Geithner: "Vast Majority" of US Banks Have More Capital Than Needed

This morning before Congress Treasury Secretary Turbo Tax Tim said that the stress test results show that the 'vast majority' of US banks have more capital than they need.

Right. Most real banks, who do banking, have sufficient capital and have been well managed.

Its only the five or six largest money center banks that have trillions in bad debt and toxic derivatives that threaten to soak up all the available capital in the real economy.

Its the vast majority of banks who have been sound in their credit expansion and risk management who are paying the price through higher FDIC fees, along with the taxpayers, as Tim and Larry support the Wall Street oligarchs.

The action in the equity markets ahead of Tim's remarks was about as blatant as it gets. This is getting to be disgusting.

Market manipulation and rampant financial speculation with public funds will continue until we are confident that the economy has improved. When the electricity fails because of malinvestment in the real world economy, the Obama people can have public service community organizers deliver pamphlets door to door telling us how good things are becoming.


April 21 (Bloomberg) -- Treasury Secretary Timothy Geithner told a congressional panel that the “vast majority” of U.S. banks have more capital than needed.

He also said there are signs of thawing in credit markets and some indication that confidence is beginning to return.

“Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets,” Geithner said in prepared testimony to the committee overseeing the Troubled Asset Relief Program.

Earlier today, Geithner said the program has enough money for bank rescues even under “conservative” estimates.

Geithner reiterated the Treasury’s view that about $135 billion is still available for bank rescues, out of $700 billion originally authorized by Congress.

The total includes about $590 billion that has been allocated so far for various TARP activities, leaving $110 billion remaining. Also, the Treasury expects $25 billion in repayments this year, leading to the total projection of $135 billion available.

“We believe that even under the conservative estimate of available funds described here, we have the resources to move forward implementing all aspects of our Financial Stability Plan,” Geithner said in a letter to Elizabeth Warren, the chair of the Congressional Oversight Panel.

May Have More

The Treasury first put forward these estimates in late March. In the letter, Geithner said it’s possible the Treasury may have even more money remaining, depending on how many banks repay TARP and whether the housing program uses its full allocation.

“Our projections anticipate only $25 billion will be repaid” over the next year, Geithner said. This figure is “lower than many private analysts expect,” he said.

Geithner’s letter comes on the same day as a separate report on the rescue program prepared by Neil Barofsky, the special inspector general for TARP. Barofsky said his office has six audits underway about various elements of the program.

One of these inquiries is looking into federal assistance to Bank of America, which has benefited from three different bank rescue programs, and Treasury’s decision to extend aid in connection with Bank of America’s acquisition of Merrill Lynch. The audit was expanded to include the other eight large banks that received TARP funding in October 2008, the report said.

The reporters on this story: Rebecca Christie in Washington

Collapsing US Aggregate Demand Strikes Imports Hardest

Falling aggregate Demand and the weaker dollar have finally broken the back of the parabolic growth of imports and the US trade deficit.



As one can see, imports have been hit much harder than exports. This is why Japan and China will be struggling with their export driven GDPs.



This is the worst decline in retail sales in the post World War II era.

The US consumer has finally hit the wall. The folks in DC think they can crank this Frankenstein monster of reckless consumption back up again, given the right jolts of liquidity and spin.

To think that consumers will start borrowing and buying again without a meaningful change in the dynamic of their cashflows implying an increase in the median wage, is a hard to believe. Even for the reckless American consumer, this episode has been daunting to their over-confidence, and rightfully so.

Let's hope they don't just patch this bubble and blow it back up again. But it certainly appears as though Larry, Ben and Tim are going to try and take it to the limit one more time.

Our Modern Financial System: Hypocrisy on Parade

Crony Capitalism and Incompetence Doom Obama Economic Plans Says Nobel Laureate

Nothing you have not heard here before, and frequently.

But this is a Nobel Prize winner in Economics saying it, and a Democratic appointee to boot.

"The people who designed the plans are either in the pocket of the banks or they’re incompetent."

That sounds like Larry Summers and Tim Geithner in a nutshell to us.

Joe Stiglitz is assuming that Crew Obama really WANT to fix the economy and serve their nation. It seems possible that, being out of power for so many years, the Democratic leaders are handing out favors to their campaign contributors and feathering their nests for the future.

Then they'll worry about the public welfare. Political reform, Chicago-style.

The banks must be restrained, and the financial system must be reformed, before there can be any meaningful recovery in the real economy.


Bloomberg
Stiglitz Says Ties to Wall Street Doom Bank Rescue
By Michael McKee and Matthew Benjamin

April 17 (Bloomberg) -- The Obama administration’s bank rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.” (That pretty much covers Larry Summers and Tim Geithner, respectively - Jesse)

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said. (Personally I'd give the bondholders a very high and tight haircut - Jesse)

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database....

Bailing Out Investors

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.

Redistribution

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Critical of Stimulus

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said. (Peculiar? Perhaps he meant the odor. - Jesse)

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said. (You got that right Joe - Jesse)

Recreating Bubble

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.” (They have been kicking this cow pie down the road for so long we're almost at the edge of the world - Jesse)

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.

“They haven’t thought enough about the determinants of the flow of credit and lending.”

Whither the Rally? Three Short Term Stock Market Indicators

Second Largest US Commercial Retail Real Estate Company Files for Bankruptcy

This is the tip of the iceberg, still the early stages of failures in the real economy which has been distorted beyond all reason by the outsized financial sector, a failed regulatory regime under the influence of Wall Street, and reckless financial engineering by the Fed.


AP
Mall operator General Growth Properties files for Chapter 11 bankruptcy
Alex Veiga, AP Real Estate Writer
Thursday April 16, 2009, 3:14 pm EDT

LOS ANGELES (AP) -- The nation's second-largest shopping mall owner, General Growth Properties, filed for Chapter 11 bankruptcy protection Thursday in a tough bargaining move to restructure its $27 billion in debt.

General Growth, which owns more than 200 malls including four in Colorado, said shoppers at its malls will not be affected by its bankruptcy filing.

The Chicago-based company is paying the price for its aggressive expansion at the height of the real estate boom. General Growth, like many homeowners during the frenzy, bought several properties at top dollar and now is finding lenders unwilling to refinance.

The real estate crisis has been slow to affect the market for retail, hotels and office buildings. But the delinquency rate for commercial loans, while still relatively low, is creeping up and could deepen the economic recession.

"While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," Chief Executive Adam Metz said in a statement.

The news sent the real estate investment trust's stock down 16 cents, or 15 percent, to 89 cents in midmorning trading. The stock traded last spring as high as $44.23.

The move by the General Growth had been widely anticipated since the fall, when the company warned it might have to seek bankruptcy protection if it didn't get lenders to rework its debt terms. Efforts to negotiate with its creditors ultimately fell short late last month.

Chapter 11 protection typically allows a company to hold off creditors and operate as normal while it develops a financial reorganization plan.

The company had about $29.6 billion in assets at the end of the year, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

The company noted that some subsidiaries, including its third party management business and joint ventures, were not part of the bankruptcy petition.

General Growth said it intends to reorganize with the aim of cutting its corporate debt and extending the terms of its mortgage maturities. The company has a financing commitment from Pershing Square Capital Management of about $375 million to use to operate during the bankruptcy process.

Last month, General Growth said it got lenders to waive default on a $2.58 billion credit agreement until the end of the year.

But its Rouse Co. subsidiary failed to convince enough holders of unsecured notes worth $2.25 billion as of Dec. 31 to accept a proposal that would let the unit avoid penalties for being behind on its debt payments and give it some time to refinance its debt load.

In February, the company reported lower-than-expected fourth-quarter funds from operations and a dip in revenue amid weaker retail rents.

The company has suspended its dividend, halted or slowed nearly all development projects and cut its work force by more than 20 percent. It also has sold some of its non-mall assets.

This Is Your Economy on Credit Crack - and Heading for a Crack-Up

Here is a clear and simple explanation of why we may have already passed the point at which the Fed and Treasury will have no choice but to substantially devalue the bonds and reissue a 'new US dollar' as part of a managed default on our sovereign debt.


Ben's Un-shrinkable Balance Sheet
Delta Global Advisors
April 14, 2009

As he stated again clearly today, the Chairman of the Federal Reserve has deluded himself into thinking that when the time comes, he will be able to shrink the size of the Fed's balance sheet and reduce the monetary base with both ease and impunity. He also has deluded himself into thinking inflation will be easily contained.

It is very important that he does not fool you as well.

The Fed believes low interest rates should not be the result of a high savings rate, but instead can exist by decree, a conviction which has directly led consumers to believe their spending can outstrip disposable income.

The result of such thinking has been a rise in household debt from 47% of GDP in 1980 to 97% of total output in Q4 2008. As a result of this ever increasing burden, the Fed has been forced into a series of lower lows and lower highs on its benchmark lending rate. Keeping rates low is an attempt to make debt service levels manageable and keep the consumer afloat. Problem is, this endless pursuit of unnaturally low rates has so altered the Fed's balance sheet that Mr. Bernanke will be hard-pressed to substantially raise rates to combat inflation once consumer and wholesale prices begin to significantly increase.

Banana Ben Bernanke has grown the monetary base from just $842 billion in August 2008 to a record high of $1,723 billion as of April 2009. But it's not only the size of the balance sheet that is so daunting; it's the makeup that's becoming truly scary.

Historically speaking, the composition of the Fed's balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed's decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a "hold-to-maturity investor" of such assets.

Moreover, not only are the new assets on the Fed's balance sheet less liquid but the durations of the loans are being extended. According to Bloomberg, the Fed is contemplating extending TALF loans to buy mortgaged backed securities to five years from three after pressure it received from lobbyists and a failed second monthly round of auctions. That means when it finally decides it's time to fight inflation, the Fed will find it much more difficult to reverse course.

But because of the extraordinary and unprecedented (some would say illegal) measures Mr. Bernanke has implemented, only $505 billion of the $2 trillion balance sheet is composed of U.S. Treasury debt. Today, most Fed assets are derived from the alphabet soup of lending programs including $250 billion in commercial paper, $312 billion of Central Bank liquidity swaps and $236 billion in mortgage-backed securities.

Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him.

SP Futures Hourly Charts at 2:30 PM

Goldman Sachs Buries Losses to Beat the Estimates

That canny crew at Goldman Sachs does it again.

Last night in a surprise move Goldman announced their earnings early, showing a surprising profit of $1.8 billion, beating the Street estimate handily. The bulk of their profit purportedly came from speculative trading for their own accounts, using 'cheap FDIC guaranteed funds.'

Goldman also took the opportunity to announce a new stock issue designed to allow shareholders to help them pay back their government TARP funds. Since Goldman is putting aside 50% of its profits for employee bonuses even now, while they are still holding government subsidies, the reasons for this are obvious.

What was not reported last night is that Goldman had changed their reporting periods to begin the 1st quarter in January 2009 when they declared themselves to be a bank holding company. Prior to that, their fiscal 2008 year ended on November 30.

This made the month of December 2008 an 'orphan month' that was ignored in the financial headlines.

Goldman took this opportunity to realize some hefty writedowns in that December one month report, to the tune of approximately $1.3 Billion in pre-tax losses.

So, to earn an impressive $1.8 Billion in the first quarter, Goldman disposed of their losses in a largely ignored December filing. This facilitated their share offering with the 'wonderful earnings news' which Matt Miller of Bloomberg referred to approximately every five minutes as "blowing away their numbers."

However, this morning, Matt did mumble something about Goldman "maybe not blowing away their numbers."

Goldman did nothing illegal in their management of their earnings, both in the way in which they parsed the losses into a 'stub month' which was ignored, or in their decision to time an early announcement of 'exceptional profits' with a stock offering. But the financial press handled this badly, and considering the huge debt and forebearance Goldman owes to the government and the public it was not befitting a major institution with strong ties to the Obama administration.

The only thing getting blown away around here are the shareholders, taxpayers, and anyone else who buys what Wall Street in general is selling these days.

The banks must be restrained and the financial system reformed before we can have a genuine economic recovery.

SP Futures Hourly Chart and Rally Update

This rally looks increasingly artificial and is led by buying in the SP futures, which was the trademark intervention established when Robert Rubin was Treasury Secretary.

This does not mean it cannot go higher, as the markets are awash in liquidity with no productive outlets that can compete with the easy returns of the hot money speculation machine.

Goldman Sachs, for example, is taking cheap money from the Fed and from funds guaranteed by the FDIC and turning them into profits by gaming the commodity and equity markets. This is what passes for banking in the US in this time of excess and imbalance.

It does imply that on news this rally could turn lower with some serious momentum.

What is lacking is solid volume underneath this rally. If buying appears from real investors as opposed to speculators then it may continue.

For now this rebound in US equities a slow short squeeze probably led by the momentum traders and by the bankers who met with Obama at the White House.

We'll know more when Obama produces the details of his discussions with them in keeping with the transparency he has promised. Or are the bankers to Obama what the oil companies were to Cheney?

The banks must be restrained, and the financial system reformed, before we can have a meaningful economic recovery.

Goldman Sachs Releases Earnings After Hours

Goldman Sachs released their earnings early tonight after hours, instead of tomorrow morning.

Goldman solidly beat both earnings and revenue expectations, and has indicated that they intend to pay back their TARP borrowings as soon as possible.

Matt Miller of Bloomberg TV has used the term 'blowing away' their numbers at least thirty times since they announced their numbers after the close.

The major source of profit for Goldman Sachs was from speculative trading.

There will be no recovery in the real economy until the financial system is reformed and banks are restrained into productive functions within our society.


Goldman posts $1.7 billion profit, plans $5 billion offer
Monday April 13, 2009, 4:28 pm EDT

NEW YORK (Reuters) - Goldman Sachs Group Inc posted first-quarter earnings of $1.66 billion, a higher-than-expected profit helped by strong trading revenue, and said it planned to raise $5 billion of common shares.

The New York-based bank reported net income applicable to common shareholders for the quarter ended March 27 of $3.39 a share. For the quarter ended February 29, 2008, the company posted net income for common shareholders of $1.47 billion, or $3.23 a share.

Analysts had on average expected earnings of $1.49 a share, according to Reuters Estimates.

Goldman said it planned to use proceeds of its share offering plus additional funds to repay the $10 billion of capital it received from the U.S. government under the Troubled Assets Relief Program.

The Crisis of Our Democracy: Corruption in the Financial Markets and Obama's Failure to Reform

This interview with William Black in Barron's is an articulate and reasonably detailed summary of our own view of the current crisis from an exceptionally well-informed and experienced source.

The big question in our own mind is the depth of complicity and the motivations of the government, the media and major institutions in continuing to support this financial corruption through silence or participation.

Is Obama really merely listening to the wrong advice from highly placed sources in the Democratic Party? And how sincere are they? The record of corruption in the Obama Administration in the form of conflicts of interest and tax evasion is already the smoke that warns of fire.

All good questions, more relating to the length of time to a cure rather than its essential character.

The banks must be restrained, the financial system must be reformed, before there can be a sustained economic recovery.


Barron's
The Lessons of the Savings-and-Loan Crisis
By Jack Willoughby
11 April 2009

AN INTERVIEW WITH WILLIAM BLACK: The current bank scandal dwarfs the 1980s savings-and-loan crisis -- and could destroy the Obama presidency.

WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.

For Black's provocative thoughts on the current financial crisis, read on.


Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.

So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.

We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.

Summarize the problem as best you can for Barron's readers.

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.

What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.

The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?

Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.

In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.

Why then is there so much smoke and so little action?

First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.

Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?

Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?

You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.

Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

What needs to be done?

Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.

The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Thanks, Bill.

G7 Industrial Production Crashing

The production of real goods in the developed nations is plummeting. Even the mighty export driven economy of Japan appears to be heading lower as though it had fallen off a cliff.

Countries must begin to encourage consumption in their own economies. To do this, they ought not to be stimulating the old credit/speculation machine called the neo-liberal financial system.

Real economic growth is to be found in a broad employment and consumption, and an increase of the median wage.

This is the deep flaws in much of the third world economies, especially in Asia and Latin America. Economic health can be measured by the size and well being of the middle class in a relatively free society.

The reason is simple. Individuals can only borrow so much before they are unable to service the debt. And the greedy few can only spend so much on consumption using the wealth which the tax and financial system has delivered to them from the many.

Gaming the system so that it overtaxes the income of the many for theincreasing benefit of a few has natural limitations, unless one can enforce a type of involuntary servitude. This model has its roots far back in history, in empires like Rome, Egypt, and Sparta.

As the elite few accumulate real assets using their surplus, they will find that holding on to their wealth as the rest of society deteriorates in a downward spiral of privation can be a bit of a challenge.

Until the financial system is reformed and the economy is brought back into a balance, there will be no recovery, and the fabric of order will remain fragile.

If things continue on as they are, despite all the stimulus and fine rhetoric, the madness will once again be unleashed on the earth, and the people will wonder from whence it came, as they do each time it rises from the same sources and ravages civilization: unbridled greed, malinvestment, and corruption.




Thanks to Diapason Trading for this chart.

Chevron and Boeing Warn After Hours; Jesse's Café Américain Forms Bank Holding Company

Chevron needs to lose their preoccupation with fossil fuels and move into banking and financial services. Fossils. LOL.

Perhaps they can convert their gas stations into drive through ATMs. Don't they have a credit card business?

Why don't they become a bank holding company? The one page EZ application forms are now online at the New York Federal Reserve website. Or you can just call 1-800-BEN-BANKS. Press 2 for 'Habla Español.'

I am working on developing a personal bank. How does Banc of One sound? I modified the old Banc One logo myself for cost efficiency.

The business plan is to borrow ten billion dollars from the Fed at .5 percent and to buy Treasuries paying 2.5 percent. Since there are no employees to lay off or complex record-keeping we (the kids are the Board of Directors) think we are ahead of the curve on this one. If the Treasuries default we can always apply for one of the toxic asset buyback plans. Stress test? LOL. Stress this.

Banc of One is announcing record earnings expectations, but don't look for a 10 Q yet (it worked for Wells Fargo). I'm waiting while the little rotating egg timer on the Fed site evaluates the consolidated application for holding company status and loans of less than 50 billion dollars. Be sure to click the boxes for automatic campaign contributions. Oh, there it is. Approved. Sweet!

As for Boeing, the obvious solution is a strategic move from airplane engines to internet search engines. Those propeller heads are too 'practical' to be financiers.

Manufacturing is so yesterday. We make our money by printing it, and the details of distribution are a government function.

See you at the TARP window.


Chevron Issues Interim Update for First Quarter 2009

SAN RAMON, Calif.--(BUSINESS WIRE)--Chevron Corporation (NYSE:CVX) today reported in its interim update that earnings for the first quarter 2009 are expected to be sharply lower than in the fourth quarter 2008. Upstream earnings are expected to decline substantially, in part due to lower prices for crude oil and natural gas. Downstream earnings are also anticipated to be much lower than in the previous period, with average margins on the sale of refined products off significantly.

Boeing Cuts 1Q Guidance, Slows Production On Customer Delays

Boeing Co. (BA) said first-quarter earnings were hurt as the company trimmed twin-aisle airplane production plans in response to customer requests to delay deliveries amid "unprecedented declines in global passenger and air-cargo volumes."

Obama's Failure and the Unfolding Financial Crisis

Kevin Phillips is a brilliant and insightfuly political commentator, and we have featured his videos and writings here many times.

His latest essay is worth reading over the long weekend.

"This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland...

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers."

It is ironic that Joe Biden predicted that our Community-Organizer-in-Chief would be tested severely in his first days in office. At the time everyone thought it would be some foreign power, some military machine which would temper the character of this new leader with a significant threat to the national welfare.

Little did we suspect that the test of our sovereign republic would come from the Wall Street and the money center banks.


Table for One - TPMCafe
The "Disaster Stage" of U.S. Financialization
By Kevin Phillips
April 7, 2009, 3:34PM

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention.

By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector.

James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster.

Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off.

The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

The Character of this "New Bull Market"

The paid for opinion pundits are touting a new bull market on the Bloomberg today.

Is this a bottom? Well perhaps, but until we see some positive change in the economic indicators that are not paper exercises in thinly veiled accounting fraud we choose to remain in cash and precious metals, while trading the ins and outs on a daily basis, trying to stay out of the way of the antics of the Wall Street wisenheimers.

So far this feels like a distribution rally before a retest of the lows. It is the timing of things that is the challenge, and the ability to spot a genuine change in character in the long market trend.

This is probably not the place for any investors to enter the markets, since the risk is still so historically high, although a little lower by recent standards.

Time will tell. The Fed fooled us in 2004 with their willingness to intentionally create a housing bubble to avoid the near term consequences. Perhaps Treasury and the Fed will cast caution to the wind and do it again, setting us up for a larger, more destructive collapse on the next group's watch.

But the character of this 'bull market' strikes us as the same as that of those who are our financial and political leaders: shallow, false, short-sighted, manipulated by dark forces, self-serving, a pleasant appearance over an underlying rot, and a in sum a terrible disappointment and lapse of the discovery and disclosure of things as they are.

Changing the Rules of the Blame Game

"Treasury Secretary Timothy Geithner “is covering up,” Black said...“They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent, they think Americans are a bunch of cowards, and that we'll run screaming to the exits"…

Bill Moyer's Journal
Changing the Rules of the Blame Game
Bill Moyers and Michael Winship

A cartoon in the Sunday comics shows that mustachioed fellow with monocle and top hat from the Monopoly game – “Rich Uncle Pennybags,” he used to be called – standing along the roadside, destitute, holding a sign: “Will blame poor people for food.”

Time to move the blame to where it really belongs. That means no more coddling banks with bailout billions marked “secret.” No more allowing their executives lavish bonuses and new corporate jets as if they’ve won the megalottery and not sent the economy down the tubes. And no more apostles of Wall Street calling the shots.

Which brings us to Larry Summers. Over the weekend, the White House released financial disclosure reports revealing that Summers, director of the National Economic Council, received $5.2 million last year working for a $30 billion hedge fund. He made another $2.7 million in lecture fees, including cash from such recent beneficiaries of taxpayer generosity as Citigroup, JP Morgan and Goldman Sachs. The now defunct financial services giant Lehman Brothers handsomely purchased his pearls of wisdom, too.

Reading stories about Summers and Wall Street you realize the man was intoxicated by the exotic witches’ brew of derivatives and other financial legerdemain that got us into such a fine mess in the first place. Yet here he is, serving as gatekeeper of the information and analysis going to President Obama on the current collapse. We have to wonder, when the President asks, “Larry, who did this to us?” is he going to name names of old friends and benefactors? Knowing he most likely will be looking for his old desk back once he leaves the White House, is he going to be tough on the very system of lucrative largesse that he helped create in his earlier incarnation as a de-regulating Treasury Secretary? (“Larry?” “Yes, Mr. President?” “Who the hell recommended repealing the Glass-Steagall Act back in the 90s and opened the floodgates to all this greed?” “Uh, excuse me, Mr. President, I think Bob Rubin’s calling me.”)

That imaginary conversation came to mind last week as we watched President Obama's joint press conference with British Prime Minister Gordon Brown. When a reporter asked Obama who is to blame for the financial crisis, our usually eloquent and knowledgeable President responded with a rambling and ineffectual answer. With Larry Summers guarding his inbox, it’s hardly surprising he’s not getting the whole story.

If only someone with nothing to lose would remind the President of that old story – perhaps apocryphal but containing a powerful truth – of the Great Wall of China. Four thousand miles long and 25 feet tall. Intended to be too high to climb over, too thick to break through, and too long to go around. Yet in its first century of the wall’s existence, China was successfully breached three times by invaders who didn’t have to break through, climb over, or go around. They simply were waved through the gates by obliging watchmen. The Chinese knew their wall very well. It was the gatekeepers they didn’t know.

Shifting the blame for the financial crisis to where it belongs also means no more playacting in round after round of congressional hearings devoted more to posturing and false contrition than to truth. We need real hearings, conducted by experienced and fiercely independent counsel asking the tough questions, or an official commission with subpoena power that can generate evidence leading, if warranted, to trials and convictions – and this time Rich Uncle Pennybags shouldn’t have safely tucked away in his vest pocket a “Get Out of Jail Free” card.

So far, the only one in the clink is Bernie Madoff and he was “a piker” compared to the bankers who peddled toxic assets like unverified “liars' loan” mortgages as Triple-A quality goods. So says Bill Black, and he should know. During the savings and loan scandal in the 1980s, Black, who teaches economics and law at the University of Missouri, Kansas City, was the federal regulator who accused then-House Speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for campaign contributions and other perks. They got off with a wrist slap but Black and others successfully led investigations that resulted in convictions and re-regulation of the savings and loan industry.

Bill Black wrote a book about his experiences with a title that fits today as well as it did when he published it four years ago – "The Best Way to Rob a Bank Is to Own One." On last Friday night’s edition of BILL MOYERS JOURNAL, he said the current economic and financial meltdown is driven by fraud and banks that got away with it, in part, because of government deregulation under prior Republican and Democratic administrations.

“Now we know what happens when you destroy regulation,” Black said. “You get the biggest financial calamity for anybody under the age of 80.”

What’s more, the government ignored warnings and existing legislation to stop it before the current crisis got worse. “They didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the savings and loan crisis,” Black said. “Even while the institutions were reporting they were the most profitable savings and loans in America, we knew they were frauds. And we were moving to close them down.”

There was advance warning of the current collapse. Black says that the FBI blew the whistle; in September 2004, “there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle.”

But after 9/11, “The Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents.” So today, despite a crisis a hundred times worse than the Savings and Loan scandal, “there are one-fifth as many FBI agents” assigned to bank fraud.

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

“They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent, they think Americans are a bunch of cowards, and that we'll run screaming to the exits… And it's foolishness, all right?

“Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, ‘We just can't let the big banks fail.’ That's wrong.”

Black asked, “Why would we keep CEO’s and CFO’s and other senior officers that caused the problems? That’s nuts… We’re hiding the losses instead of trying to find out the real losses? Stop that… Because you need good information to make good decisions… Follow what works instead of what’s failed. Start appointing people who have records of success instead of records of failure… There are lots of things we can do. Even today, as late as it is. Even though we’ve had a terrible start to the [Obama] administration. They could change, and they could change within weeks.”

He called for a 21st century version of the Pecora Commission, referring to hearings that sought the causes of the Great Depression, held during the 1930’s by the US Senate Committee on Banking and Currency.

Ferdinand Pecora was the committee’s chief counsel and interrogator, a Sicilian émigré who was a progressive devotee of trust busting Teddy Roosevelt and a former Manhattan assistant district attorney who successfully helped shut down more than a hundred Wall Street “bucket shops” selling bogus securities and commodity futures. He was relentless in his cross-examination of financial executives, including J.P. Morgan himself.

Pecora’s investigation uncovered a variety of Wall Street calumnies – among them Morgan’s “preferred list” of government and political insiders, including former President Coolidge and a Supreme Court justice, who were offered big discounts on stock deals. The hearings led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934.

In the preface to his 1939 memoir, “Wall Street under Oath,” Ferdinand Pecora told the story of his investigation and described an attitude amongst the Rich Uncle Pennybags of the financial world that will sound familiar to Bill Black and those who seek out the guilty today.

“That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt,” Pecora wrote. “Indeed, if you now hearken to the Oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-1933; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob….”

According to Politico.com, at his March 27 White House meeting with the nation’s top bankers, President Obama heard similar arguments and interrupted, saying, “Be careful how you make those statements, gentlemen. The public isn’t buying that…. My administration is the only thing between you and the pitchforks.”

Stand aside, Mr. President, and let us prod with our pitchforks to get at the facts.

Berkshire Downgraded from AAA by Moody's

And then there were four (US companies left with an AAA credit rating).

Moody's strips Berkshire Hathaway of top rating
by Karen Brettell
Wednesday April 8, 2009, 6:01 pm EDT

NEW YORK (Reuters) - Moody's Investors Service on Wednesday cut its credit ratings on Berkshire Hathaway Inc. from the top Aaa, saying the recession and investment losses at its insurance operations has reduced their ability to support Berkshire's funding needs.

Moody's cut Berkshire to Aa2, the third highest investment grade, and cut its ratings on Berkshire's reinsurance subsidiary National Indemnity Co, and its bond insurance arm Berkshire Hathaway Assurance Corp, to Aa1, the second highest investment grade.

The outlook for all the ratings is stable, indicating an additional rating change is not anticipated over the next 12-to-18 months.

Falling stock prices have reduced the value of National Indemnity's investment portfolio, in turn weakening its capital cushion relative to its insurance and investment exposures, Moody's said in a statement.

Other, non-insurance businesses at the company have also seen "a meaningful drop in earnings and cash flows, particularly for businesses tied to the US housing market, construction, retailing or consumer finance," Moody's said...

The loss of Berkshire's top rating leaves only four U.S. companies rated the top investment grade by Moody's.

The company's bond insurance arm Berkshire Hathaway Assurance had been the only insurer of municipal bonds to have retained its top credit rating, although it has not been a major player in insuring primary deals.

The downgrade leaves Standard & Poor's as the only rating agency still ranking Berkshire AAA. S&P changed its outlook on the company to negative on March 25, indicating a cut from AAA is more likely.

Fitch ratings cut Berkshire to AA, the third highest investment grade, on March 12.

Bank Credit Growth Drops Precipitously

The Growth Rate of Total Credit at all US Commercial Banks is dropping precipitously as can be seen from the chart below.

This is a negative indicator for most banks involved in the actual business of banking, even as the spreads between Fed money and money on loan widen.

Advantage goes to those banks who are gaming the markets, also known as trading profits, which is probably the opposite outcome which Tim and Ben would desire, if they were thinking about it.

Should banks be trading in the markets at all for their own accounts? We think not.

Glass-Steagall should be reintroduced as quickly as possible to get the banks back in the business of banking. It is a profound disappointment that the Obama Administration with the Democratic leadership have done little or nothing to reverse the speculative trends in the money center banks.

That they have been the recipients of huge campaign contributions from these same banks make the situation all the worse, for how can one stand on principle when the outcome is at odds with your stated objectives, and you are taking money from those who favor that outcome?

If you wish to get the banks lending again, stop giving them hot money and a free ticket to the speculative gaming tables where the rules, or a lack thereof, are in their favor.

SP Futures Hourly Chart at the Close

Alcoa kicks off earnings season after the bell.

Two formations are on the chart: one bearish and one bullish. The market will tell us which one will be dominant. We are in very light trading because of the short holiday week and trader uncertainty.

Keep an eye on the VIX which is at historically high levels on average, as a symptom of the huge fear and volatility in this market.

P.S. Yesterday when this chart was posted the Pivot label was on the chart but the line associated with it had been left off. It has now been added.



McClellan Oscillator Daily for the NYSE Cash Market

Money Supply Growth

For those of you who are not familiar with the various measures of money supply here is a relatively easy to understand reference.

Money Supply: A Primer

MZM is currently the preferred measure of broad money supply 'liquidity' growth with M2 as the longer term measure standing in place of M3 which was the best and broadest measurement.

US Dollar Very Long Term Chart - Quarterly Update

US Dollar Weekly Chart with Commitments of Traders

When the Funds turn negative on the Commitments, the Dollar rally will be over.

The Fed engaged in more emergency currency swaplines this morning as the dollar short squeeze continues in Europe.

When that short squeeze is over, unless there is a coordinated devaluation in key currencies, the dollar will probably test that 80 support and fail.

Congressional Watchdog to Drop a Bombshell on the US Financial Industry

"...set to call for shareholders in those institutions to be wiped out. 'It is crucial for these things to happen...'"

How about a stiff haircut for the bondholders and defaults on the credit default swaps held by JP Morgan and Goldman Sachs?

It will be most interesting to see how Tim Geithner and Larry Summers respond to this advice from Congressional oversight.


The Guardian UK
US watchdog calls for bank executives to be sacked
James Doran in New York
The Observer,
Sunday 5 April 2009

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (TARP), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade."

She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression.

"Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."