Fannie Mae because of the extremely bad management practices, and yes, illegal accounting practices that stuck us with a huge mess and an even bigger bill. Morgensen interviews Representative Alan Grayson, a Florida Democrat, who is one congress critter doing his oversight responsibility while others wallow in the political contributions from their regulatees.
With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion.
Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.
That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.
When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal.
Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer.
“I cannot see the justification of people who led these organizations into insolvency getting a free ride,” Mr. Grayson said. “It goes right to the heart of what people find most disturbing in this situation — the absolute lack of justice.”
What’s the difference between getting justice and getting retribution? Well, in terms of missing it by light years, compare the treatment between social activist Van Jones and practitioners of accounting malpractice like Raines, Howard and Spencer (or tax dodgers who get gifts from Wall Street Bankers like our SOT). It’s the difference between a slap on the wrist and a slap across the face.
It’s just a Ball of Infusion
Posted: September 5, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy | Tags: bank profitability, credit card lending, discount window, mortgage deliquencies, prime mortgages, Subprime mortgages Comments Off on It’s just a Ball of Infusion
I’m having a difficult time reconciling the new found bank profitability driving more executive bonuses to this article at the WSJ. It’s called “Troubles for ‘Prime Borrowers Intensify” and it has some startling data. First there’s these numbers on prime mortgages which are undoubtedly creating some of the problems at the FHA that’s fueling rumors of the need for yet another bailout.
The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers.
Losses are also mounting in that group for credit card debt. This is because of the increased duration of unemployment for many folks. They basically are tapped out and don’t even have their home equity as a source of potential liquidity. Since unemployment, and especially duration is not really on the mend, how long can this go on before bank capital takes a hit again?
In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say.
About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession.
“They have made adjustments and made adjustments, but then you get to a point where you can’t adjust anymore,” says Mr. Luzon, who is a former banker.
“People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses,” he says.
So, my question is this. If some of the original bank profitability recently has been due the availability of cheap funds through the FED, TARP, and other government sources, if prime borrowers are now having increased difficulty paying their obligations, what happens to bank profitability if the government funds dry up? How long do we have to keep propping the banks up while they merrily repeat the same portfolio decisions that can’t work once the market rates are back at market levels? Also, how are they going to absorb these increasing level of loan losses?
I frankly can’t see the end to banks requiring cheap sources of funds like the Fed window. I can’t believe the economy is going to recover fast enough for this to change. How long will we have to infuse the banks with tax payer dollars and on-the-cheap loans through the discount window? I don’t think most of these institutions could function without it.
Labor Day Blues
Posted: September 4, 2009 Filed under: U.S. Economy | Tags: FHA, payrolls, total hours worked, unemployment statistics Comments Off on Labor Day Blues
The release of the new unemployment data and labor market data was pretty much in keeping with expectations. MarketWatch reports that the unemployment rate is now at an 26 year high coming in at 9.7%. The drop in payroll numbers wasn’t as severe as it has been recently, but there are still troubling underlying factors.
Payrolls fell in most sectors of the economy except for health care. Total hours worked in the economy dropped by 0.3%, long-term unemployment worsened, and the number of people working just part time who wanted full-time work reached 9.1 million, up 278,000.
The number of people who’ve been out of work longer than six months nudged up to 5 million, representing about one-third of the unemployed.
An alternative measure of unemployment that includes discouraged workers and those forced to resort to part-time work rose to 16.8% from 16.3%, marking the highest on record dating back to 1995.
Average hourly earnings on the month rose 6 cents, or 0.3%, to $18.65 an hour. In the past year, average hourly earnings are up 2.6%.
Of the 271 industries as tracked by the Labor Department, 35% were adding workers in August, according to a survey of hundreds of thousands of business establishments.
Private-sector employment fell by 198,000 in August. Employment in the private-sector is now lower than it was 10 years ago
The duration of employment is some of the worst we’ve seen in a long time. That’s represented by the number of 
people that have been out of work longer than six months. Also, the level of discouraged workers and people involuntarily working part time is incredibly high. This is reflected in the last fact which shows that the economy has taken back all of the jobs created over the last 10 years and then some. There is simply no where to go.
One of the other interesting details in the numbers was the loss of government jobs by 18,000. Only food, beverage, and petroleum industries increased along with health care. The loss of government job is a reflection of the softening in state economies that will no longer be able to plug funding gaps with federal stimulus checks. Shortly, the slash of state budgets around the country will begin to drive the unemployment rate higher.
You can tell that it will be awhile before this all turns around because the average workweek was unchanged at 33.1 hours. If employers aren’t fully utilizing their current staff, they certainly aren’t going to hire any more.
The bad job market has undoubtedly led to this bit of news too. Loan losses at the Federal Housing Administration (FHA) are so bad that there’s question of solvency. The WSJ reports we may be in for yet another bailout. This creates a double whammy because the agency insures loans for buyers with small downpayments and has be instrumental in a lot of the first time buy loans coming out of the stimulus plan.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.
Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
If its reserves fall short, the agency is obliged to notify Congress, which could spark a commotion over the extent to which the government is funding losses in the housing market. Some housing analysts have said losses might lead the FHA to pull back lending, which has helped boost flagging housing demand.
It appears that more and more federal programs geared to help ordinary Americans are on the ropes. This is especially tough since so many folks have lost their jobs, the number of hours they work, or are experiencing cuts in benefits and salary. There’s still a long way to go before this recession is over and we show any signs of a real recovery. Consider that we’ve lost all gains on assets and now all jobs created in the last 10 years. We’ve already got one lost decade under our belt. What’s in store to stop the next one?
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And now, a Game of Concentration
Posted: August 31, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy | Tags: banking cartel, banking oligopoly, TARP Comments Off on And now, a Game of ConcentrationWhen I saw this NYT Headline, “As Big Banks Repay Bailout Money, U.S. Sees a Profit”, it really did not send me to a
Expecting customer service? Fat Chance!
happy place. You’re probably going to raise a Spock-like eyebrow and ask me to explain. Why, Kat, you’re probably saying, isn’t a 15% return on our “money” a good deal in this market? Remember finance 101, rates are relative to risk so let me tell you why I’m a concern troll on this. First, here’s what the author thought was the punch line to this story.
But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.
As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”
So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.
What the author really missed was that information also comes on the back of this information last week that shows that the government has created incredible high concentration ratios in the banking market. I discussed it here in a piece where I called it a big ol’ game of monopoly. This is an ongoing policy disaster and many folks appear to be missing it.
J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
There are so many headlines buried in that NYT piece that you’d think it was written by ostriches. This is one alone should’ve grabbed a banner headline.
But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.
Well, isn’t that nice, the best borrowers paid back first. Some one over there ever take any finance classes? I doubt it. Of course, that’s going to happen you twit!! It’s the implication of what that means that scares the pants off me. The fact they’ve borrowed funds allows us to regulate their actions. Now, the big ones are paying them back so they’re out of the reach of tighter TARP regulation! They like their old loosey goosey nonsense regulations especially now that they’re all set up as a de facto cartel with government blessing. They’re ready to price discriminate, restrict services, and create extraordinary profits all they want with FEW RESTRICTIONS. Just wait until we get to witness the new and improved, unregulated CEO pay schemes!
It’s similar to handing all of our energy needs and policy over to OPEC.
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