Sunday, November 30, 2008

Trump Sued Over Chicago Tower

The lead lender on the Chicago Trump International Hotel & Tower is suing Donald Trump, seeking to collect on a $40-million personal guarantee the developer made on the 92-story structure, according to Crain's.

Citing, Crain's said Deutsche Bank Trust Co. Americas filed the suit Friday in Manhattan's New York state court, alleging Trump didn't pay off a remaining $334.2 million loan due on Nov. 7 to Deutsche Bank and its syndicate of lenders.

Amazing, Trump was doing great slapping his names on other peoples deals and getting a percentage for the marketing power of his name, and then he goes and personally guarantees his Chicago deal, breaking with the formula that has worked for him, and it bites him. .

It also looks like Trump Casinos is headed for its third bankruptcy.

This is what you get Donald for not understanding ABCT, and not watching money supply.


FDR Economics and the Krugman Recipe Don't Work

Paul Krugman is just plain wrong. Massive government spending didn't end high unemployment during the Great Depression, says Amity Shlaes. She explains here.

SEC Buries Negative Report, By Releasing On Friday After Thanksgiving

Just last week, I explained to a friend that I always looked forward to the day after Thanksgiving because that is the day that a company that has dirty laundry to release will try to bury it by releasing the news on the Friday after Thanksgiving, since people are traveling and with families, and readership of news drops dramatically.

I then remarked, even the government will release dirt Thanksgiving weekend. So who gets the prize for releasing dirt this year? None other than the supervisor of FULL DISCLOSURE in publicly traded corporate America, the Securities and Exchange Commission.

Mark Cuban, who has recently been charged by the SEC in a bizarre insider trading case, had his turkey feast this year on Friday instead of Thursday, since the SEC served up a major turkey for Cuban to chew on and chew on, on Friday. That's when the SEC chose to bury a critical report about the organization by its Office of Inspector General, by releasing the report on the great burial day, the day after Thanksgiving. The report makes the SEC look like a bunch of thugs.

As Cuban noted after reviewing the report:

No wonder they released it on the Friday after Thanksgiving without any press release to let people know its available…

Cuban also notes this about his coverage on his blog of the OIG report:

First let me say that this has nothing to do with me, but given my interest in all things financial and the government during this financial crisis, I read with interest the Office of Inspector General’s Report to Congress regarding the SEC
OK Mark, got ya. Nudge, wink.

Cuban then goes on:

First the humorous side of the report, the SEC apparently has issues with Porn usage among employees.
and on:

The OIG investigation has found that the reports that employees are required to file when they buy, sell or own securities are not meaningfully reviewed or sufficiently checked for conflicts of interest. Moreover, there is currently no system in place for the Commission to detect if an employee who has traded or owns a security failed to properly report such transaction.
and on:

The OIG is investigating an allegation that Commission staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.
and on:

The OIG report makes for interesting reading with ALLEGATIONS of intimidation, perjury, falsifying data to a court to get a judgment, and lots of abusive behavior within the employee ranks. Then there is the irony of their lack of a definitive policy on the distribution of material non public information.
and on:
Referrals to Department of Justice for Prosecution 6.

That's 6 SEC employees being referred to the Department of Justice for consideration of criminal prosecution. For the 6 months between April 1 and Sep 30 of this year. Out of only 3500 employees.
The always helpful Cuban closes with the telephone numbers to the OIG that should be used to report further SEC misconduct.

Paul Volcker and the October 1979 Saturday Night Massacre

Interactive video, graphics and front pages from NYT on the historic financial moment when then Fed chairman Paul Volcker announced the Fed would target money supply instead of interest rates.

Saturday, November 29, 2008

Harvard Dissed Obama Choice to Head CEA

President-elect Barack Obama filled the last of the four top economic positions Monday, announcing that his Council of Economic Advisers will be chaired by University of California at Berkeley economist Christina D. Romer, who, according to the Harvard Crimson, "was a subject of national indignation earlier this year when Harvard did not offer her a tenured professorship."

Romer appears to be the most sane economist of all Obama's selections, which is not saying a lot given the other selections. But, she clearly understands that money supply plays a role in the business cycle and she appears to be in favor of tax cuts and government spending cuts.

There are some problems with her anti-tax stance though, in that she reaches the conclusion based on some pretty wacky econometric voodoo conclusions that Kevin Drum discusses and she leaves a loophole in her thinking to occasionally raise taxes, as Drum points out:
One of the Romers' conclusions, by the way, is that tax increases designed to reduce an inherited deficit have a positive impact on economic growth. So if Obama ever does raise taxes, expect this to be the reason he gives for it.

Trade Deals versus "Free Trade" Deals

Dean Baker asks the big question and his answer nails it.

Subtraction By No Addition, Housing Numbers?

Floyd Norris brought out his magnifying glass to look at the recent housing data release from the Census Bureau. He found the inventory of new homes reported as lower by 18,000 when only 15,000 were sold. Where did the other 3,000 reduction in houses come from, if they weren't sold?

Further, what about new houses completed, why weren't any new houses added to the inventory? Inquiring minds want to know.

Norris called the Census Bureau on Friday and received a tape recording.

Norris comes up with one theory:

A colleague suggests to me that it could indicate that homes came off the market even though they were not sold. Perhaps builders decided to seek renters rather than wait for buyers that never arrived.

If that is true, then the inventory figures may be deceptively low, assuming that the builders would still love to sell the houses they are now trying to rent. That is not reassuring.
This might account for part of the difference, but I doubt it is all of it. Let's see how the Census Bureau explains this on Monday. But, my bet is that it has something to do with seasonal adjustment factors. Norris is using non-seasonal for his sales deductions, but, perhaps, he is using seasonally adjusted inventory numbers.

CDO's Explained

Friday, November 28, 2008

F.A. Hayek on Meet The Press

Jeffrey Tucker has somehow discovered an audio tape of a 1975 appearance by Hayek on Meet The Press.

The recording is fascinating as the panelists ask Hayek a series of questions regarding the problems of unemployment and inflation brewing at that time.

Ultimately, in the late 1970's and early 1980's, Paul Volcker appeared on the scene to slow inflation in the United States and Margaret Thatcher took control in Great Britain as Ronald Reagan did in the U.S. Thatcher and Reagan slowed the encroachment of Big Brother.

Now, however, with the current financial crisis, a return to serious inflation may be just around the corner and Hayek's comment are as relevant today as they were 30 years ago.

As Tucker puts it: You must hear this.

Speculation Larry Summers May End Up Heading the Fed

It appears Paul Volcker will be one of Barack Obama's key economic advisers. And it should not be forgotten that it has been claimed that Volcker remarked some time ago that Ben Bernanke is a one term Fed chairman.

Which makes speculation by CNBC's Albert Bozzo that Summers will end up at the Fed very interesting.

Treasury Yields Hit 50-Year Low

There is still huge fear in the markets....and the terrorist attack in Mumbai isn't helping, either.

The benchmark 10-year Treasury note is trading at 1-1/32 higher in price for a yield of 2.99 percent.

The benchmark yield fell to as low as 2.82 percent today, marking the lowest in at least five decades.

I have to think this is the greatest shorting opportunity in the history of Treasuries as Fed money printing will ultimately result in major double digit inflation.

Warren Buffett and Women: Case Closed

In August, I wrote:

Warren Buffett prefers being interviewed by women. I can't think of a time that Buffett has sat down for a major television interview by a male. It's the same with major magazine articles, always women. When Buffett wanted research coverage for Berkshire Hatahway in the late 1990's, he turned to a female.

His latest favorite at CNBC appears to be Becky Quick. Quick travelled with Buffett to Asia. When it comes to print, Janet Lowe at Fortune has been his long time choice for interviews. For the research report in the 1990's he called upon Alice Schroeder. And, now, when he has decided to give additional access for a biography, he gave that access to a woman. The same Alice Schroeder he cooperated with for the research report.
I followed this up with a comment in September:

...word is out that another Buffett biography is due out in January 2009. Same modus operandi, Buffett co-operating with a woman. This time Janet Tavakoli.
Tavakoli wrote me earlier this week and said that if Buffett gave her preferential treatment it wasn't because of her gender.

I responded to Tavakoli that I wanted to make it clear that I was not questioning the competency of the women he chooses to work with, but that I continued to believe that he preferred working with women rather than men, when it comes to public type appearances.

So here's the latest (and hopefully final) installment in this saga. I have just started reading the great biography of Buffett by Schroeder (She gets Buffett to open up to a remarkable degree) and this is what I found on pages 178-9:

The more time he spent with Susie [Buffett's first wife]and her family, the more they influenced him

"Warren," said Doc Thompson [Buffett's father-in-law], who handed down advice with the authority of the Sermon on the Mount, "always surround yourself with women. They're more loyal and they work harder. His son-in-law hardly needed to be told that.
I rest my case.

Note: In an email exchange, Tavakoli notes that Buffett has been interviewed by Charlie Rose and Brian Sullivan. I can't comment about the Sullivan interview(s) as I have never seen them, and, for that matter, never seen any Sullivan interview. However, as far as Rose goes. His show is among my favorites, but he is the most gentle interviewer on television, which probably does more to prove my point than anything.

Thursday, November 27, 2008

The Real Meaning of Thanksgiving... the triumph of capitalism over collectivism.

If you don't know this story, this is a great day to learn it. Richard Ebeling explains here.

Is German Chancellor Angela Merkel an Austrian?

As in Austrian economics. She sure sounds like it here:

Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the US and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years.

“Excessively cheap money in the US was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”
Hmmm,a superior Lady Thatcher in the making.

Wednesday, November 26, 2008

My Dream Team of Advisers to Barack Obama

Since I have been highly critical of President-elect Barack Obama's choices for economic advisers, one anonymous commenter asks, "What would be the dream economic ticket for Obama if you don't approve of his picks?????"

Below, I have gone one better, not only have I named individuals for various economic posts, but also key personnel for other positions in the Barack Obama Administration. These advisers beyond doubt would make the Obama White House the most unique free market oriented White House in history. If you want to see the country free and the economy boom, put these people next to the president :

Chief of Staff: Lew Rockwell

Special Counsel to the President: Walter Block, Ron Paul, William Anderson, Ralph Raico , Gary North

Secretary of State: Justin Raimondo

Secretary of the Treasury: Thomas J. DiLorenzo

Secretary of Defense: Hans Hermann Hoppe

Attorney General: Mario Rizzo

Chairman of the Federal Reserve: Lawrence H. White

Director of Homeland Security: Jacob Hornberger

Secretary of Health and Human Services: Bill Sardi

National Security Agency: Naomi Wolf

IRS Commissioner: Irwin Schiff

SEC Commissioner: Karen DeCoster

Energy Secretary: Robert P. Murphy

Education Secretary: Linda Schrock Taylor

Transportation Secretary: Walter Block

Office of National Drug Control Policy: Walter Block

Environmental Protection Agency: George Reisman

Press Secretary: Ilana Mercer

Chairman of the Council of Economic Advisers: Israel Kirzner

Chairman National Economic Council: Richard Ebeling

Chairman Economic Recovery Advisory Board: Robert Higgs

Head Office of Management and Budget: Robert P. Murphy

Bureau of Labor Statistics: Roger Garrison

Other members of the Council of Economic Advisers:

Joseph Salerno

Peter Schiff

Doug French

George Reisman

Other members of the National Economic Council:

Paul Craig Roberts

Stefan Karlsson

Peter Boettke

Oceans & Atmosphere Administration: Gene Callahan

Head of Guantanamo: Jeffrey Tucker

Potential Supreme Court nominee James Ostrowski

Federal Election Commission: Hans Herman Hoppe

On Warren Buffett and Women

Janet Tavakoli's new book Dear Mr. Buffett: What An Investor Learns 1,269 Miles from Wall Street is due out January 9. In September, I wrote:

Last week, we noted that a new book on Warren Buffett was due out, The Snowball: Warren Buffett and the Business of Life.

In our post we noted that Buffett gave unique access to the author, Alice Schroeder, and seemed to give preference to women over men when it came to interviews and the like.

Now word is out that another Buffett biography is due out in January 2009. Same modus operandi, Buffett co-operating with a woman. This time Janet Tavakoli.

Tavakoli emailed me this morning saying that if Buffett gave her preferential treatment it wasn't because of her gender. Now although I still do believe Buffett favors women in these type situations, I do want to make one thing clear. I am not saying that because Buffett chooses to deal with women in these situations that these women are somehow less competent than men. In fact, I have just started reading Snowball, and not only is the author, Alice Schroeder, a talented writer, I marvel at her ability to get Buffett to open up about himself. Forget waterboarding. Schroeder knows how to get it done.

As for Tavakoli, this is quite an impressive resume.

Another Economic Team

President-elect Barack Obama has announced yet one more economic team and appointed former Federal Reserve Chairman, and Rockefeller operative, Paul Volcker to be the chairman of the new advisory board tasked.

University of Chicago economist Austan Goolsbee, one of Mr. Obama's longest-serving policy advisers, will serve as the board's staff director, along with his duties as a member of the White House Council of Economic Advisers. Members of the panel will be drawn from a cross-section of citizens outside the government, chosen for their independence and non partisanship.

The panel will be called the President's Economic Recovery Advisory Board.

Clearly, Obama is trying to get a cross section of advice. The man really seems to be taking the presidency seriously and trying, but given the penchant for inflationist and interventionist policies among the current members of these teams, yes even from Volcker, the more infighting that will go on between them, the better. Here's to interventionist gridlock.

Citi Never Sleeps,' Says the Bank's Advertising Slogan. But Its Directors Apparently Do... says WSJ, as the Rupert Murdoch media empire has gone into attack mode against the Citigroup board of directors.

A New York Post editorial is calling for all of the directors to be removed and the Wall Street Journal saying most of them did not deserve to remain. Murdoch owns both papers.

Says WSJ:

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly deserve to remain on the board?

WSJ calls for the resignation of Chairman Sir Win Bischoff, who has held senior positions at Citi since 2000, and seven fellow directors, former Treasury Secretary Robert Rubin, John Deutsch, Richard Parsons, Franklin Thomas, Michael Armstrong, Alain Belda, and Kenneth Derr, who have all served for more than 9 years.

NyPo keeps things simple.


The Conclusion:
There should be no mistake about where the responsibility resides.

That would be with the Citigroup board of directors - and Robert Rubin in particular.

Markets Indicate Growing Concern of Potential Bankruptcy By Some States

The credit default swaps of 5 states are now trading at over 100.

Michigan 192
California 165
Nevada 164
New Jersey 150
Ohio 104

These are not total panic levels, but they are very high. It shows increasing concern about holding paper from these states.

Credit default swaps are often used to manage the credit risk (ie the risk of default) which arises from holding debt. Typically, the holder of, for example, a government bond may hedge his exposure by entering into a CDS contract as the buyer of protection. If the bond goes into default, the proceeds from the CDS contract will cancel out the losses on the underlying bond.

For example, a pension fund owns $10 million of a five-year bond issued by Country X. In order to manage the risk of losing money if Country X defaults on its debt, the pension fund buys a CDS from Derivative Bank in a notional amount of $10 million. The CDS trades at 100 basis points (100 basis points = 1.00 percent). In return for this credit protection, the pension fund pays 1% of 10 million ($100,000) per annum in quarterly installments of $25,000 to Derivative Bank.

Goldman Sachs Starts the Avalanche That Will Crowd Out Non-Connected Borrowers

Goldman Sachs yesterday became the first US bank to issue debt backed by the Federal Deposit Insurance Corp under yet another new Paulson/Geithner government plan to shovel money to the politically connected. Goldman raised $5 billion.

Under this program, money raised is guaranteed by the FDIC, which makes it as good as a Treasury raise. Among others, JPMorgan and Morgan Stanley, GE Capital are all expected to follow Goldman.

When all is said and done. $300 billion is expected to be raised by this program. That's $300 billion that won't be available to non-bank, non-privileged elite.

China Cuts Interest Rates By Largest Amount In More Than a Decade

It's going to be worldwide inflation. The only solution governments have to their recession causing money manipulations.

China's rate cut was 108 basis points to 5.58 per cent for loans and 2.52 per cent for deposits. It is the fourth reduction in interest rates in China since September.

Scientific American Gets It Half Right

SA, in an editorial, blasts the "quants" and other scientists who helped contribute to this horrendous financial destruction.

The causes of this fiasco are multifold-the Federal Reserve's easy-money policy played a big role-but the rocket scientists and geeks also bear their share of the blame. After the crash, the quants and traders they serve need to accept the necessity for a total makeover. The government bailout has already left the U.S. Treasury and Federal Reserve with extraordinary powers. The regulators must ensure that the many lessons of this debacle are not forgotten by the institutions that trade these securities. One important take-home message: capital safety nets (now restored) should never be slashed again, even if a crisis is not looming.

For its part, the quant community needs to undertake a search for better models-perhaps seeking help from behavioral economics, which studies irrationality of investors' decision making, and from virtual market tools that use 'intelligent agents' to mimic more faithfully the ups and downs of the activities of buyers and sellers. These number wizards and their superiors need to study lessons that were never learned during previous market smashups involving intricate financial engineering: risk management models should serve only as aids not substitutes for the critical human factor. Like an airplane, financial models can never be allowed to fly solo.

SA is correct in placing part of the blame with quants, i.e. econometricians, who were using faulty equations. But SA is way off base (and makes the same error as the quants) if it thinks the equations can be spiffed up with behavioral economics.

The problem was, is and will always remain that when dealing with human interaction there are no constants. Without at least one constant, you can't have an equation that will always work correctly.


Somebody Should Write A Book About FDR and the Great Depression

Mark Perry notes:

A Google News search shows that the phrase "since the 1930s" has been used 6,223 times in the last month, and the phrase "since the Great Depression" has been used more than 14,000 times in the last month, and most these news references are comparisons of today's economic and financial conditions to the 1930s and the Great Depression. In contrast, the phrase "since the 1980s" has been used only 1,588 times in the last month.

Oh yeah, almost forgot: Murphy to Write The Politically Incorrect Guide to the Great Depression & the New Deal

Tuesday, November 25, 2008

Rumors About JPMorganChase Needing BIG Money...

...are heating up.

Is this who GW had in mind when he said other big bailouts may occur?

Best Corporate Footnote of the Year?

From A. Schulman, Inc. (ViaFootnoted):

During fiscal 2008, the Compensation Committee determined that maintaining a lease on a private airplane was no longer a cost-effective method for providing business-related transportation to our Named Executive Officers and Directors. The airplane was used only for business-related travel, and personal use was not permitted. With the termination of the lease on the airplane, it also became increasingly difficult and cost prohibitive to access our Canadian fish camp. Consequently, the fish camp, which was only used for business entertainment purposes, was offered for sale during 2008. The only offer to purchase the fish camp came from Terry L. Haines, our former Chief Executive Officer and President. Ultimately we negotiated with Mr. Haines to sell the fish camp for a purchase price of $55,000 and the transaction closed during fiscal year 2009.

Another Rubin Robot in Place

President-elect Barack Obama has named Peter Orszag as his choice to head the Office of Management and Budget. Orszag was a director of Robert Rubiin's pet program, The Hamilton Project.

Here's the bio of Orszag that appeared at CBO, before it was scrubbed:

Peter R. Orszag began his term as the seventh Director of CBO on January18, 2007. Under his leadership, the agency has significantly expanded its focus on areas such as health care and climate change.Before joining CBO, Dr. Orszag was the Joseph A. Pechman SeniorFellow and Deputy Director of Economic Studies at the Brookings Institution. While at Brookings, he also served as Director of The Hamilton Project; Director of the Retirement Security Project; and Codirector of the Tax Policy Center, a joint venture with the UrbanInstitute.

In previous government service, Dr. Orszag served as Special Assistant to the President for Economic Policy and Senior Economic Adviser at the National Economic Council during 1997 and 1998. Earlier, he served as a staff economist and then Senior
Adviser and Senior Economist at the President's Council of Economic Advisers.

Dr. Orszag graduated summa cum laude in economics from Princeton University and obtained an M.Sc. and a Ph.D. in economics from the London School of Economics, which he attended as a Marshall scholar.

He has coauthored or coedited a number of books, including Protecting the Homeland 2006/7 (2006), Aging Gracefully: Ideas to Improve Retirement Security in America (2006), Saving Social Security: A Balanced Approach (2004), and American Economic Policy in the 1990s(2002).

Dr. Orszag is a member of the Institute of Medicine (IOM) of the National Academies of Sciences.

Dr. Orszag is an avid runner and the proud father of two children, Leilaand Joshua.

Pray for an End to Financial Collapse, Chief Rabbis Say

Israel's chief rabbis are calling for a mass prayer rally Thursday in the hope that heavenly intervention will stem the global financial crisis.

Chief Ashkenazi Rabbi Yona Metzger and Chief Sephardi Rabbi Shlomo Amar have decided that this Thursday, the first day of the Jewish month of Kislev, will be a special day of prayer.

I always thought God had a soft spot for Hank Paulson, mortgage backed securities and counterparty risks.


Does Geithner Have The Chops To Be Treasury Secretary?

Hmmm, the long knives are out for Geithner.

NYT's Andrew Ross Sorkin makes a deep stab with this hit piece.

The Probability That Kiyoshi Ito Will Design Anymore Equations That Robert Merton Will Use To Blow Up A Hedge Fund Has Dropped Significantly

From NYT (my emphasis):

Kiyoshi Ito, a mathematician whose innovative models of random motion are used today in fields as diverse as finance and biology, died Nov. 10 at a hospital in Kyoto, Japan. He was 93.

His death was confirmed by his daughter, Junko Ito.

Mr. Ito is known for his contributions to probability theory, the study of randomness. His work, starting in the 1940s, built on the earlier breakthroughs of Albert Einstein and Norbert Wiener. Mr. Ito’s mathematical framework for describing the evolution of random phenomena came to be known as the Ito Calculus.

“People all over realized that what Ito had done explained things that were unexplainable before,” said Daniel Stroock, a professor of mathematics at the Massachusetts Institute of Technology.

Mr. Ito’s research was theoretical, but his models served as a tool kit for others, notably in finance. Robert C. Merton, a winner of the Nobel in economic science, said he found Mr. Ito’s model “a very useful tool” in his research on the evolution of stock prices in a portfolio and, later, in helping develop a theory for pricing stock options that is used on Wall Street today. Mr. Ito, he said, was “a very eminent mathematician.”

Actually, Ito appears to have used his theoretical equations properly in the world of theory and not incorrectly in the field of finance. Robert Merton and Myron Scholes have given Ito a black name by using the equations he designed, inappropriately. They blew up Long Term Management Capital together, and Scholes is on his way to blowing up another hedge fund.

There are no constants, zero, in the field of human action, thus no equilibrium equations can be designed. What the likes of Merton and Scholes do is assume some variable is a constant, attempting to defy Wenzel's Observation #1.


Monday, November 24, 2008

The Slippery Slope Towards Slavery

We are on it and moving at a very fast speed, says Mario Rizzo.

Geithner Is the Greatest (Possibly a Genius)....

...says Carlyle Group's Randal Quarles, who will probably soon be asking Geithner for money, when Carlyle starts its bank buying binge.

"He's a very strong choice for some very specific reasons," Quarles told On Wall Street. "He has a wealth of experience at the Treasury and Federal Reserve. He's been intimately involved in dealing with the financial crisis. And before the financial crisis he was very thoughtful and involved in trying to reduce some specific risks in the system."

Before the crisis he was involved in trying to reduce some specific risks in the system? Oh yeah, that worked well.

Quarles has already managed to get Boston Private Financial Holdings Inc. $150 million in capital through the Paulson program.


Libyan President Muammar al-Gadhafi's Son Honored by Carlyle Group...

at a dinner at the Washington Club.

James A. Baker, III and Frank Carlucci attended, according The Jamahiriya News Agency.

The Carlyle Group never ceases to amaze.


The Obama Economic Team

President-elect Barack Obama officially announced key members of his economic team today. The new appointees—and short profiles—are listed here:

Timothy F. Geithner, Secretary of the Treasury

A Rubin robot.

See full profile here.

Lawrence H. Summers, Director of the National Economic Council

A Rubin robot.


Situated in the White House, he will have regular access to Obama.

Jackie Calmes writes:

Summers, who may well end up being Obama's closest economic adviser, has been especially public in calling for a big stimulus package. Many saw his touch in Obama's call this weekend for the stimulus plan to create or save 2.5 million jobs.

Doesn't understand basic economics, see here and here.

Christina D. Romer, Director of the Council of Economic Advisors

A Keynesian, but actually appears to pay some attention to the money supply as an influence on the business cycle. See here.

Melody C. Barnes, Director of the Domestic Policy Council

A George Soros operative. She has served as Executive Vice President for the Soros front, The Center for American Progress. She also served as chief counsel to Senator Edward M. Kennedy on the Senate Judiciary Committee from December 1995 until March 2003.

Heather A. Higginbottom, Deputy Director of the Domestic Policy Council

Higginbottom founded and served as Executive Director of the American Security Project, which has been supported by the anti-war Gary Hart. Her stand on domestic policy issues is unclear.

Best hope for economic sanity out of this group is from Romer. But when you are reaching into Berkeley, of all places, for economic hope, you are obviously not talking about a Milton Friedman protege.

Possible sanity on war from Higginbottom.

It's The Rubin Robots

Jackie Calmes at IHT fills in more pieces to the puzzle:

It is testament to former Treasury Secretary Robert Rubin's star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.

The president-elect's choices for his top economic advisers — Timothy Geithner as Treasury secretary, Lawrence Summers as senior White House economics adviser and Peter Orszag as budget director — are past protégés of Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Obama have Rubin ties: Michael Froman, Rubin's chief of staff in the Treasury Department who followed him to Citigroup, and James Rubin, Rubin's son.

LOL: Krugman Blames Lame Duck Bush Administration for Rape of Taxpayers in Citi Bailout

Says Krugman:

Amazing how much damage the lame ducks can do in the time remaining,

In fact, this bailout has Citigroup vice-president and "senior counselor" Robert Rubin's fingerprints all over it. And that means the incoming Obama team was all over the deal, since Rubin's robots are all in position to run Obama economics. And, don't forget, the next Treasury Secretary, Tim Geithner, a Rubin robot, was also in the room that cut the Citi deal. Geithner is current NY Fed Prez and future Treasury Secretary, do you think he might have had some say in this new rape of the taxpayer?

The Bush Administration was at the scene of this crime, but, make no mistake, the capo in charge was Obama's man Rubin. Nothing in this bailout would have changed in a post Jan. 19 bailout.

CITIGROUP BAILOUT: It's Up To $306 Billion in Guarantees Plus Equity Infusion

The United States government will guarantee up to $306 billion of Citigroup assets, as part of a major bailout of Citi.

In addition, Citi will receive a capital injection of $20 billion. As part of the capital injection, the U.S. government will receive warrants exercisable at $10.61 on 254 million shares. Given the stock closed Friday at $3.77, this is a non-dilutive deal on a per share price basis for Citi shareholders.

THIS IS THE FIRST DEAL DONE BY THE GOVERNMENT WHERE SHAREHOLDERS HAVE NOT BEEN FORCED TO TAKE HUGE HITS ON THEIR STOCK POSITIONS. Freddie and Fannie shareholders are likely to lose everything. Lehman Brothers is in bankruptcy and Bear Stearns shareholders received less than 50% of the closing price on the last day Bear Stearns traded before the government rescue. In this deal, if the warrants are exercised, the government will pay more than 280% above the closing price on Friday.

It pays to be the Robert Rubin wing of Goldman Sachs.

UPDATE: Unlike Freddie, Fannie, Bear and Lehman, no one at Citi in senior management will lose their jobs. Bobby R. has their back.

The Coming Bizarre Show Trial of Mark Cuban

"It's about cheap publicity," one of Mark Cuban's lawyers, Stephen Best, said to me over the phone as I tried to grasp the bizarre insider trading charges against Cuban.

"The SEC is suffering from bad publicity because of the way the markets have crumbled around them," said Best. "Mr. Cuban is high profile and they want to move the focus away from the way they have handled the crashing stock market."

I wanted to know who at the SEC he thought might be behind this. "Do you think SEC Commissioner Chris Cox is involved in this?", I asked. "Yes," Best answered without hesitation. (Note: Cox recused himself from the vote on whether Cuban should be charged because of a bizarre series of emails between Cuban and and Fort Worth-based senior SEC trial lawyer, Jeffrey Norris, who called Cuban unpatriotic. “Either you are really an anti-American ideologue or your allegiance to making money is significantly greater than your dedication to your country,” wrote Norris. Cox was cc'd on some of the emails.)

Most people's view of justice in America is that of prosecutors and regulators going after bad guys, after carefully weighing evidence. But some prosecutors indeed have what Cuban was quoted as calling "win-at-any-cost ambitions". And their eyes can get especially big when a high profile name is involved. It's great for the resume when you move on to the private sector and there's nothing like going back home to Thanksgiving dinner when you're the guy at the family table going after the big name.

Two of the SEC lawyers involved in the Cuban case seem to be win at any cost, bragging rights around the Turkey Day dining table, types. Best pointed out to me that one SEC attorney on Cuban's butt is Robert Kaplan. Kaplan was recently under Congressional investigation for possible misconduct. Another SEC attorney involved with the case, Scott Friestad, recently lost a case in North Carolina and the judge found it appropriate to rebuke Friestad's tactics during the trial.

Best promises their will be bombshells coming out about the SEC's conduct in the Cuban case. He points out that the SEC has done a number of things from minor to major that do not follow general SEC policy. On the minor end, the SEC generally calls a client's lawyers when a client is about to be charged by the SEC. The SEC did not extend this standard courtesy to Cuban's lawyers. No calls were made to them by the SEC before the charges were made public.

On a more serious note, the SEC in addition to investigating Cuban was investigating is the company in which Cuban sold stock that prompted the SEC charges. Best points out a very crucial timeline that is critical to the charges against Cuban. There is no insider trading charges against Cuban unless the president of testifies that he told Cuban he was about to get inside information and that Cuban agreed not to sell any stock.

So is under investigation and the SEC closes the case against just days before the then CEO of, Guy Faure, is to be questioned by the SEC about what was or was not said to and by Cuban. Best certainly is implying this timeline suggests that someone got to the SEC and let them know Faure would deliver Cuban on a platter, if was taken off the platter.

Now to the charge itself.

There are many sound economists who believe that there is nothing at all wrong with insider trading, see here and here. But the charges against Cuban are truly taking the concept of insider trading to a new bizarre outlier that could literally give CEO's the power to halt the selling of any major stockholder at anytime. With CEO's pulling down multi-million dollar salaries that are coming under attack,it shows just how desperate the SEC is to win some kind of case, somewhere against some "name" that they will literally create a tool under which CEO's will be able to freeze shareholders from selling stock whenever they want.

Here's what I mean. The charge against Cuban is that he received a call from Faure when Faure was president of and that Faure said to Cuban that he was about to give him some inside information. The inside information being that was about to sell more stock to raise more money.

Now there is nothing in writing about this, just a "he said , she said" between Cuban and Faure. If Faure really wanted to convey inside information to Cuban, he could have very easily have documented the disclosure by having Cuban sign a standard non-disclosure document. Faure did not do this.

In truth, the way it likely went down is that Faure was desperate for cash and decided to contact big bucks Cuban to see if he would invest more money. Upon hearing Faure's plan, Cuban must have thought this guy is a f#*king idiot and sold his stock. If it went down this way, there is no insider trading case.

There is only a case if the desperate Faure would have spent time, before asking Cuban for money, spouting off legalese about insider trading. How likely is that?

This is where the timeline Best emphasises comes into play. Who knows what the SEC found out about and Faure when they conducted their investigation of or who knows what Faure feared they might discover? So at this point you have an SEC looking for some good publicity and a possibly desperate Faure. If they charge Faure with anything, who is going to pay attention? But if Faure plays ball and suddenly "remembers" he turned into a legal gusher warning Cuban of all sorts of things during their phone call and that he then "remembers" that Cuban acknowledged Faure's gusher of legalese, then the SEC has Cuban as its target and you get regular national news coverage and as a bonus you get coverage on ESPN.

That's the case and it is hard to see how the facts in this case go anywhere near "beyond a reasonable doubt". It will be a major surprise if the SEC wins this case. But let's say they do somehow win. What they will have done is create a tool for fat cat CEO's to stop major shareholders from selling their stock. It will become known as a "Cuban situation."

Suppose a CEO fears a major shareholder may be selling stock or fears he might start selling stock, if the SEC wins its case against Cuban, then all the CEO has to do is call the shareholder up and tell him he is thinking of selling more stock in the company. This will freeze that shareholder from selling stock, as his stockbroker and his lawyer will remind him of what happened to Cuban, who received such information by phone.

The SEC, of late, has been marked by very little in the way of deep thinking. The latest charge against Cuban is more along this line. If the SEC succeeds in this case, it will do nothing but create another tool for fat cat CEOs to use against common shareholders.

UPDATE: Steve Best, one of Cuban's lawyer, writes: "The legal standard of proof in a civil case is beyond a preponderance of the evidence-- you cited the criminal standard."

Sunday, November 23, 2008

It's the Robert Rubin Wing Of Goldman Sachs That Will Be In Charge of Obama Economic Policy

So says WSJ:

The new economic team emerges from the Democratic Party's moderate flank, with Mr. Rubin as the common denominator. Mr. Summers was Mr. Rubin's longtime deputy at Treasury and then succeeded Mr. Rubin as Treasury secretary. Mr. Geithner was a senior aide at Treasury during this period.

Peter Orszag, who will be Mr. Obama's budget director, was the first director of the Hamilton Project, a program co-founded by Mr. Rubin at the Brookings Institution, a think tank...

Rubin was Vice Chairman and Co-Chief Operating Officer from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner along with Stephen Friedman. He then served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations.

He now is Director and Senior Counselor of Citigroup where he draws an annual salary of $17 million.

The supermerger between Travelers Group and Citicorp was facilitated by the repeal of the Glass-Steagall Act (Gramm-Leach-Bliley Act). This legislation was passed under the Clinton administration, days before Rubin's resignation. Some believe that Rubin's $17 million Citi salary is quid quo pro for his role in the repeal of Glass-Stegall.

Citi Rescue Coming

Details remain hazy, however, I remain convinced that there will be no significant dilution of Citi stock. Which means it won't be like the Bear Stearns rescue or the Lehman Brothers collapse or the Freddie and Fannie rescues.

NYT says as much in its report on the developing rescue:
If approved, the plan could serve as a model for other banks, heralding another shift in the government’s morphing financial rescue.

Please, Send Me My Earnings Reports In Spanish

The smear campaign against tax-dodging/top tax legislator Congressman Charlie Rangel (NY-D) continues.

In July, the New York Times reported on Rangel's four rent controlled apartments. In August, the New York Post first reported on Rangel's "beachfront villa in a sun-drenched Dominican Republic resort." NyPo followed up with another attack on his failure to report income from the villa. Then there was the report of Rangel using his official congressional stationary to solicit money from constituents for a Columbia University Center to encourage minority participation in government.

Today's installment of Get Charlie comes, again, from Nypo:

Harlem Rep. Charles Rangel took a "homestead" tax break on a Washington, DC, house for years while simultaneously occupying multiple rent-stabilized apartments in New York City, possibly violating laws and regulations in both cases.
What really caught our eye in this Nypo installment of Get Charlie was Nypo's detailing of the excuses Rangel used for not reporting rental income on his Dominican villa:

At first, Rangel blamed the accounting mishaps on sloppy bookkeeping and his wife, who he said was in charge of the family's finances. He also said he did not receive regular financial reports from the Punta Cana Resort and did not understand the paperwork because it was in Spanish.
We knew about Charlie's gentlemanly act of blaming his wife, but this is the first we have heard of Charlie using the "No comprendo" excuse.

We tend to shy away from giving tax advice at EPJ but, folks, the "It was my wife's fault" and the "No comprendo" excuse are being used by the chairman of the House Ways and Means Committee, the committee from where all tax legislation emanates. If he isn't prosecuted for this I think you have to consider these legitimate defenses for under reporting income. Thanks, Chuck.

Obama: I Have Directed My Team To Come Up With An "Economic Recovery Plan"

The FDR nightmare is on its way.

Without providing details, in a radio address President-elect Barack Obama says he "directed [his] economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011...We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead."

He did not detail the jobs that will be lost because of the money taken from other sectors of the economy to support these make work programs.

Saturday, November 22, 2008

Obama and FDR

Above is a great graphic of Obama taking notes from FDR, which is very accurate depiction of Obama thinkng, if we are to believe the leaks about the coming Obama Administration. The coming administration appears ready to meddle in the economy across the board. The new regulations and money transfer programs will be very FDRish.

As for following the lead of FDR, Tyler Cowen notes in his column accompanying the graphic:

The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention; the truth is that Roosevelt changed course from year to year, trying a mix of policies, some good and some bad.
Cowen is being a bit polite to FDR. All of FDR's economic programs were disasters. During his entire time in office (1933 to 1945) the economy was in a downturn. (Note: On the true status of the economy during the war years see Robert Higgs )

Not exactly the type of performance that one would think demands emulation.

Citi Execs Meeting With Government Officials

The meetings started Friday on how to stabilize Citi.

Since this is the Robert Rubin wing of Goldman Sachs expect a new twist to the bailout format: Shareholders will be protected.

The Citibank Insured/Non-Insured Deposit Picture

Citi has around $773 billion in deposits, only $100 billion are FDIC insured.

According to John Carney, most Ctit deposits are held outside the US, for tax and accounting reasons or because they are accounts owned by foreigners or ex-pats, and are therefore uninsured.

As Carney notes, there are certainly the seeds for an overseas led depositor bank run if uninsured investors get nervous.

Weekend Special: Eliot Spitzer's Call Girl...

...Ashely Dupre speaks to Diane Sawyer.

A Geithner Treasury Will Mean Major Changes In Financial Regulation

Tim Geithner clearly does not understand free markets. He sees market failures where the government must intervene to fix things. In Geithner, the Treasury will be run by a micro-managing interventionist.

Here Geithner's own words about financial regulation.

Timothy Geithner on the Usefullness of Fog

“Most consequential choices involve shades of gray, and some fog is often useful in getting things done." From WSJ as quoted by NYT.

Sounds like a real open truth teller, along the lines of Dick Nixon.

Bailouts Geithner Has Been Involved With

Barack Obama's choice for Treasury Secretary, Timothy Geithner, should be called the Bailout King. According to NYT:

[H]e was involved in the bailouts of Mexico, Indonesia, Korea, Brazil and Thailand.
This is in addition to his recent roles in the bailouts of Bear Stearns and American International Group, and Treasury Secretary Paulson's $700 billion boondoggle.

Friday, November 21, 2008

Senator Inhofe Delivers Floor Speech on Halting Handout of Bailout Funds

On Monday,Senator Inhofe introduced legislation to amend Section 115 of the Emergency Economic Stabilization Act (EESA) to require an affirmative vote on the part of Congress to approve Treasury's plan for the remaining $350 billion and require a freeze on any remaining funds of the first $350 billion, stating, "It is imperative that we not allow that amount of money to be added to a deficit approaching $1 trillion this year without any input from the legislative branch."

In a speech on the Senate Floor, Senator Inhofe went on to say, "Congress completely abdicated its responsibility by signing a truly blank check over to the Treasury Secretary. However, the lame duck session of Congress offers us a tremendous opportunity to change course. We should take it."

Read Jim Inhofe's NRO article on why the bailout money needs to be stopped, here.

Tim Geither In Profile

According to various news sources, Tim Geithner will be nominated as Treasury Secretary by Barack Obama. An official announcement is expected Monday.

Judging by his actions it does not appear Giethner believes in free markets. For him, the government needs to stand by with buckets and buckets of money.

According to reports, in 1997 he was instrumental in pushing then Treasury Secretary Rubin to OK a bailout of South Korea.

Geithner also was reportedly behind the $29 billion guarantee against losses that the Fed made to JP Morgan when JPM purchased Bear Stearns. The guarantees against losses, it should be noted was in addition to the fact that JPM stole Bear Stearns at a huge discount from its liquidation value.

His interventionist credentials are pretty well established on Wall Street. Here's Larry Kudlow's thinking on Geithner ans the next tranche of the $700 Billion Paulson boondoggle:

As for the TARP bailout story, it is generally believed that Geithner is a strong interventionist. And so we can expect him to move toward raising the second $350 billion tranche of the originally authorized $700 billion package by Congress

Geithner graduated from Dartmouth College with a bachelor’s degree in government and Asian studies in 1983 and from the Johns Hopkins School of Advanced International Studies with a master’s in International Economics and East Asian Studies in 1985, according to his official bio on the New York Fed site.

He joined the Treasury in 1988 and worked in three administrations, serving as Under Secretary of the Treasury for International Affairs from 1999 to 2001 under Treasury Secretaries Robert Rubin and Larry Summers.

He also worked for Kissinger Associates for three years.

He become New York Fed president in 2003. In that capacity, he worked as the vice chairman and a permanent member of the Federal Open Market Committee, the group responsible for formulating the nation's monetary policy.

One side note. Geithner graduated from the International School of Bangkok, Thailand. His father appears to be a possible CIA agent and is listed by the New York Times as the "program officer in charge of developing countries for the Ford Foundation."

Geithner falls under the Robert Rubin wing of Goldman Sachs influence, as he worked for Rubin when Rubin was Treasury Secretary.Geithner also serves as chairman of the G-10’s Committee on Payment and Settlement Systems of the Bank for International Settlements. He is a member of the Council on Foreign Relations and the Group of Thirty.

But it is his interventionist bent that could prove we have a major inflationist at Treasury. One Obama confident relates a recent conversation between an associate and a Fed official, in which the latter complained, "Christ, Geithner wants to save everybody."

More money hand outs to Wall Street, no wonder the market jumped 500 points on news of the Geithner selection.

Addicts to Power

Thomas P.M. Barnett explains what it is like in D.C. right now:

There is always the feeding frenzy when a new president takes office, especially if the break for the party in question is 8 years or more. You have this entire universe of super-talented, ambitious and supremely focused players who’ve gone into the exile of think tanks for the long winter, cranking all manner of—admittedly—pretty dull books (you want to say careful things) and attending conference after conference to network like crazy, and never turning down any commissions or what not. So when the floodgates open, it’s not pretty. I mean, you’re talking about true addicts to power—as in, people who’ve organized their entire lives around these moments of possibility.

Geithner to Be Nominated as Treasury Secretary

President-elect Barack Obama plans to announce his economic team on Monday and will name New York Fed President Tim Geithner his nominee for Treasury Secretary, NBC News is reporting.

The Treasury Capital Purchase Program

Here are the details released as of Nov 17th:

CAPITAL PURCHASE PROGRAM: $158,561,409,000 Total

$15,000,000,000 Bank of America Corporation
$3,000,000,000 Bank of New York Mellon Corporation
$25,000,000,000 Citigroup Inc.
$10,000,000,000 The Goldman Sachs Group, Inc.
$25,000,000,000 JPMorgan Chase & Co.
$10,000,000,000 Morgan Stanley
$2,000,000,000 State Street Corporation
$25,000,000,000 Wells Fargo & Company
$10,000,000,000 Merrill Lynch & Co., Inc.
$17,000,000 Bank of Commerce Holdings
$16,369,000 1st FS Corporation
$298,737,000 UCBH Holdings, Inc.
$1,576,000,000 Northern Trust Corporation
$3,500,000,000 SunTrust Banks, Inc.
$9,000,000 Broadway Financial Corporation
$200,000,000 Washington Federal Inc.
$3,133,640,000 BB&T Corp.
$151,500,000 Provident Bancshares Corp.
$214,181,000 Umpqua Holdings Corp.
$2,250,000,000 Comerica Inc.
$3,500,000,000 Regions Financial Corp.
$3,555,199,000 Capital One Financial Corporation
$866,540,000 First Horizon National Corporation
$1,398,071,000 Huntington Bancshares
$2,500,000,000 KeyCorp
$300,000,000 Valley National Bancorp
$1,400,000,000 Zions Bancorporation
$1,715,000,000 Marshall & Ilsley Corporation
$6,599,000,000 U.S. Bancorp
$361,172,000 TCF Financial Corporation

While Citi Crashes...

Citigroup stock is trading below $4.00 this morning, way off its all time high of $54.00.

Yesterday during a telephone conversation, investment advisor Bill Smith of SAM Advisors pointed out to me the absurdity of the current Citigroup situation.

Since Citi is crashing, you would think that the board of Citi would spend extra time focusing on Citi to right the ship. Instead 20% of Citi's board is part of Barack Obama's transition team: Robert Rubin, Richard Parsons, Chairman of Time Warner Inc. and Anne Mulcahy, Chairman and CEO of Xerox Corporation.

Smith is also highly suspicious of what Rubin does to earn his $17 million per year. Rubin thinks the salary is a quid pro quo from Citi for Rubin's taking down the Glass Stegall Act, while he was Treasury Secretary.

Nobel Prize Winner Scholes Freezes His Hedge Fund After Losses

Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October.

The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year, according to data compiled by Hedge Fund Research Inc.

Somebody really ought to take Scholes' equations away from him. Scholes was also a partner in Long Term Capital Management that blew up in spectacular fashion in the late 1990's by losing $4 billion.

According to Platinum Grove's web site, they:

...rely upon sophisticated and proprietary quantitative modeling augmented by
qualitative research, on a global basis... Risk control is central to asset management and PGAM relies on an innovative risk-control framework and on sophisticated processes to add to returns while preserving capital.

The Coming Great Liquidation and The Opportunity

At WSJ, Andy Kessler makes a number of important points with regard to the market between now and the end of the year.

First, we are likely to see huge tax selling. Stocks that are down will see even more downward pressure between now and the end of the year, as investors sell stocks that are down to lock n tax losses.

And this goes for mutual funds as well. Kessler writes:

Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions.

Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem.
The redemptions could also cause huge legacy capital gains for some mutual fund investors. Kessler explains:

To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.
Here's something the lame duck Congress should do immediately, temporarily lift the tax on capital gains distributions made by mutual funds to provide relief from these legacy capital gains.

And then, of course, there will be hedge fund liquidations because of the advisor fee structures at the funds. Kessler again:

...when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.
Bottom line, there is going to be huge technical downward pressure on some stocks between now and the end of the year.

Given that the Fed appears to be expanding money supply again, this should mean a huge "January effect" for January 2009. In a normal year, the January effect occurs as the technical selling pressure from the end of the year stops, often within a matter of days some stocks that faced huge selling pressure jump by 25% or more after the first of the year (Sometimes the climb starts the last few days of the old year).

With all the technical liquidations going on this year, watch the new low list carefully. Look for stocks of companies that are backed by solid operations and a solid balance sheet. If they appear to be going down for no reason day after day, it could very well be technical end of year selling pressure. Some of,these stocks will have huge rebounds, maybe 50% or more, within the first few days of January 2009. It will be a great opportunity, make your entire trading profits before February 1 and take the rest of the year off. It's going to happen for some.

Thursday, November 20, 2008

On CEO's Whining About Short Sellers:

"You have to wonder if this helps or hurts investor confidence. When executives keep blaming shorts, it just shows they aren't taking the challenges to their company seriously. And it certainly implies they aren't planning any management shake-up."
-John Carney

From personal experience,I would say 95% of the CEO's, who have complained to me about short sellers, just didn't understand markets, trading patterns and how market makers operate. I think two companies that do have legitimate complaints are Bear Stearns and Lehman Brothers.

Sen. Inhofe: Paulson Threatened Martial Law To Pass Bailout

Sen. James Inhofe, R-Okla., revealed to a Tulsa radio station details of Treasury Secretary Henry Paulson's conference call as Paulson pressured to get the "bailout" bill passed.Clip is approximately one minute.

(Via LRC)

Carlyle Funded Bank Also Gets Treasury Money

Boston Private Financial Holdings Inc. will get $150 million in capital through the Paulson "Bailout" program. This comes on top of $173 million Boston Private raised in July from private investors, including $75 million from the Carlyle Group.

According to Chris Carey at BailoutSleuth, the total number of institutions that have been selected to receive taxpayer money from Paulson's $250 billion program is now just beyond 70.

Major Move In Long Bond Treasury Market

The 30-year U.S. Treasury bond climbed 5 points during the regular session today and is up another 4 points in after hours trading.

The big question is who is the aggressive buyer? Is it a short seller caught in a squeeze? Is there someone who actually believes that inflation over the next 30 years will not climb above 3.44%? Could it be the Fed?

Dramatic moves like this usually have a story to them. And more often then not they reveal themselves over time. But with a major move like this, guaranteed there are some shorts bleeding tonight.

For anyone with patience and staying power, this has to be an ideal time to short the bonds. There is no way I see these rates at these levels long term.

Money Supply Watch: Fear Continues; Fed Countering With Money Printing

There's a battle between fear and the Fed. Fed money printing is likely to win out in the long run.

M1 nsa for the week ended November 3 increased by $42.5 billion. This indicates that fear remains in the system. It is unlikely we will see a rebound in the economy until individuals stop pulling money out of other money components and putting the funds in cash and checking accounts, i.e. M1.

However, M2 nsa also increased for the week. It climbed by $45.6 billion. The Fed is clearly in money printing mode (as opposed to the slowdown this summer). The M2 money growth rate is now expanding week after week. The annualized growth for the last three months is almost at double digits at 9.89%.

If this growth in M2 is sustained, the downturn will end much sooner than most expect.

Swiss National Bank Makes Surprise Rate Cut

You know global inflation can't be too far away when even the Swiss are getting into the aggressive rate cutting act.

The Swiss National Bank on today made a surprise and steep one percentage point rate cut.

The Swiss National Bank said it's lowering its three-month Libor target range by one percentage point to a 0.5% to 1.5% range.

The move "will provide the Swiss franc money market with a generous and flexible supply of liquidity in order to bring the Libor down to the middle of the target range.

Jobless Claims Hit 16-Year High; Where The Cuts Are

The number of U.S. workers filing new claims for jobless benefits rose by 27,000 last week to their highest level in 16 years, according to the Labor Department.

Much of the job losses are comng from the fnancial sector, the high tech sector and, of course, Detroit's Big Three auto firms.

Here is A list of recently announced job cuts, as compiled by CNBC:

announced plans on November 19 to cut approximately 800 positions at a Wichita, Kansas plant, due to delays in the U.S. Air Force tanker-replacement project and the end of other programs. The layoffs, which will hit managers and both salaried and hourly workers, will take place mostly in the first half of 2009.

Citigroup is cutting as many as 53,000 jobs in its investment bank and other divisions throughout the world.

JPMorgan Chase hs annouced that it plans to cut least 10 percent and maybe 15 percent of its workforce.

Sun Microsystems said Friday it plans to cut up to 6,000 jobs, or 18 percent of its global work force, as sales of high-end servers have collapsed.

BT Group, the UK telecommunications firm, will cut 10,000 jobs, or 6.3% of its global work force, in the first quarter of 2009.

Applied Materials, the semiconductor-and-solar panel equipment maker, is slashing 1,800 jobs, the company annonnced after reporting four-quarter profits fell 45% on weak sales due to declining corporate technology spending.

Circuit City, which is filing for bankruptcy, is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.

Deutsche Post, German mail and logistics company Deutsche Post will cut 9,500 jobs at its DHL unit in the U.S. and eliminate U.S.-only domestic express shipping.

Nortel Networks plans to lay off 1,300 workers, nearly 5 percent of its workforce.

Motorola posted a third-quarter net loss and revenue fell a steeper-than-expected 15 percent, as a result the telecom equipment maker will slash 3,000 jobs in a cost-cutting effort.

Ford said it would cut 2,260 white-collar workers in North America.

General Motors, which previously said it would reduce salaried employment costs by 20 percent, will also cut another 1,900 salaried jobs on top of the 5,100 announced last summeR.

Fidelity Investments
will start laying off about 2.9 percent of its global workforce later this month—affecting 1,288 workers in the first round from a workforce of 44,4000—and plans to trim more workers early next year.

Toy maker Mattel Inc. says it is cutting some 1,000 positions worldwide in response to the ongoing economic downturn.

Goldman Sachs notified roughly 3,200 employees this month that they have been laid off, part of previously reported plans to slash 10 percent of the firm's global work force. The move comes after laying off hundreds of support staff and junior bankers in June.

At Merrill Lynch, 10,000 employees could be released as a result of the merger with Bank of America.

Bank of America, the second-largest U.S. bank by assets said in June it expected to eliminate about 7,500 jobs over the next two years after the completion of its acquisition of Countrywide Financial Corp, the largest U.S. mortgage lender.

Barclay's plans to cut about 3,000 jobs as it brings Lehman Brothers into its fold. Lehman, which filed for bankruptcy last month, had 26,000 employees. About 10,000 have been given jobs until at least the end of the year.

Wachovia, said in August it would cut 6,950 jobs, 600 more than it had previously disclosed.

UBS said at the beginning of October it would cut another 2,000 jobs at its troubled investment bank. The job losses come on top of 7,000 jobs already cut, about 4,100 of which were in investment banking positions cut in the past year. The bank will have reduced its headcount by more than 10 percent to under 80,000.

Credit Suisse has cut more than 1,500 jobs, the majority in investment banking in the last year since 2007, and on Tuesday it said it would cut 500 more jobs.

HSBC said late last month it was cutting 1,100 jobs in its investment banking operation, or 4 percent of the workforce.

announced its plan to cut 9,000 jobs in the wake of its agreement to purchase Dresdner Bank from Allianz. About 2,500 jobs of the 9,000 cuts will be outside Germany.

Computer maker Dell, which is nearing the end of nearly 9,000 job cuts, has asked employees to consider taking up to five days of unpaid vacation, is offering voluntary severance packages and has instituted a global hiring freeze.

A Bet On The Robert Rubin Wing of Goldman Sachs

Prince Alwaleed bin Talal's Kingdom Holding said Alwaleed will increase his Citigroup stake, his largest holding, to 5 percent. His holdings in Citi are currently less than 4%.

In his mysterious role at Citi as "Director and Senior Counselor", since joining the bank n 1999, Rubin has pulled down $150 million in salary and bonuses.

Junk Bond Yields Spike

Fear continues strong throughout the economy. Average yields on US junk bonds have topped 20 per cent for the first time.

The yield on the benchmark Merrill Lynch US High-Yield index hit 20.81 on Wednesday after climbing to 20.27 per cent on Tuesday. Before Tuesday, the previous high for the index was 18.66 per cent in January 1991. The risk premium, or spread over comparable Treasury securities, is close to double what it was in 1991, when Treasuries were yielding more than 8 per cent.

Some long-term bonds issued by General Motors, one of the biggest non-investment grade issuers, have been yielding more than 50 per cent.

Wednesday, November 19, 2008

Fed Sees Recession Lasting Through First Half of 2009

You have to take this news out of the Fed with a ton of salt, since they didn't see the recession or the housing crisis coming, despite the fact that they caused it by their money supply manipulations.

That said, according to minutes of the closed-door meeting of the Federal Open Market Committee on Oct. 28 and 29. The Fed governors and Fed bank presidents "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased."

For a group that hasn't done too well on the forecast front, they do get into some detailed forecasts. The minutes, for example, also report that "Participants agreed that inflation was likely to diminish materially in coming quarters."

Given that the Fed is now printing money again, and that it will only take a lessening of the desire to hold cash balances that will re-ignite inflation, the Fed's expectations that inflation is likely to diminish materially is a very bold statement, and has a good chance of proving very wrong by mid-2009.

Four Years of Gridlock?

Lew Rockwell sees four years of gridlock, with Republican leaders returning to their free market, limited government roots. Let's hope that is the case and not just wishful thinking on Lew's part because of the current lame duck Congress dragging its feet on a bailout of the auto industry.

Without gridlock, it is a continued march towards totalitarianism.

The Booming Auto Industry (For Real), That Is, The Bailout Is About Bailing Out Auto Unions

If you don't have the albatross of above market union wages and legacy payments, you can do pretty well in the auto industry. Mark Perry writes:

On Monday, Honda celebrated the opening of its $550-million, nonunion plant in Greensburg, Indiana, capable of producing 200,000 vehicles annually, highlighting the contrast between the healthy Asian automaker and its ailing domestic rivals.

And even though the starting hourly wage at the plant is $18.41, or roughly $10 less than an average Detroit Three worker, demand for these jobs was off the charts. When Honda announced it was hiring 900 employees, 33,000 people applied. Honda eventually plans to employ about 2,000 at the plant, which started production in October.

Here's Perry on union versus non-union wages :

For a time, unionized workers can enjoy higher-than-market compensation, and job security. To the extent that union labor costs are higher and therefore the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan, see CD post on Honda's new Indiana plant) and away from unionized firms. As a result, the growth of productivity and employment, as well as market share, will tend to lag in the unionized sector (from 90% market share in the 1960s for the Big 3, to 47% today).

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations (Honda, Toyota). Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability (Big Three) are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run (172,000 UAW jobs lost at GM alone). The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.

Here Comes the Greenie-Industrial Complex: What May Come Out of the Obama Administration

Micro-managing with no clue about basic economic principles appears to be the driving force behind Barack Obama's first 100 days. With the ascent of unions and the Greenie-Industrial Complex as icing on the cake.

At The Wall Street Journal's CEO Council Conference, Obama's incoming chief of staff Rahm Emanuel told the audience, according to WSJ, that "a major economic stimulus would be 'the first order of business' for Mr. Obama when he takes office Jan. 20. The focus of spending will be on infrastructure, specifically 'green infrastructure,' which he said would include mass transit, upgraded electricity transmission lines, 'smart' electrical meters that allow consumers to save money by using electricity at off-peak hours, and universal broadband Internet access, which he said would encourage telecommuting."

With regard to unions, he said, "unions are addressing the concerns of a middle class that has seen U.S. median income slide over the past eight years, while health care, energy and education costs have soared."

He stressed that the new administration would "throw long and deep," taking advantage of the economic crisis to push wholesale changes in health care, taxes, financial re-regulation and energy.

Everyone of the proposals listed by Emanuel will slowdown the economy, create huge opportunities for pork and suffocate the producing class. The United States is about to enter a new stage of decline.

Larger Inmate Population Is Boon to Private Prisons

Like I said, prisons will be a major growth industry in America.

Stephanie Chen at WSJ is reporting:

Prison companies are preparing for a wave of new business as the economic downturn makes it increasingly difficult for federal and state government officials to build and operate their own jails.

The Federal Bureau of Prisons and several state governments have sent thousands of inmates in recent months to prisons and detention centers run by Corrections Corp. of America, Geo Group Inc. and other private operators, as a crackdown on illegal immigration, a lengthening of mandatory sentences for certain crimes and other factors have overcrowded many government facilities.

Prison-policy experts expect inmate populations in 10 states to have increased by 25% or more between 2006 and 2011, according to a report by the nonprofit Pew Charitable Trusts.

My bet is that these incarceration rate projections are too low.

Once Obama starts implementing his unworkable programs, the big question will be whether or not he uses force and prison time to try and muscle his programs. If he does, incarceration rates are headed way up---for the the college educated and white collar working class.

As I wrote:

I certainly hope it doesn't get this bad, but I fear it may...It won't happen right away. It may be barely noticeable, at first, but at some point you will think twice about doing something you do now without hesitation.

If Barack Obama is serious about sharing the wealth and bringing on bigger government, it is not going to be pretty. The greatest tyrants on the planet were big government socialists, Mao and Stalin at the top of the pack. Part of the reason they became tyrants is because the programs they instituted didn't work and thus surveillance and force were instituted.

Socialized healthcare won't work and could eventually result in black market healthcare with doctors ending up in jail. Other, regulations will make lawbreakers out of others who right now can't imagine that they will ever end up in jail. Ultimately, the broad based forcing of human action in a direction it doesn't naturally want to go has to be enforced at the point of a gun.

CPI Climbing at 3.7% Annual Rate

The Consumer Price Index decreased 1.0 percent in October, before seasonal adjustment, according to the Bureau of Labor Statistics. The October level of 216.57(1982-84=100) was 3.7 percent higher than in October 2007.

The October drop from the previous month of 1.0 percent, was the biggest one month drop in 61 years and reflects the slowdown in money growth over the summer and the accompanyng fears about the economy which has caused a strong desire to hold cash balances.

Neverthe less, it was the energy index whch was responsible for most of the decline in the index. It fell 8.6 percent in October following declines of 1.9 percent in September and 3.1 percent in August. Despite the decline, gasoline prices remain 12.0percent above their October 2007 level.

The food index increased 0.3 percent in October. Compared with a year earlier, the food index was up 6.3 percent.

The medical care index rose 0.2 percent in October after rising 0.3 percent in September, and was 2.8 percent higher than a year ago.

Citigroup Liquidates Fund That Fell 53% In a Month

Citigroup is liquidating its Corporate Special Opportunities hedge fund after it lost 53 per cent of its value last month. This is the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit.

Nomura Chief Says Liquidity Crisis Over

He is doing a lot of hedging but Kenichi Watanabe, chief executive of Japan's Nomura said, “From a very optimistic point of view, the financial liquidity crisis has subsided, for the time being, and the focus has shifted to the real economy.”

Given that the world's central banks are printing money to "unfreeze" the markets, the likelihood is that Watanabe is correct and the liquidity crisis is over. As for the "real" economy, the central bank doses of liquidity will take care of that also. If central bank money printing continues, the real concern will be re-ignited inflation and not a long drawn out recession, but as they say on election night, it is still too close to call.

Tuesday, November 18, 2008

Walter Block On Black Productivity

Walter Block has created a major brouhaha at Loyloa College in Maryland as a result of his speech there and comments he made during the Q & A. See his report on the controversy here.

Part of the controversy surrounds Block's comments on the productivity of blacks. I'll let Block take it from here: young man asked about the pay gap between blacks and whites, which I had said in my lecture was of about the same magnitude as that between females and males, about 25–30%. My answer, of course, was in terms of lower productivity. After all, if black people had the same productivity as white people on average, but were paid less, then there would be profit opportunities available to all those who hired blacks and fired whites, and such a situation could never last.

But why was this so: Why, that is, would this minority group have lower productivity than the majority? Surely, it couldn’t be attributed to marriage asymmetry? No, I replied. And here I was very careful to say that the cause was a matter of dispute, and that I, as an economist, was not in a position to say which was correct. Instead, I would merely offer both options, and call for the audience to make up its own mind on this issue. The politically correct answer is that lower black productivity is due to slavery, Jim Crow legislation, poor treatment of African-Americans in terms of schooling, etc. The politically incorrect explanation was supplied by Richard Herrnstein and Charles Murray in their book The Bell Curve: lower black IQs.

I have never been impressed with the reasoning in Murray's book. However, I believe that there may be another reason behind lower black productivity that Block may have missed in his explanation. I call it the "Black Crutch". It's a crutch that Jews, Italians, Irish etc. just don't have.

The crutch is that when something goes wrong in business or at work, a black can say it is racism, and it stops his mind from thinking further on the topic. I hasten to add that this does not apply to all blacks. I have dated enough black women to know there are plenty of blacks that don't use such a crutch.

However, I have observed many situations where the Crutch has been used. I will provide an example.

Once I was called by a client to help a friend of the client who had started a business that was going under. The friend had borrowed money for the business from a Jew, an Italian and two blacks. To say this was not the brightest investment was to put it politely. As part of my role in helping out, I called the four investors to explain there would be a very long delay in their getting their money back, if they were to get it back at all.

The Jew and the Italian were not very happy to say the least. But, the interesting comments came from the two blacks, one was a man the other was a woman. They both said pretty much the same thing. It went something like this: "If he thinks he can put something over on me because I am black, he has another thing coming."

Now, think about this for a minute. It was a bad investment. Could the Jew say, "If he thinks he can pull one over on me in business because I am a Jew"? Of course not, since Jews are supposed to be wizened in business. Likewise, with the Italian, where some have a reputation for breaking bones when investments don't go well.

So after they calm down, the Jew and Italian will perhaps learn from the experience and think about what mistakes they made to get into such a poor investment. But, I wonder about the two blacks, they have the Crutch. It wasn't that they made a bad investment it was because they were black that they were taken advantage of. If they stop their thinking there and use the Crutch, they are simply not going to think about and develop beyond where they are now.

I think the Black Crutch is of the most dangerous excuses for failure that circulates in much of black society. Blacks have used the crutch to tell me why they have been turned down for credit or lost a job, when I could see from the facts that the case suggested otherwise. Blacks who rely on the crutch stop growing in important ways and it is very easy to see how such reliance could lower productivity.

Note: I am not saying there isn't racism or discrimination, in fact, I marvel at how often I can detect subtle racism going on when I am with black friends and they don't detect it. But any person who uses the Black Crutch is setting himself up for a life of mediocrity. The best way to deal in business is to walk as though there are no crutches and you have to overcome the situation anyway. There are lots of people who don't like Jews or Chinese, yet they succeed in business without out being liked. For anyone who needs proof that you can succeed even when being discriminated against, I recommend the Thomas Sowell books on race and discrimination.

Stop Printing Money... the Fed did this summer and you kill inflation.

Wholesale prices plunged a record amount in October.

The Labor Department reported today that wholesale prices dropped by 2.8 percent in October, the biggest one-month decline on records that go back more than 60 years.

The 2.8 percent overall decrease marked the third straight month that wholesale prices have fallen.

Money supply growth, as measured by M2 nsa, was under 2% on an anualized basis this summer, but is now back up over 7%. Take advantage of the inflation pause while it lasts by buying hard assets.

Alert: Paulson, Bernanke Testimony

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify today before the House Financial Services Committee.

The Soros Obama Connection

Bloomberg explains:

Thanks in part to funding from benefactors such as billionaire George Soros, the Center for American Progress has become in just five years an intellectual wellspring for Democratic policy proposals, including many that are shaping the agenda of the new Obama administration...

CAP's president and founder, John Podesta, 59, former chief of staff to President Bill Clinton, is one of three people running the transition team for president-elect Barack Obama, 47. A squadron of CAP experts is working with them...

These include the center's call for a gradual withdrawal of U.S. troops from Iraq and a buildup of forces in Afghanistan, a plan for universal health coverage through employer plans and proposals to create purchasing pools that allow small businesses to spread the cost among a larger group of workers. Obama has endorsed much of a CAP plan to create ``green jobs'' linked to alleviating global climate change.

CAP also is advocating the creation of a ``National Energy Council'' headed by an official with the stature of the national security adviser and who would be charged with ``transforming the energy base'' of the U.S. In addition, CAP urges the creation of a White House ``office of social entrepreneurship'' to spur new ideas for addressing social problems...

To help promote its ideas, CAP employs 11 full-time bloggers who contribute to two Web sites, ThinkProgress and the Wonk Room; others prepare daily feeds for radio stations. The center's policy briefings are standing-room only, packed with lobbyists, advocacy-group representatives and reporters looking for insights on where the Obama administration is headed.

For more on the international meddler Soros, see my post: The Soros New World Order: A Review of George Soros' "The Bubble of American Supremacy"