Clusterstock

What's Happening Today: Friday, July 10

Erin Geiger Smith — Fri, 10 Jul 2009 06:00:00 EDT

Macro

8:30 AM: Export Prices
8:30 AM: Import Prices
8:30 AM: Trade Balance

Earnings

Audiovox Corporation (VOXX) (After Market)
Infosys Technologies LTD (INFY) (After Market)

All times ET.

Get This Delivered To Your Inbox

You can get this dropped in your inbox every morning as The Daily Precap. It's simple. It's convenient. It's free. All we need is your email address (though we'd love your name and state, too, if you're willing to share it). Sign up below!

Join the conversation about this story »

FOUND! Ruth Madoff Tracked Down On Long Island

John Carney — Thu, 09 Jul 2009 17:40:00 EDT

The kids over at Cityfile think they may have pinpointed the whereabouts of Ruth Madoff.

As you know, Ruth’s been missing in action since she was forced out of her East 64th Street penthouse last week.

A “reliable source” tells Cityfile that Ruth has been staying at the home of her niece, Diane Hochman, in Hewlett, Long Island. The sourcing is a bit iffy, however. This reliable person doesn’t have first hand knowledge. He or she has just “been in touch with acquaintances of the family.” Good enough!

Here’s Cityfile’s report:

Hochman is the daughter of Joan Roman, Ruth's sister. Joan's husband, Robert Roman, used to work at Bernard L. Madoff Investment Securities until he retired a couple of years ago. His responsibilities were then handed over to Seth Hochman, Diane's husband and Joan's son-in-law, who worked for his uncle, Bernie, until the firm came crumbling down. Confused yet? It's a tangled web.

We've made numerous attempts today to reach Ruth at the Hochman house to confirm she's there, but we've been getting voicemail. (Perhaps they know better than to answer the phone.) Hopefully one of the fine tabloids in town can do the legwork here and get someone out to Hewlett to surprise her on the front lawn.

Click here for more pictures of Ruth's secret getaway at Cityfile.

Join the conversation about this story »

See Also:

Mortgage Bankers: Bring Back The No-Doc Loan

Joe Weisenthal — Thu, 09 Jul 2009 16:59:00 EDT

Hello old friend.

Realtor.org: No-doc loans are particularly hard to get, locking out people whose incomes are derived from investments or who are able to tax-shelter significant dollars.

The California Mortgage Bankers Association spokesman Dustin Hobbs says the industry understands that banning most alternative financing isn’t the long-term answer.

"It's a reaction to the current environment," he says. "There's such a lack of appetite for risk right now in general that any product viewed as having any sort of risk at all has a tough hill to climb."

Chris George, president of CMG Mortgage, predicts that no-docs and other nontraditional loans will be back within the next six months as lenders gain confidence. "As with injuries, as with your credit, as with the economy, time heals all wounds," he says.

Karl Denninger thinks this is an invitation to bringing back mortgage fraud. That's certainly a risk, but it's also true that old-style, 30-year mortgage is something of a tired dinosaur, that makes less and less sense. There are more people working as freelancers, and the idea of having a lifetime job at the big factory in your town is a joke.

To some extent, that just means renting is probably on a long-term secular increase, a point which Richard Florida has been talking about quite a bit. And for the people who do have abnormal careers or income streams, certain much-derided mortgage, such as the pick-a-pay or no-doc will probably come bac, eventually, though six months seems way too optimistic.

Join the conversation about this story »

See Also:

How To Make Bankslaughter Slightly Less Stupid

John Carney — Thu, 09 Jul 2009 16:38:36 EDT

Now that we know that many of our financial institutions have proved to have been disastrously managed, people have been looking to find strict new rules they hope will improve things. The latest idea proposed from the pages of the Guardian is a new crime called “bankslaughter.”

We’d hoped this terrible idea would go away after we explained its stupidity. Unfortunately, it’s getting some support from otherwise bright people like James Kwak and the guys who write the Free Exchange blog for the Economist.

We already explained (here, here and here) what’s wrong with criminalizing bank failure. Maria Woehr at DealScape put up a nice summary.

We already explained (here, here and here) what’s wrong with criminalizing bank failure. Maria Woehr at DealScape put up a nice summary.
Bank executives faced with the prospect of a criminal investigation and possible conviction would likely be overly cautious.
Being unlucky in the markets becomes a criminal matter.
This may not deter the true rogues who take the riskiest bets.
The criminal process is not well-suited to settling the kind of complex financial investigation.
As failures multiply during an economic downturn and prosecutors begin to launch bankslaughter investigations, banks would reign in their own risk-taking.
Hedge funds blow up all the time, and nobody calls for their head
Shareholders want bank managers to take on enormous risks. If anything, the problem is that they want bank managers to take on too much risk

James Kwak actually disagrees with our arguments far less than he thinks he does. Our main objection to bankslaughter was to it’s criminal aspects. Kwak agrees that this is “overkill.” Instead, he favors a watered down version of bankslaughter that would work like tort law, punishing negligent or wreckless bank management in civil courts. This would be a vast improvement over the criminal version but there are still serious problems with this proposal.

To begin with, who is the injured party with standing to bring a suit? In the examples proposed by Kwak, the injured are innocent bystanders. Shareholders of banks have entered into a agreement with the managers voluntarily. We know they don’t object to risk taking by bank managers because they bought shares. If they want to change the terms of the agreement they have an easy way to do this: sell their stock and buy shares of a company that promises to be more conservative. Why impose this new duty of care on bank managers if shareholders don’t want it?

To but this more seriously, the corporate form is designed to divorce risk taking from management. The shareholders take the risk, while the management runs the company under various duties intended to maximize shareholder returns. We try to further align the incentives of managers with shareholders by making them risk-takers as well, through things such as incentive pay. Making the managers bear unlimited liability, however, would divorce management interests from shareholders. Instead of business judgment, companies would be governed according to a regulatory judgment. This would obviously diminish investor appetite for capitalizing banks.

More plausibly, the injured parties are the taxpayers who are forced to bailout failed financial institutions. This makes some sense. With banks operating under an implicit government guarantee, shareholders and creditors have incentives to permit banks to take on too much risk. In this circumstance, it might make sense to impose an additional liability on firms whose blowups have large societal costs.

This would basically operate as a claw-back of wealth from managers whose firms failed. There are still problems with this idea—which we'll save for another post—but reimagining it as a civil tort with taxpayers as the injured parties ameliorates some of the more severe problems we mentioned earlier.

Join the conversation about this story »

See Also:

CHART OF THE DAY: The Man Recession

Joe Weisenthal,Kamelia Angelova — Thu, 09 Jul 2009 16:18:00 EDT

Today's chart simply represents the gap between male and female unemployment. As you can see, we're in uncharted territory. Or, at least, newly charted territory.

The zero line in the center of the graph means that men and women are equally unemployed. When the line dips below zero, as it did for 20 years between 1958 and 1978, it means that the female unemployment rate is higher than the male rate. When it climbs above zero, the male unemployment rate is relatively ascendant.

Get This Delivered To Your Inbox

You can get this dropped in your inbox every afternoon as The Chart Of The Day. It's a simple. It's convenient. It's free. All we need is your email address (though we'd love your name and state, too, if you're willing to share it). Sign up below!

Join the conversation about this story »

Don't Pass Ron Paul's "Audit The Fed" Bill

Donald Kohn — Thu, 09 Jul 2009 14:36:44 EDT

(This testimony was delivered before the Subcommittee on Domestic Monetary Policy and Technology)

Chairman Watt, Ranking Member Paul, and other members of the Subcommittee, I appreciate the opportunity to discuss with you the important public policy reasons why the Congress has long given the Federal Reserve a substantial degree of independence to conduct monetary policy while ensuring that we remain accountable to the Congress and to the American people. In addition, I will explain why an extension of the Federal Reserve’s supervisory and regulatory responsibilities as part of a broader initiative to address systemic risks would be compatible with the pursuit of our statutory monetary policy objectives. I also will discuss the significant steps the Federal Reserve has taken recently to improve our transparency and maintain accountability.

Independence and Accountability
A well-designed framework for monetary policy includes a careful balance between independence and accountability. A balance of this type conforms to our general inclination as a nation to have clearly drawn lines of authority, limited powers, and appropriate checks and balances within our government; such a balance also is conducive to sound monetary policy.

The Federal Reserve derives much of the authority under which it operates from the Federal Reserve Act. The act specifies and limits the Federal Reserve’s powers. In 1977, the Congress amended the act by establishing maximum employment and price stability as our monetary policy objectives; the Federal Reserve has no authority to establish different objectives. At the same time, the Congress has--correctly, in my view--given the Federal Reserve considerable scope to design and implement the best approaches to achieving those statutory objectives. Moreover, as I will discuss in detail later, the independence that is granted to the Federal Reserve is subject to a well-calibrated system of checks and balances in the form of transparency and accountability to the public and the Congress.

The latitude for the Federal Reserve to pursue its statutory objectives is expressed in several important ways. For example, the Congress determined that Federal Reserve policymakers cannot be removed from their positions merely because others in the government disagree with their views on policy issues. In addition, to guard against indirect pressures, the Federal Reserve determines its budget and staff, subject to congressional oversight. Thus, the system has three essential components: broad objectives set by the Congress, independence to pursue those legislated objectives as efficiently and effectively as possible, and accountability to the Congress through a range of vehicles.

Benefits of Independence to Conduct Policy in Pursuit of Legislated Objectives
The insulation from short-term political pressures--within a framework of legislated objectives and accountability and transparency--that the Congress has established for the Federal Reserve has come to be widely emulated around the world. Considerable experience shows that this type of approach tends to yield a monetary policy that best promotes economic growth and price stability. Operational independence--that is, independence to pursue legislated goals--reduces the odds on two types of policy errors that result in inflation and economic instability. First, it prevents governments from succumbing to the temptation to use the central bank to fund budget deficits. Second, it enables policymakers to look beyond the short term as they weigh the effects of their monetary policy actions on price stability and employment.

History provides numerous examples of non-independent central banks being forced to finance large government budget deficits. Such episodes invariably lead to high inflation. Given the current outlook for large federal budget deficits in the United States, this consideration is especially important. Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation. Moreover, the bond rating agencies view operational independence of a country’s central bank as an important factor in determining sovereign credit ratings, suggesting that a threat to the Federal Reserve’s independence could lower the Treasury’s debt rating and thus raise its cost of borrowing.¹ Higher long-term interest rates would further increase the burden of the national debt on current and future generations.²

The second way in which political interference with monetary policy can damage the economy is by promoting an undue focus on the short term. Because excessively easy monetary policy tends to boost economic activity temporarily before the destabilizing effects of higher inflation are felt, policymakers with a relatively short-term outlook may be tempted to ease monetary policy too much. The eventual result is higher inflation without any permanent benefit in terms of employment, an outcome that is inconsistent with the dual mandate for maximum employment and price stability. Thus the increase in inflation must be followed by policies to bring inflation back down--policies that have the side effect of temporarily reducing output and employment. The fixed, lengthy, and overlapping terms of Federal Reserve Board members, in combination with the other elements of operational independence, help ensure that the Federal Reserve appropriately considers both the short-term and long-term effects of its policy decisions.

Statistical studies have confirmed that countries with more independent central banks experience lower and more stable rates of inflation with no sacrifice of jobs or income.³ Moreover, low and stable rates of inflation help to deliver strong economic growth and high rates of employment. The benefits of central bank independence appear to be a major explanation for the trend I mentioned earlier of countries moving to establish or to enhance the independence of their central banks. It is surely no coincidence that countries around the world have experienced sustained declines in the level and variability of inflation as they have moved to grant their central banks greater operational independence.

Monetary Policy Independence and the Mitigation of Systemic Risk
Is monetary policy independence threatened by giving a central bank other responsibilities, such as supervisory and regulatory authority for some parts of the financial system? Are there potential conflicts between a high degree of independence for monetary policy and accountability in supervisory and regulatory policy? I believe that U.S. and foreign experience shows that monetary policy independence and supervisory and regulatory authority are mutually compatible and even have beneficial synergies.

The current financial crisis has clearly demonstrated the need for the United States to have a comprehensive and multifaceted approach to containing systemic risk. The Administration recently released a proposal for strengthening the financial system that would provide new or enhanced responsibilities to a number of federal agencies, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission with respect to over-the-counter derivatives, the SEC with respect to hedge funds and their advisers, and several agencies, including the Treasury, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the SEC with respect to the resolution of systemically important failing nonbank financial institutions. In addition, the proposal would provide the Federal Reserve certain new responsibilities for overseeing systemically important financial institutions and payment, clearing, and settlement arrangements.

These incremental new responsibilities are a natural outgrowth of the Federal Reserve’s existing supervisory and regulatory responsibilities. Through our role as consolidated supervisor of all bank holding companies (BHCs), the Federal Reserve has long been responsible for supervising many of the most important U.S. financial organizations, and in the current crisis several more large complex financial firms--including Goldman Sachs, Morgan Stanley, and American Express--have become bank holding companies. And the expanded regulatory authority of the Federal Reserve with respect to payment and settlement systems builds upon our existing responsibilities for supervising certain critical payment, clearing, and settlement systems, such as the Depository Trust Company and CLS Bank, as well as our historical efforts to reduce risk in such systems through, for example, our Payment System Risk Policy.⁴

The authorities that the Administration’s proposal would provide the Federal Reserve with respect to systemically important non-BHC financial firms and payment, clearing and settlement systems also are similar in many respects to the authorities that the Federal Reserve currently has with respect to bank holding companies and payment, clearing, and settlement systems under our supervision. The Administration’s proposal does call for a more macro-prudential approach to the supervision and regulation of systemically important financial firms and payment, clearing, and settlement systems, including the establishment of higher capital, liquidity, and risk-management requirements for systemically important firms. The Federal Reserve already has been moving to incorporate a more macro-prudential approach to our supervisory and regulatory programs, as evidenced by the recently completed Supervisory Capital Assessment Program. The Federal Reserve has also long been a leader in the development of strong international risk-management standards for payment, clearing, and settlement systems and has implemented these standards for the systems it supervises.

In our supervision of bank holding companies and our oversight of some payment systems, we already work closely with other federal and state agencies and participate in groups of regulators and supervisors such as the Federal Financial Institutions Examination Council and the President’s Working Group on Financial Markets. These responsibilities and close working relationships have not impinged on our monetary policy independence, and we do not believe that the enhancements proposed by the Administration to the Federal Reserve’s supervisory and regulatory authority would undermine the Federal Reserve’s ability to pursue our monetary policy objectives effectively and independently.

Indeed, these enhancements would complement the Federal Reserve’s monetary policy responsibilities. The Federal Reserve and other central banks have always been involved in issues of systemic risk, most notably because central banks act as lenders of last resort. Central banks, which operate in markets daily and have macroeconomic responsibilities, bring a broad and unique perspective to analysis of developments in the financial system. And, as we have seen over the past two years, threats to the stability of the financial system can have major implications for employment and price stability. Thus, the Federal Reserve’s monetary policy objectives are closely aligned with those of minimizing systemic risk. To the extent that the proposed new regulatory framework would contribute to greater financial stability, it should improve the ability of monetary policy to achieve maximum employment and stable prices.

Accountability and Transparency
In a democracy, any significant degree of independence by a government agency must be accompanied by substantial accountability and transparency. The Congress and the Federal Reserve have established a number of policies and procedures to ensure that the Federal Reserve continues to use its operational independence in a manner that promotes the nation’s well-being. The Federal Reserve reports on its experience toward achieving its statutory objectives in the semiannual Monetary Policy Reports and associated congressional testimony. The Federal Open Market Committee (FOMC) releases a statement immediately after each regularly scheduled meeting and detailed minutes of each meeting on a timely basis. We also publish summaries of the economic forecasts of FOMC participants four times a year. In addition, Federal Reserve officials frequently testify before the Congress and deliver speeches to the public on a wide range of topics, including economic and financial conditions and monetary and regulatory policy.

Our financial controls are examined by an external auditor, and Reserve Bank operations and controls are reviewed by each Reserve Bank’s independent internal audit function and by Board staff who oversee Reserve Bank activities. We provide the public and the Congress with detailed annual reports on the consolidated financial activities of the Federal Reserve System that are audited by an independent public accounting firm. We also publish a detailed balance sheet on a weekly basis.

The Federal Reserve recognizes that the new programs we have instituted to combat the financial crisis must be accompanied by additional transparency. Americans have a right to know how the Federal Reserve is using taxpayer resources and they need to be assured that we are acting in a responsible manner that minimizes risk and maintains the integrity of our operations. We have increased the transparency of our actions while safeguarding our ability to achieve our public policy goals of fostering financial and economic stability. This year we expanded our website to include considerable background information on our financial condition and our policy programs. Recently, we initiated a monthly report to the Congress and the public on Federal Reserve liquidity programs that provides even more information on our lending, the associated collateral, and other facets of programs established to address the financial crisis. These steps should help the public understand the considerable efforts we have taken to minimize the risk of loss as we provide liquidity to the financial system in our role as lender of last resort. Altogether, we now provide a higher degree of transparency than at any other time in the history of the Federal Reserve System. Because of the large volume of information we publish, the Federal Reserve is among the most transparent central banks in the world.

Federal Reserve policymakers are highly accountable and answerable to the government of the United States and to the American people. The seven members of the Board of Governors of the Federal Reserve System are appointed by the President and confirmed by the Senate after a thorough process of public examination. The key positions of Chairman and Vice Chairman are subject to presidential and congressional review every four years, a separate and shorter schedule than the 14-year terms of Board members. The members of the Board of Governors account for seven seats on the FOMC. By statute, the other five members of the FOMC are drawn from the presidents of the 12 Federal Reserve Banks. District presidents are appointed through a process involving a broad search of qualified individuals by local boards of directors; the choice must then be approved by the Board of Governors. In creating the Federal Reserve System, the Congress combined a Washington-based Board with strong regional representation to carefully balance the variety of interests of a diverse nation. The Federal Reserve Banks strengthen our policy deliberations by bringing real-time information about the economy from their district contacts and by their diverse perspectives.

Oversight by the Government Accountability Office
On the topic of Federal Reserve accountability and transparency, the possibility of expanding the audit authority of the Government Accountability Office (GAO) over the Federal Reserve has recently been discussed. As you know, the Federal Reserve is subject to frequent audits by the GAO on a broad range of our functions.

For example, the supervisory and regulatory functions of the Federal Reserve are subject to audit by the GAO to the same extent as the supervisory and regulatory functions of the other federal banking agencies. Thus, the GAO has full authority to--and does in fact--audit the manner in which the Federal Reserve supervises and regulates bank holding companies on a consolidated basis. Moreover, if the Congress were to provide the Federal Reserve with responsibility for serving as the consolidated supervisor of systemically important financial firms that are not bank holding companies, the GAO would, under existing law, have full authority to audit the Federal Reserve’s supervision and regulation of such firms as well. We would expect the GAO to actively use that authority, as it does today. Indeed, as of June 29, 2009, the GAO had 19 engagements under way involving the Federal Reserve, including 14 that were initiated at the request of the Congress. In addition, since the beginning of 2008, the GAO has completed 26 engagements involving the Federal Reserve, including engagements related to the Basel II capital framework, risk-management oversight, the Bank Secrecy Act, and the Board’s Regulation B, which implements the Equal Credit Opportunity Act.

The Congress also recently clarified the GAO’s ability to audit the Term Asset-Backed Securities Loan Facility (TALF), a joint Treasury-Federal Reserve initiative, in conjunction with the GAO’s reviews of the performance of Treasury’s Troubled Asset Relief Program (TARP). The Federal Reserve has been working closely with the GAO to provide that agency with access to information and personnel to permit it to fully understand the terms, conditions, and operations of the TALF so that the TARP can be properly audited. At the same time, the Congress granted the GAO new authority to conduct audits of the credit facilities extended by the Federal Reserve to “single and specific” companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loan facilities provided to, or created for, American International Group and Bear Stearns. These facilities are markedly different from the widely available credit facilities--such as the discount window access for depository institutions, the Primary Dealer Credit Facility, and the Commercial Paper Funding Facility--that the Federal Reserve either has historically used or has recently established to address broad credit and liquidity issues in the financial system. For this reason, the Federal Reserve did not object to granting the GAO audit authority over these institution-specific, emergency credit facilities.

The Congress, however, has purposefully--and for good reason--excluded from the scope of potential GAO audits monetary policy deliberations and operations, including open market and discount window operations, and transactions with or for foreign central banks, foreign governments, and public international financing organizations. By excluding these areas, the Congress has carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining the independence of the central bank’s monetary policy functions and avoiding disruption to the nation’s foreign and international relationships.

The same public policy reasons that supported the creation of these exclusions in 1978 remain valid today. The Federal Reserve strongly believes that removing the statutory limits on GAO audits of monetary policy matters would be contrary to the public interest by tending to undermine the independence and efficacy of monetary policy in several ways. First, the GAO serves as the investigative arm of the Congress and, by law, must conduct an investigation and prepare a report whenever requested by the House or Senate or a committee with jurisdiction of either body. Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented, as well as recommendations to the audited agency and to the Congress for changes or future actions. Accordingly, financial markets likely would see the grant of audit authority with respect to monetary policy to the GAO as undermining monetary independence--with the adverse consequences discussed previously--particularly because GAO audits, or the threat of a GAO audit, could be used to try to influence monetary policy decisions.

Permitting GAO audits of monetary policy also could cast a chill on monetary policy deliberations through another channel. Although Federal Reserve officials regularly explain the rationale for their policy decisions in public venues, the process of vetting ideas and proposals, many of which are never incorporated into policy decisions, could suffer from the threat of public disclosure. If policymakers believed that GAO audits would result in published analyses of their policy discussions, they might be less willing to engage in the unfettered and wide-ranging internal debates that are essential to identifying the best possible policy options. Moreover, the publication of the results of GAO audits related to monetary policy actions and deliberations could complicate and interfere with the communication of the FOMC’s intentions regarding monetary policy to financial markets and the public more broadly. Households, firms, and financial market participants might be uncertain about the implications of the GAO’s findings for future decisions of the FOMC, thereby increasing market volatility and weakening the ability of monetary policy actions to achieve their desired effects.

These concerns extend to the policy decisions to implement the discount window and broadly available credit facilities. These facilities are extensions of our responsibility for promoting financial stability, maximum employment and price stability. Indeed, unlike the institution-specific loans that the Federal Reserve has made that now are subject to GAO audit, these broader market facilities are designed to unfreeze financial markets and lower interest rate spreads in concert with our other monetary policy actions. It is important that, like other monetary policy decisions, the Federal Reserve remain independent in making policy decisions regarding these facilities.

An additional concern is that permitting GAO audits of the broad liquidity facilities the Federal Reserve uses to affect credit conditions could reduce the effectiveness of these facilities in helping promote financial stability, maximum employment, and price stability. For example, even if strong confidentiality restrictions were established, individual banks might be more reluctant to borrow from the discount window if they knew that their identity and other sensitive information about their borrowings could be disclosed to the GAO. Rumors that a bank may have used the discount window can cause a damaging loss of confidence even to a fundamentally sound institution. Experience, including experience in the current financial crisis, shows that banks’ unwillingness to use the discount window can result in high and volatile short-term interest rates and limit the effectiveness of the discount window as a tool to enhance financial stability.

Overall, the Federal Reserve believes that removing the remaining statutory limits on GAO audits of monetary policy and discount window functions would tend to undermine public and investor confidence in monetary policy by raising concerns that monetary policy judgments in pursuit of our legislated objectives would become subject to political considerations. As a result, such an action would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.

Thank you for inviting me to present the Board’s views on this very important subject. I look forward to answering any questions you may have.

(via CrossingWallStreet)

Join the conversation about this story »

See Also:

Dykstra: "I'm Not Bankrupt" (VIDEO)

Joe Weisenthal — Thu, 09 Jul 2009 14:02:00 EDT

CNBC is running some interview footage between Lenny "Nails" Dykstra and Jane Wells. The money line: "I'm not bankrupt."

He's just looking to reorganize his assets, and he noted that Donald Trump has filed for bankruptcy multiple times. Apparently he's still making money trading stocks. Ok.

Join the conversation about this story »

See Also:

BUSTED: The Congressman With Cash In His Freezer

Joe Weisenthal — Thu, 09 Jul 2009 13:52:00 EDT

William Jefferson is the former Congressman currently on trial for corruption -- you know, one of those sacrificial lambs the government tosses out every once in a while to keep the public sated.

His main crime (probably) was being incredibly unsophisticated. TPMMuckraker has some great pictures of the cold hard cash he kept in his freezer.

This second one is even more incriminating, because it shows that not only does he keep cash in the fridge, but he eats tofu ice cream and veggie burgers.

Join the conversation about this story »

See Also:

Busted Sky Capital Boss Was An Eliot Spitzer Supporter

John Carney — Thu, 09 Jul 2009 13:29:00 EDT

The brokerage chief arrested yesterday by the FBI was a political donor to Eliot Spitzer, as were many of his employees.Their political connections stretch even further, including both Democrats and Republicans.

A three-year old profile in Forbes described the "second act" of Ross Mandell, who founded Sky Capital a few years after he became a poster-boy for how bad the securities industry was at booting out bad brokers. In 1996, the Wall Street Journal ran a story about Mandell noting despite numerous customer complaints, job terminations and a six-week suspension by the NYSE. Mandell denied wrong-doing but admitted to a cocaine addiction.

He made a comeback in the next decade, and that included cozying up to powerful politicians.

Here's how Forbes described it:

Despite Mandell's checkered record, his companies have attracted a slew of illustrious former politicians and government officials to advise and sit on their boards. Among them: Former House Majority Leader Richard K. Armey; L. Paul Bremer III, former presidential envoy to Iraq; and former Senator Larry L. Pressler. Mandell and his employees are also contributors to politicians, including Eliot Spitzer.

Join the conversation about this story »

Exclusive: Merrill Shaking Down BofA For Monster Paychecks

John Carney — Thu, 09 Jul 2009 12:35:00 EDT

Merrill Lynch, frightened by the unending flood of people out of its doors, is planning on setting 2009 compensation levels back up to 2007 levels, according to a person familiar with the matter. Executives at the investment bank have been in talks with senior people at Bank of America, warning that the entire franchise could fall apart if compensation levels don't match those offered by, say, Citigroup. Last week, Citigroup revealed it would be paying 2007 compensation by raising salaries to make up for lower bonuses.

But don't go putting a downpayment on that Tribeca condo yet, Merrillistas. The situation remains fluid, and pressure from Charlotte and Washington DC could result in a reversal of these plans. None of this was confirmed with Merrill.

Join the conversation about this story »

See Also:

Tim Geithner: M.I.A.

Joe Weisenthal — Thu, 09 Jul 2009 12:12:00 EDT

Remember when Tim Geithner was all over the news, nervously attempting to instill confidence in the market and ensure Americans that the administration would take "bold steps" to make the financial system safe. Or if he wasn't talking about a bank rescue, he was off in China, serving as bond-salesman-in-chief.

But that's the last we've heard of Turbotax Tim. The P-PIP, of course, is a big nothingburger, and on the economy we hear more about Larry Summers, Austan Goolsbee and Christina Romer than we do Geithner.

The Journal says today that he's been helping Obama think about whether Bernanke should be replaced, but is that all he's been reduced to? Has it just been that and stamping ACCEPTED on all the TARP applications?

Timmy, we miss you.

Join the conversation about this story »

See Also:

TheStreet.com Erases Its Lenny Dykstra Post-Mortem

Joe Weisenthal — Thu, 09 Jul 2009 11:23:00 EDT

Oh damn, this is disappointing. It looks like TheStreet.com (TSCM) actually had something about Lenny Dykstra's personal bankruptcy -- Dykstra, of course, wrote about trading options for that website for a few years, and his profile is even still on the site.

The column, from columnist Timothy Collins was titled 'Lenny "Nails" Dykstra, The Next John Meriwether?' -- Meriwether having just thrown in the towel on (yet) another busted hedge fund.

What did Collins say? We don't know. The piece appears to have been scrubbed. The higher-ups have made it disappear as though Dykstra was some fallen KGB guy who had his picture taken with Stalin.

Google turns up nothing. Did anyone catch what Collins had to say about his fallen comrade?

Join the conversation about this story »

See Also:

Nope, The P-PIP Probably Still Won't Work

John Carney — Thu, 09 Jul 2009 11:17:00 EDT

Now that we've got the buy-side managers for the Obama adminstrations Public Private Investment Program lined up, the question is whether there will be anyone on the sell-side. With the buy-side guys saying that the P-PIP will allow them to pay between 5% and 10% more for toxic assets, you might think banks would be all over this thing.

But that's not how its shaping up. The P-PIP is still stumbling. Many are now wondering whether bankers will sell into the program. Today Lucian Bebchuck has a guest column on the WSJ's Real Time Economics blog explaining why banks aren't eager to unload toxic assets. Mostly, its that so much of what the government has done is enabling and encouraing banks to retain the junk on their balance sheets.

We suspended mark-to-market. "A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets."

The Stress Test Gave A Free Pass For Losses After 2010. "In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010. The stress tests focused on whether, by the end of 2010, the accounting losses that a bank will have to recognize will leave it with sufficient capital on its financial statements. The bank supervisors explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then."

The combined effect is that banks are strongly discouraged from selling any toxic assets that mature after 2010 for any price lower than the current mark on the books.

Bebchuck's analysis doesn't go far enough. The worst off banks, especially those with low levels of common equity, won't sell because they don't want to give up the potential upside of the assets.

"My paper “The Put Problem with Buying Toxic Assets” shows that that zombie banks will be reluctant to sell their toxic assets, even if they are marked to market, because they don't want to give up the volatility," explains economist Linus Wilson. "That volatility makes their shareholders richer and puts their bondholders and the FDIC, which insures deposits, at risk."

To put it more simply, zombie banks will be reluctant to sell even if the toxic assets are marked down to at or below fair market value. The private investors will rationally throw caution to the wind because they get the majority of the upside and taxpayers bear most of the downside.

Join the conversation about this story »

See Also:

The CFTC Can't Stop Wild Commodity Speculation Alone

Richard Bernstein — Thu, 09 Jul 2009 10:48:00 EDT

I loudly applaud the CFTC’s efforts to tighten commodity trading regulations, but I think that Washington still doesn’t fully understand the root cause of today’s speculative commodity and financial markets.

It’s not about position limits. It’s about credit flowing to financial speculation instead of toward productive use.

It is difficult for any oversight agency to try to maintain fair markets so long as there are easily accessible opaque trading avenues. As opposed to the text book “speculator” who openly declares him or herself as such, today’s hedge funds are masters of circumventing required transparency.

Commodity speculators have and will easily get around CFTC reporting requirements because the CFTC only oversees the public commodity markets. Washington doesn’t seem to realize that the non-public markets might actually be a bigger haven for speculators.

Here is a rather dramatic example.

The Bank for International Settlements (BIS) provides data on commodity-related swaps and derivatives positions on global bank balance sheets. Over the past several years, the value of these swaps ballooned to historic levels as the bull market in commodities matured.

One might suggest that the growth in these over-the-counter (OTC) commodity contracts was simply a reflection of extraordinary global growth and “de-coupling” (no one, of course, would mention the extraordinary growth of the hedge fund industry!). Unfortunately, the data do not support that the growth in OTC commodity-related derivatives was caused by anything related to fundamentals.

Historically, the notional values of these commodity-related bank balances were equal to about 40-50% of the total sales of all publicly traded materials and energy companies in the world. However, during 2007/2008’s exponential increase in commodity prices, commodity-related bank balances rose to over 200% of total global commodity-related sales. If one hedges more than one uses, then one is, by definition, speculating. Keep in mind that these data only account for OTC commodity derivatives on bank balance sheets, and do not include any exchange traded instruments.

These data raise a couple of questions germane to the recent CFTC announcement:

First, why aren’t the Fed and the Treasury Department involved in the discussions about commodity-related transactions? These BIS data reflect positions on global bank balance sheets. Anyone want to bet whether some folks in Washington might be somewhat upset if they found out the bank holding companies that just received TARP funds were entering into swap agreements that caused the price of oil to increase?

Second, won’t the CFTC’s proposals simply push more trading to the opaque swaps market? If a hedge fund enters into a swap agreement with a bank, and the bank hedges that exposure on an exchange, the bank correctly lists itself as a “commercial” (i.e., non-speculator/non-hedge fund) user of the commodity markets. If a hedge fund traded directly on the exchange, then it would have to list as a “non-commercial” (i.e., speculator). Thus, setting tighter position limits on exchanges might have a negligible effect on curtailing commodity speculation because speculators could still potentially circumvent the more stringent requirements by using the OTC markets.

Washington seems to be going about this the wrong way. Excess credit fuels speculation. We had the biggest credit bubble of our lifetimes, and eventually saw a huge commodity bubble.

There should be no witch hunt for evil speculators. Speculation is a necessary part of any financial market. One has to admit though that the extreme speculation associated with this decade’s “bubble” environment was not healthy for the overall economy. Bubbles and excess speculation cause tremendous misallocation of economic resources.

Washington should make sure that if credit is going to flow again, then it flows towards productive use in the real economy, and not into commodity and financial market speculation. The CFTC should be applauded for its efforts however fruitless they may ultimately be, but Washington as a whole still needs to better understand the insidious link between credit and speculation.

Richard Bernstein is CEO of Richard Bernstein Capital Management. He was previously the Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch. He has written two books on investing: Navigate The Noise: Investing In The New Age Of Media And Hype and Style Investing: Unique Insight Into Equity Management.

Join the conversation about this story »

See Also:

Do Demographics Doom Us To Repeat Japan?

Joe Weisenthal — Thu, 09 Jul 2009 10:45:00 EDT

Forget propping up zombie banks (and zombie everything else). And ignore our central bank's war on interest rates.

A good question, which David Goldman at AITimes asks, is whether it's our demographics that ultimately doom us to repeate Japan's two lost decades.

Back during Japan’s lost decade of 1990-2000 (the first lost decade, that is), Japan’s population had just began to age dramatically. In 1990 the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did. Interest rates of 0.25% or less and spectacular government deficits couldn’t make a dent in the vast shift towards a propensity to save. The result was deflation: falling asset values and a strong yen.

Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s.

...

There is another deflationary dimension to aging. Old people are creditors, young people are debtors. Inflation is a transfer of wealth to debtors from creditors (debtors pay back debt in cheaper dollars). A country with a preponderance of old people will show strong political pressures against inflation. As Uwe Parpart, Cantor Fitzgerald’s market strategist, pointed out to me in conversation, that’s why the Japanese never objected to deflation. As old people, they benefited.

Bear in mind that the demographics-is-destiny crowd can get things spectacularly wrong. Witness the collapse of the Irish economy, which only a few years ago Malcolm Gladwell was lauding for their ideal dependency ratios. Then they collapsed.

There's also the immigration question mark. It has the potential to keep us young if people will still want to come here. On the other hand, un-skilled immigration is no panacea for growth (see: California). Ultimately, the problem is not really savings or home values or stocks, it's whether the thinning ranks of the young have enough real resources to care for their elderly in a manner they expect to be cared for. Where will the actually supply of care come from?

Another consideration that bodes ominously for us is the unemployment rate. For whatever reason, our base level of unemployment is much higher here than in Japan, where the rate still stands at some ridiculously low level of around 5%. That may be bad news for investors in companies there -- who might like to see more aggressive cost cutting -- but from a broader societal stability standpoint (which is the real basis for all these demographic questions) that low unemployment rate is quite nice.

Join the conversation about this story »

See Also:

Employment Is NOT A Lagging Indicator

Henry Blodget — Thu, 09 Jul 2009 10:10:00 EDT

Most bullish commentators these days are in complete agreement about one thing: employment is a LAGGING indicator. In other words, pay no attention to the crappy jobs reports...because the job market lags the economy.

That sounds encouraging. But it's wrong.

As Richard Bernstein noted last week, most of the numbers in the monthly employment report are LEADING or COINCIDENT indicators of the economy. Only one, the UNEMPLOYMENT RATE, is a lagging indicator.

Taken together, the employment indicators suggest that employment and the economy are still very weak. On a positive note, some of the leading and coincident indicators appear to have peaked, which suggests that we may be headed toward recovery.

The LEADING indicators in the employment reports include:

The length of the workweek (which hit an all-time low last month, although the manufacturing workweek ticked up slightly)

Weekly initial jobless claims (these appear to have peaked, but they still remain very high).

The COINCIDENT indicators include:

Payrolls (the number of jobs added or lost each month. The losses appear to have peaked)

The LAGGING indicators include:

The unemployment rate (percentage of the workforce that is unemployed. This lags the economy in part because the "workforce" used to calculate the percentage changes. Specifically, it shrinks as the economy collapses and some job-seekers give up or take part-time work. And it grows as the economy recovers and many folks who had given up looking for work start looking again.)

One important point, made by Northern Trust economist Asha Bangalore, is that employment recovers in fits and starts, not a straight line. So the importance of one month's report (such as June's) should not be overstressed.

Here is a full picture of the labor market, including the recent behavior of the key leading, coincident, and lagging indicators.

START >

Join the conversation about this story »

See Also:

Chinese Banks Are Lending Like Crazy

Joe Weisenthal — Thu, 09 Jul 2009 09:51:47 EDT

Despite the collapse of foreign demand, China is still growing its economy -- then again, it'd be kind of hard not to be with the kind of lending going on with Chinese banks.

New lending in June hit $224 billion (1.53 trillion Yuan) double from just May. No wonder car sales are up; banks there are forcing money down the throats of borrowers.

We already wrote about this last month, and got this comment from user rawb, which, if genuine, is rather telling:

I'm in Beijing currently and I was walking with a 24 year old grad student and she was telling me how last week she got a phone call (random) from a bank (more random) offering her 10,000 RMB personal loan at a fixed rate. She studies economics, and she didn't really understand it, but was curious.

So she asked them what this loan was for and they tell her to buy stuff... personal consumption, whatever she wants. No limits really. Just go spend some money.

She's not quite adept enough to recognize this is a bubble and a disaster in the long run, but she did recognize it as very odd. She told them she's going to NYC to study in August, and so she wouldn't be suitable for this loan, but they persisted and told her that, no, that's even better, as NYC has many nice things to buy!

... seriously. not a joke. I know it's anecdotal but whatever.

Professor Michael Pettis adds some insight, which should terrify you:

Today bank stocks were down, on rumors that the very high and clearly unsustainable loan growth rates would soon come to an end. If you need any evidence of how topsy-turvy things have become that fact should be enough.

Under “normal” circumstances the possibility that banks would continue to force new loan growth at anywhere near the current rates should raise terrible concerns about an explosion in future loan losses and cause bank stocks to collapse. Instead, it is concern that this lending spree might come to an end that causes bank stocks to fall.

Of course this might not be totally irrational. If you believe, as most of us do, that there is an implicit guarantee by the government on future loan losses, then this is clearly a heads-we-win, tails-the-government-loses proposition. Let them pile on the loans at the guaranteed spread between lending and deposit rates.

Lovely. Massive lending, an implicit guarantee, a heads-we-win, tails-you-lose betting scenario... what could go wrong?

Join the conversation about this story »

See Also:

No One Felt Like Shopping Much In June

John Carney — Thu, 09 Jul 2009 09:47:01 EDT

What should we blame for the weak retail sales? How about all that rain in the North East that ruined your summer share? There's something almost reassuring about hearing people blame weather for sales numbers. It's like we're not really into 18 months into a recession that is wiping out not just jobs but entire companies.

Anyway, here's a piece of anecdotal evidence on sales. We're told that the Target in Brooklyn's Atlantic Center is not terrible anymore. The store was notorious for having pitiful inventory, leaving would-be shoppers confused about why they couldn't spend their money there. "It's like an entirely different Target," a person familiar with the matter. "The shelves were clean and organized and filled."

Here's the AP's write up, by Anne D'Innocenzio:

Escalating job worries and rainy weather dampened shoppers' appetite for buying summer staples like shorts and dresses, resulting in sharp sales declines for many merchants in June and increasing concerns about the back-to-school shopping season.

As retailers reported their monthly figures Thursday, the weakness appeared to cut across all sectors, particularly apparel sellers. Among the biggest disappointments so far were teen merchant Wet Seal Inc., The Children's Place Retail Stores Inc. and Limited Brands Inc., which owns Victoria's Secret.

Even low-priced operator Costco Wholesale Corp. struggled with a same-store sales decline compared with a year ago, when business was helped by stimulus rebate checks.

Same-store sales — sales at stores open at least a year — are considered a key indicator of a retailer's health.

"Consumers are under severe pressure on the job front, so discretionary spending is just not happening, "said Ken Perkins, president of retail consulting firm Retail Metrics LLC.

"This is not setting up well for the back-to-school season."

Rainy weather across a broad swath of the country was a factor in depressing sales of seasonal goods last month. But shoppers clearly are being discouraged by financial worries.

The latest jobs report from the government, which showed shrinking wages and higher-than-expected job losses last month, is increasing concerns about consumers' ability to spend in the months ahead.

Merchants are relying more now on shoppers' paychecks to fuel purchases because consumers' two other key sources of funding — credit cards and home equity loans — have shrunk. But, seeing their earnings dwindle, shoppers are continuing to seek 70 percent discounts.

Job worries caused consumer confidence, as measured by the nonprofit Conference Board, to drop in June, reversing a three-month upward trend fueled by a stock market rally that also is fizzling.

Costco said Thursday that its June same-store sales dropped 6 percent but managed to meet Wall Street's expectations.

The Issaquah, Wash.-based company said in a recorded message that some of its strongest categories included food and fresh food products, such as deli items, frozen food and candy. It experienced weakness in nonfood, discretionary categories.

But many mall-based apparel merchants fared worse.

Limited Brands struggled with a 12 percent drop in same-store sales last month; analysts surveyed by Thomson Reuters had expected a 7.9 percent decline.

Wet Seal posted an 11.1 percent drop in June, worse than the 9.1 percent decline that Thomson Reuters had expected.

The Children's Place reported a 12 percent same-store sales decline in June; analysts had expected an 8.7 percent decline.

Join the conversation about this story »

See Also:

Attn: Mall Owners, These Retailers Might Become Deadbeats

Manhattan Rents Collapse 17%

Joe Weisenthal — Thu, 09 Jul 2009 09:13:40 EDT

What's that? You're going to put off selling your place and rent it in the meantime? Good luck on that.

According to the latest survey of the Manhattan market put out by Prudential Douglas Elliman Real Estate and Miller Samuel, the rental price per square foot fell 17% from last year, and 8.8% just form the first quarter.

Now on the surface, average rents actually ticked up by .9% yoy, but this number doesn't mean much, since low-end rental volume shrank, and volume at the high end spiked (the rich, they're renters now!).

2Q09MRMOmatrix

Join the conversation about this story »

See Also:

Jobless Claims Drop To Lowest Levels Since January

John Carney — Thu, 09 Jul 2009 08:50:00 EDT

Here's what you should probably do with this week's jobless numbers: ignore them.

Here's what you probably will do: talk about how the "unexpected" drop to the lowest level since January indicates that the worst fears about the economy may not be coming true.

But we're getting ahead of ourselves. Let's go to the tape: initial claims for jobless benefits dropped 52,000 to "a seasonally adjusted" 565,000 in the week ended July 4.

Economists had expected claims to fall by only 4,000. Which pretty much shows you that economists are pretty useless for this kind of thing.

One guy who may not be useless is Abiel Reinhart, an economist at JPMorgan Chase. He recently argued that there will be 50,000 fewer workers than normal filing jobless claims in early July.

One reason the new claims was probably lower was the absolute halt in US manufacturing in the first couple of quarters of this year, especially at the automakers. They traditionally lay people off in the summer and slow down production for plant improvements, but this summer they may be trying to play a bit of catch up by producing inventory that wasn't built in the winter and spring. And as Reinhart said, Detroit has already fired so many workers and closed so many plants that there aren't that many autoworkers to file claims.

The typical seasonality of jobless may be throwing off the numbers. Government planners anticipate an increase in jobless claims in the summer, and so they smooth them out. This is why the official numbers are "seasonally adjusted." So this week's drop in seasonally adjusted claims masks an actual increase in jobless claims. We jumped from 559,894 claims at the end of June to 577,506 for the July 4th week.

Join the conversation about this story »

See Also:

Buffett: First Stimulus Was Like Viagra Mixed With Candy

Joe Weisenthal — Thu, 09 Jul 2009 08:40:00 EDT

Apparently ABC television didn't get the memo that they're supposed to censor supporters of a second stimulus, as Paul Krugman alleged yesterday.

Berkshire Hathaway (BRK) CEO Warren Buffett was on Good Morning America (still about as mainstream as you can get), and he threw his name on the list of those supporting, yes, a second stimulus. Buffett has repeatedly said that there seeing no evidence of greenshoots or an uptick in business.

The best part is what he said about the first stimulus: "Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in."

Good Morning America, indeed!

Join the conversation about this story »

See Also:

New Goldman Conspiracy: They're Seeing Every Trade Before They Happen

Joe Weisenthal — Thu, 09 Jul 2009 08:07:00 EDT

Back in January, Portfolio ran something on all the Goldman Sachs (GS) conspiracy theories out there.

But since then, Goldman Sachs conspiracy theory-ism has beeen taken to many more levels. They'd have to update it big time*, with the stuff about the rogue programmer and everything in Matt Taibbi's Rolling Stone piece.

Barry Ritholtz asks: "Is Goldman Stealing $100 Million per Trading Day?"

(Interlude for ominous music...)

We're going to go out on a limb and say the answer is: no. But there are some postings on the ever-reliable Daily Kos, so maybe there's something to it. We don't know. Ritholtz apparently suspects more will be coming out on this in the coming days... Ok.

*Other possibilities of wrongdoing include the collapse of the oil market, fomenting dissent in Western China, and the death of Michael Jackson (which Goldman may or may not have orchestrated in order to decrease order volume on that day).

Join the conversation about this story »

See Also:

Is Rick Wagoner Still Getting His $20 Million Pay Day?

Joe Weisenthal — Thu, 09 Jul 2009 07:36:41 EDT

We'd rather not describe former GM CEO as having driven the company into the ground. As far as we're concerned, GM's death was not the result of any one guy's management failure, but rather a confluence of trends, internal and external, that made the old GM's bankruptcy an inevitability.

That being said, he didn't do anything to fight the trends, and yet he's still on top for a huge retirement package. That's how it goes. Failure is not grounds for not getting paid.

According to the WSJ, Rick Wagoner is still technically employed by the company, taking $1 a year, as well as health benefits, while the company and the government handle the "delicate" issue of Wagoner's pay package, which could be as high as $20 million. Maybe they'll split the difference

Join the conversation about this story »

See Also:

California IOU Values Could Fall 50%

Joe Weisenthal — Thu, 09 Jul 2009 07:01:27 EDT

What are the odds California can maintain the value of its IOUs and solve its budget woes? A reader with extensive history on this sort of thing writes in:

California is following the long tradition of bankrupt states turning to IOUs when the capital market looks less than inviting. States can't make scrip issues legal tender but they want their
IOUs to be accepted at prices close to par. This is a non-trivial problem for a
state that can't issue bonds at market yields. The traditional method is to
accept scrip at par for state tax liabilities.

It doesn't always work. Indiana issued 6% scrip in 1839 but they issued far more
than current tax liabilities and the scrip traded at 40-50 cents on the dollar.
During the canal busts of the 1840s Indiana, Michigan, Cook County IL and the
city of Chicago all resorted to scrip IOUs. The IOUs generally traded between
par and 40% discounts depending on perceived credit worthiness and supply
relative to taxes due. These are just a few examples. Between the panics of
free banking era, the gilded age and Great Depression a number of states and
hundreds of counties and cities issued IOUs when the money ran out. In most
cases accepting the scrip for taxes created a market where the IOUs traded near
par with minimal interest payments.

For what it's worth, that 50 cents on the dollar is what we set our original offer at (just saying).

Meanwhile, the FDIC has weighed in on California IOUs.

This interagency statement offers guidance for financial institutions regarding California registered warrants (warrants). Beginning July 2, 2009, and until a budget is passed, the State of California (State) intends to issue warrants for most general fund payments. The State is issuing these warrants, for example, as payment to individuals for income tax refunds, local governments for social services, and private contractors and state vendors for goods and services provided to the State. State chartered financial institutions should ensure their holdings of warrants are consistent with applicable state laws and regulations.

The State Attorney General has opined that these warrants are valid and binding obligations of the State. Because they share the same expected source of repayment, the warrants generally have the same credit quality characteristics as the State's other general obligations. For risk-based capital purposes, general obligation claims on a state receive a 20 percent risk weight. ¹ Therefore, these warrants would also receive the same risk weighting.

As with any obligation issued by a jurisdiction, financial institutions should exercise prudent judgment and sound risk management practices with respect to the warrants. Financial institutions are individually responsible for understanding, managing, and controlling the risks and obligations arising from accepting and holding these warrants. Risk management practices should include evaluating the credit quality of the warrants, establishing appropriate concentration limits, and ensuring appropriate liquidity risk management. Supervisors will evaluate financial institutions' risk management practices as part of the normal supervisory process.

Anyway, tomorrow is ostensibly the last day the big banks will take the IOUs, so we'll see what happens then. Check Craigslist and eBay to see if the after-market really picks up at a discount to face value. Then things start to get really interesting.

Join the conversation about this story »

See Also:

Faux Scandal Alert: Stimulus Money Going To Pro-Obama Areas

Joe Weisenthal — Thu, 09 Jul 2009 06:41:00 EDT

The USA Today tries to stir up some controversy with a report saying: "Billions in aid go to areas that backed Obama in '08"

This comes after some reports, largely debunked, that partisan politics were at play in closing the Chrysler car dealers. Still, you can pretty start all the cries of "Chicago-style" corruption right now.

Here's the nut of the paper's study:

"There's no politics at work when it comes to spending for the recovery," White House spokesman Robert Gibbs says.

Counties that supported Obama last year have reaped twice as much money per person from the administration's $787 billion economic stimulus package as those that voted for his Republican rival, Sen. John McCain, a USA TODAY analysis of government disclosure and accounting records shows. That money includes aid to repair military bases, improve public housing and help students pay for college.

The reports show the 872 counties that supported Obama received about $69 per person, on average. The 2,234 that supported McCain received about $34.

Let's just tick off a bunch of obvious problems with concluding anything nefarious.

Hardly any stimulus money has gone out, so we don't have a good sample yet.
Obama drew support from poorer areas, and since much of the sitmulus went to transfer payments, then by definition that money would go to Obama areas.
Some Republican areas have deliberately talked-down the stimulus, and if they did receive it may not have been as eager to spend it.
Engineering this on a massive scale would be difficult. Isn't Joe Biden in charge of it? Case closed.

What's funny is that the NYT has its own stimulus analysis today, and it concludes something that runs counter to McPaper's (does anyone still call it that?) assertion. It says that of the actual transportation projects, many more have gone to rural areas, rather than the traffic-clogged cities that really need it. And since McCain did better rurally than he did in urban areas, this would be the exact opposite political outcome.

So yes, this looks like a non-scandal from the beginning.

Join the conversation about this story »

See Also:

Remember Subprime? It's Back

Joe Weisenthal — Thu, 09 Jul 2009 06:14:42 EDT

Those pesky subprime mortgages aren't done tormenting the economy.

Sure, the waves of subprime foreclosures have subsided, but now those homes are held by subprime bondholders, and they're eager to wash their hands of the highly-distressed properties:

WSJ: While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

...

"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

All this "shadow inventory" represents a huge overhang for the market, and it's one reason that current housing stats ought to, perhaps, be taken with a grain of salt.

The one word to keep in mind here is "capitulation", which can be really overused especially if you're watching TV about the stock market. But home investors of all stripes do seem to maintain irrationally high expectations for what they can sell their house for -- frequently concluding that they're entitles to profits no matter what. That too is shadow inventory, since it represents people who would otherwise like to be selling.

See Also:

What's Happening Today: Thursday, July 9

Erin Geiger Smith — Thu, 09 Jul 2009 06:00:00 EDT

Macro

8:30 AM: Initial Claims
10:00 PM: Wholesale Inventories

Earnings

Chevron (CVX) (5:00 PM)
Franklin Covey Co. (FC) (After Market)

All times ET.

Get This Delivered To Your Inbox

Join the conversation about this story »

Obama's Support Eroding Everywhere

Joe Weisenthal — Thu, 09 Jul 2009 05:56:08 EDT

Yesterday we mentioned that poll out of Ohio showing Obama's support collapsing in the uber-important swing state.

Turns out that's not a one-state phenomenon. Both Gallup and Rasmussen have new polls out showing big slippage in support for the administration

Everything seems to have changed since that last jobs report, since it viciously undercut the green shoots claims. Here's Rasmussen:

The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 32% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-seven percent (37%) Strongly Disapprove giving Obama a Presidential Approval Index rating of –5.

The number who strongly disapprove inched up another point to the highest level measured to date and the overall Approval Index is at the lowest level yet for Obama.

And:

In the wake of last week’s disappointing report on job loss, consumer confidex has fallen to the lowest level in two months. The Rasmussen Investor Index shows investor confidence falling to the lowest level in three months. The number of investors who say the economy is getting worse jumped from 43% before the jobs report to 51% today.

If this direction continues, it begins to increase the odds the the White House will pursue a stimulus, though at this point, according to multiple reports, there really is no appetite for it among politicians. These numbers may also slow down climate reform, if that's deemed to be a non-essential issues at the moment.

Join the conversation about this story »

See Also:

PIMCO Bails On P-PIP

John Carney — Wed, 08 Jul 2009 17:00:00 EDT

When the Obama administration announced today the names of the nine fund managers it had selected to run public-private partnerships that it hopes will buy as much as $40 billion of toxic securities from banks, lots of people noticed the the bond giant PIMCO was not on the list.

The nine manager groups are Alliance Bernstein LP, with sub-advisors Greenfield Partners LLC and Rialto Capital Management LLC; Angelo Gordon and Co LP with GE Capital Real Estate; BlackRock Inc ; Invesco Ltd ; Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP; Trust Company of the West; and Wellington Management Co LLP.

So what happened to PIMCO, which has been a very public advocate of government plans to buy up debt? It seems that PIMCO decided that the government has been too unpredictable, changing directions a number of times. They just didn't want to play a game where they couldn't rely on the rules staying the same.

The fund managers who are playing now have to raise at least $500 million from private investors. Treasury will then match this and lend up to 100 percent of the total equity in the partnerships to finance acquisition. If you are keeping track, that means that the capital structure of the partnership will be three-fourths taxpayer money and 1/4 private investment.

Join the conversation about this story »

See Also:

Train Derails, Spills Contaminated Dirt On Hicksville, New York

John Carney — Wed, 08 Jul 2009 16:44:00 EDT

A freight train reportedly carrying contaminated dirt derailed in Hicksville, New York this afternoon.

Just last week a Long Island Rail Road train derailed in nearby Huntington, causing the LIRR to suspend service on all trains on the Port Jefferson line east of Hicksville. That derailment was blamed on a watermain break that flooded the tracks. Two commuter trains in Washington, DC crashed in late June, killing 9 people and injuring scores of others.

After years of progress, train injuries and fatalities are on the rise. A 2005 survey found that 800 people die from train and subway accidents each year. Every 90 minutes, a train accident occurs in the United States.

Here's a question we haven't been able to find an answer to: what are the costs in terms of deaths and injuries of rail expansion plans advocated by many of the nation's mayors? This seems like it should be easy information to obtain but for some reason it isn't. The National Transportation Safety Board's website is a disaster. That's frustrating because surely safety should be part of the public deliberation about expanded the use of rail transportation.

Join the conversation about this story »