31 March 2008

The Paulson Plan: a Foray into a Financial Iraq

We were asked if we favor the Paulson plan. After all, several noted academic economists have come out and spoken in favor of it. Wall Street complains that it will increase regulation and lessen their profits. Well, Wall Street complains all the time, but especially loudly when it has been caught with its hand in the cookie jar, and some economists will say just about anything for some of the cookie crumbs. The Banks protested the adoption of the Federal Reserve Act in 1913 in much the same manner, with false protestations while they privately were promoting it by incenting endorsements from economists and politicians.

Treasury Secretary Paulson softened his delivery this morning by couching the plan in terms of just 'a template' and a 'basis for discussion.'

Its important to realize that this study had its genesis in a Bush Administration effort to lighten regulation on Wall Street that has been underway for some time. The Bush cabinet is taking the opportunity of the Bear Stearns collapse to quickly bring this forward under the title "Financial Stability Act" in much the same way they were able to quickly bring out the "Patriot Act" after the 911 tragedy.

The next Presidential Administration will have to live with the problems created by eight years of Bush mismanagement. It would be better to leave sweeping changes to them, rather than follow yet another blank check proposal from a group in Washington that have proven over and over that they cannot, or will not, do what is required to act in the public interest.

When you have a massive failure in a critical system, you do not go to those on whose watch it occurred, with their proactive involvement, with strong elements of deception and fraud involved, with innocent people being victimized, and ask them what should be done to fix the system so it doesn't happen again.

We just have to ask how many times can someone lie to you, and cheat you, and take some of the goodness of life from you and your children, before you wise up and show them the door?

Not even a template. Not even a basis for discussion. No bonanza for the lobbying interests such as they had when the Banks went after the repeal of Glass-Steagall. And especially not something to distort and delay the real action that is required.

Are we in favor of this plan? No. Hell no.


It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power,'' said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official. Paulson's proposal will ``allow Wall Street to do whatever they want until a crisis occurs, at which point the Fed would intervene.'' Bloomberg News

The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

"During the late 1990s, Wall Street fought bitterly against any attempt to regulate the emerging derivatives market, recalls Michael Greenberger, a former senior regulator at the Commodity Futures Trading Commission...“After that, all was forgotten,” says Mr. Greenberger, now a professor at the University of Maryland. "At the same time, derivatives were being praised as a boon that would make the economy more stable."

Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that “these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.” Although Mr. Greenspan acknowledged that the “possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations “would be a major mistake.”

“Regulatory risk measurement schemes,” he [Greenspan] added, “are simpler and much less accurate than banks’ risk measurement models."``

Mr. Greenberger, still concerned about regulatory battles he lost a decade ago, says that Mr. Greenspan “felt derivatives would spread the risk in the economy.”

“In reality,” Mr. Greenberger added, “it spread a virus through the economy because these products are so opaque and hard to value.” A representative for Mr. Greenspan said he was preparing to travel and could not comment."

30 March 2008

The Political and Economic Continuum: Where Are We Today, Where Are We Going?


This essay from the International Herald Tribune is a sound analysis of where we are now and where we have been. It reinforces our notion that the old ways of approaching problems have failed. A new school of economics will rise out of the ashes of the economic failure to come as Keynesianism rose out of the Great Depression, as monetarism rose out of stagflation.

With regard to free market capitalism, we still think it is the best approach to a well-functioning society, but would like to see a return to it at least here in the United States. Sociopathic elements always try to corrupt the game, replacing the meritocracy with oligopoly and competition with monopolistic croney capitalism. Freedom is not a goal; it is a way of life.

The solution seems obvious: a society of laws that respects the rights of the individual to both excel or just get by in a meritocracy, with an equitable distribution of goods with a reasonable variation based on effort and ability, enforced with equal justice. The trick seems to be not imagining a solution, but rather in implementing it, achieving it, and keeping it.

The dynamic tension is not between the traditional right and traditional left in politics. That is largely a matter of preference between the amounts of tradition and progress, and the rate of societal change. The genuine conflict is between the power of the state and of the individual, between the will to power of an elite and the broad rights of the individual to life, liberty and the pursuit of happiness.

The extremes of both Left and Right meet in the same place: Stalin and Hitler, the all-consuming state and the complete diminishment of the rights of the Individual.

"The issue today is the same as it has been throughout all history, whether man shall be allowed to govern himself or be ruled by a small elite." - Thomas Jefferson

"Sell not virtue to purchase wealth, nor Liberty to purchase power." Benjamin Franklin

"The only sure bulwark of continuing liberty is a government strong enough to protect the interests of the people, and a people strong enough and well enough informed to maintain its sovereign control over the government." - Franklin Delano Roosevelt

Benjamin Franklin was approached by a group of citizens asking what sort of government the delegates had created. His answer was: "A republic, if you can keep it."


The failure of neo-liberalism
By Phillip Blond
Tuesday, January 22, 2008
LANCASTER, England

More and more, it appears that in the 21st century we are returning to the economics of the 19th, where wealth was overwhelmingly concentrated in the hands of a few owners and astute speculators.

Neither the Right nor the Left seem capable of creating a society in which all benefit from increased prosperity and economic security.

Right-wing claims that free markets will enrich all sections of society are palpably false, while the traditional European welfare state appears to penalize innovation and wealth-creation, thereby locking the poor and unskilled into institutionalized poverty and unemployment.

Thus in the new age of globalization, both ideologies create the same phenomenon: an underclass caught between welfare and low wages, a heavily indebted middle class increasingly subject to job and pension insecurity and a new class of the super rich who escape all rules of taxation and community.

It was in Britain that neo-liberalism first emerged in its decisive form. Confronted with union militancy and the apparent bankruptcy of the welfare state, the Conservative party under Margaret Thatcher was elected in 1979. In America, Ronald Reagan took office in 1981, and the Anglo-Saxon countries have pursued and advocated free market liberalization ever since.

Today, its reach extends as far as communist China, which, while eschewing political freedom, fervently preaches economic liberalization. This year even the French acknowledged free market supremacy, electing a president who has persistently denounced the costs of Gallic welfarism and praised the economic advantages of the Anglo-Saxon model.

But the benefits of free market liberalization depend on who you are, where you are and how much money or assets you had to begin with.

In terms of economic development, free market fundamentalism has been a disaster. The free market solutions applied to Russia during the Yeltsin years succeeded only in mass impoverishment, the creation of a hugely wealthy oligarchical class and the rise of an authoritarian government.

Similarly, the growth rates of Latin America and Africa, which had been higher than other developing nations, dropped by over 60 percent after they embraced IMF-sponsored neo-liberalism in the 1980's, and have now ground to a halt.

On an individual level, a similar story pertains. Real wage increases in the top 13 countries of the Organization for Economic Cooperation and Development (OECD) have been below the rate of inflation since about 1970.

Thus wage earners - rather than asset owners - have faced a persistent 30-year downward pressure on their standard of living. It comes as no surprise to learn that the golden age for the wage worker, expressed as a percentage share of GDP, was between 1945 and 1973, and not under economic liberalization.

Nobody questions that trade increases prosperity, and that the liberalization of credit and financial services allow hitherto excluded groups to supplement their wages by buying shares or houses and thus participating in the asset economy.

But the real story of neo-liberal success is not the extension of assets to all, but the huge and disproportionate share of wealth attained by the very rich. In the United States, between 1979 and 2004 the wealthiest 1 percent saw an increase in their share of national income of 78 percent, whereas 80 percent of the population saw an overall decrease in their income share by 15 percent. That's a wealth transfer from the large majority to a tiny minority of some $664 billion.

The traditional Left panicked in the face of neo-liberal hegemony and spoke in the 1980's of redistribution, higher taxes and restrictions on capital transfers. But, outside of Scandinavia, they were whistling in the wind: Traditional state-regulated economies appeared locked into high unemployment and low growth.

A new path for the Left was offered by the country that first experienced the new Right: the UK. By the late 1990's, Britain was exhausted by Thatcherism; its public services were failing and the country was socially and economically fragmented. Thus in 1997 New Labor was elected.

Under the guidance of Tony Blair and Gordon Brown, the new progressives promised that the benefits of rising prosperity would be applied to the public sector and the poor. Social exclusion would be tackled by opening up education and extending opportunity to all. The rest of the world was once more transfixed by the social experiment taking place in Britain. Could this seemingly exclusive neo-liberal circle be squared for the benefit of all?

Sadly, after 10 years the conclusion has to be no.

Poverty in Britain doubled under Thatcher, and this figure has become permanent under New Labor. The share of the wealth, excluding housing, enjoyed by the bottom half of the population has fallen from 12 percent in 1976 to just 1 percent now. Thirteen million people now live in relative poverty. Social mobility has declined to pre-war levels.

The least able children from the richest 20 percent of the population now overtake the most able children from the bottom 20 percent by the age of seven. Nearly half of the richest group go on to get university degrees while only 10 percent of the poorest manage to graduate. Clearly, the New Left has entrenched class division even more firmly than the neo-liberal Right.

This in a nutshell is the problem: Both Left and Right seem incapable of challenging monopoly capitalism. Neither welfarism nor statism can transform the lives of the poor, and neither, it seems, can neo-liberalism. Only a shared economy can correct the natural tendency of the free market to favor monopolies.

But we can only share if all own. Thus there is a radical and as yet unexplored possibility - that of a general and widely distributed ownership and use of assets, credit and capital. This would dissolve the conflict between capital and labor since it would be a market without monopoly and a state where waged labor - since it was the owner of capital - did not need state welfare.

Phillip Blond is a senior lecturer in philosophy and theology at the University of Cumbria.

The Failure of Neo-Liberalsim

„Niemand ist hoffnungsloser versklavt, als die, die fälschlicherweise glauben, sie seien frei.“
(None are so hopelessly enslaved as those who falsely believe they are free.)


J. W. von Goethe


Gold Forecast 2007-2008: Back to the Abyss


This had been posted on our former site at The Crossroads Cafe.

A new forecast and theme will be done sometime around May for 2008-2009.



29 March 2008

On the Road from Samaria

When they manipulated the stock market,
I remained silent;
I was making money and felt superior to the crowd.

When they silenced their critics,
I remained silent;
I was self-righteous and felt they got what they deserved.

When they came for the blue collar workers,
I did not speak out;
I enjoyed my superior social status and the cheap consumer goods.

When they came for my neighbor's possessions
I remained silent;
I was afraid and jealous and glad to see him brought down.

When they grew richer and more powerful
I accepted their lies in silence;
I wanted to gain their favor and be one of them.

When they came for me,
and sent me to a camp as a useless eater
I reaped what I had sown.
On the Road from Samaria, Jesse

Silent Spring: the Calm Before the Storm


"...And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?"

The Second Coming, William Butler Yeats

"In a nod to the debacle in mortgage lending, the administration proposed a Mortgage Origination Commission to evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers.

Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.

Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment."

Bush Administration Plan Would Concentrate Regulatory Power with the Fed

Predatory Lenders' Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers
By Eliot Spitzer
Thursday, February 14, 2008;
The Washington Post
Page A25

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

The writer is governor of New York.

(When Spitzer wrote this in February of 2008 he was, unbeknownst to him, the target of a intense Federal investigation to find something in his life that would be damaging to his career and his credibility. It succeeded, and he was silenced, and those who watched took a lesson from it. - Jesse)

When they manipulated the stock market,
I remained silent;
I was making money and felt superior to the crowd....

On the Road from Samaria, Jesse




Debt Becomes Death, the Destroyer of Worlds


The chain reaction was initiated by a simple spark igniting high-explosive charges designed to compress the uranium or plutonium core upon detonation. The compressed core goes critical, initiating a chain reaction that persists until the fuel is consumed...

We knew the world would not be the same. A few people laughed... A few people cried... Most people were silent. I remembered the line from the Hindu scripture the Bhagavad Gita; Vishnu is trying to persuade the prince that he should do his duty, and to impress him takes on his multi-armed form, and says, "Now I am become death, the destroyer of worlds." I suppose we all thought that, one way or another.

Without the radioactive core and nuclear fuel, many would-be weapons of mass destruction are merely large conventional explosions: powerful, but not widely devastating.

The analogy is that the subprime mortgage failure is the spark, a recessionary downturn and credit crunch is the conventional explosion, and the credit derivatives, particularly the credit default swaps, are the nuclear core that amplifies the original misjudgement to massively devastating proportions.

It is hard to believe that something this complex and obviously dangerous was built up over such a long period of time without a few economists noticing it. It is an obvious Ponzi scheme at its simplest. At its most complex, the pointless size and interconnectedness of the Credit Default swaps is almost diabolical. Companies with no substantial ties to the debt of third parties placing enormous wagers on their default that are up to an order of magnitude greater than the total debt involved. Pure, unadulterated, and highly lethal speculation.

Ironically the protective shielding in this case will not be lead and concrete and earth, but gold and silver and other commodities that will endure the coming inferno of paper.

Future generations will ask: what were they thinking?

Indeed.

Bankruptcies in America
Waiting for Armageddon
Mar 27th 2008
The Economist

The recent rise in corporate bankruptcies in America may well be a sign of much worse to come

...If the debt markets are to be believed, companies could be in at least as much trouble as they were in the previous two downturns, in the early 1990s and at the start of this decade, after the dotcom bubble burst. A leading indicator is the spread between yields on speculative “junk” bonds and American Treasury bonds. A year ago, the spread was only about 280 basis points; the long-term average is around 500 points. This month the spread exceeded 800 points for the first time since March 2003, reaching 862 on March 17th.

The bankruptcy rate (in the previous 12 months) for high-yielding bonds has so far edged only modestly higher, to 1.28% from a record low of 0.87% in November. But most forecasters expect it to rise sharply over the coming months. For instance, Moody's, a ratings agency, predicts that the default rate will rise to 5.4% by the end of this year, mostly due to problems in America. (Moody's also expects a rise in European bankruptcies this year, but only to 3.4%, thanks to lower levels of borrowing and less exposure to economic weakness.)

That is a relatively optimistic prediction, for it would merely return the bankruptcy rate close to its long-term average after an abnormally trouble-free period, and it assumes only a mild recession in America. But if there is a severe recession, the default rate “could go to double figures,” admits Kenneth Emery, head of corporate-default research at Moody's.

Other forecasters are much gloomier. FridsonVision, a research firm, publishes a default-rate predictor based on the percentage of bonds trading with a spread of at least 1,000 basis points. On March 19th this was forecasting a default rate on high-yielding American corporate bonds of 8.55% by the end of February 2009, compared with Moody's forecast for American bonds of 6.8% for that date....

A look at the firms with distressed debt shows that problems are rapidly moving beyond the long-term sick (airlines, cars) and the industries immediately affected by the crisis (home builders, mortgage lenders, monoline insurers). Craig Deane of AEG Partners, a restructuring-advisory firm, says he is now seeing troubled companies in retailing, restaurants, manufacturing and food processing...

But perhaps the biggest difference this time will be the effects of the huge market for credit derivatives and other credit-related securities, which often dwarf the amount of debt that a firm has issued, says Henry Owsley of Gordion, another restructuring adviser. The interaction between underlying debt and credit derivatives will complicate bankruptcy and near-bankruptcy no end, he says.

A big concern for company bosses will be the role of speculative investors, especially hedge funds. They can use derivatives to pursue complex strategies that may not be in the best interests of the firm that has issued the underlying debt, says Henry Hu, a law professor at the University of Texas, Austin. In a bankruptcy, a hedge fund could use the voting rights attached to different securities to maximise the overall value of its holdings in the firm at the expense of other investors.

Imagine, for instance, a hedge fund that owns debt secured against a company asset. It may prefer to force the firm into liquidation in order to win that asset rather than engage in a restructuring negotiation that will keep the firm alive. Meanwhile, it can boost its returns by short selling its unsecured debt and its equity. Or suppose that a hedge fund owns credit-default swaps as well as a firm's debt. If the fund makes enough money from the pay-out of the credit-default swaps, it may prefer to use the voting rights on its debt to ensure that the firm goes bust rather than negotiate a way to avoid bankruptcy...

Bankruptcies in America - The Economist




Bush Administration Proposal Would Concentrate Regulatory Power with the Fed


"As nightfall does not come at once, neither does oppression.
In both instances, there is a twilight when everything remains
seemingly unchanged. And it is in such twilight that we all
must be most aware of change in the air - however slight -
lest we become unwitting victims of the darkness."
Supreme Court Justice William O. Douglas


It is most likely that this proposal from the Bush Administration is a 'red herring' to try and channel the outrage of the public into ineffective remedies and to confuse and delay the genuine reforms until well after this Adminstration leaves town.



March 29, 2008
Treasury Dept. Plan Would Give Fed Wide New Power
By EDMUND L. ANDREWS
NY Times

WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades. (the Fed played a critical, pivotal role in permitting if not encouraging the excesses, moreso than any other agency - Jesse)

Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused the financial crisis. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.


Parts of the plan could reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors. The plan would merge the S.E.C. with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like. (Separately they are both nearly useless. This just makes them completely useless - Jesse)

The blueprint also suggests several areas where the S.E.C. should take a lighter approach to its oversight. Among them are allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.

The proposal began last year as an effort by Henry M. Paulson Jr., secretary of the Treasury, to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system.

His goal was to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank mortgage lenders.

“I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Mr. Paulson will say in a speech on Monday, according to a draft. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.”

Congress would have to approve almost every element of the proposal, and Democratic leaders are already drafting their own bills to impose tougher supervision over Wall Street investment banks, hedge funds and the fast-growing market in derivatives like credit default swaps.

But Mr. Paulson’s proposal for the Fed echoes ideas championed by Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee.

Both see the Fed overseeing risk across the entire financial spectrum, but Mr. Frank is likely to favor a stronger Fed role and to subject investment banks to the same rules that commercial banks now must follow, especially for capital reserves.

The Treasury plan would let Fed officials examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system. (Where was the Fed's ability to examine the off balance sheet abuses of Citigroup while they were most definitely under the Fed's purview for example? - Jesse)

That would be a significant expansion of the central bank’s regulatory mission. (and where does the considerable increase in funding come for this? - Jesse)

When Fed officials agreed this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to bolster its protections against a collapse.

In two unprecedented moves, the Fed engineered a marriage between JPMorgan Chase and Bear Stearns, lending $29 billion to JPMorgan to prevent a Bear bankruptcy and a chain of defaults that might have felled much of the financial system.

For the first time since the 1930s, the Fed also agreed to let investment banks borrow hundreds of billions of dollars from its discount window, an emergency lending program reserved for commercial banks and other depository institutions. (the difference is that in the 1930s these actions were precipitated by the action of the President and the Congress - Jesse)

But Mr. Paulson’s proposal would fall well short of the kind of regulation that Democrats have been proposing. Mr. Frank and other senior Democrats have argued that investment banks and other lightly regulated institutions now compete with commercial banks and should be subject to similar regulation, including examiners who regularly pore over their books and quietly demand changes in their practices.

In a recent interview, Mr. Frank said he realized the need for tighter regulation of Wall Street firms after a meeting with Charles O. Prince III, then chairman of Citigroup.

When Mr. Frank asked why Citigroup had kept billions of dollars in “structured investment vehicles” off the firm’s balance sheet, he recalled, Mr. Prince responded that Citigroup, as a bank holding company, would have been at a disadvantage because investment firms can operate with higher debt and lower capital reserves. (only in so far as they were to take advanage of the repeal of Glass-Steagall, an effort led by their former Chairman Sandy Weill, and utilize government guaranteed depositor's money to personally finance their speculation - Jesse)

Senator Charles E. Schumer, Democrat of New York, has taken a similar stance.

“Commercial banks continue to be supervised closely, and are subject to a host of rules meant to limit systemic risk,” Mr. Schumer wrote in an op-ed article on Friday in The Wall Street Journal. “But many other financial institutions, including investment banks and hedge funds, are regulated lightly, if at all, even though they act in many ways like banks.” (Precisely. They ought not to be banks and ought not to have impacted banks IF Glass-Steagall had been in place - Jesse)

Mr. Paulson’s proposal is likely to provoke bruising turf battles in Congress among agencies and rival industry groups that benefit from the current regulations.

Administration officials acknowledged on Friday that they did not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that would extend well after the elections in November. (Prediction - It will go nowhere but will help to confuse and blunt and delay the necessary effective reforms and laws to allow further looting of the Treasury while this Administration leaves town - Jesse)

In a nod to the debacle in mortgage lending, the administration proposed a Mortgage Origination Commission to evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers. (LOL. - Jesse)

The bulk of the proposal, however, was developed before soaring mortgage defaults set off a much broader credit crisis, and most of the proposals are geared to streamlining regulation.

This plan would consolidate a large number of regulators into roughly three big new agencies.

Bank supervision, now divided among five federal agencies, would be led by a Prudential Financial Regulator, which could send examiners into any bank or depository institution that is protected by either federal deposit insurance or other federal backstops. It would eliminate the distinction between “banks” and “thrift institutions,” which are already indistinguishable to most consumers, and shut down the Office of Thrift Supervision.

Any effort to merge the Commodity Futures Trading Commission with the S.E.C. is likely to provoke battles.

Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.

Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.

Arthur Levitt, a former S.E.C. chairman who has long pushed for stronger investor protection, said his first impression of the plan was positive. Even though the S.E.C.’s powers might be reduced, Mr. Levitt said, the plan would create a broader agency to regulate business conduct in all financial services. (Levitt was a part of the problem himself - Jesse)

“It’s a thoughtful document,” he said. “I’m intrigued by the fact that it puts an emphasis on investor protection, and that it establishes an agency specifically for that purpose, which would operate across all markets. I think that’s a very constructive first step.”

As a reminder, the Federal Reserve is not elected by the people, is not one of the three branches of our government, is not part of the Civil Service, and is not subject to the kinds of congressional oversight generally available to the Congress over such agencies as the SEC.


27 March 2008

BSC Says CEO James Cayne Sold ALL His Shares at $10.84


BSC SEC Filing Says James Cayne Sold All His Remaining Shares in His Company

NEW YORK, Mar 28, 2008 NEW YORK (CNNMoney.com) -- Just a day after JPMorgan Chase quintupled its bid for Bear Stearns, James Cayne, the chairman of the troubled investment bank, dumped his entire stake in the firm, selling more than $60 million worth of company stock he owned.

Cayne, who also served as Bear Stearns' chief executive before stepping down in January of this year, sold over 5.6 million shares of company stock Tuesday at $10.82 a share, according to a company filing with the Securities and Exchange Commission on Thursday.

Bear Stearns (BSC, Fortune 500) shares closed at $11.23 apiece in Thursday trading on the New York Stock Exchange.

The deal, which was first announced by JPMorgan (JPM, Fortune 500) on the evening of March 16, initially valued the troubled investment bank at $2 a share, a 93% discount from its closing price on March 14.

The Dame of Doom Says UBS and MER to Take Another Big Hit


Ben's 'too big to fail' list is going to get busy.

Hey what about these non-US "banks" that are holding heavy like Bear Stearns? Will the Fed save them too? Or is this going to be a global central bank group effort?

Capability Tim at the NYFed can mail a 'how-to' document to Buba in care of Threadneedle Street. Obvious nationalisation is so déclassé.


Whitney: Merrill, UBS Face New Writedowns
03/27/08 -
09:16 AM EDT
Marketwatch

Oppenheimer analyst Meredith Whitney on Thursday forecast new writedowns and losses at Merrill Lynch and UBS two more investment banks hit hard amid the deep-rooted credit crunch.

Whitney, who last fall issued an early and accurate call that Citigroup would have to cut its dividend, predicted writedowns of $6 billion and $11.1 billion at the two firms, respectively. She issued the note late Wednesday, after shares of the two firms stumbled in the wake of a bearish note on Citi that predicted $13 billion in writedowns.

Shares of Merrill were falling 2% and UBS shares were up 3.6% in premarket trading. Merrill had fallen 7.2% and UBS sank 3.1% Wednesday. Citi fell 5.8% Wednesday.

Whitney expects Merrill to lose $3 a share in the first quarter, down from her earlier prediction of a profit of 45 cents a share. For the full year, she sees a profit per share of 20 cents, down from her earlier forecast of $4 a share.

UBS could lose $2.72 a share in the first quarter, she said, lowering her earlier outlook of a profit of 72 cents a share. For the full year, she sees a profit of 45 cents a share, vs. an earlier view of a $3.72-a-share profit. The two firms have been among the hardest hit in the credit crunch. Merrill wrote down $14.6 billion in soured mortgage-related investments in the fourth quarter, while UBS wrote down $18 billion.

Whitney's note on Citi Wednesday predicted as much as $50 billion in writedowns for the financial sector. The note also cut forecasts for Bank of America, JPMorgan Chase and Wachovia Bank.


...I saw pale kings and princes too,
Pale warriors, death-pale were they all;
They cried—“La Belle Dame sans Merci
Hath thee in thrall!”

I saw their starved lips in the gloam,
With horrid warning gaped wide,
And I awoke and found me here,
On the cold hill’s side.

And this is why I sojourn here,
Alone and palely loitering,
Though the sedge is wither’d from the lake,
And no birds sing.
John Keats

Justice Department Sponsored Report Finds KPMG Culpable in Subprime Bankruptcy


What is there about the danger of 'moral hazard' that people don't understand?

Do highly profitable abuses usually stop by themselves, especially when the punishments assessed are a small cost of the price of doing business? When only a few 'outsider' scapegoats get punished while the enablers and insiders move on to corrupt new and larger circles of society?

Is there any decency and honor left in the media and our government and our businesses and our universities? Most everyone has their price, but we are dismayed to find out how relatively little it can be. How easily the rest go along with a few vocal thought leaders and lose their personal and professional souls.

What will it finally take to bring us to our senses?

March 27, 2008
Inquiry Assails Accounting Firm in Lender’s Fall
By VIKAS BAJAJ
NY Times

A sweeping five-month investigation into the collapse of one of the nation’s largest subprime lenders points a finger at a possible new culprit in the mortgage mess: the accountants.

New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department.

In its scope and detail, the 580-page report is the most comprehensive document yet made public about the failings of a mortgage business. Some of its accusations echo charges that surfaced about the accounting firm Arthur Andersen after the collapse of Enron in 2001.

E-mail messages uncovered in the investigation showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client.

From its headquarters in Irvine, Calif., New Century ruled as one of the nation’s leading subprime lenders. But its dominance ended when it was forced into bankruptcy last April because of a surge in defaults and a loss of confidence among its lenders.

The report lays bare the aggressive business practices at the heart of the mortgage crisis.

“I would call it incredibly thorough analysis,” said Zach Gast, an analyst at RiskMetrics who raised concerns about accounting practices at New Century and other lenders in December 2006. “This is certainly the most in-depth review we have seen of one of the mortgage lenders that we have seen go bust.”

A spokeswoman for KPMG, Kathleen Fitzgerald, took strong exception to the report’s allegations. “We strongly disagree with the report’s conclusions concerning KPMG,” she said. “We believe an objective review of the facts and circumstances will affirm our position.”

The report zeros in on how New Century accounted for losses on troubled loans that it was forced to buy back from investors like Wall Street banks and hedge funds. Had it not changed its accounting, the company would have reported a loss rather than a profit in the second half of 2006.

The report said that investigators “did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings.”

Even so, the profits were the basis for significant executive bonuses and helped persuade Wall Street that the company was in fine health when in fact its business was coming apart, the report contends.

In bankruptcy court, creditors of New Century say they are owed $35 billion. The company’s stock peaked at nearly $65.95 in late 2004; it was trading at a penny on Wednesday.

A spokesman for New Century, which is being managed by a restructuring firm under the supervision of the bankruptcy court, said the company was pleased that the report had been published.

The investigation was led by Michael J. Missal, a lawyer and former investigator in the enforcement division of the Securities and Exchange Commission who was hired by the United States trustee overseeing the case in United States Bankruptcy Court in Delaware.

Mr. Missal, who also worked on an investigation of WorldCom’s accounting misstatements, concluded that KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.

In the aftermath of the collapse of Enron, Arthur Andersen was indicted and convicted on obstruction of justices charges. The conviction was overturned by the Supreme Court in 2005, long after the company had ceased doing business.

Mr. Missal drew an analogy to Enron and said there was evidence that KPMG auditors had deferred excessively to New Century.

“I saw e-mails from the engaged partner saying we are at the risk of being replaced,” Mr. Missal said in a telephone interview about a KPMG partner working on the audit of New Century. “They acquiesced overly to the client, which in the post-Enron era seems mind-boggling.

Ms. Fitzgerald of KPMG countered, “There is absolutely no evidence to support that contention.”

In one exchange in the report, a KPMG partner who was leading the New Century audit responded testily to John Klinge, a specialist at the accounting firm who was pressing him on a contentious accounting practice used by the company.

“I am very disappointed we are still discussing this,” the partner, John Donovan, wrote in the spring of 2006. “And as far as I am concerned we are done. The client thinks we are done.”

KPMG said Wednesday that a national standards committee had approved the practice in question.

The accounting irregularities became apparent when a new chief financial officer, Taj S. Bindra, started asking New Century’s accounting department and KPMG to justify their approach, beginning in November 2006.

Most of the mortgage company’s executives from that period have resigned or been laid off. A spokesman for two of the company’s three founders, Edward F. Gotschall and Robert K. Cole, said both had cooperated with the investigation but had not yet reviewed the report. A lawyer for Bradley A. Morrice, the third founder who was president and chief executive in 2006 and part of 2007, did not return a call.

The three founders together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial.

The company and its executives are the subjects of a federal investigation by the Justice Department. Investors have filed numerous civil lawsuits against the company

26 March 2008

Is the Federal Reserve Accountable? Quis Custodiet Ipsos Custodes?


Is it a moral hazard to prop up financial institutions made insolvent through reckless speculation and probable fraud without required reforms or remedial actions? Is it appropriate to fail to take the necessary steps towards writing down assets and allowing the final cure of price discovery to occur? Are the banks using their respite to further spread the risk of their misadventures to the naive public?

Is the Fed a willing party to the continuation of one of the greatest financial frauds since The South Sea Bubble and the Mississippi Company?

Perhaps the truth will come out when Senator Chris Dodd convenes his hearings into the Bear Stearns bailout. Perhaps we will not. But we can look to the precedents.

In 1836, Jackson forced the closing of the Second Bank of the U.S. by revoking its charter for their abuses in the issuance of the nation's currency.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the [public] bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

The Debt Shuffle
by Jesse Eisinger Mar 20 2008
Conde Nast Portfolio

Wall Street cheered Lehman's earnings, but there are questions about its balance sheet.

Bear Stearns collapsed for two reasons. It had a short-term funding crisis where lenders pulled their loans and customers pulled their cash. But it also had a longer-term leverage problem. Last week’s crisis didn’t happen in a vacuum; that leverage eventually led to the collapse in confidence.

After the collapse, Wall Street’s attention naturally turned to the other investment banks, especially Lehman Brothers, perceived as the most vulnerable. So, investors were thrilled when Lehman topped earnings expectations on Tuesday — as the firm took pains to reassure the markets that it has plenty of cash to ride out the turbulence.

Yet aside from a smattering of attention here and there, investors and the media mostly overlooked the balance sheet. In other words, they forgot what happened mere hours earlier with Bear Stearns. Wall Street’s short-term memory is notoriously lousy, but this must set a record. (Could Jimmy Cayne be sharing his stash with his hedge fund buddies?)

What actually happened to Lehman’s balance sheet in the first quarter? Assets rose. Leverage rose. Write-downs were suspiciously minuscule. And the company fiddled with the way it defines a key measure of the firm’s net worth. Let’s look at the cautionary flags:

Lehman’s balance sheet isn’t shrinking, as we’d expect.

Lehman finished the first quarter was total assets of $786 billion, up almost 14 percent from the previous quarter and 40 percent from a year earlier. Other financial institutions are taking down their exposure right now amid the market turmoil to be prudent. Lehman says it wants to. It is not.

Lehman got more leveraged, not less.

The investment banks “gross” leverage hit 31.7 times equity, up from the fourth quarter and way up from last year’s 28.1. According to Brad Hintz, an analyst with Bernstein Research, Lehman’s leverage reached its highest point since 2000. Lehman, like all the investment banks, prefers to look at net leverage, excluding hedges, and that went down. And the firm says that the asset rise was mainly a result of increases in short-term items that have low risk. But we’ve heard a lot of that lately across the financial world. It’s quite simple: The more leverage Lehman has, the less room assets have to fall to wipe out its equity.

Lehman includes debt in its calculation of equity. Say what?

It’s always worrisome when a company changes a key definition of a closely watched measure of financial performance. In a note in its earnings release, Lehman said it has a new definition of “tangible equity,” or the hard assets that it has left over after subtracting its liabilities. This is a measure of net worth, the yardstick by which investment banks are valued. Lehman’s new definition allows for a higher portion of long-term subordinated borrowings (which it calls “equity-like”) in tangible equity. Previously, it had a cap on the percentage of “perpetual preferred stock,” a form of equity-like debt that doesn’t have a maturity date, in its equity. Now, it doesn’t have a cap. Think of it this way: If you borrow money from your parents to make your down payment on your house and they don’t expect to get paid back right away (at least not before you pay your mortgage off) is it equity in your house? No, it’s a loan. And Lehman hasn’t borrowed from mommy and daddy.

Lehman says it is merely conforming to the Securities and Exchange Commission’s definition of tangible equity and had contemplated making the change for a while. And the firm says the change didn’t result in any difference to its net leverage ratio.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Lehman’s write-downs seem tiny.

Lehman finished the quarter with $87.3 billion of real estate assets. These include residential mortgages and commercial real estate paper. The bank only wrote these assets down by 3 percent. And its Level III assets —the hardest to value portion of these instruments—were written down by only the same percentage. The indexes and publicly traded instruments and companies that serve as proxies for these securities generally fell more than that in the quarter. Lehman points out that took larger gross write-downs and then made money through hedges, for a smaller net number.

Lehman remains exposed to lots of dodgy mortgages, including a group labeled: “Prime and Alt-A.” Prime mortgages represent loans to good quality borrowers; Alt-A loans go to borrowers a mere step up from subprime, and represent an area with almost as many problem loans as subprime. The total amount of such mortgages on Lehman’s balance sheet was $14.6 billion in the first quarter and it actually rose from $12.7 billion in the previous quarter. Is this the time to be increasing exposure to questionable mortgages? More ominously, only $1 billion of that figure is prime and the rest is Alt-A, according to Hintz’s estimate.

The picture emerging is that of an investment bank that is dancing as fast as it can. If Lehman can keep piling up more assets, and if these assets come back, Lehman comes out a big winner. But if it didn’t properly mark down those assets during these bad times, the investment bank’s returns —and therefore its profitability—will be much lower in the future.

And that’s the good case. If the assets do not recover, then time is against the firm.

There is a larger, monetary policy issue here. The Federal Reserve has announced that it will lend to investment banks for the first time since the Depression, acting as a lender of last resort. At the very least, regulators should be demanding that the investment banks bring down their leverage and reduce their risk. Are the regulators sending a stern-enough message to Lehman? If so, it’s not getting through.


The implications of the Fed's actions in the case of Bear Stearns are enormous. It has radically extended its scope of regulation and activity beyond traditional banking to investment banks, non-members of the Federal Reserve System, and set itself up as the lender-of-last-resort to the entire financial community. This needs to be examined closely by the Congress, in addition to the specific actions with regard to Bear Stearns.

Four Largest US Banks Earnings Outlooks Slashed


Four largest U.S. banks' outlooks slashed: Oppenheimer
Wed Mar 26, 2008 1:22am EDT
By Jonathan Stempel

NEW YORK (Reuters) - The earnings outlooks for the four largest U.S. banks have been slashed by Oppenheimer & Co analyst Meredith Whitney, who said there is "no clear end in sight" to downward pressure on the sector's profits.

In a report late Tuesday, Whitney said Citigroup Inc the largest U.S. bank by assets, might lose $1.15 per share in the first quarter, four times her prior forecast for a 28 cents per share loss. She expects the bank to lose 15 cents per share in 2008, after earlier seeing profit of 75 cents per share.

Whitney in October correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital.

The analyst on Tuesday also lowered her first-quarter profit per share forecasts for Bank of America Corp to 35 cents from 92 cents, for J.P.Morgan Chase & Co to 70 cents from 86 cents, and for Wachovia Corp (WB) to 55 cents from 78 cents.

She cut her 2008 profit per share forecasts to $3.25 from $3.65 for Bank of America, to $2.90 from $3.20 for JPMorgan, and to $2.70 from $3.05 for Wachovia. The new forecasts are below analysts' average forecasts compiled by Reuters Estimates.

"Despite cutting estimates for financials by over 30 times since November, we are confident this will not be our last reduction in 2008," Whitney wrote. "As key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."

She added: "We anticipate the current credit cycle to be the worst in generations."

The analyst left her profit per share forecast for Wells Fargo & Co (WFC.N: Quote, Profile, Research), the fifth-largest U.S. bank, unchanged at 55 cents for the first quarter and $2.15 for the year.

Whitney expects Citigroup to suffer $13.12 billion of write-downs in the first quarter, on top of $18.1 billion of write-downs and costs tied to subprime mortgages in the fourth quarter.

The analyst said the bank's first-quarter write-downs might include $9 billion for collateralized debt obligations, $1.97 billion for commercial mortgage securities, and $2.15 billion for "leveraged" loans used to fund corporate buyouts.

She said Bank of America might suffer $4.29 billion of write-downs, including about two-thirds from CDOs.

JPMorgan might suffer $2.83 billion of write-downs, with nearly half from leveraged loans, while Wachovia faces a possible $1.53 billion of write-downs, with about half tied to commercial mortgages, she said.

Whitney rates Citigroup "underperform," and the other three banks "perform." These reflect how shares may perform relative to the Standard & Poor's 500 .SPX over 12 to 18 months.

In Tuesday trading, shares of Citigroup closed at $23.42, Bank of America at $40.97, JPMorgan at $46.06 and Wachovia at $30.04. The shares are down a respective 55 percent, 21 percent, 5 percent and 47 percent since last March 26. The S&P 500 is down 6 percent over that time.

(Editing by Tomasz Janowski)

25 March 2008

Consumer Expectations Decline to the Lowest Level Since the Beginning of the 1973-4 Bear Market


US consumer confidence stumbles to 5-year low

WASHINGTON (AFP) — US consumer confidence slid to a five-year low in March while a measure of expectations for the future hit the weakest level in 35 years, a closely watched survey showed Tuesday.

The Conference Board said its index of consumer confidence declined to 64.5 points from 76.4 a month earlier. That was sharply below the level of 73.4 points expected by economists.

The survey -- often is seen as a gauge of consumer spending, which represents the bulk of US economic activity -- showed the weakest confidence since the start of the US invasion in Iraq.

Lynn Franco, director of the Conference Board consumer research center, said: "Consumers' confidence in the state of the economy continues to fade and the index remains at a five-year low."

In an even more ominous sign, the survey's expectations index declined to 47.9 from 58.0.

Franco said: "Looking ahead, consumers' outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon. The expectations index, in fact, is now at a 35-year low, levels not seen since the (1973) oil embargo and Watergate." (as you may recall, 1973 was the beginning of a major two year bear market - Jesse)

The present situation index decreased to 89.2 from 104.0 in February, suggesting activity has weakened in recent months, according to Franco. Consumers claiming business conditions are "bad" increased to 25.4 percent from 21.3 percent, while those claiming conditions were "good" declined to 15.4 percent from 19.1 percent.

Those saying jobs are "hard to get" rose to 25.1 percent from 23.4 percent, while those indicating jobs are "plentiful" decreased to 18.8 percent from 21.5 percent."The labor market situation is at the center stage of the fall," said economist Marie-Pierre Ripert at Ixis Corporate and Investment Bank, who adds that the report is more evidence a recession has arrived.

"Even if the correlation in monthly changes in consumer confidence and private consumption is quite loose, the recent development in consumer confidence suggests a decline in consumer spending in the first and second quarters ... As a result, we don't rule out two declines in a row in GDP (gross domestic product)."

The report is based on a survey of 5,000 US households through March 18.

Get Ready for the Second Wave of Writedowns, Defaults, and Invsolvencies


This week is the end of the first quarter, and so the Wall Street carneys are taking Uncle Sam's easy money and are whitewashing the fences, putting lipstick on the pigs, dressing the windows, and painting the tape.

But make no mistake, this is far from over and Bear Stearns was just the first shoe to drop.

Wall Street May Face $460 Billion Credit Losses, Goldman Says
By Zhao Yidi

March 25 (Bloomberg) -- Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said. (Note: this is for the subprime piece - Jesse)

``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

Earnings and share prices at U.S. financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. earlier this month.

Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.

Merrill Lynch & Co. had its 2008 profit estimates cut by 45 percent at JPMorgan on concern the third-largest U.S. securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages, New York-based analyst Kenneth Worthington said.

Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to ``sell'' from ``neutral'' at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.

Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

Goldman, which has lost 17 percent this year on the New York Stock Exchange, rose 36 cents to $179.24 in composite trading at 11:50 a.m. Merrill fell $1.13 to $47.25, Lehman declined $2.16 to $44.48 and Bank of America dropped $1.47 to $40.98.

To contact the reporter on this story: Zhao Yidi in New York at at yzhao7@bloomberg.net.
Last Updated: March 25, 2008 12:02 EDT

24 March 2008

The Failure of Croney Capitalism


Count on the British press to provide a realistic alternative analysis, as compared to the sychophants in the mainstream corporate media and academia in the States.

We differ a bit in prescription for a cure, but the diagnosis could not be more clear or more correct.


THE RED MENACE
The world's markets gambled on financial alchemy. They lost.
By Iain MacWhirter

COME BACK Karl Marx, all is forgiven. Just when everyone thought that the German philosopher's critique of capitalism had been buried with the Soviet Union, suddenly capitalism reverts to type. It has laid a colossal, global egg and plunged the world economy into precisely the kind of crisis he forecast.

The irony, though, is that this time it isn't the working classes who are demanding that the state should take over, but the banks. The capitalists are throwing themselves on the mercy of government, demanding subsidies and protection from the capitalist market - it's socialism for the banks. Hedge fund managers of the world unite, you have nothing to lose but your bonuses.


On Friday, the heads of the big five British banks demanded - and got - another £5 billion in "emergency liquidity" from the Bank of England to add to the £5bn they received earlier in the week. But like militant shop stewards they complained it wasn't enough. "Look how much the banks are getting in Europe and America," they whinged. Hundreds of billions of dollars and euros are being thrown at banks in an attempt to save them from themselves.

The quaint idea that loss-making companies should fail, to ensure the health and vitality of the capitalist system, has quietly been discarded. The banks, we are told, are "too big to fail", which means that they have to be taken into public ownership - like Northern Rock - or have their debts underwritten by government, like Bear Stearns, which comes to much the same thing. The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

Which takes us back to Marx. The crisis that is rocking the world is a classic example of the kind of shocks and dislocations that Marx said were an essential feature of a competitive capitalist economy. The falling rate of profit that results from too much investment piling into new technologies and commodities forces capital to engage in a constant search for profit. (Personally the shocks we are seeing are not the result of functioning free markets, but the result of gross imbalances introduced by the corruption that croney capitalism through protracted malinvestment fostered by Greenspan's outrrageously obvious credit bubble and promotion of the degradation of safeguards and regulation. - Jesse)

As it becomes harder and harder to make money out of making things - just look at the collapse in prices of computers over the last decade - so exotic financial derivatives have been created to boost wealth without engaging in recognisable economic activity. Speculation takes over. British manufacturing has collapsed to a fraction of what it was 20 years ago, and a vast financial services sector has grown up in its place making money largely out of inflation in house prices, ie debt.

Moreover, with globalisation, trillions of dollars have been washing around the world markets looking for a home. This has created a monster: the market in financial derivatives; a Pandora's box of inscrutable financial instruments governed by supposedly failsafe mathematical formulae. Collateralised debt obligations - implicated in the subprime mortgage crisis - are at least rooted in nominal house prices, but they have been detached from the actual mortgages and sold as commodities in the securities market.

Credit default swaps have created a $45 trillion global industry based on nothing at all, merely speculating on the movements of currencies and commodity prices. A credit default swap is a kind of insurance contract taken out between two bankers who bet on the price of an asset. They don't need to own the asset, and there is no actual loss if the default happens. But the contracts can be traded, allowing the swappers to create value out of nothing but their own agreement.

According to the Bank for International Settlement in Basel, the global derivatives market is worth some $516 trillion - 10 times the value of all the world's stock markets put together. And much of it is based on very little but leveraged optimism; pieces of paper theoretically based on the price of an empty house in Cleveland, Ohio.

Billions have been magicked out of nothing by this financial alchemy, but in the end, there is no way of turning dross into gold, and the reckoning had to come. And someone had to pay - which is where we, the people, come in.

As happened in the 1930s, the whole system is collapsing. We are faced with the choice of colossal bank defaults or hyper inflation: saving the banks or saving our savings. The central bankers decided that they would rather save the banks. So our governments are using public money to bolster banking balance sheets and allowing inflation to rip so that the banks' losses will be devalued, along with the pound in your pocket.

So what happens now? Or as Lenin said, What Is To Be Done? Well, not Communism for a start. Central control and outright state ownership along Soviet lines is no longer a viable political option - an undemocratic public monopoly is almost as bad as a private one. The fact that the banks are currently in league with western governments to create a kind of financial communism is doubly disturbing.

Instead of just propping up bankrupt banks, the governments should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets, and refitting western economies to combat climate change. It needs a kind of green New Deal - an update on Roosevelt's imaginative policies of the 1930s fought tooth and nail by the banks.

They want unlimited access to public money to save themselves from the consequences of their own actions; welfare for the wealthy. This is above all a political, not an economic problem. There needs to be a political mobilisation of public opinion to force the banks and the government to bring the people into the equation. Unfortunately, the party that used to perform this function, Labour, has largely been bought out by the banks. They have privatised the government, even as they have socialised the financial markets.

The Red Menace - Sunday Herald - UK

Bailing Out the Fed: Aid to Dependent Pigmen


How Can We Help to Finance the 29 Billion in Risk the Fed is Taking for Bear Stearns and JPM?


How do we insulate the Federal Reserve from absorbing any of those losses, even though they will be passed along to all holders of the US dollar?

By all means let's "Stop Those Rebate Checks."

But this time let's start by stopping the checks to the small elite of wealthiest US citizens that have been going out for the past eight years.

The depths of Wall Street venality knows no bounds. They cannot stop. These are serial Pigmen.


March 24, 2008
Op-Ed Contributor
Stop Those Checks
By BRUCE BARTLETT
Great Falls, Va.

WITH unusual speed and cooperation last month, George W. Bush and Democrats in Congress agreed to a tax rebate set to be paid out beginning in May. Families will get checks for $300 to $1200 or more, and it is assumed that they will all rush out to spend this money immediately, giving retailers a boost that will raise economic growth.

Despite the bipartisan support for the rebate, few economists have supported the idea. They note that we have tried rebates in the past — most recently in 2001 — and there is no evidence that they have meaningfully stimulated either consumption or growth. By and large, people saved the money they received or paid bills (which is the same thing); very few used their rebates to increase spending.

The true reason why the current rebate has been so popular in Washington is that giving away free money in an election year is good for politicians of both parties. Superficially, it looks as if Washington is responding to a real problem with decisive action. After all, if there is a recession the Democrats who control Congress will be held just as accountable as the Republicans who control the executive branch.

But in the almost six weeks since the rebate legislation was signed into law, the economic situation has changed. The meltdown in financial markets is much more serious than it looked in February. At its root are bad mortgages and other debts that are like toxic waste spreading throughout the financial system.

The solution, therefore, is not to drop $100 bills from helicopters — which is essentially what the rebate would do. Rather, what we need is a mortgage Superfund that can clean up the toxic waste. If we can cleanse the financial system of at least some of the bad debts, it will do far more to restore the economy to health than anything that could be accomplished by the rebate — even if the rebate were to work as it is supposed to.

We all know that the government is eventually going to get stuck with a lot of the bad debts, just as it did in the early 1990s when a previous housing bubble burst and bankrupt savings and loans had to be rescued. That bailout cost taxpayers $160 billion. The next one will probably cost more because the problem is bigger and the economy is larger.

At the same time, there are increasing demands for targeted relief for homeowners facing foreclosure. It looks to many people as if Washington cares more about fat-cat bankers than working families in hard times. At some point, Congress is going to respond with additional aid for people caught in the mortgage mess, and this relief will come on top of the $117 billion cost of the rebate.

We need to stop and ask whether we can afford to spend $117 billion that the Treasury Department does not have on a program of dubious effectiveness. It simply makes no sense to send out checks to people who have no need for it as some kind of election-year bribe to vote for incumbents of both parties. That money would go a long way toward cleaning up the mortgages that are poisoning the financial sector.

Congress should immediately repeal the rebate and redirect the money that has been budgeted into a package of measures that would help the housing sector and those people who actually need assistance. The Treasury might use some of the money, for example, to enable Fannie Mae and Freddie Mac, the government-sponsored housing agencies, to buy up some of the bad mortgages, get them off bank balance sheets and help homeowners refinance them.

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

This is a proposal that both Republicans and Democrats should embrace. It involves no increase in the deficit. We would simply redirect already appropriated money into other channels that are much more likely to help the economy.

The checks haven’t gone out yet so no one has to give anything back. Congress could pass a repeal bill in a day if it wanted to. At a minimum, hearings should be held on this proposal in light of the country’s deteriorating financial situation.

Bruce Bartlett, the author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” was an official under Presidents Ronald Reagan and George H. W. Bush.

Stop Those Checks - NY Times

Opera Buffa: JPM Raises Bid for 39.5% of BSC to $10


JP Morgan Increases its offer on Bear Stearns to $10
but for a Minority Share
L'Opera Buffa On Wall Street

It is reported this morning that JP Morgan Chase is increasing its offer to buy Bear Stearns to $10 per share, but will only be buying 39.5% of the company.

In an amended deal, JP Morgan Chase will also be risking 1 billion dollars in losses in Bear Stearns.

The Federal Reserve (the public aka all holders of US dollars) will be taking the risk on the next $29 billion.

Without the Fed's guarantee, Bear Stearns would be in receivership todaywith the shares worth 'zero.' This is Aid to Dependent Pigmen.

Moral hazard reaches comedic proportions.



Text of Revised JPM-BSC Deal
March 24, 2008 10:02 a.m.
JPMorgan Chase and Bear Stearns Announce Amended Merger Agreement
and Agreement for JPMorgan Chase to Purchase 39.5% of Bear Stearns


NEW YORK-- March 24, 2008--

JPMorgan Chase & Co. (NYSE: JPM)
and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.

In addition, JPMorgan Chase and Bear Stearns entered into a share purchase agreement under which JPMorgan Chase will purchase 95 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock after giving effect to the issuance, at the same price as provided in the amended merger agreement. As discussed below, the purchase of the 95 million shares is expected to be completed on or about April 8, 2008.

The Boards of Directors of both companies have approved the amended agreement and the purchase agreement. All of the members of the Bear Stearns Board of Directors have indicated that they intend to vote their shares held as of the record date in favor of the merger.

The JPMorgan Chase guaranty of Bear Stearns' trading obligations has also been significantly clarified and expanded. For more information, the guaranty agreement will be filed publicly and the parties will provide a Question and Answer document describing the guaranty in further detail on their respective websites. JPMorgan Chase has also agreed to guarantee Bear Stearns' borrowings from the Federal Reserve Bank of New York.

The Federal Reserve Bank of New York's $30 billion special financing associated with the transaction has also been amended so that JPMorgan Chase will bear the first $1
billion of any losses associated with the Bear Stearns assets being financed and the Fed will fund the remaining $29 billion on a non-recourse basis to JPMorgan Chase.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, "and bring more certainty for our respective shareholders, clients, and the marketplace. We look forward to a prompt closing and being able to operate as one company."

"Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders," said Alan Schwartz, President and Chief Executive Officer of Bear Stearns. "The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining Bear Stearns' financial stability."

While the rules of the New York Stock Exchange (NYSE) generally require shareholder approval prior to the issuance of securities that are convertible into more than 20% of the outstanding shares of a listed company, the NYSE's Shareholder Approval Policy provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company.

In accordance with the NYSE rule providing that exception, the Audit Committee of Bear Stearns' Board of Directors has expressly approved, and the full Board of Directors has unanimously concurred with, Bear Stearns' intended use of the exception. The closing of the sale of the 95 million shares is expected to be completed upon the conclusion of a shareholder notice period required by the NYSE, which is expected to occur on or about April 8, 2008.

23 March 2008

Which Way Out of the Minsky Moment?


If we are indeed in a Minsky Moment, which we think we are, then monetary inflation by the Fed and government invervention without reform will most likely increase the probability of a protracted stagflationary repression in the United States, and possibly lead to civil unrest and an exogenous reform of the system. An abandonment of the system as it is with a turn to fascism has been the historic choice of Wall Street. The political lobbying against systemic reform by the Bankers and their sycophants will be intense and as persuasive to the many as most appeals to fear. However, their reckless advice leads to a trip to the brink of the abyss.


The Minsky Moment
by John Cassidy
February 4, 2008
The New Yorker

Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his financial-instability hypothesis, which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

Minsky, who died in 1996, at the age of seventy-seven, earned a Ph.D. from Harvard and taught at Brown, Berkeley, and Washington University. He didn’t have anything against financial institutions—for many years, he served as a director of the Mark Twain Bank, in St. Louis—but he knew more about how they worked than most deskbound economists. There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic. A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy. The current cycle began in 2003, with the Fed chief Alan Greenspan’s decision to reduce short-term interest rates to one per cent, and an unexpected influx of foreign money, particularly Chinese money, into U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in particular—at historic lows, a speculative real-estate boom quickly developed that was much bigger, in terms of over-all valuation, than the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial lenders extend credit to ever more dubious borrowers, often creating new financial instruments to do the job. During the nineteen-eighties, junk bonds played that role. More recently, it was the securitization of mortgages, which enabled banks to provide home loans without worrying if they would ever be repaid. (Investors who bought the newfangled securities would be left to deal with any defaults.) Then, at the top of the market (in this case, mid-2006), some smart traders start to cash in their profits.

The onset of panic is usually heralded by a dramatic effect: in July, two Bear Stearns hedge funds that had invested heavily in mortgage securities collapsed. Six months and four interest-rate cuts later, Ben Bernanke and his colleagues at the Fed are struggling to contain the bust. Despite last week’s rebound, the outlook remains grim. According to Dean Baker, the co-director of the Center for Economic and Policy Research, average house prices are falling nationwide at an annual rate of more than ten per cent, something not seen since before the Second World War. This means that American households are getting poorer at a rate of more than two trillion dollars a year.

It’s hard to say exactly how falling house prices will affect the economy, but recent computer simulations carried out by Frederic Mishkin, a governor at the Fed, suggest that, for every dollar the typical American family’s housing wealth drops in a year, that family may cut its spending by up to seven cents. Nationwide, that adds up to roughly a hundred and fifty-five billion dollars, which is bigger than President Bush’s stimulus package. And it doesn’t take into account plunging stock prices, collapsing confidence, and the belated imposition of tighter lending practices—all of which will further restrict economic activity.

In an election year, politicians can’t be expected to acknowledge their powerlessness. Nonetheless, it was disheartening to see the Republicans exploiting the current crisis to try to make the President’s tax cuts permanent, and the Democrats attempting to pin the economic downturn on the White House. For once, Bush is not to blame. His tax cuts were irresponsible and callously regressive, but they didn’t play a significant role in the housing bubble.

If anybody is at fault it is Greenspan, who kept interest rates too low for too long and ignored warnings, some from his own colleagues, about what was happening in the mortgage market. But he wasn’t the only one. Between 2003 and 2007, most Americans didn’t want to hear about the downside of funds that invest in mortgage-backed securities, or of mortgages that allow lenders to make monthly payments so low that their loan balances sometimes increase. They were busy wondering how much their neighbors had made selling their apartment, scouting real-estate Web sites and going to open houses, and calling up Washington Mutual or Countrywide to see if they could get another home-equity loan. That’s the nature of speculative manias: eventually, they draw in almost all of us.

You might think that the best solution is to prevent manias from developing at all, but that requires vigilance. Since the nineteen-eighties, Congress and the executive branch have been conspiring to weaken federal supervision of Wall Street. Perhaps the most fateful step came when, during the Clinton Administration, Greenspan and Robert Rubin, then the Treasury Secretary, championed the abolition of the Glass-Steagall Act of 1933, which was meant to prevent a recurrence of the rampant speculation that preceded the Depression.

The greatest need is for intellectual reappraisal, and a good place to begin is with a statement from a paper co-authored by Minsky that “apt intervention and institutional structures are necessary for market economies to be successful.” Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it. Among the problems at hand: how to restructure Wall Street remuneration packages that encourage excessive risk-taking; restrict irresponsible lending without shutting out creditworthy borrowers; help victims of predatory practices without bailing out irresponsible lenders; and hold ratings agencies accountable for their assessments. These are complex issues, with few easy solutions, but that’s what makes them interesting. As Minsky believed, “Economies evolve, and so, too, must economic policy.” ♦


In Time of Tumult,Obscure Economist Gains Currency
Mr. Minsky Long Argued Markets Were Crisis Prone;
His 'Moment' Has Arrived
By JUSTIN LAHART
August 18, 2007

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.

When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.

The worst of all worlds would be a stagflationary depression in which unemployment was high, wages were stagnant for the majority, and the price of essentials spiraled higher despite slack aggregate demand.

The Financial Instability Hypothesis by Hyman Minsky May 1992

An increasing complexity of the financial structure, in connection with a greater involvement of governments as refinancing agents for financial institutions as well as ordinary business firms (both of which are marked characteristics of the modern world), may make the system behave differently than in earlier eras. In particular, the much greater participation of national governments in assuring that finance does not degenerate as in the 1929-1933 period means that the down side vulnerability of aggregate profit flows has been much diminished. However, the same interventions may well induce a greater degree of upside (i.e. inflationary) bias to the economy.


It is our view that the only sustainable exit from this boom-bust cycle will be a systemic reform of the banking system so that it once again serves the real economy, and a return to the growth of real wages and a more equitable distribution of wealth in the country to foster aggregate savings and sustainable consumption.