Weekend Economists' Dirty Harry Weekend May 8-10, 2009

[Demeter]

Welcome to this tardy, but nonetheless here, edition of Weekend Economists, in which we try to keep our spirits up with popular culture while contemplating the ruin of our nation, or ruination for short.

Our economy is in an uproar. There are perps taking liberties with our liberties, pocketing our pay, and destroying everything in their paths.

While we could take the Biblical, Buddhist, and other major religions' philosophical approach that crime does not pay, and the bad guys will get theirs either in this life or the next or the afterlife, still....Americans are an instant-gratification culture. We want what we want NOW! And for a people crying out for instant justice, there's (FANFARE)

DIRTY HARRY CALLAHAN!

Dirty Harry specializes in cutting the carp. He is Instant Karma. If only we could turn him loose on the Wall St. banksters and the Torture Team, our problems would be solved. It would be legal, too, since W shredded the Constitution into cole slaw already.

But while we wait for our white/black/dirty knight, let us delve into the infinite grab bag of political economy as practiced in this early part of the 21st Century....

Post them if you've got them. Add your favorite quotes from any Clint Eastwood film, or any reference to said film, or anything on the theme.


Go ahead. Make my day.

[Demeter]

1. As Usual, We Open With a Bank Seizure

http://www.fdic.gov/bank/individual/failed/westsound.html

Failed Bank Information Information for Westsound Bank, Bremerton, WA

On Friday, May 8, 2009, Westsound Bank, Bremerton, WA was closed by the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.

Acquiring Financial Institution

All non-brokered deposits have been transferred to Kitsap Bank, Port Orchard, WA ("assuming institution") and will be available immediately. On Monday, May 11, 2009, the former Westsound Bank locations will reopen as branches of Kitsap Bank.

Your transferred deposits will be separately insured from any accounts you may already have at Kitsap Bank for six months after the failure of Westsound Bank. Checks that were drawn on Westsound Bank that did not clear before the institution closed will be honored as long as there are sufficient funds in the account. You may speak to an FDIC representative regarding deposit insurance by calling: 1-800-830-4735 or visit EDIE the FDIC's Electronic Deposit Insurance Estimator.

EDIE - FDIC's Electronic Deposit Insurance Estimator

You may withdraw your funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with Kitsap Bank as long as the deposits are not pledged as collateral for loans. You may view more information about Kitsap Bank by visiting their web site.


As of Monday, May 11, 2009, you may continue to use the services to which you previously had access, such as, ATMs, online services, safe deposit boxes, night deposit boxes, wire services, etc.

Your checks will be processed as usual. All outstanding checks will be paid against your available balance(s) as if no change had occurred. Your new bank will contact you soon regarding any changes in the terms of your account. If you have a problem with a merchant refusing to accept your check, please contact your branch office. An account representative will clear up any confusion about the validity of your checks.

All interest accrued through Friday, May 8, 2009, will be paid at your same rate. Kitsap Bank will be reviewing rates and will provide further information soon. You will be notified of any changes.

Your automatic direct deposit(s) and/or automatic withdrawal(s) will be transferred automatically to your new bank. If you have any questions or special requests, you may contact a representative of your assuming institution at your branch office.

Loan Customers

If you had a loan with Westsound Bank, you should continue to make your payments as usual. The terms of your loan will not change under the terms of the loan contract, because they are contractually agreed to in your promissory note with the failed institution. Checks should be made payable as usual and sent to the same address until further notice. If you have further questions regarding an existing loan, please contact your loan officer.

For all questions regarding new loans and the lending policies of Kitsap Bank, please contact your branch office.



The Westsound Bank had no publicly owned stock. Equity shareholders were invested in the holding company, WSB Financial Group, Inc. Bremerton, WA and not in the bank.

[Demeter]

71. finally Came Up On Marketwatch--more details

SAN FRANCISCO (MarketWatch) -- State and federal regulators on Friday closed Westsound Bank of Bremerton, Wash., marking the 33rd bank failure so far this year.
The Federal Deposit Insurance Corporation said in a statement that it has entered into a purchase and assumption agreement with Kitsap Bank of Port Orchard, Wash. to assume all the deposits of Westsound, except those from brokers.
Westsound Bank's nine offices will reopen on Monday as branches of Kitsap Bank, the FDIC said. As of the end of March, Westsound Bank had total assets of $334.6 million and total deposits of $304.5 million. Kitsap will not assume the approximately $9.4 million in brokered deposits. The FDIC will pay the brokers directly.
In addition to assuming the failed bank's deposits, Kitsap Bank will purchase $49.3 million of assets comprising cash, cash equivalents, marketable securities and loans secured by deposits. The FDIC will retain the remaining assets for later disposition.
The FDIC estimates the cost to its Deposit Insurance Fund will be $108 million.

http://www.marketwatch.com/news/story/regulators-seize-washington-based-westsound-bank/story.aspx?guid={C42E8B63-C1D4-426F-930A-3E79C84B5EF7}&siteid=yahoomy

[Demeter]

2. Next, the Banking System and Its Grades on the Stress Tests

Flunking the Stress Tests

http://www.motherjones.com/politics/2009/05/flunking-stress-tests

By Nomi Prins | Fri May 8, 2009 6:10 AM PST

After weeks of suspense, the Federal Reserve revealed the results of its bank stress tests Thursday—as if they actually meant something. The Fed claimed to have conducted a rigorous investigation of the nation's 19 biggest banks to determine which ones would need more capital in the event of further economic woes, like a spike in unemployment or a dip in home prices or GDP. And according to Fed chairman Ben Bernanke, we should take "considerable comfort" in the results. But don't be fooled by the drama: All the stress tests did is hand the banks a free pass for further federal aid.



The tests were a meaningless exercise in numerous ways. For starters, the results were predictable—the 10 banks that need more capital were obviously still struggling. Nor was there a big mystery about how much capital they required: There are rules that determine the amount of money banks should set aside to cover their risks, and had those rules been enforced, the institutions wouldn't now be dependent on the public dime. What makes the hype over the stress tests so galling is that the Fed should have been doing this kind of monitoring all along.



But the most farcical thing about the process is that after more than two months of intrigue and secrecy and tactical leaks, we still don't have an accurate picture of the weaknesses of the financial system. In fact, the banks were allowed to participate in the design of the tests—for instance, by naming the price of the securities that they can't get rid of. Now, the government is using the results as rubber stamps for the flawed policy it has pursued since the crisis started.

Before the stress tests, banks received trillions of dollars through various federal channels. Now, well, we have tests to confirm that we should keep doing the same thing. Bernanke said as much to Congress on Tuesday: "Bank holding companies will be required to develop comprehensive capital plans for establishing the required buffers…with the assurance that equity capital from the Treasury under the Capital Assistance Program will be available as needed." Translation: Banks get to choose how to find more capital. And if they fail to raise enough funds, the government will keep dumping money into mismanaged firms, in the hope that it will one day trickle down to the little people.

The banks that came up short in the stress-test sweepstakes have seen the biggest drops in their stock prices—and thus lost the most taxpayer money—since they got their first TARP injections last October. (This list includes Citigroup, Bank of America, Wells Fargo, PNC Financial Services Group, SunTrust Banks, Fifth Third Bancorp, and Regions Financial Corp.) If the TARP infusions plus the trillions in cheap loans provided by the Fed haven't worked, another round of new capital probably won't either.

Finally, despite Treasury Secretary Tim Geithner's declaration that the results are "reassuring," the banks are likely in worse shape than the tests suggest. Just because a bank avoided the capital penalty box doesn't mean it's healthy. Some, like Goldman Sachs, are investment banks that converted to bank holding companies last fall in order to access federal money, and received a two-year grace period to standardize their books with other banks. And some happen to enjoy a symbiotic relationship with the Fed, like JPMorgan Chase, whose last two takeovers (of Bear Stearns and Washington Mutual) were government-funded. JPMorgan Chase's stock was one of the biggest losers after TARP began, yet its tests indicated that it has somehow taken care of its capital needs just fine.

Those banks that were ordered by the Fed to come up with more capital may also be shakier than Geithner would have us believe. The two biggest problem banks, Citigroup and Bank of America, spent last week frantically trying to persuade the Fed that they didn't need extra capital, although they both posted significant increases in losses from loans in their most recent quarterly results. Bank of America's CEO Ken Lewis insisted, "We absolutely don't think we need additional capital." Guess what? His bank needs $33.9 billion, according to the government. The glaring mismatch between the banks' rosy public statements and the Fed's (gentle) testing suggests a troubling reluctance to face hard facts about the real condition of the banking system. Too many numbers are open to interpretation and debate, which usually means that things are worse than they seem.

It's time for the truth from the Fed, or the Treasury, or the White House. We need a different approach that provides capital directly to consumer loans, in order to loosen up credit, provide relief for struggling citizens, and stabilize failing banks. Instead, the government's solution is merely to do more of the same. Which means that before very long, the same banks will be lining up at the public till, asking for more of our money.

[Demeter]

3. Stressing the Positive by Paul Krugman

http://www.nytimes.com/2009/05/08/opinion/08krugman.html?_r=1

Hooray! The banking crisis is over! Let’s party! O.K., maybe not.

In the end, the actual release of the much-hyped bank stress tests on Thursday came as an anticlimax. Everyone knew more or less what the results would say: some big players need to raise more capital, but over all, the kids, I mean the banks, are all right. Even before the results were announced, Tim Geithner, the Treasury secretary, told us they would be “reassuring.”

But whether you actually should feel reassured depends on who you are: a banker, or someone trying to make a living in another profession.

I won’t weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn’t have the resources to make a really careful assessment of the banks’ assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn’t.

But focusing on the process can distract from the larger picture. What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.

It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.

But it’s important to see the strategy for what it is and to understand the risks.

Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they’re still at levels that would have been considered inconceivable before the crisis.

As a result, the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.

Can the economy recover even with weak banks? Maybe. Banks won’t be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.

But there are many things that could go wrong.

It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.

Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it’s very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests — which looked only two years ahead — are able to capture.

Finally, given the possibility of bigger losses in the future, the government’s evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.

But what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.

Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.

Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.

Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.

So as I said, while bankers may find the results of the stress tests “reassuring,” the rest of us should be very, very afraid.

[Demeter]

4. What Keeps Me Awake At Night: Economy Edition

http://www.informationarbitrage.com/2009/05/what-keeps-me-awake-at-night-economy-edition.html

This is how my nightmare goes. The US Government has adopted the following mantra: BUY TIME. Buy time for:

* the stock market to recover;
* sentiment to improve;
* retail demand to pick up;
* credit markets to open up;
* bank balance sheets to be rebuilt;
* banks to lend to both consumers and small businesses;
* businesses to begin hiring again;
* homeowners who were once on the edge to be able to pay their mortgages;
* real estate prices to rise;
* residential and commercial mortgage-backed security prices to rise; and
* TOXIC ASSETS TO BECOME DE-TOXIFIED.

The US Government has done everything in its power to avoid the perception that it has lost control. Statements such as "None of the largest banks will be left insolvent," providing both direct capital injections and indirect support through the FDIC debt issuance guarantees, the AIG payouts that were funneled to Wall Street counterparties, TALF, etc. Further, the SEC and Congress were silent when FAS 157 was relaxed, providing further support to bank and insurance company balance sheets "as is." Buying time. Congress could have forced transparency, could have let the largest banks get restructured, could have facilitated a comprehensive plan against the illiquid asset problem. But this was not the path taken. And if the stock and bond markets continue to go straight up and if risk premia fall, then the "Big Brother" approach taken could be vindicated.

But what if, just what if, the economy hasn't turned the corner? What if job losses continue apace, residental mortgage defaults continue to rise and corporate bankruptcies spike? As defaults ripple through the system, given the lack of transparency and granular, easily accessible data around mortgage-backed security vehicles (CMBS, RMBS) and credit default swap (CDS) positions, how are we to untangle the mess in a timely and efficient manner? How are investors supposed to accurately price risk in the absence of this data? The US Government can continue its posture of uber-borrower, but this game can only go on for so long. Let's say the Chinese government gradually reduces its net purchases of US Treasuries, and also shortens the duration of its Treasury portfolio. As the US Treasury continues to run the printing presses, the Chinese would gradually build a compelling argument (and a powerful economic position) as to why the US Dollar should no longer be the global reserve currency and the basis of exchange in oil. Profligate spending coupled with fewer willing buyers will drive up US dollar long rates, debase the currency and set off a very unpleasant inflationary cycle. With plummeting real asset values, spiking inflation and high credit costs, the US would be in a very uncomfortable position, indeed.

The Administration and Congress have clearly taken the path of least resistance. Wiping out of the stockholders and unsecured bondholders of our largest financial institutions would have been a political nightmare, but it would have enabled the market to purge the excesses that our system has wrought over the past decade. An emphasis on generating comprehensive data and full transparency around toxic asset portfolios would have also helped in the process, creating a much clearer picture of ultimate ownership and a basis for working out the problem credits (and counterparties). This wouldn't have produced nightmares, it would have yielded wakeful pain followed by catharsis and and way forward. The path taken looks and feels good today, but potential troubles lurk just below the surface.

Is there a monster in my closet? Well, maybe...

[DemReadingDU]

10. Is there a monster in my closet?

yeh, something like the Incredible Hulk.
It's getting bigger and more ugly as time goes by. It appears Obama and team are trying to keep the monster hidden forever, but that monster is going to burst thru closet sooner or later.

[Demeter]

11. It's Called Extortion

Mayor: All right. Give the message to the Chronicle. We'll agree to pay, but we'll tell him we need time to get the money together.

Callahan: Wait a minute. Do I get this right? You're gonna play this creep's game?

Mayor: It'll get us more breathing space.

Callahan: It also might get somebody killed. Why don't you let me meet with the son-of-a-bitch?

Chief: No, none of that. You'd end up with a real blood-bath.

Mayor: I agree with the Chief. We'll do it this way, all right?

[Demeter]

88. Channeling my inner Larry Summers by Edward Harrison

http://www.nakedcapitalism.com/2009/05/guest-post-channeling-my-inner-larry.html

(A VERY LONG ARTICLE--BUT THIS IS THE MEAT OF IT)

Time is NOT our friend. Time is our enemy.

1. The economy will worsen considerably more. The stress tests indicate a worst-case scenario which is unrealistically optimistic. The necessary corollary of this statement is that the legacy assets which are already impaired will become more impaired. In a worst-case scenario, many institutions will be insolvent.

2. Balance sheets will worsen because of commercial real estate loans, credit card loans and other real economy effects as well. This double whammy of deteriorating legacy assets and new asset impairments in a worst-case scenario will overwhelm the programs now in place.

3. Political capital will be consumed over time. Americans will tire of this crisis. And, therefore, the natural checks and balances in the system will stymie further efforts. The legislative branch will re-asset itself in the government budget process and in the financial sector oversight process. The judicial branch will be called on to take issue with the turn of events. Obama is not going to get more stimulus. He is not going to get additional funds to re-capitalize banks. And he will not get a free hand in administering these programs already in place. Moreover, the Fed’s quasi-fiscal role will cause a backlash from Congress and risk its independence...

[Demeter]

5. Dirty Harry Says: About Obama

You gotta be kidding. I don't got any time to break in any newcomers. Why don't you do this boy a favor...if I need a partner, I'll get me someone who knows what the hell he's doin'.

[Demeter]

7. Some Brave Souls Penetrate the Numbers

Preliminary Q1 2009 Stress Test Results: Significant Increase in Stress Across the Banking Industry


“Young man sometimes the only way to win is to lose gracefully.”

Gen. Bill Creech, Commander,
USAF Tactical Air Command
to Dennis Santiago years ago

(NOT DIRTY HARRY, BUT IT SURE SOUNDS LIKE SOMETHING HE'D SAY)


Technology Innovation That Actually Works

We admire the Federal Deposit Insurance Corporation for many reasons. This month, we applaud them once again for the fine job they have done to bring the Central Data Repository (CDR) online in a way that serves the growing public demand for timely US bank data. Made operational just in January of 2009, we’ve just collected Q1 2009 CALL reports for over 7,600 reporting units, a goodly portion of which came out of submittal confirmation only a couple of days ago.

These CALL reports are submitted to the FDIC during a 30 day submission window beginning the first day of the quarter. We’ve been testing a variation of IRA’s ratings analyzer on these Q1 CALL’s since April 1st. The result is that IRA is now positioned to deliver preliminary bank stress estimates for the new quarter roughly two to three weeks ahead of the FDIC’s mid-quarter research master file release. Based on this maiden run, we are pleased to report that the FDIC’s CDR engine has the potential to enable a quantum leap in granularity looking at the U.S. banking industry.

Coupled with our analyzers, it’s possible to generate analysis on bank units as they file their CALL’s and, based our findings, generate a industry picture in around 36 to 48 hours after the close of the CALL submittal window. That’s pretty good!

Stable Pie Slices, But Dramatic Increase in Banking Industry Stress

Based on looking at sample set of around 91% of the test population used in Q4 2008, we observe that the distribution of IRA Bank Stress Rating grades for Q1 2009 retains the roughly 2/3rd to 1/3rd ratio of banks with A+/A grades versus elevated stress institutions IRA detected was characteristic of the banking industry throughout 2008.

Q1 2009 Preliminary IRA Bank Stress Rating Grade Distribution
(Based on data for 7,519 bank units from the FDIC CDR*)
Source: FDIC/IRA Bank Monitor
IRA Bank Stress Grade 2009 Q1* 2008 Q4
A+ 3362 3918
A 1909 1705
B 135 119
C 411 390
D 87 98
F 1615 2003
There were an additional 108 banks in the initial data set that were found to have some holes in the data thus preventing computation for the preliminary analysis run.

We see indicators of a continued migration of banks from the A+ range where stress fall below the index Dec-1995 = 1.0 start mark into the A range indicating more banks are now feeling the effects of economic conditions regardless of the business practice models they’ve had in place.

At this time we do not know what the disposition of the remaining 750 or so institutions that are not in the CDR as of 5/3/2009. We have not yet had a chance to determine who these missing units are.

IRA Historical Bank Stress Grade Distributions
based on FDIC Research Master Files
Source: FDIC/IRA Bank Monitor
Period A+ A B C D F
2008 12 3,918 1,705 119 390 98 2,003
2008 09 4,498 1,325 283 356 63 1,793
2008 06 4,884 1,248 404 326 66 1,458
2008 03 5,167 1,042 578 334 68 1,233
2007 12 5,556 610 884 315 70 1,029
2007 09 5,931 395 950 274 37 902
2007 06 6,056 354 972 273 60 824
2007 03 6,075 304 1,057 284 63 795
2006 12 6,370 134 1,165 204 39 697
2006 09 6,666 29 1,108 198 44 628
2006 06 6,729 0 1,155 194 35 613
2006 03 6,752 2 1,131 187 39 608

At first glance the situation as of Q1 2009 may seem to be getting better. But it’s not. In prior quarters, banks wound up getting “F” grades because they were barely making money; that is, they had small but positive net incomes that produced ROE’s sufficiently below industry averages to indicate elevated business operating stress. A lot of these institutions were suffering due to mark-to-market accounting, goodwill write-downs and other ROE issues.

In Q1 2009, the data indicates a dramatic climb in the industry aggregate average Bank Stress Index from 1.8 at the end of Q4 2008 to a whopping 5.57 coming out of 1Q 2009 or half an order or magnitude above the 1995 benchmark. The reason for this is the number of banks who delivered negative net incomes in the first quarter of 2009, one thousand five hundred fifty-seven (1,557) of them as updated on our system after the data run on May 5, 2009.

Keep in mind what the Q1 2009 FDIC data is saying: Even with the change in the FASB rule for M2M accounting, and Fed liquidity programs, the leading factor driving higher industry stress scores remains ROE degradation, not charge-offs or operational factors such as efficiency. When charge-offs are the leading factor in the IRA Banking Stress Index, then the industry will be through the worst.

Number of Bank Units with Negative
Net Income in 1Q2008 by State
updated as of May 5, 2009
Source: FDIC CDR/IRA Bank Monitor
AL 27
AR 11
AZ 39
CA 135*
CO 27
CT 12
DC 4*
DE 11
FL 149*
GA 139*
HI 1
IA 29
ID 5
IL 108*
IN 10
KA 1
KS 37
KY 20
LA 11
MA 27
MD 16
MI 53
MN 77
MO 64*
MS 7
MT 10
NC 36*
ND 10
NE 27
NH 4
NJ 26
NM 5
NV 23
NY 30*
OH 22
OK 19
OR 14
PA 41
PR 2
RI 3
SC 18
SD 8
TN 33*
TX 89*
UT 23*
VA 20
WA 49*
WI 22
WV 1
WY 2
* items updated since 5-3-2008. Please note that th FDIC CDR system continues to release data. The definitive lock down of quarterly numbers happens when the research masterfile is released later this month.

The Q1 2009 results calculated by IRA are looking a little like a table from the CDC’s H1N1 confirmed laboratory cases page. Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world’s central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar.

We’ve noted in the past that US banks have been migrating down the quality slope taking an average of 9 months to complete the journey from “A” to “F” on the stress scale. The story is predictable. It begins with business losses and recriminations. This is followed by lending engine contraction as the propensity to create exposure narrows towards risk aversion and “quality lending” exclusivity. This is a rare diet to try to live on in these times. The bank, which makes its’ living wage from the interest it collects from its’ lending engine slowly starves.

At a certain point the carry cost of the infrastructure outweighs the earnings rate. Then you start to see strange shifts to seek incremental income from service fees, a move that often only serves to increase customer reluctance and mistrust. The end result is a stressed business model that can only be remedied by getting the core business, its’ lending engine, running again.

Counting the fourth quarter of 2007 when IRA’s data indicates this phenomenon began to emerge, we are now eighteen (18) months or one-half of a business cycle dragging this massive boat anchor the behind the US economy. We may have wasted valuable time trying to save Wall Street at the cost of Main Street.

At this point the reasons no longer matter. It’s time to win by thinking gracefully. The numbers indicate we need to seriously ask the question as to whether economic recovery for the United States can still come just from repairing Wall Street – or whether instead we should be worried about addressing the underlying loss rates that are driving the provisioning behind these poor ROE results. Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?

Readouts on all 7,519 bank units collected by IRA to date are now available to our Advisory Clients. The Beta version of unit level preliminary indicators now appears in the IRA Bank Monitor for Professionals. Preliminary grade indicators appear in pink if available. It will begin to appear in the IRA Bank Ratings Service for Consumers as soon as Beta testing is completed. IRA is presently working on adapting the accompanying bank-holding company (BHC) extension of our ratings system to also feed from CDR collected preliminary data. We continue to support our “prime solution” philosophy that it takes everyone with fair, equal and transparent access to risk information to collectively guide our economy to recovery.
Posted by Dennis Santiago at 9:50 PM

[Demeter]

9. "I tried being reasonable, I didn't like it."

Not sure, but I think this is an actual Clint Eastwood quote.

[Demeter]

12. And Yves Smith Clocks In

http://www.nakedcapitalism.com/2009/05/yet-more-stress-test-doubts.html

...The illogic is breathtaking. It has now become conventional wisdom that a bankruptcy is the only way to straighten out GM, yet there is no realistic plan for getting the banking industry into a configuration that reduces systemic risk or end incentives for banks to gamble with their now explicit government backstop or a realistic plan to clean up the bad assets (we do not believe the PPIP will succeed). Receivership for the weakest banks is a far better approach for taxpayers and the economy, yet the Journal is touting the line that what is best for incumbent bank management is surely best for America.

And Hintz is kidding himself if he thinks existing shareholders are not exposed to serious dilution, particularly from either nationalization or from debt for equity swaps. It's way too early to be declaring victory....

[Demeter]

13. How stress tests were carried out

http://www.ft.com/cms/s/0/4e62960e-3a6d-11de-8a2d-00144feabdc0.html

The stress tests involved more than 150 senior bank supervisors, analysts and economists grilling the top 19 US banks about their likely losses in the event of a deeper-than-expected recession.

Following the policy announcement on February 10, these banks were asked to estimate their losses, and the resources available to meet those losses, under adverse conditions defined by regulators. Teams of bank supervisors – specialising in specific types of assets, bank earnings capacity and reserves – then evaluated the banks’ submissions and asked for further information.

They tested banks’ projections against independent benchmarks of their own tailored to the portfolio mixes of each bank.

Taking into account likely losses, operating earnings and reserves, the supervisors reached a judgment about whether each bank required additional capital to guard against the risks represented by the stress test.

There was both an overall tier-one capital test (which virtually every bank met easily) and a common equity test (which identified the need for many banks to hold some extra equity to guard against potential risks).

Supervisors told banks about their assessment last week – giving them the chance to challenge the findings. Bankers say the authorities were willing to update their assessments in the light of changes to asset portfolios from the fourth quarter to the first quarter, but refused to put much weight on very strong first-quarter operating earnings when reaching their judgment on future revenues.

Thursday’s announcement will in effect put banks into one of four categories: those (if any) that need extra tier-one capital; those that need to increase their equity buffer; those that have an adequate capital buffer under the stress test standard; and those that have surplus capital and could be eligible to repay bail-out funds subject to further conditions.

[Demeter]

14. A Dirty Harry Stress Test

I know what you're thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement, I've kinda lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya punk?

[Robbien]

52. Psst... Fed Not Actually Going To Make Banks Raise That Stress-Test Capital

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

The banks have 28 days to announce their capital-raising plans and until November 9 to implement them. Wells Fargo and other banks that will have to raise capital told the Financial Times that if operating profits were greater than the government’s stress-case forecast for the second and third quarter, they would receive credit for the difference. That, in turn, would reduce the need to raise fresh equity from other sources.

http://www.businessinsider.com/henry-blodget-psst-fed-not-actually-going-to-make-banks-raise-that-stress-test-capital-2009-5

So the tests are fake
The fake results were negotiated downward by over $70 billion
And the penalties are not really penalties

The games people play.

[Demeter]

58. No Surprise There

Clearly a case of moving goal posts. and there's always Uncle $ugar, in a pinch.

[DemReadingDU]

6. Magnum Force

Infirmary Doctor: Sure you don't want a local for this, Harry? Takes about seven stitches.
Harry Callahan: No, thanks.
Infirmary Doctor: Ok, it's your ass...
Harry Callahan: My head, the cut's on my head.



:hi:
Thanks for starting the weekend thread!

[Demeter]

8. I Was Out Pumping Up the Economy After Dinner

I got the younger kid to drive me, since I still feel decrepit after digging in the mud.

Sorry for the delay.

[Demeter]

15. And Now for Something Completely Different--Reality and the Rest of the World

"These loonies. They ought to throw a net over the whole bunch of 'em."

[Demeter]

16. Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says (Update1)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avf2KVFwU8xQ

May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.

“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”

The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.

‘Big Deflation’

The global economy is facing “big deflation,” though the risks of inflation are also increasing as governments print more money, Taleb told the conference organized by Bank of America- Merrill Lynch. Gold and copper may “rally massively” as a result, he added.

Taleb, a professor of risk engineering at New York University and adviser to Santa Monica, California-based Universa Investments LP, said the current global slump is the worst since the Great Depression that followed Wall Street’s 1929 crash.

The Great Depression saw an increase in global trade barriers and was only overcome after President Franklin D. Roosevelt’s New Deal policies helped revive the U.S. economy.

The world’s largest economy may need additional fiscal stimulus to emerge from its current recession, Kenneth Rogoff, former chief economist at the International Monetary Fund, told Bloomberg News yesterday.

“We’re going to get to the point where recovery is just not soaring and they’re going to do the same again,” he said. “We’re going to have a very slow recovery from here.”

Fiscal Stimulus

The U.S. economy plunged at a 6.1 percent annual pace in the first quarter, making this the worst recession in at least half a century. President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

Gold, copper and other assets “that China will like” are the best investment bets as currencies including the dollar and euro face pressures, Taleb said. The IMF expects the global economy to shrink 1.3 percent this year.

Gold, which jumped to a record $1,032.70 an ounce March 17, 2008, is up 3.6 percent this year. Copper for three-month delivery on the London Metal Exchange has surged 55 percent this year on speculation demand will rebound as the global economy recovers from its worst recession since World War II.

Commodity prices are also gaining amid signs that China’s 4 trillion yuan ($585 billion) stimulus package is beginning to work in Asia’s second-largest economy. Quarter-on-quarter growth improved significantly in the first three months of 2009, the Chinese central bank said yesterday, without giving figures.

Credit Derivatives

China will avoid a recession this year, though it will not be able to pull Asia out of its economic slump as the region still depends on U.S. demand, New York University’s Roubini said.

Equity investments are preferable to debt, a contributor to the current financial crisis, Taleb said. Deflation in an equity bubble will have smaller repercussions for the global financial system, he added.

“Debt pressurizes the system and it has to be replaced with equity,” he said. “Bonds appear stable but have a lot of hidden risks. Equity is volatile, but what you see is what you get.”

Currency and credit derivatives will cause additional losses for companies that hold more than $500 trillion of the securities worldwide, Templeton Asset Management Ltd.’s Mark Mobius told the same Singapore conference today.

“There are going to be more and more losses on the part of companies that have credit derivatives, those who have currency derivatives,” Mobius, who helps oversee $20 billion in emerging-market assets at Templeton, said at the conference. “This is something we’re going to have to watch very, very carefully.”

Taleb is best known for his book “The Black Swan: The Impact of the Highly Improbable.” The book, named after rare and unforeseen events known as “black swans,” was published in 2007, just before the collapse of the subprime market roiled global financial institutions.

To contact the reporters on this story: Chen Shiyin in Singapore at [e-mail]; Liza Lin in Singapore at [e-mail].

[Demeter]

17. Economic recovery and the perverse math of GDP reporting by Edward Harrison

http://www.nakedcapitalism.com/2009/05/guest-post-economic-recovery-and.html

Now that everyone is talking about green shoots and the potential for economic recovery, I thought I would run through the statistics of U.S. GDP with you. The reason I am bringing this up is that there is a lot of confusion about what recovery means and positive GDP growth mean. So, I am going to spell it out in a bit more detail here. I will start with recession, which will lead into recovery – the thing we are all interested in right now. Afterward, I will briefly sketch out what GDP is and throw some numbers up to illustrate a few points before wrapping up with a conclusion.

What is a Recession

In the United States, the official dates for a recession are determined by the National Bureau of Economic Research (NBER). Wikipedia has a useful definition of the organization:

The NBER was founded in 1920. Its first staff economist and Director of Research was Wesley Mitchell. Simon Kuznets was working at the NBER when the U.S. government asked him to help organize a system of national accounts in 1930, which was the beginning of the official measurement of GDP and other related indices of economic activity. Due to its work on national accounts and business cycles, the NBER is well-known for providing start and end dates for recessions in the United States.

The NBER is the largest economics research organization in the United States<2>. Sixteen of the thirty-one American winners of the Nobel Prize in Economics have been NBER associates, as well as three of the past Chairmen of the Council of Economic Advisers, including the former NBER president,Martin Feldstein. NBER research is published by the University of Chicago Press.


Now, the Business Cycle Dating Committee at the NBER is the group that decides when a recession has occurred, usually with a significant lag (the recession starting in December 2007 wasn’t called until December 2008). As far as I know, the Dating Committee is really a virtual group of economists which don’t actually meet, but rather discuss things via e-mail, telephone, what have you in an ad hoc and informal fashion before arriving at the critical moment when they must come together and date the business cycle. On their website there is a page called, “Business Cycle Expansions and Contractions” which has a good note in the footer about what recessions actually are. It reads:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement from the NBER's Business Cycle Dating Committee, dated 12/01/08.


I hope that clears up the fallacy of the two quarters’ decline in real GDP, a shorthand that has developed but is inaccurate. SO, to sum it up, in the U.S., the NBER has the final say regarding determining business cycles. They are looking at weakness in four key areas – income, employment, production and sales in order to date a recession.

Recovery

When it comes to recovery, the NBER are using the exact same methodology in reverse. Their statement regarding the last recovery in 2001 is telling regarding how this process works.

The committee's goal is to determine the dates of peaks and troughs as definitively as possible. The committee is careful to avoid premature judgments. The initial announcements of many of the major indicators of economic activity are preliminary and subject to substantial revisions, so it is not possible to identify the month of a peak or trough rapidly. The main reason that the committee's decision in this episode was particularly difficult was the divergent behavior of employment. The committee felt that it was important to wait until real GDP was substantially above its pre-recession peak before determining that a trough had occurred, and to study the NBER's past practices carefully to ensure that its decision in this episode was consistent with the dating of earlier turning points.


What is interesting to note is that at least one member of the Dating Committee, Robert Gordon, a Professor of Economics at Northwestern University, is showing his cards already. Last week, I posted an article he wrote suggesting that the recession is about to end (See my post “Jobless claims may signal the end is near”). Apparently, he thinks recovery may be coming.

You should notice that the NBER uses the term ‘peak’ to describe the onset of a recession and ‘trough’ to describe the onset of recovery. So, really recession is the phase after the business cycle has peaked. It ends and we get a recovery when the business cycle has troughed. That’s the terminology.

GDP

This terminology makes a good entree into GDP and what it is. Going back to Wikipedia, GDP is described as follows:

The gross domestic product (GDP) or gross domestic income (GDI), a basic measure of an economy's economic performance, is the market value of all final goods and services produced within the borders of a nation in a year. <1> GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is,compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits).<2> <3>


What you should notice in the definition is that GDP is a measure of “goods and services produced” not sold. And this is something I will get back to later. What the statisticians are trying to do is value everything that is produced in the United States domestically and sum it up as an aggregate number. That is all GDP really is.

GDP as reported

From my view point point, the interesting bit about GDP is NOT inflation (i.e. real vs. nominal GDP), but rather the fact that the number which is reported is a first derivative. It is the change in GDP which is reported, not the actual number. And, this is significant because generally a business cycle troughs when the change in GDP goes from being negative for a significant period to being positive for a significant period. Equally, a business cycle peak (read recession) occurs when the change in GDP goes from being positive for a significant period to being negative for a significant period. So, it is the change in GDP that everyone cares about. But, reporting the change brings in a few statistical anomalies that are important.

Negative numbers are bigger than positive numbers

The first problem with measuring a first derivative is that negative percentage changes have statistically greater effect than positive percentage changes. Let me give you an example. Say GDP starts at 100 and it drops 20% to 80, if it rises 20%, you get back to 96, not 100. The 20% down move is the equivalent of a 25% up move. So, in a country like Latvia, where GDP is down 20% annualized, you need an even large push to the upside of 25% to get back to even. Net, net, this means recovery has to be either stronger or longer than the recession to get back to the pre-recession level of production.

Subtracting less negative means positive

Thinking about production as opposed to sales again, you have to look at inventories. The NBER is not fooled by inventory builds because they look at both industrial production and retail sales. But, since GDP is a pure production statistic, inventory builds distort the picture. For example, say your economy produces $980 worth of stuff one quarter that gets sold. But it also sells a lot of stuff, $20 worth, out of inventory. If next quarter, you need to sell just as much stuff ($1000), guess what, GDP growth goes up automatically (Remember, we are not talking about GDP, but GDP growth). The inventory purge means you are producing less to meet demand than you would otherwise need to. So, when comparing one quarter to the next, unless you purge just as much stuff or unless demand goes down, you need to produce more. Therefore, you get an automatic uptick in GDP growth.

in my post “GDP: 4th quarter 2008 was worse,” I said this about Q1 GDP:

clearly the consensus was much too bullish as I predicted. And the main culprit was inventories, which were purged at a $136.8 billion annual rate. That is enormous. In fact, Q1 2009 saw the largest inventory purge ever. As a percent of GDP, you have to go back to Q4 1982 to get a more liquidationist reading.


Now, if you think about this in the context of what I just presented, it makes it pretty clear that you don’t need to build inventories to get an uptick in GDP growth. All you need to do is purge fewer inventories. Subtracting a less negative number is the same as adding a positive number. And I doubt we will be purging an annualized $136.8 billion in inventories going forward.

Recovery does not mean recovery

My final thought on the statistics here has to do with starting from a lower base. Before the Great Depression in 1929, the U.S. had nominal GDP of $103.6 billion. By 1933, this had dropped to $56.4 billion due to deflation and a decrease in production. Over the next four year, GDP growth soared. It was 17.0% in 1934,11.1% in 1935, 14.3% in 1936 and 9.7% in 1937. That’s some serious growth, right? Well, GDP was only $91.9 billion in 1937, a full 11.3% lower than it had been 8 years earlier. In fact, it wasn’t until 1941 that we attained the nominal production output of 1929.

What this should illustrate is that working from a lower base makes an increase in GDP comparatively easier than when working from a higher base. Yes, it was a powerful recovery, but it did NOT get the United States back to the same productive level for many years. In that sense, recovery does not mean recovery immediately.

Thoughts

Having run through this, I have a few thoughts.


1. The massive inventory purge we just witnessed is more significant than people realize. The numbers I ran through should help demonstrate this. Would it be wild to think Q3 could see a positive GDP growth number? Perhaps, especially with an idled auto sector. Nevertheless, we should think outside the box here.

2. The same logic for inventories (i.e. subtracting a less negative number is the same as adding a positive) is at play with imports – but in the opposite direction. As recession took hold, U.S. trade shrank, reducing both imports and exports. But, since the U.S. is a debtor nation, the shrinkage in imports has been much larger than the shrinkage in exports (why else do you think we saw horrific declines in exports from Asia in January and February?). That has been a plus for statistical GDP growth. If we do get a recovery, unless people save much more, this same dynamic in reverse will be a drag on GDP growth.

3. It should be pretty clear now that just because we get a recovery does not mean the United States is going back to where it was. After all, the financial services sector is still fairly sick and it comprised an outsized percentage of GDP. So, unless Geithner, Summers and Bernanke can reflate the sector as they seem to be trying to do, the U.S. is going to need to make up the slack from somewhere else. This suggests that the recovery will be weak.


So, most of this suggests an early but weak recovery. That’s pretty much my baseline view too.

[Demeter]

18. The SEC is unsalvageable

http://blogs.reuters.com/felix-salmon/2009/05/07/the-sec-is-unsalvageable/


http://www.footnoted.org/wp-content/uploads/2009/05/d09358.pdf

This is one of the driest pieces of prose you’ve ever seen: a 64-page report from the Government Accountability Office on the subject of the SEC, entitled “Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement”. The “Results in Brief” spreads over six pages and is full of stuff like this:

While Enforcement had demonstrated success in carrying out its law enforcement mission, significant limitations in the division’s management processes and information systems hampered its ability to operate at maximum effectiveness and to use limited resources efficiently, and may have contributed to delays in Fair Fund distributions.

In other words, you’d have to be bonkers to try to read the whole thing.

All hail, then, the mighty Moe Tkacik,

http://tpmmuckraker.talkingpointsmemo.com/2009/05/scenes_from_the_saddest_regulatory_agency_in_ameri.php

who has not only read the report but has distilled from it a picture of such utter dysfunction and managerial incompetence that her blog entry should be required reading for anybody who thinks that the SEC can conceivably be turned into an effective regulatory institution.

What’s entirely clear from Moe’s report is that you’d have to be a masochist of the highest order to work at the SEC. Since we don’t really want our capital markets run by masochists of the highest order, there’s a massive problem here. And I don’t think that there’s any feasible solution.

[Demeter]

38. "Nothing wrong with shooting as long as the right people get shot" ---Harry Callahan

[snot]

50. Hold it. Isn't the solution obvious: stop doing the things that wrecked the SEC?

I.e., for a change, appoint competent leadership, and stop under-funding and under-staffing it?

I suspect the SEC, like FEMA and so many other agencies, of what happens when you let people who don't like government run it. They basically set about to "prove" government can't work by making sure it doesn't.

[Demeter]

57. there Is Another Aspect, Though

The crony system has got to stop. No capture by Goldman Sachs, or ex-Treasury, ex-Wall St, ex-anything.

[snot]

69. Totally agreed.

[Demeter]

19. Asia breaks free from Geithner and Summers by Edward Harrison

http://www.nakedcapitalism.com/2009/05/guest-post-asia-breaks-free-from.html

On Monday, I mentioned that the Asian Development Bank Fund was a clear sign that Asia was cutting loose from the west and looking to take care of things domestically. WIlliam Pesek of Bloomberg News put out a piece this morning echoing those sentiments, but also adding a lot more background regarding the events leading up to the Asian Crisis in the late 1990s, which I think is relevant. Below, are some relevant excerpts from the Pesek post with a link in the sources at the footer. Afterward, I will follow that with a 2005 piece from Marshall Auerback that runs on similar lines.

Pesek starts off:

The International Monetary Fund’s 1997 meeting has a special place in the hearts of many journalists.

There we were in Hong Kong, Asia’s economies crashing around us, watching George Soros duke it out with Malaysia’s prime minister. The billionaire described Mahathir Mohamad as a “menace to his own economy.” Mahathir labeled Soros, one of the speculators blamed for attacking Malaysia, a “moron.”

That brawl comes to mind as another big story out of the event comes full-circle. It involves an Asia-only bailout fund, Lawrence Summers and Timothy Geithner. Its implications will travel far and wide in the fastest-growing economic region.

The “Asian Monetary Fund,” so passionately derided by Summers and Geithner at the time, is back. There is little a crisis-plagued U.S. can do to stop Asia’s $120 billion foreign- exchange reserve pool. Its creation is the clearest sign yet that Asia is getting serious about combating the global crisis. Done right, it will bode well for the region’s outlook.

There is still a role for Soros and Mahathir in this story more than a decade later, and I’ll get back to them shortly.

In September 1997, Summers was deputy U.S. Treasury secretary and Geithner was just being sworn in as assistant secretary for international affairs. Today, they are director of the White House National Economic Council and Treasury secretary, respectively. Back then, Summers, Geithner and their boss, Robert Rubin, objected to Asia having a bailout fund.

Eclipsing the IMF

Their concern was that it would eclipse the IMF in the region and, by extension, the U.S.’s say in how Asia retooled economies. They feared doling out billions of dollars in aid with few policy-change strings attached would prove dangerous. And they got their way. That changed this week.

From 1997 to 1998, the IMF arranged about $100 billion of loans to Indonesia, South Korea and Thailand as currencies collapsed. In return, governments had to cut spending, raise interest rates and sell state-owned companies. The IMF’s policies needlessly deepened the turmoil.

During this global crisis, nations sought help from neighbors instead of borrowing from the IMF. Indonesia, for example, raised $5.5 billion of standby loans from the Asian Development Bank, World Bank, Australia and Japan, and increased the size of its currency-swap arrangements with China and Japan to bolster access to foreign exchange.

A quick re-cap then? In 1997, Asia blew up. The IMF got involved. At the time, Tim Geithner and Larry Summers had prominent roles in making sure it was the IMF and not the ADB which was central to the process. Now, in 2009, it is the U.S. which has blown up spectacularly and the U.S., with Geithner and Summers again in positions of authority, is in no position to dictate terms. Hence the ADB monies. The U.S. may have forgotten the Asian Crisis, but the Asians have not. Marshall Auerback wrote a post 4 years ago reminding us that an Asian Monetary Fund was in development. Here is what he had to say with my highlighting for emphasis:

Even prior to the Asian financial crisis of 1997, the Japanese had begun to sell the idea of creating an Asian monetary fund to provide regional liquidity. Almost as soon as the trial balloon was launched, Washington shot it down with great force, sending Lawrence Summers, then Deputy Secretary of the Treasury to the region to make sure the message was not misunderstood. In spite of the subsequent travails experienced by the region, the idea apparently died a quick death.

Or did it? When Haruhiko Kuroda, former Japanese Deputy Minister of Finance for International Affairs, took over the helm of the ADB on February 1st of this year, he quietly began to promote the idea again. Kuroda has long been a strong advocate of an Asian Monetary Fund, an idea whose time may have come, given the increasingly low esteem with which the International Monetary Fund is held, particularly in emerging Asia, which has long been the world’s major savings repository.

It’s worthwhile looking again at the history of this venture: in the spring of 1997, before the onset of the Asian financial crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians cope with any potential fallout which might arise in the event of a precipitous withdrawal of short-term portfolio capital from their respective economies. The idea was killed by then-Treasury Secretary Robert Rubin and Deputy Secretary Summers, both of whom saw the idea as a threat to the monopoly of the IMF over international financial crises. The US Treasury in particular did not want Japan taking the lead in this area because Japan would not have imposed the IMF’s conditions on the Asian recipients, and as a policy objective for Washington, this almost superseded the importance of restoring the region to full economic health.

We all know what happened subsequently. Instead of forestalling global economic instability, the Treasury/IMF proposals helped make further instability inevitable. Ironically, the emerging markets’ crisis that ensued led to American policymakers developing a proposal very similar to that suggested by the Japanese in the first place. By November 1998, the Brazilian economy was so destabilised by volatile capital flows, that Secretary Rubin put together a $42 billion “precautionary package” to shore up Brazil, which had been the ostensible rationale underlying the initial Japanese proposal for the AMF.

Which does lead one to question the motives underlying Washington’s opposition to the original Japanese proposal. By killing off the idea of a competing Asian Monetary Fund, Rubin/Summers enabled the IMF to continue in its guise as an ostensibly “neutral” agency, thereby facilitating the implementation of the Treasury’s agenda whenever a financial crisis which required the IMF’s intervention arose. Of course, the “medicine” the IMF proffered had the ultimate effect of weakening pre-existing financial structures by imposing Western measures of financial restructuring, thereby giving Wall Street a huge stake in the subsequent “reform” agenda introduced: Basle capital adequacy ratios were to be applied. Highly indebted banks and firms were to be closed. Labour laws were to be changed to make it easier to fire workers, facilitating the closures. Regulations on foreign ownership were to be lifted in order to allow foreign banks and firms to buy domestic banks and firms, injecting needed capital and skills. All of which required lots of western style restructuring and “reform”, and who better to offer this than America’s finest investment bankers?

Somewhat similar measures were applied in a much narrower setting to solve the American savings and loan crisis in the late 1980s and early 1990s, and they worked. But it is one thing to undertake such reforms where real interest rates are very low and indebtedness not high (as in the United States in the late 1980s), and another to undertake them where both real interest rates and indebtedness are high. In these conditions such restructuring leads to closures and layoffs, with deflationary knock-on effects and more investor pullout. In short, the Fund’s initial insistence on fiscal contraction, cuts in aggregate demand, and large-scale institutional reform accelerated debt deflation.

This is why the IMF's strategy for Asia ultimately failed in spite of widespread attempts revisionist attempts to take credit for the region’s subsequent economic recovery. In fact, in spite of the introduction of refinancing to the tune of US$110 billion, almost three times Mexico’s US$40 billion package of 1994–95 (the biggest in the imf’s history to that date), the crisis continued unabated: Asia’s currencies went into freefall by early 1998, leading to the Fund to call for even more interest rate hikes to arrest this process. Yet by May the deepening economic contraction, the rising unemployment and the fear of social unrest combined to produce a second wave of capital outflows and renewed falls in currencies and stock markets.

The Japanese themselves had long expressed disquiet with the IMF/Treasury measures forced on the afflicted economies in return for a financial bailout, fearing - rightly, as it transpired - that an overly conservative approach would push them into a full-blown recession. The financial mandarins in Tokyo wanted fiscal pumping and low interest rates so Asian exporters could trade their way out of the quagmire - and protect billions of dollars worth of Japanese investments in the region. Unfortunately, given the state of their own economy, Tokyo’s mandarins had comparatively little leverage and credibility to push their proposals more forcefully. It was the resumption of the collapse in May 1998 which finally forced Asian governments to begin to turn away from the initial imf strategy. They began to follow Japan’s remedies: bringing down interest rates and turning fiscal restriction into fiscal expansion.

In retrospect, it is clear that the Fund's most serious error in policy was its failure to see the danger of calling for high real interest rates for Asian economies with high levels of private indebtedness. Unlike the Japanese, mandarins at the Fund failed to understand that high real interest rates, which are fairly well tolerated in Latin American countries where debt has historically been kept low by the 1970s legacy of hyperinflation, would be disastrously deflationary in Asian economies, characterised by a high savings/high debt structure.

Seen within this historic context, therefore, Mr Kuroda’s appointment as head of the Asian Development Bank is very significant, since he, along with his predecessor at the Japanese Ministry of Finance, Eisuke Sakakibara, was one of the major architects devising the original Asian Monetary Fund proposal, which was largely predicated on these Japanese policy prescriptions. Additionally, Kuroda is on record as expressing the Asian countries’ frustration that they lacked the proper voting power on the IMF to reflect their economic development over the past two decades. When he succeeded Sakakibara at the MOF, he noted: “The voting share and board representation of the Asian countries have been extremely limited. On the other hand, 37 per cent of the voting power in the IMF belongs to executive directors from Europe.” His comments largely reflected Asian frustration over the IMF as a “white man’s club” whose interests were increasingly at variance with those of the Far East. That the Japanese nevertheless openly put forward Sakakibara as a potential IMF President after Michel Camdessus’s retirement, knowing full well that his chances for acceptance were virtually nil, suggests that the country had an ulterior diplomatic motive: to demonstrate to the rest of Asia that it was best to disengage themselves from institutions which paid scant heed to the interests of the world’s largest savings bloc and thereby smooth the obstacles for the reintroduction of a regional lending facility like an Asian Monetary Fund.

Whilst the AMF proposal itself has ostensibly failed to gain any further traction in spite of the many manifest failures of the IMF since the Asian Financial crisis, the Asia Times has recently noted that in substance, if not in form, a less direct route toward the same objective has steadily been gain steam over the past several years:

“The AMF was generally greeted with scepticism and just as quickly vanished. But its legacy was felt in other ways. Despite US resistance, the 10 members of the Association of Southeast Asian Nations (ASEAN) linked their international reserves with Japan, China and South Korea in May 2000 as part of a currency swap framework that became known as the Chiang Mai Initiative. An Asian Clearing Union (ACU) has been functioning since 1975 to settle intraregional trade transactions in local currencies, and ASEAN has had a currency swaps arrangement since 1977 to deal with temporary international liquidity problems.

At a surveillance level, the Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) was set up in 1991 to monitor financial market developments and exchange information on perceived threats. More recently, Thailand has instigated an Asian Bond Fund as a part of the Asian Cooperation Dialogue, with the objective of developing domestic capital markets and reducing reliance upon speculative inflows from abroad…"

In the meantime, Japan has been polishing up the AMF formula and, reverting to its traditionally more pragmatic approach, has shifted the battleground to the diplomatic front. Two years ago, the ADB launched a scathing attack on the IMF's role in the global financial architecture by floating the idea of ‘credible emergency financing from official sources, with less strings’. In language that clearly was aimed at Asia's central bankers and monetary chiefs, the institute's Japanese dean, Masaru Yoshitomi, called for ‘collective measures to restore systemic currency stability, including joint interventions’.

Simultaneously, Kuroda's predecessor at the ADB, Tadao Chino, began to challenge the World Bank's function as the final arbiter of global development policy by setting the agency on a more independent footing. ASEAN countries have given warm, if qualified, support for monetary union, even awarding the ADB Institute a contract several years ago to conduct regular surveillance of the members' economies, in a pointed intrusion into the IMF's turf.”- (“Asia’s Answer to the IMF”, Alan Boyd, Asia Times, Feb. 19, 2005)

It is understandable why Washington would continue to resist the notion of an Asian Monetary Fund. As things stand right now, in spite of the significant contraction in bond yields since the late 1990s, western investors continue to extract huge risk premiums from the entire emerging markets universe as a quid pro quo for the provision of their capital. This is manifestly perverse, especially when one considers that the ultimate source of much of that liquidity is Asia. All of the nations of Asia continue to run large current account surpluses, the proceeds of which are funnelled back into the US Treasury market, where the savers obtain a yield of less than 5 per cent, in a country which is now the world’s largest debtor nation, suffering the twin diseases of a declining currency and higher inflation (both of which are eroding the real value of the Asian creditors’ respective investments).

By contrast, even leading Asian conglomerates (whose products are readily gobbled up by the American consumer) are forced to pay several hundred basis points above the yield of Treasuries. The Western investor or banker is extracting a wholly unmerited premium, whilst the US continues to trade on its reserve currency and safe haven status to subsidise its over-consumption and perpetuate the country’s growing financial imbalances.

It’s a great deal for Washington and readily explains the Treasury’s violent opposition to an Asian Monetary Fund (or anything else that would disrupt the existing status quo, such as restrictions on capital account mobility). But must the world’s largest creditor bloc continue to act from such a position of weakness, which is more apparent than real? The aggregate net creditor position of Asia dwarfs its indebtedness. The domestic markets are rapidly maturing and will soon be in a position to replace the American consumer (who must surely retrench if the US is ultimately to come to grips with its own debt disease).

The actions by Asia’s leading policy makers suggest an implicit (albeit belated) recognition that they have been getting a raw deal from the existing global financial architecture and are taking incremental steps to redress the current imbalance. To be sure, historic rivalries, notably between China and Japan (manifesting themselves most recently over Taiwan) may slow the development of an AMF. It is also probable that the Bush administration will likely go out of its way to exacerbate this rivalry and thereby frustrate the development of competing multilateral agencies, which would invariably weaken Washington’s influence in the region.

But in spite of these periodic setbacks, the trend appears clear. The day is moving closer where an Asian Monetary Fund will become a reality. It is particularly noteworthy that the idea continues to be pushed by Japan, America’s staunchest ally in the region. Tokyo’s embrace of Washington only goes so far. Ironically, if (as we suggested last week) America ultimately repudiates existing obligations to its (largely) Asian foreign creditors, it will simply catalyse this process and likely ensure the AMF’s swift arrival, in spite of ongoing efforts to render this idea stillborn since 1997. The world is full of such rich ironies: In Iraq, America has long expressed opposition to the formation of Shiite-dominated theocracy, yet the recent elections suggest that this is about to become an impending reality. So too, the inexorable logic of current economic policy making may yet introduce outcomes – such as the introduction of an Asian Monetary Fund – completely at variance with Washington’s oft-expressed preferences to the contrary. In any event, time is definitely not on the side of the existing status quo.

My view here is this: the Great Unravelling has been a blow to every nation in the global economy. The U.S., Europe, Africa, Asia, Latin America, Canada, they have all suffered. But, Asia is de-coupling. Mind you, I am not saying they are literally about to separate from the West and embark on their own growth path. No, the ties are too strong. Nevertheless, the West is weak, particularly the United States. No one from the IMF is dictating terms in Asia today. Nor will they for the foreseeable future. The die is cast. The United States badly overplayed its hand in the 1990s. Asia senses it is weak, overburdened with debt and depression. This is therefore their opportunity to break free and I believe Asia will use it.

[Demeter]

20. Harry on the IMF:

Callahan: You know, you're crazy if you think you've heard the last of this guy. He's gonna kill again.

District Attorney: How do you know?

Callahan: 'Cause he likes it.

[Demeter]

21. Good Night, All! I'll Be Back in the Morning

[Karenina]

22. And off to the GP you go!

:kick:

[ozymandius]

23. Another bank gets eaten.

Kitsap Bank, Port Orchard, Washington, Assumes All of the Deposits of Westsound Bank, Bremerton, Washington

Westsound Bank, Bremerton, Washington, was closed today by the Washington Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Kitsap Bank, Port Orchard, Washington, to assume all of the deposits, except those from brokers, of Westsound Bank.

....

As of March 31, 2009, Westsound Bank had total assets of $334.6 million and total deposits of $304.5 million. Kitsap will not assume the approximately $9.4 million in brokered deposits. The FDIC will pay the brokers directly. Customers who placed money with brokers should contact them directly for more information about the status of their deposits.

....

In addition to assuming the failed bank's deposits, Kitsap Bank will purchase $49.3 million of assets comprised of cash, cash equivalents, marketable securities and loans secured by deposits. The FDIC will retain the remaining assets for later disposition.

http://www.fdic.gov/news/news/press/2009/pr09069.html

[tclambert]

24. "Cutting the carp?"

Dirty Harry, the seafood chef: "Seeing as this is a filet knife, the sharpest kind of knife there is, you have to ask yourself something. Do I feel lucky? Well do ya, fish?"

[Tansy_Gold]

30. Thank you.

Your come back was MUCH better than mine would have been!

:yourock:



Tansy Gold, feelin' lucky today (for no known reason)

[Demeter]

32. How Am I Doing With the Dirty Harry Quotes Otherwise?

These are movies I have seen (although not recently).

[Tansy_Gold]

51. I have no idea. I never saw any of the movies. Not my style.

Nor the godfather saga. Nor any of that stuff with lots of violence in it. Keeps me awake at night.

[Joe Chi Minh]

75. Great! Hilarious.

[Demeter]

25. B of A and Bernanke: Unstressed

http://brucekrasting.blogspot.com/2009/05/b-of-and-bernanke-unstressed.html

The Stress Test process is a triumph of form over substance. The entire effort is being highly orchestrated for the benefit of the public. I give Bernanke and the Fed an A+ for ‘managing the news’.

Yesterday Bernanke spoke. On three separate occasions he repeated this theme:

Banks that require additional capital as a result of the stress test will have the choice of (i) Raise equity in the public market (ii) Sell assets to raise capital (iii) Convert ‘existing’ securities into common stock and finally (iv) Additional equity from TARP.

Each time that he said this he followed it with, “I do no not think that we will be forced to use option iv”.

Shortly thereafter there is a leak to the press that Bank of America needs $34 billion. This actually had the markets down early, but then more leaks. The capital shortfall will be addressed with a ‘conversion’ of the TARP preferred into common stock and a sale of a BAC’s remaining interest in China Construction Bank (“CCB”).

My guess is that the significant details on the convert and the assets sales will be on the tape by Friday. Over the weekend Bernanke will be on the talk shows saying:


“Yes we had some issues with the banks. Our largest concern was with BoA. We solved that problem. It only took us 48 hours. The good news is that we did not have to spend any more taxpayer money. So, stop worrying and go back to Wal-Mart. I need to boost consumer confidence and spending ASAP. If I do not, my rosy forecast for the year-end economy will not be met and I probably will be out of a job.” WE'RE PRAYING FOR IT, BEN!



When one looks at a potential investment in a corporate debt obligation the first question to ask is, “How much is below me?” If you want to buy a senior bond you need to understand what the subordinated debt layers are about. If the Sub debt matures before you do, then it is not Sub debt at all. It is senior to you. The same thinking goes to the preferred level of the balance sheet. Is that money really there? Can it be redeemed? The equity has to be looked at too. Is this an air ball of deferred tax assets and goodwill?

When you apply these rules to the Bank of America $34 billion fix, the deal comes up very short of substance.

Converting the TARP Preferred stock into common equity will improve BoA’s position. They will no longer have to pay the TARP dividends (sorry tax-payer). Over time that will help BoA earn its way out of trouble. It has very little short-term benefit. On the assumption that the amount of Tarp Pref to be converted to common is $26 billion the net savings amounts to only $1.3 billion a year. A rounding number.

The conversion of Tarp Preferred into common improves BoA’s Tier 1 capital ratio. It is an accounting event, not an economic event. If you want to ‘fix’ BoA you have to put real ‘cash money’ equity into it.

The rumored asset sale of CCB (CHINA BANK IN FRIDAY'S SMW) will have a more beneficial impact. But not much. BAC’s remaining holdings could be worth $8 billion. The interest in CCB that is now being sold was purchased in November of 2008. That acquisition was done by the holding company. The investment was financed with debt, not equity. The sale will improve the overall gearing ratios. It will add some ‘equity’ back onto the Tier 1 capital line. It will help make BoA look better. But, at what cost? When BoA completed the purchase of CCB five short months ago they said:

"Bank of America intends to remain a long-term and significant strategic investor in CCB,"

All of the shareholders of BAC including the taxpayers would have reaped benefits from the CCB investment for many decades. To sell it now, in order to create a short term accounting advantage, is just bad business. This is an example of the bad choices that will be made when DC owns the common stock.

I suspect that this ‘white wash’ is likely to work for the time being. At some point in the next six months BAC is going to come to the market with a new Sub Debt deal. It is going to have a fat coupon. It will be a tempting purchase. I will look at it and likely conclude; the Pref is distressed money that does not want to be there, the common is controlled by the Feds, the equity underneath me does not cover the book losses, the earnings power has been diluted by asset sales of good ‘stuff’, the senior debt above me is guaranteed by the FDIC, the deposit base is not captive and they can no longer pay for the talent that they need. I will take a pass on those ‘beautiful’ bonds. Push come to shove they will get converted to equity and the investors will end up side by side with the Fed. No thanks.

On the Sunday talk shows this weekend Mr. Bernanke should speak candidly about B of A and the stress test:

“Bank of America showed up as the weakest of the 19 banks we stress tested. This is because we had previously converted the bulk of the Citibank TARP Preferred investment into common stock. As a result the Citi Tier One capital ratio has already been gimmicked up. We will do the same deal with BoA. It is a band aide approach for these important institutions. We are going to do it with most of the other 17 big banks as well.”

“We had to do it this way. We wanted to put more new equity into them so that they could really address their balance sheet problems and earn their way out of trouble. We could not do that. We only have $90 billion of TARP money left. Congress will not give us any more money, so we had to make do. We have to keep the rest of the TARP money available if there is another emergency. Our cupboard is almost bare.”

“We know that we are making short-term choices that are in conflict with our longer-term best interests . We simply do not have the resources to address the problem today. The banks can’t raise sufficient capital on their own. Therefore we are trying to buy time to fix our weaknesses. We are doing everything that we can to improve the optics of the situation. Because we have no alternative we are going down the exact same road that Japan did twenty years ago.”

“We have saved the system. The cost will be high. As was the case in Japan, the result will be an extended period of sub par growth.”



Bruce Krasting
Westchester, NY, United States
I worked on Wall Street for twenty five years. This blog is my take on the financial issues that we face.

[Demeter]

26. As Harry Would Say:

Callahan: Yeah, well, when an adult male is chasing a female with intent to commit rape, I shoot the bastard, that's my policy.
Mayor: Intent? How did you establish that?
Callahan: When a naked man is chasing a woman through an alley with a butcher knife and a hard-on, I figure he isn't out collecting for the Red Cross.
Mayor: I think he's got a point.

[Demeter]

27. Trade collapse and vertical foreign direct investment

http://www.voxeu.org/index.php?q=node/3537

Global trade is collapsing at an unprecedented rate, but not evenly across the globe. This column argues that ‘vertical specialisation’ – the internationalisation of manufacturing supply chains – accounts for the amplification of Japan’s drop in trade. The good news is that once OECD countries start to recover, the amplification should work in reverse, boosting Japanese exports and imports at an accelerating rate.

The US subprime mortgage crisis inflicted high capital losses for domestic and foreign financial firms that had invested in securities backed with US real estate loans. This triggered a severe credit crunch in the US, which grew into a full-blown financial crisis of global proportions and later ended up affecting the entire global economy. The prime characteristics of the current global economic crisis have so far been plummeting stock and equity prices, skyrocketing bank failures, and a sudden collapse in international trade.
Trade collapse

The aggravation of the recessionary spiral in OECD countries brought international trade to a grinding halt in the fourth quarter of 2008, and a 9% contraction in global merchandise trade, by volume, is already underway for 2009 (WTO, 2009).

Such a collapse in trade could be a natural consequence of high levels of interdependence in finance, trade, and FDI. Indeed, some consider that falling trade is caused by a massive decline in final demand and a shortage in trade credit (see for example Baldwin and Evenett 2009).

I believe, however, that these explanations fail to account for key peculiarities of the unprecedented contraction in world trade, notably that the trade contraction has been rather asymmetric across industrial economies. Another important piece of evidence is that this asymmetric fall in trade is not correlated with exposure to the crisis in any simple and straight-forward ways.

For example, trade in Japan has declined at a much faster pace than that in the US. The impact of the economic crisis on Japan has so far been relatively moderate – at least in financial institutions – yet Japanese trade has been badly hit. Figures for February 2009 indicate a 50% year-on-year contraction in Japanese export volumes and a 43% decrease in volumes of imports.1 Meanwhile, comparable trade figures at the epicentre of the crisis, the US, show a mere 24% decrease in exports and 34% decrease in imports.2

What explains such a difference in the speed of trade collapse across Japan and the US?
Vertical specialisation

The emergence of global production networks has promoted the vertical specialisation of countries and increased trade in both intermediate and final goods. Manufacturing firms increasingly specialise in particular stages of the production process and export intermediate inputs for further processing. Products may cross national borders several times and endure several transformations before they reach their final consumer.

The link between vertical specialisation and international trade enjoys strong empirical backing. In fact, back in 2001, Hummels, Ishii, and Yi showed that vertical integration could account for almost one-third of the export growth in OECD countries.3 Yi (2009) clarifies that this link can work in both directions. In fact, he suggests that vertical integration accounted for much of the trade collapse -- but sadly, he does not provide an estimate.

Vertical specialisation boosts the values and volumes of foreign trade for the mere statistical reason that trade statistics are measured in gross terms, rather than net ones. This measurement technique partly explains that flows in trade increase (decrease) at an accelerating rate when demand rises (falls).

From this point of view, the trade collapse could result from a breakdown of vertical trade chains. While vertical specialisation can account for possible differential impacts of trade, a full explanation of the disproportionate scale of trade contraction in response to demand shocks across Japan and the US requires examining the different strategies of US and Japanese multinationals.
Vertical foreign direct investment

The growth of vertical specialisation was driven in part by investments of multinational firms to take advantage of lower costs of unskilled labour in foreign countries (Tanaka 2009). Multinationals established offshore production plants in unskilled-labour-abundant countries to conduct the unskilled-labour-intensive stages of production. Under these schemes, parent firms supplied intermediate inputs to their foreign affiliates, which performed the final assembly, and subsequently exported the final products back to home markets.

Vertical specialisation is particularly clear in the case of FDI by Japanese multinationals, but is less so in the case of FDI by US multinationals.4 While the vertical specialisation driven by Japanese multinationals has been deeply stretched across countries, the vertical FDI of US multinationals is perhaps more concentrated on a narrow set of countries, notably Canada and Mexico.

In my view, the difference in vertical FDI strategies between US and Japanese multinationals is one possible cause of the disproportionately large collapse of trade flows in Japan in response to global demand contraction. As Japanese firms have embraced vertical FDI, Japan has been more fully immersed in vertical specialisation patterns than the US.
Concluding remarks

Once fiscal stimulus plans deployed by OECD countries spark a recovery in global demand, the international production networks of Japanese multinationals will help boost Japanese exports and imports at an accelerating rate.

However, rising national protectionism in a number of countries could deprive the world economy of the benefits of global production networks. Thus, national governments must coordinate international economic policies, so as to prevent that the trade collapse leads to a collapse in international division of labour.

The Japanese version of this column appeared in Hitotsubashi University's Hi-Stat Vox No. 7
References

Hummels, David, Jun Ishii, and Kei-Mu Yi, (2001) “The nature and growth of vertical specialization in world trade.” Journal of International Economics, 54, 75–96.
Tanaka, Kiyoyasu, (2009) “Vertical foreign direct investment: evidence from Japanese and US multinational enterprises.” Global COE Hi-Stat discussion paper No.46
Yi, Kei-Mu (2009). “The collapse of global trade: the role of vertical specialization,” in Baldwin and Evenett (eds), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, a VoxEU publication.
WTO (2009). WTO sees 9% global trade decline in 2009 as recession strikes. WTO: 2009 Press release 554, 23 March 2009.

[Demeter]

28. How Useful Were Recent Financial Innovations? There Is Reason To Be Skeptical

http://www.petersoninstitute.org/realtime/?p=691


by Adam S. Posen and Marc Hinterschweiger | May 7th, 2009 | 05:45 pm

Who could be against innovation? That is the argument used by industries that wish to avoid regulation, that excessive government oversight will diminish incentives to innovate, or erode property rights to innovations, and we all will be worse off for it. And in the broad, this is a valid concern. We are all better off for having had new products and even paradigms in pharmaceuticals, in aerospace, in energy (we hope soon), and, yes, in financial services. We should not kill the geese that lay the golden eggs leading to ongoing productivity growth.

But not every innovative product is safe, let alone productive. Unlike pharmaceuticals, aerospace, and a host of other technical fields, financial innovations have been allowed to proliferate unscrutinized and untested for safety or effectiveness. Yet the negative spillovers on the public at large from faulty financial engineering and toxic products have now been clearly demonstrated to be enormous. In particular, there is some solid evidence that the most recent batch of financial innovations was used in manners inconsistent with their labeling, and not only had terrible side effects, but did not even yield the advertised benefits.

Like most innovations, the theory behind the most-recent financial developments made sense. Innovative financial products such as credit default swaps and collateralized debt obligations were supposed to promote an efficient allocation of risk and hence allow those market participants to bear the risk of an asset who could do so best. Freed from the burden of such risk, nonfinancial companies would be able to engage in more-productive capital formation, generating growth for the entire economy. Furthermore, financial companies would be more stable because they would be able to get illiquid assets off balance sheets and not be tied to collateral.1 This mantra of Wall Street investors and financial economists alike implied that expansion in the use of newer derivatives and the like would lead to an expansion in the country’s capital stock, and that these financial products would be useful to nonfinancial companies, not just to banks.




Figure 1 Notional amount of derivatives and US gross fixed capital formation, 2000–2008


Source: Bank for International Settlements (BIS), International Financial Statistics, via Datastream (IFS) Office of the Comptroller of the Currency (OCC)

The growth of derivatives and real-sector investment in the United States tell a different story (figure 1). Between 2003 and 2008, US gross fixed capital increased by about 25 percent, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300 percent, while derivatives held by the 25 largest US commercial banks rose by 170 percent. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex—and now proven dangerous if not toxic—financial products and real corporate investment.

Another way to assess the presumptive benefits for the real economy of these products is to analyze who made use of derivative instruments. Figure 2 shows the share of OTC derivatives by counterparty as of June 2008 (78 percent of all global derivatives for which such a level of detail is available are included). Reporting dealers, mainly banks and investment banks, accounted for 41 percent of all counterparties (double-counting is eliminated). Other financial institutions acted as counterparties in almost half of all cases. Only 11 percent of all counterparties were nonfinancial costumers. Hence, almost 90 percent of all derivative contracts took place between financial institutions. Had their usage by financial institutions generated either a boom in productive lending or a more resilient financial system, then, even if unused by nonfinancial companies directly, these new products could still have been productive. Since we have clearly seen the opposite over this time period, it is a revealing indicator that the nonfinancial companies for whom these products were prescribed did not themselves use them.
Figure 2 OTC derivatives by counterparty as of June 2008 (BIS)



Source: Bank for International Settlements (BIS)

Going forward, the US Congress and its international counterparts will have to decide how much to increase regulation and supervisory oversight of financial institutions. We are already hearing warnings from the financial industry that government should be careful not to overreach in its attempts at reform, for fear of harming financial innovation. While that is a worthy principle, our belief is that the record of recent financial innovations acts as a warning to be skeptical about excessive claims that all financial innovation is worthwhile. What was advertised as something to redistribute risk, and thereby increase productive investment, generated little capital formation; what was supposed to benefit nonfinancial businesses was mostly used in a speculative game between financial players. In fact, given the gap between these products’ claims and their actual usage and impact, one has to wonder whether recent financial products are like the recalled weight-loss supplement Hydroxycut, the repeatedly crashing DC-10 aircraft, or the Chernobyl nuclear reactor design. If so, even if many financial innovations are beneficial, all of them need to be monitored over the long term, as well as scrutinized before issuance, by regulators for their safety and effectiveness.

Note

1. Posen’s 2007 op-ed downplaying the mortgage crisis followed this logic (mistakenly).

[Demeter]

29. Government Counterfeiting

http://dailyreckoning.com/government-counterfeiting/


Yesterday, both the Bank of England and the European Central Bank announced moves to boost the economy. They're both falling in line behind Mr. Bernanke, who is "pulling out all the stops" in order to avoid a deep depression. Both the BoE and the ECB are going to take up forms of QE - quantitative easing - in which the banks buy government debt directly.

Don't try QE at home, dear reader; you'll be arrested for counterfeiting. QE so closely resembles old-fashioned printing press money that you couldn't tell them apart in a police line up. Both are ways to increase the supply of money...which, according to theory, leads to consumer price inflation.

The Dow fell 102 points yesterday too. The bear market rally has gone on for nearly 9 weeks. It's probably ready for a rest...and maybe a pullback. We doubt it's over though. There is still far too much money and far too many suckers who have not been pulled back into the stock market. The next leg down of this bear market will have to wait - most likely.

Another ominous thing that happened yesterday was that bond yields increased. The yield on the 10-year Treasury note - at 3.3% - is more than a full percent above its low. The yield on the 30-year bond is at 4.26%.

These yields are still very low. But they seem to be moving higher. They are ominous because at some point in the future we expect all Hell to break loose in the bond market. The slippage we're seeing now in bond prices (when prices go down, yields go up) may or may not be an early warning.

But we probably have a few new readers of The Daily Reckoning...let us backtrack in order to bring them into the picture.

We begin by going back half a century. America emerged the world's biggest, strongest, most innovative and dynamic economy after WWII. Then, it went from strength to strength...to weakness. Gradually, Americans turned their attention away from production and towards consumption. And gradually, America's most profitable businesses shifted from making things to financing them. That's why GM created GMAC...and why GE staked its future on GE Finance. And it's why the center of American economic power moved from the manufacturing hinterlands of Detroit and Cleveland...to the financial centers on the coast...notably the big one in Lower Manhattan.

The financial sector boomed by supplying credit. Americans borrowed. And so, their debt increased. From being the world's leading creditors in the '50s and '60s...they became the world's leading debtors in the '80s and '90s. Gradually, the consumer economy required more and more debt to produce an extra unit of output. Debtors had to borrow not only to buy...but also to pay back, or pay the interest on, previous borrowings.

In the Eisenhower years, it took only an extra $1.50 or so of debt to spur an extra dollar's worth of GDP. By the end of the century, the cost had risen to over $4...and then to $6 a few years later. Total debt, which had been about 150% of GDP before Ronald Reagan took office, shot up to 370% in the final years of G.W. Bush.

By the late '90s and early 21st century, the American economy had entered the Bubble Epoque. The financial industry - aided and abetted by the Fed - was providing so much 'liquidity' it was causing asset prices to bubble up everywhere. Of course, bubbles always blow up - without exception. And when the dot.com bubble exploded in 2000, at first, we thought that was the end of the Bubble Era. Little did we realize, the biggest bubbles were still to come. Then came the bubbles in housing, art, emerging markets, oil, and commodities. All blew up. But the biggest bubble of all - the bubble in credit - blew up too, bringing the Bubble Epoque to a close. Capitalism giveth. Capitalism taketh away. The process of what Schumpeter called "creative destruction" continues.

We are now in the post-bubble era. The financial industry has been bombed out. It can no longer create bubbles. Governments all over the world are propping up the walls...and shoring up the foundations. But the Bubble Epoque can't be revived.

Is that the end of the story? Not at all. The feds' efforts to stop the progress of capitalism will have some spectacular consequences. The fireworks will start when the bond market cracks...sending yields through the roof. And that's all we have to say about it today...stay tuned.

....One of the reasons people believe the "worst is behind us" is because the Chinese economy seems to be growing....."But could it all be a bit of false hope? Could we, in fact, be misinterpreting a temporary stimulus-induced economic pick-me-up as an actual sustainable recovery?"

China says it is growing. But if it were really growing it would be using more fuel and more electricity. Instead, industrial demand for gasoil, used by factories and commercial plants, fell 12.6% in the first quarter.

Our old friend Sean Corrigan, chief investment strategist over at Diapason Commodities, also points out that electricity generation has been going down too. The last seven months' power output has been 8.5% below that of a year ago.

Another old friend, Jim Rogers, believes China - along with commodities - is still the best place for your money. He may be right. But we don't speak Chinese...and we fear the Chinese market may be subject to more risks than is popularly understood....

[Demeter]

36. In San Francisco:

District Attorney: I've just been looking over your arrest report. A very unusual piece of police work. Really amazing.
Callahan: Yeah, well I had some luck.
District Attorney: You're lucky I'm not indicting you for assault with intent to commit murder.

[Demeter]

31. Dilbert Does a Madoff

"http://widgets.dilbert.com/o/4782b1ae641c3eb6/4a05ac031b089c2c/478cf2052d7472a1/a96d91c9"

[Demeter]

33. Media Still Covering Up The $400 Billion Fannie And Freddie Scandal (FNM, FRE)

http://www.businessinsider.com/why-the-media-ignores-the-400-billion-fannie-and-freddie-bailout-2009-5

Joe Weisenthal
This Friday morning, Fannie Mae (FNM) announced that it had lost another $23 billion in the quarter, and would have to call down $19 billion more in taxpayer support. It also said that it would face losses as far as the eye can see.

Do you know how much we've committed to backstopping Fannie and its partner-in-crime Freddie Mac (FRE)? $400 BILLION! Back in February that was doubled from the original $200 billion.

But the news of the quarterly loss is getting hardly any attention. Nothing here at the NYT business section, for example. Nothing at the blogs that were going nuts when AIG was revealed to have paid out bonuses back in March.

The problem is that the Fannie and Freddie disasters don't fit into any conventional media narrative. At AIG you had Joe Cassano, lurking in the shadows, turning AIGFP into his own personal casino, while taking home gargantuan pay.

Fannie Mae? They help nice families get into homes. Their motto is something about helping the people who help house America. Who could be against that? Plus, the Fannie and Freddy story doesn't help explain the idea that laissez-faire deregulation is what allowed Wall Street to go crazy. Fannie and Freddy had their own freakin' regulator, OFHEO. Two companies with one regulator to look into both of them.

And then you have all the Democrats on the inside (Rahm Emanuel, for example) on the outside (Barney Frank), who have ties to the company's worst years.

If AIG (AIG) ever has to ask for one more dollar to pay counterparties like Goldman Sachs (cue the ominous music!), there'll be a fresh round of media outrage. Fannie and Freddie continue to blow through cash though, and it goes without a peep, depriving the public insight into one of the more important aspects of the housing bubble and the crisis.

[Demeter]

35. Dirty Harry Replies:

Callahan: Say Jaffe, is that tan Ford still parked in front of the bank?
Jaffe: Tan Ford...Yep. Tan Ford.
Callahan: Engine running?
Jaffe: I don't know. How can I tell?
Callahan: Exhaust fumes coming from the tailpipe.
Jaffe: Oh, my God. That is awful. Look at all that pollution.
Callahan: Yeah. Do me a favor. Call this number.
Jaffe: Police department?
Callahan: Yeah. Tell them Inspector Callahan thinks there's a 211 in progress at the bank. Be sure and tell them that's in progress.
Jaffe: In progress. Yes sir.

Callahan: Now, if they'll just wait for the cavalry to arrive.

Callahan: Ah, shit...

[Demeter]

34. California Continues To Implode

http://globaleconomicanalysis.blogspot.com/2009/05/california-continues-to-implode.html

Inquiring minds are reading Controller John Chiang's May 2009 California Budget Summary Analysis. Here are a few noteworthy items:

The State’s revenues continued to deteriorate in April. Total General Fund revenues were down $1.89 billion (-16%) from the latest estimates found in the 2009-10 Budget Act.

Personal income taxes were $1.06 billion below the estimate (-12.6%), corporate taxes were below the estimate by $831 million (-35.6%) and sales taxes lagged the estimate by $108 million (-19.9%).

Some of April’s sales tax receipts were pushed into early May, but declining taxable transactions still drove sales tax receipts well below the Budget Act projection. While California’s sales tax rate went up April 1, revenues from the new rate will not be seen until May.

Compared to April 2008, General Fund revenue in April 2009 was down $6.3 billion (-39%). The total for the three largest taxes was below 2008 levels by $6.3 billion (-40.3%). Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%). Corporate taxes were $142 million below (-8.6%) April of 2008

Sales tax collections year to date are short $327 million (-1.8%) from the 2009-10 Budget Act. Income taxes were $653 million lower (-1.7%) than expected, and corporate taxes were $788 million lower than expected (-9.5%).

The State’s other revenue streams were $299 million below (-6.7%) the estimates. Because the 2009-10 Budget Act contained actual revenue through February 2009, these disparities only occurred in the months of March and April.

Send a Message

Taxation is not the way out of this mess, reduced spending is. Please consider California, Please Send A Message!

The propositions to raise taxes are already short, and borrowing money from the lottery is sheer madness. California citizens have a chance to tell the spendthrifts to go to hell. All it takes is an appropriate NO vote on 5 of 6 California 2009 ballot propositions on May 19.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

HE THINKS IT'S BAD IN CALIFORNIA--OUR GOVERNOR JENNIFER GRANHOLM HAS HAD TO CUT THE BUDGET EVERY YEAR SHE'S BEEN IN OFFICE (GOING ON 8?) THANKS TO GOP ENGLER GUTTING THE TAX BASE DURING HIS 12 YEARS OF FREE REIN UNDER REGANOMICS.


IT'S PITIFUL. IF MICHIGAN SURVIVES, IT WILL BE THE STRONGEST STATE IN THE UNION.

[Demeter]

37. "A good man always knows his limitations" --Dirty Harry, Magnum Force

[Demeter]

39. On Wall Street: Beware of the sucker’s rally

http://www.ft.com/cms/s/0/158f174a-3bed-11de-acbc-00144feabdc0.html

....The 2000–2002 bear market had three, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.

The granddaddy of all bear markets, 1929 –1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.

Bear markets typically end with a whimper rather than a bang, casting doubt on the latest recovery according to Hussman Econometrics, which analysed numerous US market bottoms and bear market rallies. With the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent. By contrast, bear market rallies were preceded by steeper declines and had sharper rebounds. Another characteristic of bear market rallies has been modest volume on the rebound compared to the decline. The current recovery fits the pattern of bear market rallies in terms of volume and the “V” shape of the trough. Analysts at Bespoke Investment Group noted that there have been only seven other periods in the past 110 years with rallies of similar magnitude for the Dow. Three preceded the Great Depression, three came during the Depression and one in 1982.

That last example is a hopeful one as it kicked off the greatest bull market of all time. Expectations of a sustainable rebound have been helped by the fact that US stocks touched a 13-year low in March. But this was also the case in 1974, the start of a long rally – technically a bull market – that lost steam after a 73 per cent gain in two years. It would take four more years to reach the 1973 high and two more, the start of the 1982 bull market, to break decisively higher.

An authority on bear market bottoms, Russell Napier of CLSA sees a 1974-1976 scenario unfolding followed by an even worse slump. In Anatomy of the Bear, he scanned media coverage around the bottoms of 1921, 1932, 1949 and 1982 and does not see the apathy that characterised those turning points.

“For the great bear market bottoms, you need a society-wide revulsion with equities,” he said. “It just doesn’t smell like the big one yet.”....

[Demeter]

40. Harry's response?

Harry Callahan: We're not just going to let you walk out of here.
Crook: Who's "we", sucker?
Harry Callahan: Smith, and Wesson, and me.

[Demeter]

41. Friday Movie Night - Slave Economics Edition

How bad can it get? View these short documentaries on slave labor in China and in the USA.

http://www.economicpopulist.org/?q=content/friday-movie-night-slave-economics-edition

[Demeter]

42. Wonder What Harry Would Say?

Captain Briggs: Don't you lecture me, you son of a bitch! Do you know who I am? Do you know my record?
Harry Callahan: Yeah... you're a legend in your own mind.

[Demeter]

43. Dave Lindorff: The Obama Administration is Becoming a Stand-Up Comedy Act

http://blog.buzzflash.com/lindorff/234


What a joke the Obama Administration is becoming, as it keeps trying to prop up failing industry after failing industry.

First we had the president becoming First Car Salesman, offering federal guarantees for GM and Chrysler car warrantees so that potential car customers wouldn't turn away from those two companies' showrooms fearing that the manufacturers would go bust and leave them holding the bag. Then he started touting the cars themselves, saying they were "great products" and that people should go out and buy them.

Now we have the White House and Treasury Department assuring us that all 19 of the country's biggest banks are going to survive the credit crisis and the economic slump, and that they are all basically sound. Okay, so some of them, such as Bank of America that has to come up with $35 billion in new capital, need cash infusions or need their books juggled -- a total of $100 billion for all 19 banks -- but as Fed Chairman and Chief of Rehabilitation and Promotion (that's CRAP) for the banking industry Ben Bernanke, is assuring us, "All the banks in the stress tests are solvent."

Really. Forget about all those troubled assets folks. They are solvent. Honest.

These stress tests are really a joke, though. Consider that the government (and in the end each individual American taxpayer) is now a huge stakeholder in every bank that received bailout funds. If one of these stress tests were to honestly report that one of these "too big to fail" banks was insolvent, or that it would become insolvent if the recession got worse, that would cause a collapse in that bank or, at a minimum, a plunge in its share value, with the government being the loser.

Do we really think CRAP Bernanke and Treasury Secretary Tim Geithner are going to do that?

The only way to do a real stress test would be the way the Fed and the Federal Deposit Insurance Corp. and other bank regulators used to do them: in complete secrecy. Banks, after all, which even under the best of circumstances lend out 10 times their assets, are critically dependent upon the confidence of their depositors. Any sign that a bank is in trouble and the depositors and even business customers such as those who maintain credit lines at an institution, start to flee.

So these stress tests really are not honest evaluations of the financial conditions of these banks, but rather, public relations exercises designed to boost the public's confidence in them. Even then, though, the tests were anything but rigorous. One test was based on an assumption that the nation's unemployment would reach 8.8 percent sometime next year, with housing prices falling another 14 percent in 2009. But official unemployment is already at 8.9 percent and is still rising, and housing prices are falling more than that level. The so called "worst case" stress test assumed unemployment rising to 10.3 percent in 2010 and housing prices losing another 22 percent in 2009, but in fact, things could well be much worse than that, both for unemployment and housing prices, by 2010.

So really, the fact that these easy "stress" tests resulted in a conclusion that the 19 banks in question need to raise a total of $100 billion in new capital in six months should be a cause for alarm, not confidence.

Add to that the fact that the government's and the banking industry's proposed solution to the capital shortfall, since there are likely to be few investors who will want to shovel new money into these zombie banks, is to convert the money that the government has already loaned to the banks in return for preferred shares in those institutions into common shares, which counts as capital. If you think about it, while this shifting around of money on the banks books may yield better numbers, it doesn't really provide the banks with one dollar more of cash to lend, or to cover bad debts. What it does do is take government money that could conceivably be recovered in the event of a bank failure, and convert it into paper that could easily end up having a value of 0 in the event of a bank failure. If a bank were to go down the tubes, its common shares would have no value at all, and then that's what our TARP funds would also be worth: zero.

No wonder Obama and his term of financial "wizards" are touting the alleged strength of these banks!

So it has come to this. After getting rid of an inarticulate and know-nothing president and a manipulative, secretive and anti-democratic vice president, we now have a White House filled with comics and hucksters shilling shamelessly for the both the automotive and the banking industry, both of which are candidates for roles in a "Night of the Living Dead" remake.

This should not give us confidence about other government claims, such as when President Obama and his State Department and Pentagon "wizards" stand up and tell us that they have a plan for the mess in Iraq or the other mess in Afghanistan, or that they even know what they are doing in and to Pakistan.

Congress has been a joke for years. Now the White House is becoming a laughing stock. It is, I'm afraid, all starting to look like one big joke, and it's on us.

DAVE LINDORFF is a Philadelphia-based journalist. His latest book is "The Case for Impeachment" (St. Martin's Press, 2006). His work can be found at www.thiscantbehappening.net.

[Demeter]

44. "If you want a guarantee, buy a toaster."--Clint Eastwood himself

[Joanne98]

45. Hate "Too big to fail" You're about to get more of it. Tests May Spur Bank Mergers

For America’s regional banks, it’s merger time, Breakingviews says.

With the results of the stress tests now public, it’s clear that none of the country’s largest financial institutions will fail. Those that need capital will find it, even if it takes de facto nationalization. But that doesn’t mean the banking system is robust, the publication notes.

A handful of regional institutions received the equivalent of barely passing grades — including SunTrust, Regions Financial, KeyCorp and Fifth Third.

These banks have more than $500 billion of assets among them. Even if they can raise the extra capital that regulators say they need, they may not be in a position to act as engines of credit creation — a requirement for their local economies to pull out of the recession, Breakingviews says.

Moreover, if they can’t raise private money over the next six months, they may need to have the government take significant, or even majority, stakes in them.

One risk is that they will stagger along, zombielike, for years, the publication says. However, it argues, there’s an alternative: Let the strong eat the weak.

A core group of relatively robust regional banks has also emerged from the Treasury’s examinations, including U.S. Bancorp and BB&T, as well as PNC Financial, which has to raise a relatively modest $600 million.

An alternative to propping up troubled banks with new capital is to actively encourage a wave of consolidation, Breakingviews suggests.

This approach would make life simpler for the government should the banks fail to raise private capital, it says. Rather than taking controlling positions in many midsize banks, the government could take smaller stakes (or none at all) in fewer, larger banks that in turn use the capital to buy troubled rivals, the publication posits.

By encouraging, for instance, the acquisition of SunTrust by BB&T, the takeover of KeyCorp by U.S. Bancorp and the purchase of Regions by PNC, the government would foster the creation of three new heavyweights better equipped to compete with JPMorgan Chase, Wells Fargo and Bank of America, Breakingviews says. These three went from big to megabanks by acquiring troubled rivals like Washington Mutual, Wachovia and Countrywide early in the banking crisis, in deals blessed by regulators.

http://dealbook.blogs.nytimes.com/2009/05/08/tests-may-spur-bank-mergers/

[Hugin]

46. A little more about the 'usury' debates... My final words on the subject.

As my only post for today, I thought I'd touch on this subject once again...

The debate which erupted in GD was centered on if it's 'usury' for an Insolvent Taxpayer Bailout Recipient Bank Owned Credit Card Company to suddenly jack an Interest Rate from an already substantial 13% to a PUNISHING 30% rate.

I thought only via legal due-process could -punishments- be allocated upon those found guilty of some crime or in a civil court someone who had somehow through neglect or design caused injury or loss to another person or class of people... But, apparently that provision of our Constitution has been rendered obsolete in this "Brave New Country" of Laws written by The Banks for The Banks.

Now, the discussion which erupted centered on the word 'usury' and if it was the common definition used by laypeople or some obscure 'legal definition' (That incidentally was never posted because it varies. Itself, a violation of 'equal protection'.) which held sway in a decision about Banking practices in these matters.

Here is a definition of 'usury' from a reliable and commonly available source...

usu·ry

Function: noun
Inflected Form(s): plural usu·ries
Etymology: Middle English usurie, from Anglo-French, from Medieval Latin usuria, alteration of Latin usura, from usus, past participle of uti to use
Date: 14th century

1 archaic : interest
2: the lending of money with an interest charge for its use ; especially : the lending of money at exorbitant interest rates
3: an unconscionable or exorbitant rate or amount of interest ; specifically : interest in excess of a legal rate charged to a borrower for the use of money

From... http://www.merriam-webster.com/dictionary/usury

You will notice that the oldest and most common use of the word relates to simply charging interest on a loan. An extension of the definition is the practice of charging -exorbitant- amounts of interest on a loan. The so-called legal definition of 'usury' is based on this extension and as it turns out is not really defined... at all.

Here's where it gets interesting... That part about the legal rate and who sets it. You would assume the legal rate would be set by the consensus of the people in a democracy and a Nation of Laws. But, this is not the case... The legal rate is in effect set by the Banks themselves via a corrupt legislative process.

How do we fix this? Well, if we were really a Just Nation, we'd recognize the real crime in this process is allowing a Private Entity to unilaterally try, convict, and in some cases punish other citizens without due process. Sometimes with fatal consequences on the punished.

The Lenders are terrified of the prospect of this eventuality... As evidenced by their going all out to snuff any actual Court involvement and investigation of their activities. The latest effort centered on using taxpayer funded lobbying to defeat the amendment to the latest joke of a Mortgage Relief Bill.

They know... If these 'usurious' practices were to ever go to Court and especially be presented to a Jury of the accused's Peers that this Jury would use the common definition of 'usury' and set the interest rate to a reasonable amount. The Banks would LOSE! Game over! Do not pass Go, Do not collect pound of flesh.

To end this... A joke.

At a bar someone approaches an attractive person and says, "Will you sleep with me for $1,000,000.00?

To which the attractive person replies, "Sure!"

The someone then says, "Will you sleep with me for $1.00?"

To which the attractive person says, "No way! What do you think I am?"

The someone then says, "Well, we've already established that... Now, we're dickering about the price."

Well, it's time the Banks were made to dicker-about-price in the open and under the legal framework established by the Constitution.

Edit: a little changing of wording.

[Dr.Phool]

47. "WHAT KIND OF SICK INDIVIDUAL PUTS KETCHUP ON A HOT DOG?!!"

Probably the same kind of sick individuals, who were defending these practices in GD. What the fuck has DU turned into?

I gotta stay outa there.

[Hugin]

48. Personally, I have a thing against Mayo on hamburgers.

:blech:

I do like mustard on them... Lots of mustard. ;)

[Dr.Phool]

49. Mayo on a burger is blasphemy.

Now, I'm going to have some beers on a Harley!

[tclambert]

53. Careful, Doc. That can lead to organ donation.

[Dr.Phool]

60. Nobody would want my liver, for sure.

[Demeter]

59. Hey Guys, the No Mayo cry Is From Hollywood Homicide!

I have yet to do a Harrison Ford weekend, because I revere him too much.

[Tansy_Gold]

55. Dijon????

Tansy Gold, who likes her hot dogs and her bacon cheeseburgers PLAIN. No ketchup. No mustard. No pickle. No onion. No tomato. No lettuce. No mayo. No special sauce. No nothin'.

[tclambert]

54. Usury = loan-sharking

Doesn't really solve the problem, I know. Now you gotta define loan-sharking.

More to the point, penalties can be included in contracts. If a builder finishes early, the contract can specify a bonus. Finishing late may incur a penalty. If a pro athlete fails a drug test, he may face suspension.

[Hugin]

56. Nowhere is it specified that missing a payment on a water bill can get your CC rate jacked to 30%.

This is a case where a reasonable person would stop and think a crime had been committed.

I know, I said the above was my last word on the subject... But, there's more.

The Banksters know they are doing wrong. It's why they've been pushing and pushing for Binding Arbitration... It's because they KNOW if the crap they're pulling ever got near a group of reasonable people in a game where they didn't hold all of the chips. They would lose and lose BIG.

And that 'contract' crap... It's what they've been hiding behind. If you remember the AIG bonus stuff. Well that didn't turn out so well when the common folk caught wind of it. Contracts are broken all of the time.

Especially, the loosey-goosey, we can do whatever we want whenever we want, but, you've gotta toe-the-line extortion the CC industry is claiming to be 'contracts'. If they actually got into a situation where citizens were to decide... These 'contracts' would be determined to be null-and-void so fast the Banksters wouldn't have time to pucker their sphincters.

[Dr.Phool]

68. In an earlier life, I knew several loan sharks.

I never used one, but I knew them, and how they operated. Here's the deal.

Let's say you needed $1,000. You go to the Juice Man and arrange a loan. He loans you the money at "30% interest". But, it's agreed that it's to be paid over a 10 week period. You pay him back $130 per week, for 10 weeks. Debt paid. If you can't afford the payment, you pay the $30 interest payment for the week, and you're terms are extended another week. Simple.

So, actually your 30% loan is really a roughly 150% loan on an annual basis.

I knew guys who were sent to prison after they got busted for charging that kind of interest. But, nowadays, that's nothing compared to the 400+% being charged by legal payday lenders, and penalties and interest being charged by credit card companies.

They had to put The Mafia out of business, so that the bankers could show them how to rob people, and do it right. The same way they ruined Vegas.

[Demeter]

61. Is Anyone Minding the Store at the Federal Reserve?

http://www.youtube.com/watch?v=PXlxBeAvsB8&feature=player_embedded

[Demeter]

62. "How Would You Fix the Economy?"

Dear Mr. President,

Please find below my suggestion for fixing America’s economy. Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan. You can call it the Patriotic Retirement Plan:

There are about 40 million people over 50 in the work force.

Pay them $1 million apiece severance for early retirement with the following stipulations:

1) They MUST retire. Forty million job openings - Unemployment fixed.

2) They MUST buy a new American CAR. Forty million cars ordered - Auto Industry fixed.

3) They MUST either buy a house or pay off their mortgage - Housing Crisis fixed.

It can't get any easier than that!

P.S. If more money is needed, have all members in Congress and their constituents pay their taxes...
If you think this would work, please forward to everyone you know. If not, please disregard.



http://informationclearinghouse.info/article22585.htm


Dirty Harry couldn't have said it better.

[Demeter]

63. Bank of England braced for third wave of financial crisis

http://www.guardian.co.uk/business/2009/may/08/bank-england-recession-economy

On Thursday the Bank surprised the City by announcing that it would pump an extra £50bn of new money into the economy despite recent stockmarket rallies.

Now the Guardian has learned that this increase in quantitative easing was driven by fears in Threadneedle Street that the credit crunch is still sucking the life out of the British economy and the banking sector remains in deep trouble.

The new mood of caution chimes with comments from business leaders yesterday, who warned that apparent green shoots in the economy had shallow roots.

Richard Lambert, director general of the CBI, said: "The fact is that for all the injections of taxpayers' money, the credit markets are still not working properly."

Bank of England officials are concerned that big banks now supported by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking Group, are struggling to increase lending volumes, as they had promised in return for help from the government.

The governor, Mervyn King, and several other members of the Bank of England's monetary policy committee are said to be unconvinced by talk of green shoots that has helped propel the FTSE 100 share index up by more than 20% over the last month.

Fears of a false dawn echo the mood at the beginning of the year, when apparent recovery in financial markets was wiped out by a second wave of crisis led by RBS and Lloyds.

This week both banks again warned of sharp increases in bad loans to British business customers. RBS said yesterday it was seeing little sign of green shoots.

Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.

The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.

In return for support from the government, both RBS and Lloyds had pledged to increase lending to homeowners and businesses to compensate for declining foreign lending. Instead Stephen Hester, chief executive of RBS, said yesterday that demands for loans had contracted as customers "quite properly" try to reduce their borrowings as the recession bites.

King presents the MPC's latest quarterly inflation report next Wednesday and speculation was rife in the Square Mile last night that the report would contain gloomy forecasts for economic growth and inflation, which will probably be projected as being below its 2% target in two years' time, even though it is currently at 2.9%.

Last year King was criticised by some experts for failing to cut interest rates fast enough as the economy slid into recession. But from September, when US investment bank Lehman Brothers collapsed, he led the MPC in slashing rates to an all-time low of just 0.5% and embarked on the unconventional quantitative easing in March, a policy the European Central Bank said on Thursday said it would follow.

Poor lending decisions by HBOS, now part of Lloyds, and RBS, along with the rapid deterioration in the economy, mean that the two banks in which the government has major stakes could alone account for £25bn of bad debts by the end of the year.

Both banks believe these losses will count towards the "first loss" they must bear before their insurance – through the government's asset protection scheme – kicks in.

The extent of the rise in bad debts has surprised some commentators who now believe the taxpayer could be on the hook for losses under the asset protection scheme faster than first expected.

There has been some evidence of a small increase in mortgage lending in Britain, but it is not nearly strong enough to prevent house prices, which are down nearly a quarter from their 2007 peak, falling further. And unemployment is expected to continue rising well into next year, something that is likely to restrain consumer spending.

Many economists have been encouraged by some better figures on consumer confidence and forward-looking surveys into thinking that the 1.9% contraction in the economy in the first quarter of the year – the worst for three decades – will not be as severe in the second quarter. But they say that this only marks a slower pace of contraction, not a rapid return to growth.

Few share the chancellor's belief that the economy will recover strongly in 2009, and nor does the Bank of England.

[Demeter]

64. UK's income gap widest since 60s

http://www.guardian.co.uk/society/2009/may/08/poverty-equality-britain-incomes-poor

[Demeter]

65. Recovery? What Recovery?

http://www.newsweek.com/id/196007

Kevin Kelly
Newsweek Web Exclusive

Don't tell me that the economy is getting better, or has even hit rock bottom. My faith in an imminent recovery deserted me on May 5, when one of our customers, Salyer American Foods, based in Monterey, Calif., suddenly fell into receivership. There had been little to no indication that the company was so close to financial ruin. As it turns out, the company's lenders say Salyer owes them over $34 million, a debt equal to almost half its sales. A company attorney told local media that tight credit markets and the economic recession had pushed Salyer over the edge. If the receiver doesn't find some way to revive the company's fortunes, our bag manufacturing company stands to lose nearly $1.5 million in revenue, about 2 percent of our $60 million in sales.

On the same day my customer fell into receivership, Fed chairman Ben Bernanke told a congressional committee that he believed the economy was in the process of bottoming out and "would turn up later this year." He's not alone in his optimism. Over the past two weeks or so, it has become a cottage industry among economists and the media to spot the first "green shoots" of a recovery. Certainly shoots there may be. The stock market has rebounded smartly over the past two months, as has consumer confidence. Pending home sales have ticked up, while unemployment claims are easing. And many economists insist a manufacturing revival is in the wings because inventories have fallen so low that restocking must begin soon.

But I haven't found many small-business owners ready to jump on the recovery bandwagon, and for good reason. We're still experiencing the "bottoming out" phase and worry that another bottom remains below this one. Call us pessimists, but we're not sure the green shoots aren't just weeds.

Who can blame us? Take the experience of a friend of mine, who runs a $6 million company that provides promotional material to businesses. His sales are down 20 percent compared with last year. Over dinner last week, he said he certainly wasn't shedding customers at the same pace he had been in the fall, but customers were still defecting. "I can't see any reason why they'd come back soon," he said. So he's getting ready for a second round of layoffs and plans to end spending on marketing until things look more promising.

He's not alone among my friends and colleagues in his sense that bad times may be here to stay. One friend just decided to abandon her two-year-old Web-based gift boutique thanks to declining sales. She has another friend whose promising e-business startup had its venture funding yanked when it failed to meet sales goals. "Two years ago they'd have been given time to work things out," she says. Instead they recently closed. Another friend of mine works for a commercial real-estate company that's instituting 10 percent wage cuts beginning in mid-May. "It's better than people losing their jobs," he said to me, "but I don't expect to be getting the money back any time soon." Given the growing worries about commercial real estate, he's probably right.

Even some companies that are supposed to be recession-resistant remain worried. I know the general manager of a small candy company, who says his sales haven't stopped sliding despite the belief that people supposedly eat more comfort food during bad economic times. He has cut back a shift and won't be rehiring soon. Representatives for a small local bank have told me that they haven't seen an uptick in business lending, and that they don't have businesses looking for money other than those they wouldn't lend to in the first place. And a long-time machine supplier of mine has had a completed bag-making machine on its floor since late 2008, when the customer decided not to go through with the purchase. Despite a steep discount, the company can't find a buyer.

Based on my company's experience, I don't necessarily see a positive side to low inventories. Over the past several months, we've seen lead times on orders fall at least 30 percent. Where our customers used to give us three to four weeks to fill an order, now they give us as little as two. Shorter lead times have followed the trend toward smaller orders. Where companies would once order 3 million bags and hold them on their floors for several weeks, now they're asking for only 1.5 million and reordering at the last possible moment. In most cases, it's not that their sales are falling, just that they're slashing order sizes and reducing lead times in order to avoid tying up capital in inventory. Since they're entering smaller orders more often, we're less likely to hold inventory as well. In my corner of the manufacturing sector, the revival that economists have been pointing to seems a long way off.

Now, I know businesspeople can be notoriously wrongheaded when it comes to spotting trends. Aren't the Big Three automakers at least partly responsible for their own demise because of their failure to anticipate the need for more fuel-efficient cars? I know I've almost blown the opportunity to capitalize on growth in the past by being too conservative about buying new equipment. In fact, I've angered customers by stretching out lead times rather than investing, because I've been worried that the sales growth isn't sustainable. Talk about a self-fulfilling prophecy. Even right now, when I can see that a judicious equipment purchase could propel our company forward, I worry about taking on more debt and hold back, even with one supplier offering terms that would give us a machine for a year without any payments.

Then I have a day like May 5. I read the Fed chairman's testimony and feel a bit upbeat, only to get surprised by the collapse of Salyer. Certainly, as my brother points out, it is unlikely we'll lose the entire sales volume even if our troubled customer disappears, because other customers will step in to fill the gap, and they'll buy product from us too. But is it insane to hold off on optimism when you're not sure whether another customer could bite the dust? Perhaps waiting to make any big investments makes sense until we're completely sure recovery is on its way. Of course, if I wait, and lots of other businesspeople like me wait, what will become of those green shoots that may be dotting the landscape?

[Demeter]

66. The Corporation (A Documentary)

http://www.informationclearinghouse.info/article12998.htm

[Demeter]

67. Top Senate Democrat: Bankers 'Own' the US Congress

Sen. Durbin speaks the truth, after which he cedes the Supreme Court appointment process to Arlen Specter, who gave us Clarence Thomas...

http://informationclearinghouse.info/article22534.htm

[Demeter]

70. Dilbert Does It Again: Thus Ended Capitalism

"http://widgets.dilbert.com/o/4782b1ae641c3eb6/4a06d2859c196940/478cf2052d7472a1/7d8ece97"

[Hugin]

78. For some reason I can't see these...

All I get is a little object block in the upper right hand side of the page.

:shrug:

[Demeter]

80. Try the Website, Then

Dilbert.com

[Demeter]

72. Car Talk: GMAC could get $7.5 bln from U.S. next week

http://news.yahoo.com/s/nm/20090509/bs_nm/us_banks_gmac_1

WASHINGTON (Reuters) – GMAC, the troubled automobile lender, may receive a $7.5 billion infusion from the U.S. government as early as next week, the Washington Post reported in its Saturday edition, citing unnamed sources.

The funds for GMAC would come as part of an Obama administration package that aims to revive the nation's financial system even after it found that major banks need less financial aid than expected, the Post said.

U.S. Treasury Secretary Timothy Geithner told Reuters Television on Friday that the administration will provide substantial support to GMAC, a vital provider of financing for buyers of U.S.-made cars.

"It's likely, again, that GMAC will need to take additional capital from the government and we'll be prepared to provide that," Geithner said in the interview.

The Treasury and U.S. banking regulators say GMAC needs to raise $11.5 billion to fill a capital hole it could face if the economy were to deteriorate further.

GMAC, the former financing arm of General Motors Corp., has taken $5 billion from the government already. In addition, the Treasury has lent GM $884 million to support GMAC's lending activities.

Under the restructuring of Chrysler Corp., GMAC is assuming the business of Chrysler Financial. When the Obama administration announced Chrysler's bankruptcy filing on April 30, it said it would offer support to GMAC, including necessary capital, to allow it to finance Chrysler's sales.

[Demeter]

73. Improving markets helped banks pass stress test (And Other Tales From the Crypt)

http://news.yahoo.com/s/nm/20090509/bs_nm/us_banks_regulators_1

WASHINGTON (Reuters) – U.S. bank regulators breathed a huge sigh of relief in early April when improving financial markets looked set to push the nation's 19 largest banks through the gauntlet of tough "stress tests" in reasonably good shape.

In early March, a month after Treasury Secretary Timothy Geithner announced the tests on February 10 to help restore investor confidence in the major banks, the scene was much bleaker: major stock indexes had slumped to 12-year lows on persistent fears about the financial weakness. It looked possible that a major bank might need an emergency government rescue even before the stress test results could be announced.

But since the trough, markets improved steadily with rising share prices and volumes, better liquidity and other signs of stabilization, and regulators gained comfort that capital markets would be willing to fill any holes the stress tests unearthed at banks.

"It looked to us by mid-March, and early April, that this might work," said a senior U.S. regulatory official, who spoke on condition of anonymity because of the sensitivity of the tests.

Stress tests released on Thursday showed the largest banks had a $74.6 billion gap to make up to ensure they could withstand a worst-case scenario regulators set for them. Nine of the 19 banks tested already had the necessary buffer and would not need to raise any more.

Morgan Stanley and Wells Fargo sold more than $15 billion of shares and bonds the next day, and Bank of America Corp announced plans to sell 1.25 billion shares as investors reacted positively to the relatively small size of the shortfall.

If by the middle of next week banks are half-way to raising the needed capital, and a half dozen or so of the banks needing to augment their buffers have done so, regulators would be pleased, the official said. In particular, such a development would likely signal the administration would not have to ask Congress to replenish its bailout war chest.

TEST IDEA TOOK SHAPE IN SEPTEMBER

The stress test idea germinated in early September as officials at the Federal Reserve and the New York Fed, including Geithner who was then president of the New York Fed, took part in conference calls to discuss deteriorating financial markets.

But the crisis intensified with the collapse of Lehman Brothers and the Fed rescue of American International Group, and the stress test idea was put on the backburner. By the time the administration of President Barack Obama took office, however, there was breathing room to try the idea.

Regulators at the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp teamed with researchers and statisticians to design a model that would test the 19 banks at once according to the same standards, and then make the results public, an unprecedented undertaking.

As regulators refined the model, they ironed out bugs in the test and settled disputes among officials at different regulatory agencies including at regional Fed banks.

Disagreements included whether a particular bank's assets were of higher quality than average and what bank earnings were likely to be over the next two years, particularly if a bank had acquired a troubled asset, such as another financial institution that was in trouble.

Regulators shared the all-but-final version of the tests with all 19 banks on April 24 at the regional Feds that govern the districts in which the banks are headquartered. Regional Fed bank presidents participated in most sessions, but Fed board officials did not.

Early market reaction this week showed the announcement of the stress test results, which some had feared would destabilize vulnerable banks by exposing weaknesses, had stoked enthusiasm. U.S. stocks rose on Friday, led by financial shares.

The release of the stress test results "has given people a little bit of confidence that the government can help to solve this part of the financial crisis," said Richard Sparks, senior equities analyst and options trader at Schaeffer's Investment Research in Cincinnati.

"There's a sense that the government actually has a logical plan ... even if things got worse, these companies will be able to survive," Sparks said.

BY ALL MEANS, WE MUST SAVE THE BANKING COMPANIES--THE HELL WITH EVERY OTHER BUSINESS AND ALL THE LITTLE PEOPLE. A PLAGUE ON ALL THE BANKING HOUSES!

[Demeter]

74. U.S. economic growth seen resuming in third quarter

http://news.yahoo.com/s/nm/20090510/bs_nm/us_usa_economy_bluechip_1



WASHINGTON (Reuters) – The U.S. economy is expected to begin growing in the second half of this year, while the jobless rate is expected to peak in the first quarter of 2010, according to a survey of top forecasters released on Sunday.

The consensus forecast of panelists surveyed in the Blue Chip Economic Indicators newsletter for May predicted economic growth, as measured by real gross domestic product, would shrink 2.8 percent in 2009 but grow 1.9 percent in 2010.

The economic downturn is expected to ease in the second quarter of this year after sharp declines in the fourth quarter of last year and the first quarter of this year, the survey said. Growth is forecast to resume in the third quarter.

The May consensus forecast from the economists saw second-quarter GDP contracting at a 1.7 percent annual rate, 0.4 percentage point better than was forecast a month ago.

In April, the panelists forecast GDP would contract 2.6 percent in 2009 and grow 1.8 percent in 2010.

"The past month provided fresh evidence the decline in business activity is starting to moderate, buttressing consensus expectations that the economy will emerge from recession in the second half of this year," the newsletter said.

The economy is showing some signs of inching toward health....

I HAVE NO NEED TO GO TO THE GARDEN SHOP FOR COMPOST--I HAVE ALL THE MANURE I CAN EVER NEED RIGHT HERE.

[DemReadingDU]

77. How?

How can growth resume, when the economy is still sliding.
Ah, it will be fake growth reports, like fake jobless numbers, like fake stress tests.

[Demeter]

83. Clint Eastwood himself would say:

"I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will."

[Dr.Phool]

76. "The Madoff Affair" on PBS Frontline Tuesday.

Sounds interesting.

The money quote: We really are living in the age of the idiot, aren't we? Most people are so comfortable with their ignorance that common wisdom is no longer wise. My new rule? Whatever course of action everyone else agrees on, do the opposite.

------------------------------------------------------------

And if Frontline's "The Madoff Affair" (9 p.m. Tuesday, May 12, on PBS, check listings) is any indication, far from a vision of regret and self-hatred, Madoff chuckled softly to himself as he poured gasoline over many, many sizable fortunes, then struck a match. Who knew there was a sadistic, half-crazed anarchist behind that calm, professional demeanor?

"He confessed with pride," Lucinda Franks tells the camera. "Like, 'Look what I did. I mean, you're not gonna believe what I did when you get to the bottom of this.'"

"Here's a guy who thinks he got over on the world for the last 30 years and doesn't have a bit of remorse," adds securities fraud lawyer Ross Intelisano.

Harder to parse is the culpability of the other players in the Madoff scandal. While most of the investment firms that funneled money to Madoff were unaware of Madoff's treachery, they clearly neglected to perform due diligence, the investment term for carefully and thoroughly examining the soundness of the investments you're advocating. The investment firm Fairfield Greenwich, in particular, entrusted $7.5 billion to Madoff without adequately exploring the man's practices. Like so many other firms, they were willing to turn a blind eye as long as millions of dollars in commissions were rolling in.

You also have to wonder whether Madoff had some kind of pull with the Securities and Exchange Commission, the way it systematically ignored multiple warnings from whistle-blower Harry Markopoulos, the financier who at one point went so far as to send a detailed memo to the SEC warning that Madoff was quite clearly up to something fishy.

The remarks of Michael Bienes, one of Madoff's early partners who was interviewed extensively for the Frontline special, give us some idea of how one man could pull off such a colossal fraud.

Frontline: What made you think that he could return 20 percent?
Quantcast

Bienes: I don't know! How do I know? How do you split an atom? I know you can split them, I don't know how you do it. How does an airplane fly? I don't ask.

Frontline: Did you ask him?

Bienes: Never! Why would I ask him? I wouldn't understand if he explained it. Something with arbitrage between bonds and stocks and blah blah blah.

We really are living in the age of the idiot, aren't we? Most people are so comfortable with their ignorance that common wisdom is no longer wise. My new rule? Whatever course of action everyone else agrees on, do the opposite.

Whether you've been thinking this way for years or just a few months now, Frontline's "The Madoff Affair" (along with the new Vanity Fair tell-all by Madoff's secretary) provides a nice excuse to gawk at the misfortunes of the fortunate. Of course, once you take a closer look at the list of Madoff's victims and consider what it would be like to lose a nest egg you spent a lifetime building, or factor in the unions, pension funds and charities that took a hit, this taste of schadenfreude becomes a little less palatable. What kind of a man could lay ruin to so many fortunes with a twinkle in his eye?

http://www.salon.com/ent/tv/iltw/2009/05/10/madoff/index.html?source=newsletter

[Demeter]

85. Thanks!

[DemReadingDU]

79. SNL: The bank stress test answers are graded.

5/9/09 SNL: The bank stress test answers are graded.
http://www.nbc.com/Saturday_Night_Live/video/clips/geithner-cold-open/1099562/


:rofl:

[Demeter]

84. Fabulous!

[Demeter]

81. Obama takes aim at US multinationals

http://www.ft.com/cms/s/0/412f2784-38b7-11de-8cfe-00144feabdc0.html

Barack Obama on Monday unveiled a sweeping crackdown on offshore tax avoidance by US companies, in a move likely to affect the way Britain taxes profits earned by UK companies operating abroad.

Mr Obama, who campaigned relentlessly on the issue of closing offshore loopholes, said the steps he announced would raise $210bn (£140bn) over 10 years and “make it easier” for companies to create jobs in Buffalo, New York, rather than in Bangalore, India.

But corporate America reacted with dismay, saying the rules – which would affect multinationals such as General Electric and Procter & Gamble – would put US companies at a disadvantage to foreign rivals.

“It is the wrong idea, at the wrong time for the wrong reasons,” said John Castellani, Business Roundtable president. “It will cripple growth, reduce the competitiveness of US companies overseas and destroy jobs.”

Mr Obama’s move will be studied around the world, however the administration on Monday highlighted Ireland, the Netherlands and Bermuda as examples of how distortionary existing tax policies are, saying the three accounted for more than a third of US foreign profits in 2003.

In London, Chris Sanger, head of tax policy at Ernst & Young, said the US move could have implications for the Treasury’s long-running review of UK anti-avoidance rules relating to foreign income. “From the UK perspective, it may put more pressure on it to see if its new rules are consistent,” Mr Sanger said.

He added the Obama administration’s proposal would put US tax policy at odds with much of the rest of the world, where it is common for profits earned abroad not to be taxed at home.

The steps announced by President Obama would include closing down the “check box” loophole that enables companies to avoid US and foreign taxes by shifting income to subsidiaries based in offshore tax havens.

He cited a Cayman Islands building where more than 18,000 US companies are housed. “Either this is the biggest building in the world or it is the biggest tax scam in the world,” Mr Obama said. “I think the American people know which it is.”

The administration also estimated that US companies paid an effective tax rate of just 2.3 per cent on the $700bn they earned in foreign profits in 2004.

Under Mr Obama’s proposals, which are likely to be included in this year’s budget document, US companies would no longer be able to claim deductions against their tax bill before they had paid taxes on offshore profits. The administration would also close the loophole whereby companies that claim a US tax credit on taxes paid to overseas jurisdictions then inflate and accelerate those credits.

[Demeter]

82. AIG blames market disruption for loss

http://www.ft.com/cms/s/0/ad1e2f48-3b5b-11de-ba91-00144feabdc0.html

American International Group reported a $4.35bn net loss in the first quarter, reflecting continuing markdowns of the value of credit insurance sold by its financial products unit.

The company blamed “restructuring and market disruption charges and accounting charges related to taxes” for its performance. AIG’s loss, which amounted to $1.98 a share, follows the $62bn loss it took in the last quarter of 2008, the largest quarterly loss in US corporate history, and a loss of $8.9bn for the year-ago period.

AIG Financial Products, AIG’s financial service unit, had an operating loss of $1.1bn. AIGFP recorded a $454m markdown of the value of the remaining $12bn credit insurance it sold on subprime mortgage securities, showing just how damaging the business continues to be. The group continued to wind down the credit insurance it provided to European banks to less than $200bn in nominal exposure and said it did not expect to make payments on those contracts.

But of greater concern to analysts was the weakness of AIG’s core insurance arms. Operating income was down for the general insurance business as net premiums fell 17.5 per cent compared with the year-ago period. Premiums in the life assurance business also declined, leading the firm to increase its dependence on investment income. The firm denied that it had engaged in aggressive pricing.

Much of the discussion on the group’s results concerned AIG’s asset sales and its efforts to generate cash to repay the government for its loans and other support in place since September last year. AIG, once the world’s largest insurance group, is being forced by the government to spin off many of its crown jewels and wind down many of its operations. The company declined to speculate on how much asset sales have raised so far.

Among options is a public offering of a 20 per cent stake in AIU Holdings, which was spun off in April to try to insulate the core insurance unit from the stigma of the AIG brand.

While many financial institutions that have accepted public capital are struggling to maintain a difficult balance between the desires of the government and their private shareholders, AIG, which has received almost $200bn in support from the government has far less leeway to decide its fate.

“We are making good progress and stabilising the business,” said Edward Liddy, chief executive in a call with investors.

[Demeter]

86. A U.S. Hog Giant Transforms Eastern Europe

http://www.nytimes.com/2009/05/06/business/global/06smithfield.html?_r=3&adxnnl=1&pagewanted=1&adxnnlx=1241932051-FpQXRVe4Dl5ZgDNzWDiyfw

YUP! IT'S GOOD OLD SWINE-FLU SMITHFIELD

By DOREEN CARVAJAL and STEPHEN CASTLE

CENEI, ROMANIA ... Almost unnoticed by the rest of the Continent, the agribusiness giant has moved into Eastern Europe with the force of a factory engine, assembling networks of farms, breeding pigs on the fast track, and slaughtering them for every bit of meat and muscle that can be squeezed into a sausage.

The upheaval in the hog farm belts of Poland and Romania, the two largest E.U. members in Eastern Europe, ranks among the Continent’s biggest agricultural transformations.

It also offers a window on how a Fortune 500 company based in Virginia operates in far-flung outposts. Smithfield has a joint venture in a Mexican hog farm located near where United Nations scientists are investigating a potential link between pigs and the new strain of influenza in humans. With the exact origins of the virus still in doubt, Smithfield emphasizes that the disease has struck none of its hogs or employees.

But Smithfield’s global approach is clear; its chairman, Joseph Luter III, has described it as moving in a “very, very big way, very, very fast.” In less than five years, Smithfield enlisted politicians in Poland and Romania, tapped into hefty European Union farm subsidies and fended off local opposition groups to create a conglomerate of feed mills, slaughterhouses and climate-controlled barns housing thousands of hogs.

It moved with such speed that sometimes it failed to secure environmental permits or inform the authorities about pig deaths — lapses that emerged after swine fever swept through three Romanian hog compounds in 2007, two of which were operating without permits. Some 67,000 hogs died or were destroyed, with infected and healthy pigs shot to stanch the spread.

In the United States, Smithfield says it has been a boon to consumers. Pork prices dropped by about one-fifth between 1970 and 2004, according to the U.S. Department of Agriculture, suggesting annual savings of about $29 per consumer.

In Eastern Europe, as in American farm states where Smithfield developed its business strategy, the question is whether the savings are worth the considerable costs. The company says it is “sensitive to our neighbors’ concerns” and that complaints are often from disgruntled residents left behind.

But Robert Wallace, a visiting professor of geography at the University of Minnesota says Smithfield’s global rise is part of a broader “livestock revolution that has created cities of pigs and chickens” in poorer nations with weaker regulations. “The price tag goes up for small farmers.”

In Romania, the number of hog farmers has declined 90 percent — to 52,100 in 2007 from 477,030 in 2003 — according to European Union statistics, with ex-farmers, overwhelmed by Smithfield’s lower prices, often emigrating or shifting to construction. In their place, the company employs or contracts with about 900 people and buys grain from about 100 farmers.

In Poland, there were 1.1 million hog farmers in 1996. That number fell 56 percent by 2008, as the advent of modern farming methods transformed agriculture, according to the Polish National Agricultural Chamber.

.................
The impact on the environment is even more marked. With almost 40 farms in western Romania, Smithfield has built enormous metal manure containers to inject waste into the soil. “We go crazy with the daily smell,” said Aura Danielescu, the principal of a school in Masloc, who closes her windows tight.

Smithfield farms in Romania’s Timis County are among the top sources of air and soil pollution, according to a local government report, which ranked the company’s individual farms No. 13 through No. 40. The report also indicates that methane gases in the air rose 65 percent between 2002 and 2007.

Taxpayers footed part of the bill; Smithfield tapped into millions of euros in subsidies — from a total of €50 billion available in the E.U. last year — that are meant to encourage modern farming balanced with care for the environment.

In a similar chain of consequences, separate subsidies mined by Smithfield helped support the export of cheap pork scraps from Poland to Africa, where some hog farmers also are giving up because they cannot compete.

Smithfield representatives strongly defend their methods. They say they did everything they could to quash the Romanian swine fever outbreak, and they contend the lack of licenses was an oversight. “We have learned not to assume that a government’s awareness of our plans and operations is the same as permission to keep moving forward until we have obtained all necessary permits,” Charles Griffith, a company lawyer, said in answer to written questions.

Company officials also point to heavy investment in poor parts of Eastern Europe and a commitment to reinvesting profits locally. Mr. Griffith highlighted among Smithfield’s contributions the “acquisition, renovation, and construction of meat processing plants, swine farms, feed mills, and cold storage facilities,” and support for “networks of independent farmers that are contracted to shelter and feed pigs to market weights.”

For all that, some villagers in the new hog country say they are dazed. “For them, it’s like dealing with primitive people in the bush, where only power and strength is important,” said Emilia Niemyt, the mayor of Wierzchkowo, a Polish village of 331 people that has pressed complaints about odors. “They fulfill the idea of conquering the East with the methods of the Wild West.”

ASSEMBLY LINE OF PIGS

When the East beckoned in 1999, Smithfield exported a vertical integration strategy, copied from the poultry giant Tyson Foods. The chief promoter of that strategy was Mr. Luter, whose family transformed a 73-year-old meatpacking operation into a behemoth with almost $12 billion in annual revenue.

Every stage of a hog’s life — from artificial insemination to breeding genetic characteristics — is controlled. A handful of employees tend thousands of hogs that spend their lives entirely indoors, under constant lighting, to spur growth. Sows churn out litters three or four times a year. Within 300 days, a pig weighing roughly 120 kilograms, or 270 pounds, is ready for slaughter.

Smithfield fine-tuned its approach in the depressed tobacco country of eastern North Carolina in the 1990s. In 2000, money started flowing from a Smithfield political action committee in that state and around the United States. Ultimately, more than $1 million went to candidates in state and federal elections. North Carolina lawmakers helped fast-track permits for Smithfield and exempted pig farms from zoning laws.

As Smithfield flourished, the number of American hog farms plunged 90 percent — to 67,000 in 2005 from 667,000 in 1980. Some farm states grew wary. When Hurricane Floyd struck North Carolina in 1999, torrential rain breached six pig waste lagoons, prompting the authorities to impose a construction moratorium on new pig farms using lagoons.

Missouri, too, pressed Smithfield to install technology to reduce odor. In Iowa, Smithfield lobbyists fended off efforts to force meatpackers to purchase hogs on the open market instead of using only their livestock.

Facing more restrictions in the United States, Smithfield took its North Carolina game plan to Poland and Romania, where the company moved nimbly through weak economies and political and regulatory systems.

Today Smithfield is the biggest pork producer in Romania, where it owns an enormous meatpacking plant, almost 40 hog farms and croplands sprawling over 50,000 acres. In Poland, the company employs 500 farmers to raise hogs that are bound for its Communist-era slaughterhouse, Animex.

Smithfield declined to disclose the total of subsidies it has collected. Romania pays a levy of around 30 euros per pig raised suggesting that, by producing 600,000 a year, Smithfield was eligible for 18 million euros in special national subsidies intended to improve the leanness of hogs. Though the company said late Tuesday that not all its pigs qualified for the subsidy, it did not say how many are. Newly released Romanian data show the company collected almost €300,000 in cropland subsidies last year and more than €200,000 in special funding for new European Union states. In Poland, Smithfield reaped more than €2 million for its subsidiary Agri Plus.

“Subsidies are money,” Luis Cerdan, chief executive of Agri Plus, said. “It improves the profits of the company.”

But Mr. Griffith, Smithfield’s lawyer, characterizes total benefits as tiny. Even more so, he said, “when you consider that we have not taken any cash out of these operations and have no plans to do so in the foreseeable future.”



ENVIRONMENTAL DISASTERS

The connections in the upper reaches of government meant that Smithfield could weather protests from local communities. The company was fined €9,000 for spilling manure on a local highway while transporting waste from a leaking container; €35,000 for a leaking bin that seeped hog waste into soil; another €35,000 for four farms operating without permits in Arad County; and €18,500 for not preventing water pollution.

Some villagers, however, concentrate on the advantages. “I have land near them and there’s no problem,” Dorin Mic Aurel, mayor of Masloc, said. Smithfield is the biggest taxpayer in Masloc, contributing $27,000 yearly that helped bring running water to the village.

But Smithfield found it hard to overcome fallout from the swine fever outbreak that struck Cenei. At the time, hog corpses lay in heaps, and residents remember chaotic efforts to shoot and burn them. That particular strain affects only hogs, but scientists have found elements of swine viruses — one from Europe or Asia, the other from North America — in the genetic code of the new influenza A(H1N1) virus.

When Ioan Ciprian Ciurdar, deputy mayor of Cenei, said that the stench from nearby farms was overpowering, Smithfield responded that a heat wave was to blame.

Mr. Ciurdar said that he had visited the farm with a colleague who snapped photographs until a security guard demanded the camera and destroyed the pictures. “If you’re an owner,” he said, his voice rising, “it doesn’t mean you can do whatever you want.”

Smithfield contends that “it is impossible to know” why the pigs got sick, while noting a breakdown in the supply of government-supplied swine flu vaccines. But several officials on both sides of the debate believe that Smithfield was overwhelmed by its own industrial machine and its ever multiplying pigs.

“Thousands of piglets were born,” Mr. Seculici, the architect, said. “There was no place to put them because the new farms weren’t finished. Nobody admits this, but this was the cause of swine flu. They were forced to improvise.”

Smithfield acknowledges that it placed young pigs on farms under construction, but insists that doing so had no impact on health.

“It was done too fast; that caused a lot of problems,” Mr. Taubman, the former U.S. ambassador, said.

When it came to cleanup, Smithfield again turned to special E.U. subsidies, requesting $11.5 million in compensation. But the local authorities — those with the power to dole out the money — balked at the demand, outraged that the epidemic was taking place on unlicensed farms which they accused of lax biosecurity measures.

A special mission of the European Commission confirmed some of their complaints, finding that Smithfield had failed to submit regular reports on the deaths of its pigs and that employees moved freely between farms despite suspicions of swine fever.

“Although we acknowledge these dysfunctions, this does not mean that our farms were operating outside the purview of Romanian authorities,” Mr. Griffith, a lawyer for Smithfield, wrote. “Our farms were operating openly and in regular, day-today contact with those authorities.”

“When we discovered that a number of our farms in Romania were operating on an emergency basis without all required permits,” Mr. Griffith said, Smithfield acted “to obtain all required permits.”

Blocked from collecting the money, Smithfield turned to Valeriu Tabara, head of the Romanian Parliament’s agricultural committee. With support from other politicians, Mr. Tabara pushed for an amendment that would enable animal owners to be compensated for disease-driven losses regardless of ignoring proper biosecurity measures.

Smithfield is uncertain if the amendment will be beneficial to the company. The revision, Mr. Griffith said, “would generally not apply retroactively to our claim.”

Mr. Tabara has no doubts, however, saying that “Smithfield is in the category of companies that have registered losses.”|

A STRUGGLE ACROSS CONTINENTS

When Mr. Neag, the former hog farmer, strides his land, only two animals trail him: battered mutts.

He is a cereal farmer now, like many other former hog farmers who complain their annual incomes have fallen by about half to €5,000.

“I didn’t think they were the enemy like someone who comes to take the bread from our mouth,” Mr. Neag said, recalling the arrival of Smithfield.

That lament echoes as far away as the Ivory Coast.

Patrice Yao’s pig farm in Abidjan, near a local prison, is part of a cluster where farmers like him and Basile Donald Yao are trying to survive despite a flood of cheap frozen pork from Europe.

“My farm isn’t working,” said Mr. Yao, 27, who owns about 45 hogs, compared with 100 three years ago. “The Europeans are sending all their cheap meat to our market.”

The Animex packing house spokesman, Andrzej Pawelczak, declined to identify where the Smithfield pork products were sent in West Africa. But in Polish Farmer Magazine he identified the countries as Liberia, Equatorial Guinea and the Ivory Coast.

According to Polish agricultural officials, Animex collected more than €3 million in export funds.

In the face of that, Ivorian farmers cannot compete. Fresh local pork sells for under $2.50 a kilo, while Europe’s frozen offal is a bargain in bustling markets at $1.40.

Mr. Yao said that many pig farmers have left, in search of work. Like Romanian ex-farmers combing Europe’s construction sites for work, he is considering becoming an export himself.

“I’ve already got my passport and when the occasion presents itself I am going to leave,” he said.

“I dream of leaving for Italy or Spain. There is nothing here for us.”

[Demeter]

87. Are Taxpayers Bailing Out Troubled Banks Twice?

http://abcnews.go.com/Business/Economy/story?id=7547916&page=1



...Congress is moving swiftly to comply with the president's request. A credit card holder's Bill of Rights has already passed the House. The bill would prohibit retroactive rate increases, prevent companies from issuing cards to anyone under 18 and eliminate what's called "double-cycle billing."

Double-cycle billing is a little known calculation used by many companies. The company looks at your current monthly balance, as well as your previous months' spending, and averages them both, charging you a higher interest rate.

Although the practice is considered deceptive, credit card holders often consent to it when they sign a contract.

"Most of these credit card companies have a little clause left somewhere in the back on page 28 in language that says, 'we can charge you any amount we want, at any time we want, for no reason at all,'" said Elizabeth Warren, a law professor at Harvard.

Warren chairs the Congressional Oversight Panel, an independent agency that tracks the hundreds of billions in taxpayer dollars already being used to help the banks survive.

On the heels of this week's stress tests, which showed 10 of the nation's 19 largest banks will need a further injection of cash to survive, she said it's no secret where the banks will get the money.

"We've seen a sharp rise in interest rates in the last few months on good customers who are paying. It's coming from banks taking taxpayer dollars." Warren said.

In essence, that means the banks will raise rates on taxpayers who helped them out in the first place....

Bank of America told ABC News they could not comment on an individual's account. As far as rates go, the bank said, "Any hikes reflect the current economic conditions. Our costs of providing credit have significantly increased."

YEAH, ALL THAT TAXPAYER BAILOUT AT ZERO % INTEREST, AND ALL THOSE UNPAID BONUSES REALLY ADD TO THE COST OF LENDING!

[DemReadingDU]

89. KCRW video Planet Money

4/19/09 Planet Money: The Economy Explained

Perhaps this video was posted somewhere, but I don't recall. It's appx 1 hour 18 minutes. (Main presentation appx 50 minutes, followed by Q & A)

In simple terms, the Planet Money team explains setting up a new bank, an asset, a liability, a foreclosure. The big bank problem. Why the banks need to be saved.
more...
http://www.kcrw.com/media-player/mediaPlayer2.html?type=video&id=ot090419planet_money_the_eco


edit: At appx 1 hour, someone asks the question what would happen if the 2 biggest banks failed, and would credit cards cease to function.

[Demeter]

90. I'm Wrapping It Up for the Weekend. Happy Mother's Day to Us Mothers!

May we have a year of joy in our offspring.