Sunday, January 31, 2010

How to Negotiate a Good Deal on a Car

An auto insider tells me to ask to see the dealer's invoice and offer $100 over the invoice price.

I reconfirmed this with a friend who is familiar with the auto industry from the dealers' perspective. He writes:
I'd say this is a good rule of thumb and is a common tactic salespeople encounter.

The dealer invoice price normally has something called "holdback" built into it, it's a reserve that is paid to the manufacturer but then re-released back to the dealer after the sale is made during dealer-manufacturer accounting reconciliation.

It's a buyers market in many ways but I'd say sticking with the invoice + $100 is a decent strategy because sales managers will be incredibly reluctant to make deals that cut into dealer holdback even if the customer is somehow aware of this.
In other words, if you pay only $100 above invoice, you are getting a decent price. However, if you are a tough negotiator and want to go for the throat, there's still a little room in there.

Breaking Down the GDP Number

Stefan Karlsson has a solid break down of my least favorite aggregate piece of data, the GDP number:
-More than a quarter of that growth was illusory, as the domestic purchases deflator rose 2.1% while the GDP deflator rose 0.6%, meaning that terms of trade adjusted GDP rose 4.2%, not 5.7%.

-Many of the assumptions of this preliminary numbers seem over-optimistic (for example on structures and the trade deficit), meaning that the number will probably be revised down, just like the third quarter number was revised down from 3.5% to 2.2% (and could be downwardly revised further in the annual reviews).

-Of the now reported 4.2%, no less than 3.4% depended on reduced inventory reductions. That doesn't make that growth less real, but it does suggest that growth will likely slow down.

-The one really bullish aspect, apart from the overall number, was that government purchases fell back as a share of GDP for the first time since the fourth quarter of 2005. It remains to be seen however, just how sustainable this will be (the Q4 2005 drop was a temporary blip in the upward trend from 2000 to 2009).
I would also add that motor vehicle output, though down from Q3, added 0.61 percentage to the fourth-quarter change in real GDP. This is, of course, all part of Obama's manipulated economy.

The Truth About Alan Greenspan and Ben Bernanke

Simon Johnson has an important piece on the "colossal failure of government" as a result the Ben Bernanke reappointment. It is must reading, here.

Please forgive him for his closing comment:
Ultimately, sensible democratic governance prevails in the United States.
Afterall, he is part of the establishment. Ignore this and applaud him for kicking huge amounts of sand in the face of his fellow establishment buddies.

In the piece, Johnson not only speaks truth to the establishment about Bernanke, but he also takes on Alan Greenspan. Of Greenspan, he writes:
Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).>

Greenspan, as you recall, was worshiped as some sort of economic magician. Even his most asinine comments were seized upon by a legion of acolytes. Instead of providing meaningful periodic oversight, every Senate hearing was essentially a re-coronation.

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world.
Yes, Greenspan was worshipped for his asinine comments and it is significant to see Johnson, former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, a senior fellow at the Peterson Institute for International Economics, and a member of the CBO’s Panel of Economic Advisers acknowledge the nonsense in Alan Greenspan pronouncements. This view is becoming more prevalent by the mainstream.

But there was only one economist in real time who recognized Greenspan as a phony, right from the start, and had the courage to write about it then. That was the great economist Murray Rothbard. Rothbard's early writings about Alan Greenspan are now must reading in light of Johnson's comments. Read them here. (Please note the link is to two Rothbard pieces. There is a bit of a problem in the layout of the Rothbard writings and the identification of the dates they were originally published. The first piece was published in 1987, when Greenspan was first confirmed by the Senate as Fed chairman. The second was published in 1991, at the time of Greenspan's reconfirmation.)

The death of Rothbard in 1995 was the only thing that prevented a further attack on Greenspan as Greenspan opened the money spigots to fuel the housing bubble that is now causing financial devastation for many. That job was left to the students of Rothbard such as Stefan Karlsson, Peter Schiff and myself.

Google Develops App to Workaround Apple (Unoffcial) Ban

From Wired's John Abell:
Google, which last week in a somewhat more modest development bypassed Apple’s iPhone app blockade by unveiling an html5 version of Google Voice, which takes full advantage of mobile Safari on the iPhone. found it to be an impressive variation of the app Apple has neither approved nor officially rejected.

Steve Jobs Lets It Rip: Google’s ‘Don’t Be Evil’ Mantra is ‘Bullshit'

You have to love competition.

Following a big public announcement, Apple CEO Steve Jobs often takes time in the day or two afterwards to have a Town Hall.

This time, according to John Abell, Jobs, characteristically, did not mince words as he spoke to the assembled, according to a person who was there who could not be named because this person is not authorized by Apple to speak with the press.

On Google: We did not enter the search business, Jobs said. They entered the phone business. Make no mistake they want to kill the iPhone. We won’t let them, he says. Someone else asks something on a different topic, but there’s no getting Jobs off this rant. I want to go back to that other question first and say one more thing, he says. This don’t be evil mantra: “It’s bullshit.” Audience roars.

About Adobe: They are lazy, Jobs says. They have all this potential to do interesting things but they just refuse to do it. They don’t do anything with the approaches that Apple is taking, like Carbon. Apple does not support Flash because it is so buggy, he says. Whenever a Mac crashes more often than not it’s because of Flash. No one will be using Flash, he says. The world is moving to HTML5.

Ah, Steve Jobs needs a little economics lesson, being competitive is not evil, even if it detroys Apple.
(Via Business Insider)

Top Ten

Below are the Top Ten most viewed posts for the week ending Saturday January 30, 2010:

#1 The Secret Bank Bailout (2nd week on list.)

#2 I Wonder What Tyler Cowen Means by This?

#3 Geithner Conspires to Dupe Investors (email from Taylor Conant)

#4 Existing Home Sales Fall 16.7% in December; Largest Drop On Record

#5 Only 35 Subscribers Pay to Enter Through Newsday Pay Wall

#6 Shock: Inside the Healthcare Bill (30th week on list)

#7 Tracking Jamie Dimon's Influence or Why Goldman Sachs May Be Dead Meat

#8 US Crosses the Bernholz Line -- Hyperinflation Early Warning Signal (2nd week on list)

#9 Why Debra Medina's Candidacy For Texas Governor Should Be Nationalized by Phil Pepin

#10 Not Good: Elizabeth Warren Called to the White House...

Saturday, January 30, 2010

Transcript Excerpts from 'Wall Street 2: Money Never Sleeps"

There have been several versions of the transcript of the Oliver Stone movie, Wall Street 2: Money Never Sleeps that have been published on the internet, they are all unlikely to be genuine.

Business Insider is publishing excerpts from a copy of the transcript they report receiving. The excerpts have a ring of genuineness to them. Here they are.

Is Obama Behind the Curious Toyota Recall?

Many Toyota insiders are furious at the Obama Administration. The recall Toyota has issued is the result of pressure from the U.S. Transportation Department. They believe that the pressure is coming not because of a true concern for safety, but an attempt by the Administration to drive sales toward American carmakers including those recently bailed out.

Although Toyota insiders admit that pedal sticking has occurred in a few cars, they point out that it has occurred in fewer than 300 cars, and not something where the Administration shouild have pushed for an immediate full recall, but rather something that could be handled during routine maintenance after a reasonable priced solution was developed.

Toyota insiders tell me that the only solution at this time to correct the "problem" identified by the Transportation Department would cost $2,000 per car. There are 1.8 million vehicles that are subject to the recall.

Transportation Secretary Ray LaHood told WGN Radio in Chicago that "the reason Toyota decided to do the recall and to stop manufacturing was because we asked them to."

LaHood said the department urged the company to act and credited Toyota for going "a step above" by stopping production.

David Strickland, the administrator of the National Highway Traffic Safety Administration, told reporters in Washington that the Transportation Department had been in regular communication with Toyota about the recall. He said the company's decision to stop selling the vehicles was "an aggressive one and one that is the legal and morally correct thing to do."

MSNBC reports:

The timing of the recall and production suspension could not be worse for Toyota. Two years ago, the company beat out General Motors Co. to become the world's largest automaker. Now just weeks into 2010, it is stopping some sales in its biggest market, the U.S., at a time when it desperately needs to sell cars here after reporting its first-ever annual loss last year.

General Motors is offering interest-free loans and other incentives to Toyota owners who may want to get rid of their cars due to fears about faulty gas pedals.

GM General Manager of Retail Sales Steve Hill said Wednesday the company is responding to thousands of inquiries from Toyota owners.
Toyota has its scientists and design engineers working furiously in an attempt to find a cheaper method of fixing the problem, than the $2,000 per car fix. The current fix would cost the car maker $3.6 billion.

Summers as Performer in the Theatre of the Statistical Absurd

Larry Summers describes the American economy as in a "statistical recovery and a human recession".

Only someone stuck in a mathematical mindset and who over-aggregates could make such a statement.

If economic statistics aren't measuring the actions of human beings, what the hell are they measuring? If we know "humans" (talk about an aggregation!) are in recession, how can an accurate statistics be telling us different?

Summers Says Fourth Quarter US GDP Report Shows Obama Economic Policies Working

A totally manipulated economy that still ,has unemployment in double digits and the private sector dragging, has President Obama's top economic adviser, Larry Summers, crowing as to the wonderful recovery the Obama Administration has created.

In Davos, Switzerland at the World Economic Forum in a wide-ranging interview with Charlie Rose, Larry Summers, vigorously defended the Obama administration’s economic policies and regulatory proposals.

Summers argued that the latest US GDP report, which shows the economy expanded at a 5.7% rate in the fourth quarter, demonstrates that the massive fiscal and monetary stimulus measures proposed or endorsed by the administration have “pulled the [US] economy back from the brink of a depression, and created a basis for economic growth.”

There was no mention of all the projects that weren't started because funds were redirected to the stimulus projects and its government favored businesses.

The interview included an extensive discussion of the administration’s proposed reforms in financial regulation, which Summers said would increase capital standards, create a new system for handling the failure of non-bank lenders, and limit the ability of commercial banks (which benefit from federal deposit insurance and access to the Fed’s discount window) to own hedge funds and certain other alternative investment vehicles, or engaging in purely speculative proprietary trading.

There was no mention of how these regulations will mean even more government control of the financial sector.

Summers rebutted suggestions that the administration is seeking a confrontation with Wall Street as a way to shore up its popular support, but criticized the financial industry for opposing proposed bank fees that would reimburse the US Treasury for the cost of the Troubled Asset Relief Program (TARP) – the US$ 700 billion package of loan guarantees and bank capital injections approved by Congress in 2008.

Asked to comment on French President Sarkozy’s recent call for an alternative global reserve currency, Summers said any change in the US dollar’s role would be brought about by market forces – including decisions made by foreign governments and Central Banks with sizable foreign exchange holdings. “I believe the dollar is going to have a very central role in the international financial system for a very long time to come,” he said.

Friday, January 29, 2010

Paulson: Russia Tried to Get China to Blow Up Fannie and Freddie

Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, according to former-Treasury Secretary Henry Paulson, in his new book, On the Brink.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics. In his memoir, Paulson writes, according to Bloomberg which was able to obtain a copy of the book before its official publication date of February 1, that the Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies.”

This is indicative of how dangerous the Chinese holdings of U.S. debt are. It is a huge financial weapon that the Chinese can use anytime they choose for any purpose they choose. But by selling only selective debt, rather then selling various random chunks of their U.S. debt, the Russians have brought to the attention of the Chinese, if they hadn't thought of it already themselves, how to launch a limited financial nuclear attack by getting them to focus on a particular type of debt, such as Fannie Mae or Freddie Mac. Such a surgical strike would do much to protect the overall investment the Chinese have in U.S. debt, but at the same time cause a severe headache for the U.S.

Swiss Halt Deal with U.S. that IDs Americans

Americans who hid money from the Internal Revenue Service in secret Swiss bank accounts may escape exposure, at least for now.

An agreement between the U.S. and Swiss governments that was supposed to blow the cover on 4,450 accounts at Switzerland's largest bank is in danger of collapse.

The Swiss government said that it has suspended the disclosure of information to the United States under the agreement and may seek to renegotiate the deal.

The announcement came days after a Swiss court ruled that it would be illegal for Switzerland to comply with the August accord. The court essentially declared that long-standing secrecy protections trumped the agreement. The decision came in a test case involving a UBS account holder who was fighting to stay in the shadows.

How to Fix the Jobs Problem

by Llewellyn H. Rockwell, Jr.

All this talk of unemployment is preposterous. Think of it. We live in a world with lots of imperfections, things that need to be done. It has always been so and always will be so. That means that there is work to be done, and therefore, always jobs. The problem of unemployment is a problem of disconnect between those who would work and those who would hire.

What is the disconnect? It comes down to affordability. Businesses right now can't afford to hire new workers. They keep letting them go. Therefore, unemployment is high, in the double-digits, approaching 17% or more. Among black men, it is 25%. Among youth, it is 30% or higher. And the problem is spreading and will continue to spread so long as there are barriers to deal-making between hirers and workers.

Again, it is not a lack of work to be done. It is too expensive to pay for the work to be done. So ask yourself, what are those things that prevent deals from being made?

Let me list a few barriers:

The high minimum wage that knocks out the first several rungs from the bottom of the ladder;

The high payroll tax that robs employees and employers of resources;

The laws that threaten firms with lawsuits should the employee be fired;

The laws that established myriad conditions for hiring beyond the market-based condition that matters: can he or she get the job done?;

The unemployment subsidy in the form of phony insurance that pays people not to work;
The high cost of business start-ups in the form of taxes and mandates;

The mandated benefits that employers are forced to cough up for every new employee under certain conditions;

The withholding tax that prevents employers and employees from making their own deals;

The age restrictions that treat everyone under the age of 16 as useless;
The social security and income taxes that together devour nearly half of contract income;

The labor union laws that permit thugs to loot a firm and keep out workers who would love a chance to offer their wares for less.

Read the rest of the article here.

Greek Debt Prices Continue to Decline

Bloomberg reports:
Greek bonds and credit-default swaps show investors are starting to doubt that the nation can reduce the largest budget deficit in the European Union without help from outside.

The nation’s government bonds are the world’s worst performers in January, losing 4.19 percent in local currency terms and extending their decline over the past three months to 10 percent, Bloomberg/EFFAS indexes show.

The yield on two-year Greek bonds rose for a fourth- straight day, adding 53 basis points to 5.74 percent as of 12:37 p.m. in London, the most since November 2000. Ten-year yields dropped 21 basis points to 6.94 percent, after climbing to 7.15 percent yesterday, the highest level since October 1999 and up from 4.99 percent on Nov. 30. The yield is more than 3.7 percentage points higher than benchmark German bunds, after widening to 3.96 percentage points yesterday, the most since October 1998.

Credit-default swaps on Greece fell to 397 basis points, from a record-high 422.5 basis points yesterday, CMA DataVision prices show. Swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is equal to $1,000 a year on a contract protecting $10 million of debt.

The swaps have risen from 121.8 basis points in October, and compare with 433.4 basis points for Dubai in the weeks before it received cash from Abu Dhabi on Dec. 14

Roubini Wants a New Nickname

Following on the heels of the GMUers change of their blog name from Austrian Economists to, I don't know, something about problems, Nouriel Roubini wants a name change of his own.

Kim Kahn at CNBC reports:
“Dr. Doom” isn’t cutting it anymore for Nouriel Roubini.

The nickname came from the headline of an August 2008 "New York Times" article. It was basically a portrait piece of the man who had predicted the current economic crisis.But while it was “cute” at the time, it’s becoming wearisome and doesn’t accurately reflect his opinions, he told me.

And he’s armed with an alternative: Dr. Realism.
I think Dr. Insider would be more accurate. The man's connected. I would suggest Mack Daddy, for the time he puts in with the ladies, but I don't think his connection rate is that high after dark.

An Urban Legend Shot Down

Ever since Wall Street, with the help of the Bush Administration, took down hooker crazed then-Governor Eliot Spitzer, rumors circulated that Spitzer kept his socks on during his liaisons with Audrey Dupre and the like.

We can sleep easy tonight. Spitzer has now publicly denied that he kept his socks on. NyPo reports:
Spitzer also decided to clarify a bit of urban legend that swirled around his infamous scandal -- insisting the black socks he supposedly liked to keep on during the act are myth, not fact.

He was asked point-blank, was it true about the socks?

"No," he replied simply.

Ben Bernanke Moves to Consolidate Inflation Creating Power in Washington DC

The real story yesterday wasn't that, after putting on a good carnival act, the Senate confirmed their insider, Ben Bernanke, for a second four-year term as chairman of the Federal Reserve. No the real story was buried in a Bloomberg piece, 19 paragraphs down.

As I reported earlier, the Fed is thinking of adopting the interest rate on reserves as their key monetary policy target rate. This is important.

They are using the excess reserve rate to control monetary policy in a de facto way now, but officially recognizing what the Fed is doing will put more power to inflate in the hands of Washington D.C.

As I regularly point out, short paragraphs and clauses are put into legislation that few understand but that can have enormous and powerful consequences.

Bloomberg points out how such a short clause on recognizing reserve rates as the target rate will have profound consequences:
The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents...

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.
Got that? Right now the regional Fed bank presidents, who are scattered around the country at 12 districts, have input on monetary policy because of their rotating votes on the Fed funds rate. If policy officially switches to the reserve rate, the say and influence of the regional Reserve bank presidents is gone. Power will be consolidated in Washington D.C. among the Fed governors.

Bloomberg accurately points out that historically it has been the presidents who have been most vocal about fighting inflation, that brake would be removed on officially recognizing interest rates on reserves as the key rate.

You really have to wonder what these guys have in store that curiously eliminates any say so from Fed presidents around the country, and leaves interest rate and inflation rate policies solidly in the hands of the very Washington politicized Federal Reserve governors.


Alert (Sort Of ): Fed May Stop Targeting Fed Funds

File this baby under "Why you read EPJ."

Bob Murphy sends me a link to a Scott Sumner piece on news that the Federal Reserve may stop targeting the Federal Funds rate.

Sumner quotes a January 26 Bloomberg story:
Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades.

The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lackertold reporters on Jan. 8 in Linthicum, Maryland
Sumner calls this a "momentous change."

So is this a "momentous change"? Is Richmond Fed President Lacker on to something here? Er, yup. But it is only recognizing reality. I acknowledged the importance of the interest rate on excess reserves versus the Fed funds rate in 2008. Back then the Fed was doing something a bit different with the rate on excess reserves versus the Fed funds rate, but it was clear that the rate on excess reserves would become the key rate. On October 7, 2008, I wrote:

Fed Funds Rate Cuts Have Become Irrelevant

A new litmus test has developed to determine how well economists understand the machinations of Federal Reserve operations.

Any analyst now calling for cuts in the Fed Funds rate, or forecasting further cuts in the rate, will fail the test.

Yesterday, the Fed announced that it will begin to pay interest on depository institutions' required and excess reserve balances...

Paying interest on required and excess reserve balances changes the entire role of the Fed Funds rate with regard to Fed monetary policy, as long as real rates are below the rate paid by the Fed on excess reserves...

The Fed may cut the funds rate in the future for cosmetic reasons to calm the markets, but it is not necessary for the Fed to do so, given that it is now paying interest on reserves at above market rates.

Thus, any analyst calling for a Fed rate cut doesn't understand how the Fed works and the impact the new rule changes will have.
Sumner calls the Bloomberg story a "trial balloon." I think it is simply recognizing the major significance that the excess reserve rate already has on monetary policy. The rate on excess reserves now controls monetary policy to a greater extent than the Fed Funds rate. But all this is dependent on the interrelationship between the Fed Funds rate, the excess rate and the real rate (The real rate being the rate that would exist without Fed interference in the interest rate market.)

The Fed could put the Fed funds rate back into play by setting the rate on excess reserves below the real rate. That they are not clearly indicates that they have already moved to the excess reserve rate as the dominant monetary policy weapon.

Making a formal notice of the Fed targeting reserve interest rates would serve only to confirm the reality of the situation dating back to October, 2008.

Tracking Jamie Dimon's Influence or Why Goldman Sachs May Be Dead Meat

On Wednesday, President Obama hosted a lunch at the White House. Among those attending the lunch were Treasury Secretary Geithner and Jamie "The President's Favorite Banker" Dimon.

This afternoon,Treasury Secretary Geithner will meet with Dimon, at the Treasury. Lloyd Blankfein eat your heart out. It is difficult not to think the unspoken purpose of today's meeting is to draw up the President's new financial proposal in a way that protects and benefits Dimon's bank, JP Morgan Chase, yet rips the MF heart out of Goldman Sachs.

My sources at Goldman appear to be exactly on track in thinking that it was a major error and arrogance by Blankfein when he didn't get his butt down to White House when the President called a sitdown, a few weeks back. Blankfein's official excuse was fog land locked him in NYC. But as Simon Johnson has pointed out, if Blankfein seriously wanted to make the effort to get to Washington, it was entirely doable, fog or no fog.

Among Johnson's conclusion as to possibilities why Blankfein, John Mack, and Dick Parsons didn't really show, Johnson lists the BIG DISS:
Wilful defiance of the government which, while not premeditated in this instance, means that the executives grabbed an opportunity to show disrespect and relative power.
If Obama is buying this, and rest assured Obama is enough of a blogger junkie to know this theory is out there, then Goldman Sachs is dead meat.

The Chicago homeboys, Obama and Dimon (who managed to get to DC for the sitdown) are carving up Goldman and Blankfein's butt the way another Chicago homeboy, Richard Sandor, explained at a Michael Milken conference how it is done in Chicago:
In Chicago, we say, if you are not at the table, you are on the menu.
Blankfein is not only at the wrong table, he is in the wrong city.

Heavy Plotting Day for Geithner

On Friday morning, Treasury Secretary Geithner will join the President for a Cabinet meeting at the White House.

Later, Secretary Geithner will meet with Rep. Kucinich (D-OH) to discuss economic recovery.

In the afternoon, Secretary Geithner will meet with CEO and chairman of JPMorgan Chase Jamie Dimon at Treasury.

In the evening, Secretary Geithner will meet with President Obama at the White House.

Thursday, January 28, 2010

Congress Exposes Potential Profiteering in AIG's Deals

Janet Tavakoli emails a link to her latest:

Yesterday the House released some missing details of the AIG bailout. (Click here to see the unredacted pages of the March 2008 SEC filing.) The public knew that the Fed paid 100 cents on the dollar to AIG's trading counterparties to resolve its credit default swaps, but the details of the assets behind the trades were kept secret.

Plenty of Time to Renegotiate AIG's ContractsThe first bailout of AIG occurred in September 2008 when the FRBNY extended an $85 billion credit line to AIG. By the September 2008 initial bailout, Goldman Sachs had extracted $7.5 billion in collateral from AIG, and other banks that bought Goldman's CDOs also extracted billions from AIG (click here for details).

Goldman CEO Lloyd Blankfein claims he had no idea AIG had trouble producing collateral. I knew AIG was headed for grave trouble more than a year before the September 2008 bailout and raised the issue with both Warren Buffett and JPMorgan Chase CEO Jamie Dimon. Goldman Sachs claims to be superior risk managers, yet asks the public to believe that it was clueless about AIG's distress, even though Goldman itself was a key contributor to it.

Then Treasury Secretary Henry Paulson was CEO of Goldman Sachs at the time it put on these trades with AIG. Lloyd Blankfein was (and remains) CEO of Goldman and was the only Wall Street CEO at one of Paulson's bailout discussions. Stephen Friedman, then Chairman of the NY Fed, also served on Goldman's board.

Details That Could Anger the PublicAn analysis of the previously secret details shows that at the time of the November 2008 buyout, some CDOs had implied prices of around 60 cents on the dollar. Others had implied prices of around 20 cents on the dollar.

Not revealed by the new report is that many of the assets backing some of the CDOs have a high risk of severe or total principal loss (many have actual losses). These CDOs have "cliff risk," as in falling off of one. (There is currently no reliable secondary market, and similar CDOs have traded as low as one penny.) One such CDO is Davis Square IV, a CDO on which French bank Societe Generale bought protection from AIG. The CDO is a poster child for Wall Street's key contribution to a financial crisis that devastated the U.S. economy.

Goldman Sachs created and closed Davis Square IV in April of 2005. The CDO was managed by Trust Company of the West (TCW). (Click here for a list of assets of Davis Square IV from the time period around January 2008). The original portfolio included mortgage-backed securities from Goldman Sachs Alternative Mortgage Products, Merrill, and problem mortgage lenders Countrywide, New Century, Novastar, First Franklin, and Fremont (among others). Assets include home equity loans, midprime loans, subprime loans, and adjustable rate mortgages. The CDO also includes other CDOs.

AIG's Joe Cassano said AIG was basically out of the business of guaranteeing mortgage product at the end of 2005, yet the report shows more than 10% of the CDOs on which AIG sold protection appear to be from 2006, 2007, or 2008. (Around 14% of the CDO tranches are 2006, 2007 or 2008 vintage, but they make up more than one-third or more than $21 billion of the $62.13 billion notional amount purchased by the Fed.) Furthermore, CDOs from 2006 and 2007 are buried within the portfolios backing the original CDOs. For example, TCW traded mortgages from 2006 and 2007 vintages into the portfolio backing Davis Square IV. These "assets" are among the worst of the lot.

CDO managers may disclose conflicts of interest, but a conflict of interest shouldn't mean that new assets "managed" into your portfolio are highly likely to do you harm. TCW and Goldman Sachs had a relationship that benefited TCW, which earned fees from deals like Davis Square IV. Davis Square IV included several tranches of Goldman's Abacus deals, including $53.5 million from 2006. By September 2008, Goldman's CDO, Abacus 2006-12, was already downgraded from AA2 to Ca, a junk rating--it means you are likely to lose your shirt. Another part of this CDO in Davis Square IV's portfolio was downgraded from A3 to Ca. Three of Goldman's slices of Abacus 2006-15 also made their way into Davis Square IV, and they were also all downgraded to Ca, a junk rating, by September 2008.

Among other eyebrow raising assets in Davis Square IV, one finds a CDO called Pinnacle Point Funding 2007-a. This CDO was managed by Blackrock. It closed June 7, 2007, and went into acceleration (not a good sign) on December 13, 2007. Davis Square IV's "investment" was originally rated triple-A. By the time of AIG's September 2008 bailout, it was already downgraded to C, a junk rating, by Moody's. Yet the Fed awarded no-bid contracts to Blackrock to manage the assets it bought from AIG.

Read the rest here.

The Evil Elizabeth Warren

Taylor Conant emails the below clip and writes:

Check out this propaganda. Besides completely ignoring the Fed, her own narrative is not internally consistent and full of non sequiturs (what does the non-consumer oriented focus of regulators have to do with banks pulling off what they supposedly did?)

She is one ignorant lady! Yet another Harvard financial "expert".

In addition to Conant's points, I think what really makes her evil is the fact that she is very power hungry, but also extremely shrewd with an ability to talk her nonsense to the booboise.

Her grand statements seem to make sense until you pull them apart.

I almost fell out of my chair when she said that up until now there were no serious financial crises since the Great Depression. During the period she seems to think was just fine, we went off the gold standard because of an international run on the U.S. gold supply. We were, at one point, on the edge of hyper-inflation with interest rates as high as 20%. The Bretton Woods agreement collapsed. It's replacement the Smithsonian Agreement collapsed. And we witnessed stagflation, where there was inflation and recession. I could go on, but you get the picture. There was nothing calming and soothing coming out of the FDR era at all.

But Warren is a major laegue interventionist, so the interventions of FDR were all wonderful, up until now. Damn the facts, let's intervene some more. FDR style.

She also mentions backroom deals, which do occur. But they occur because there are power hungry people in the backrooms that can be manipulated for the right price. The way you solve this problem is by eliminating the backrooms, i.e. the regulations that cause the power centers.

That's not what she wants. She wants to create a super-regulator, sort of a merger of backrooms. And she won't admit it, but she wants to run it, the bitch.

She also made the interesting point that the powerful Wall Street operators would have been out of jobs if it wasn't for the government bailout. She's right. The market would have wiped these assholes so far from Wall Street that the only time Lloyd Blankfein would be working in the area again would have been as a cabbie dropping off a fare. But does she reach this obvious conclusion? No. For her it's about getting these power elite paid off so they can kiss her butt.

Finally, what the hell is she doing on the Jon Stewart Show? She is not a government official. She was named to run a damn oversight committee. You have to be real power hungry to launch a PR campaign from an oversight committee role.

This is one dangerous woman.

The Address Obama Should Have Given - For a Change to Freedom

Richard Ebeling emails:
I have up today a new piece on the Northwood blog site on "The Address Obama Should Have Given - For a Change to Freedom."

President Obama delivered his State of the Union address on Thursday, January 27th, and promised more of the same type of "change" -- bigger and more intrusive government. He is defiantly pushed for national health care, a stranglehold of environment regulations over the private sector, more government oversight and control over the financial sector, and illusionary "freeze" on government spending.

But what if the president discovered the writings of people like Henry Hazlitt, Friedrich Hayek, Ludwig von Mises, Milton Friedman, and Ayn Rand? What might such such an address have been like, and how might those in the audience have reacted?

I imagine such a State of the Union address for a change to greater freedom, and suggest what it would have said.
Ebeling's piece is a must read, funny and brilliant. Read it here.

Why You Can't Take Jim Cramer Seriously

Although in the past, Cramer has strongly criticized Federal Reserve Chairman Ben Bernanke, Cramer now tells us that he thinks the Fed Charmian is doing "everything right." Confident in this, Cramer said Bernanke will not let us slip back into a recession (although he is). Cramer points out that Bernanke is a well-versed student of the great depression. Hey so was commie, John Kenneth Galbraith.

Cramer also neglected to point out the roller coaster ride Bernanke has put us on with double digit annualized money growth from September 2008 to February 2009, followed by a near complete halt to money printing since then. Nothing wrong with stable, zero money growth, but I doubt Cramer or Bernanke would agree with me on that. My guess is that they both think the Fed is being accommodate because interest rates are low. Of course, when the effective Fed funds rate is above the T-bill rate, the Fed is anything but accomodative.

Cramer also thinks Tim Geithner is doing a good job, saying that he's impressed by what the Treasury Secretary has done. He neglects to mention that Geithner serves Goldman Sachs first, second and always.

And Cramer hasn't mentioned lately that he worked for Goldman Sachs.

Bernake Vote Is Set

He'll be baaacck.

Bernanke cloture vote to take place at 3:20 et, reconfirmation vote to follow shortly thereafter.

But interestingly, it looks like the reconfirmation vote, won't occur until after the market closes. LOL. The Senate doesn't want to see how full market trading would react to their vote.

The View from Davos: A Double-Dip Is in the Air

WSJ's Marcus Walker reports:
The global economic recovery could lose pace later this year, dashing hopes for a rapid escape from the deepest downturn of the postwar era, economists and investors said at the World Economic Forum's annual meeting at this Swiss ski resort.

Heavy debts will weigh on governments and households in the U.S. and Europe for some time, while hopes for global growth will continue to rest on fast-developing countries such as India and China, predicted participants at the meeting's opening debate on the economy.

The Walmart of Weed is Now Open

Remove regulations and allow free markets to work and deals are done in open brightly lit stores, not on dark dangerous street corners where you have to deal with thugs.

SFC reports:
Call it the Walmart of weed.

In a 15,000-square-foot warehouse just down the road from the Oakland Airport, an entrepreneur is opening a one-stop shop for medicinal marijuana cultivation that's believed to be the largest in the stat...

"A lot of people don't know much about growing pot," said Dhar Mann, 25, the owner, who stood in front of an array of Ikea-like displays, showing different rooms of cannabis cultivation systems. "Since there are no full-service resources like us, they take risks, like electrical fires."

This is hardly a fringe business. When iGrow opens today, at least three City Council members will attend. So will most of the leaders of the cannabis industry in Oakland, a city long at the vanguard of medicinal marijuana

Hillary for President?

She wasn't at the State of the Union address last night, something about pressing matters in London.

And now Peter Roff reports:
The chatter has increased in recent days about Clinton leaving the cabinet sometime in the first term, likely over some matter of principle, so that she can position herself to challenge Obama in 2012. Perhaps it is just wishful thinking on the part of those Democrats who have already grown tired of Obama. What is true is that Clinton can still mobilize the political infrastructure necessary to mount an effective challenge to the sitting president. A primary challenge against a sitting president whose approval numbers are above 50 percent and one mounted against an incumbent who is below 50 percent are two very different things, a fact of which the Clinton political team is surely aware.

(Via Drudge)

The Tiny Regulator Fiefdoms of Greece...

...lead to bribery's on top of bribery's, says Bloomberg:
When Aris Kefalogiannis started his olive oil company in Athens more than a decade ago, he says, bureaucrats in crowded offices demanded bribes to approve long lists of permits. After a year of dodging shakedowns, Kefalogiannis moved the legal seat of his company, Gaea Products SA, to the small city of Agrinion. Government outposts there had fewer functionaries looking for payoffs, he says.

“Bribery is a result of the bureaucracy,” says Kefalogiannis, 49, the company’s chief executive officer. “People get fed up and will pay anything not to waste more time. It leads to slower growth and less investment in Greece.”

Arlen Specter Trails Big Time in Pennsylvania

The man who came up with the "magic bullet" theory of the Kennedy Assassination (Do you think he might have increased his ratings among the elite with that doozy of a theory?), is trailing in the polls, like really trailing.

A new poll from Franklin and Marshall College shows Arlen Specter trails Republican Pat Toomey by 14 points, 45 percent to 31 percent. Only 34 percent of Pennsylvanians gave Specter favorable job marks, with 58 percent saying he was doing a “fair” or “poor” job as senator.

Just 29 percent of Pennsylvanians said Specter deserves reelection, with 60 percent responding that it’s time for a change.

Major Inside Player Enters Infrastructure Arena

Carlyle Group's David Rubenstein has identified infrastructure as a key investment area for his firm. Now the uber insider, Felix Rohatyn, is getting in on the act.

He is heading back, at the age of 81, to his old investment banking firm, Lazard, where for decades he conducted insider deals. He's headed back as a result of the death of Bruce Wasserstein.

Rohatyn is "aiming to fix America's roads and bridges and take the firm to new heights,' reports NyPo.

Rohatyn told NyPo that he sees Lazard playing a major role in America's infrastructure, underwriting bonds to fund projects and obtaining financing from foreign investors "to relieve the pressure on the American budget."

He also told NyPo he is going to do what he does best: "to continue pushing Washington to spend on infrastructure". Translation: Rohatyn is making one more run at your pocketbook, before he kicks.

"There will be a big infrastructure program hopefully modeled after Franklin Roosevelt and the New Deal," Rohatyn said.

Forget the State of the Union, What You Really Need to Know Is What Obama Told His Lunch Partners, Yesterday

And they aren't talking.

Yesterday, President Obama had a private lunch with oilmen, bankers, and the like. That's where the real policy plans were discussed. Attending the lunch were:

Shelly Lazarus CEO of Ogilvy & Mather Worldwide

Jamie Dimon, chief executive of JPMorgan Chase

James Hackett, chief of Anadarko Petroleum

Rex Tillerson, head of Exxon Mobil

Edward Rust Jr. CEO of State Farm Insurance

Also in attendance at the lunch were presidential adviser Valerie Jarrett, Chief of Staff Rahm Emanuel and Treasury Secretary Tim Geithner.

Geithner Headed to 7 Degree Weather to Promote the Battle Against Global Warming

Treasury Secretary Tim Geithner will travel to Minneapolis today to attend a roundtable discussion hosted by the Mayors’ Green Manufacturing Initiative and Honeywell International.

According to the Treasury:
The Secretary will tour the Honeywell energy efficient control factory, where he will learn about a wide array of Honeywell products and see several of the many ways Recovery Act dollars are hard at work. Following the tour, Secretary Geithner will join local business and labor leaders, industry representatives and elected officials to discuss the work being done in Minnesota to create green jobs. During the roundtable, the group will discuss how investments in clean energy and energy efficiency present significant opportunities to create green manufacturing jobs in Minnesota and nationwide while helping move the country toward a green economy.
It should be noted that Geithner will be making this trip to Minneapolis, in part, to promote the government's battle against global warming, while the high temperature in Minneapolis today is expected to be 7 degrees.

Response to State of the Union

By Rick Torres

Our Founders would be mortified if they heard President Obama speak tonight. They would be shocked at the fact that the government large enough to do everything for us---and thus large enough to take everything from us----is already here. President Obama wants us to believe that as the government digs its hands into our pockets to provide us with the services we can get for ourselves, we should be grateful.

There is hardly a challenge by Republican leaders to the concept of government bureaucrats raiding our wallets so that they can spend it on our behalf the way they see fit. Why do Republican leaders shy away from arguing that the way to prosperity is through a private economy, and that the best 'jobs program' the government can institute is by getting out of the way, through lower taxes and deregulation? Unfortunately, too many so-called 'moderates' in the Republican party had voted for increased spending, opening the door for unprecedented growth of government under this president.

It is time we revert back to the original tenets of the Constitution: a small government instituted among us to secure our life and liberty---not to confiscate and redistribute the fruits of our labor.

Rick Torres is running for Congress in Connecticut.

Poland's Donald Tusk: A New Free Market Leader or Just Confused Technocrat

FT recently interviewed Poland's Prime Minister, Donald Tusk.

The theme of the interview was the Prime Minister's view that Poland in needs maintain a free market approach to the economy. Indeed,to be a role model in free market development, for Eastern Europe. At one point he says Poland has the courage to be such. Yet, the start of the video has Tusk talking like an econ technocrat has he discusses how he wants a limit on the size of the government budget BUT a limit that is actually annual growth in the government budget of 1%. Methinks real courage would be a politician or government that shows how to decrease government's annual budget, not increase it. He sounds more like President Obama then a free market advocate here.

Tusk also discusses energy purchases as though there needs to be a national energy buying policy. Indeed, he calls for EU solidarity in energy policy. This is a bit away from what Milton Friedman might think is a free market energy policy. Why not just let energy providers, including Russia's Gazprom, simply compete to sell gasoline and heating oil to Poland's consumers? What does a national oil policy have anything to do with free markets?

Tusk talks a good game about free markets and private property throughout the interview, which is a good thing. Talk about private property and free markets is important, but I wonder if he really understand what it means. In the two examples during the interview, when he leaves generalities and starts talking specifics, the budget and oil "policy", he sounds more like a technocrat than a free market disciple. Somebody in Poland should call him on it.

Here's the video.

First Impressions of the New Apple iPad

By Walter Mossbeg

It’s about the software, stupid. While all sorts of commentators were focusing on how much Apple’s new $499 iPad tablet computer looks like an oversized iPhone, the key to whether it can be the first multi-function tablet to win wide public acceptance probably lies in whether consumers perceive it as a suitable replacement for a laptop in key scenarios. And that, in my view, depends heavily on the software and services that flow through its handsome little body.

I have only spent a short time hands-on with the iPad–too short to fully run it through its paces and formally review it yet. But, after attending the rollout of the new device today, and trying out some of its features for myself, I have some first impressions.

Apple CEO Steve Jobs positioned the iPad as belonging to a new category of device between the smartphone and the laptop (since the netbook, in his view and mine, is really just a small, cheap laptop). But, as the demos unfolded, I kept thinking it was more like a hybrid of the two.

It uses the iPhone’s basic user interface and physical design. But, taking advantage of a 9.7″ screen and a fast Apple-designed processor, the iPad adds some user interface elements and functionality that aren’t available–or at least typical–on smart phones, but look more like computer software. For instance, its photo program works more like iPhoto on a Mac than the photo app on an iPhone, and it will be available with a touch version of Apple’s iWork productivity suite, which is Apple’s take on Microsoft Office. This is a much more powerful program than the phone-based office suites for the iPhone or BlackBerry, and Apple (AAPL) is only charging $30 for it.

Also, Apple has rewritten most of the core iPhone apps so they look more like, and have more of the features of, Mac or PC programs. But they aren’t mere clones of full computer apps. For instance, many forego standard menus for clever overlays and sidebars that work more naturally with the iPad’s multi-touch interface. Other app developers can do this, too. But, even if they don’t, the company said the iPad will run most of the current 140,000 iPhone apps, either in a small window on the screen, or in a full-screen mode. That’s a huge plus for a new device.

Mr. Jobs said after the onstage program ended that he sees the iPad’s user interface as a fuller expression of the one on the iPhone, which had been limited by screen real estate.

And, although the reported video and music streaming services were nowhere to be seen at this preview, Mr. Jobs did offer a taste of how the iPad could deliver content, beyond simply downloads from the iTunes store. He showed off a new e-book reader app with built-in online book store that, visually at least, blew away the Amazon (AMZN) Kindle, even if it seemed to lack all of the Kindle’s features and may have a smaller catalog. Representatives of the New York Times (NYT) showed an iPad digital version of their newspaper that seemed vastly more usable than the clumsy version now on the Kindle and its ilk.

Read the full article here.

Wednesday, January 27, 2010

Hoenig Dissents Over FOMC’s ‘Extended Period’ Pledge on Rates

From Bloomberg:
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, has called for an increase in the benchmark interest rate “sooner rather than later” in two speeches since October. Today, he brought the message to his fellow policy makers in Washington.

Hoenig dissented from the Federal Open Market Committee’s pledge to keep rates “exceptionally low” for an “extended period.” It was the first dissent since January 2009, when another regional Fed bank president, Richmond’s Jeffrey Lacker, opposed “targeted credit programs.”
I appreciate Hoenig's view that the Fed should always be battling inflation, but money supply (M2) growth has been minimal and it appears to me that the real interest rate (the non-manipulated rate) is already above the Fed funds target rate. The effective funds rate is 0.12%, the 3 month T-bill rate is at 0.08%. Nobody is going to borrow money at 0.12% to invest it at 0.06%. Yet, there must be plenty of non-Fed money available to keep the T-bill rate so low. I marginal hike in the effective Fed Funds rate would probably result in the start of shrinking money supply.

US Slaps Duties on Electric Blankets from China

The United States has set preliminary anti-dumping duties ranging from 90 to nearly 175 percent on about $30 million worth of electric blankets from China, the U.S. Commerce Department said on Wednesday.

I'm thinking, does the U.S. really want to kick sand in the face of the Chinese when they have been one of the most dominant buyers of Treasury securities in recent years?

(Via Drudge Report)

Fed Leaves Rate Target Unchanged; Will Close Credit Facilities

The collapse of the Fed monetary base is about to begin in earnest, as the Fed begins to wind down its various credit facilities. I fully expect this wind down to be money supply neutral, or close to it, as I expect most of the wind downs to be paid off with excess reserves. But those who were expecting a major jump in inflation because of the climb in the monetary base are going to be backpedalingwith even more intensity than they are now, as the monetary base collapses and money supply doesn't.

Below is the statement the Fed issued today,

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

The Best US Cities in Which to Buy a Foreclosed Home

CNBC has a slideshow that claims to list the best cities in which to buy a foreclosed home.

I am not sure their methodology, comparing foreclosed house sale prices versus non-foreclosed house prices, is a completely solid method for comparisons. It really depends on the demographics of who the buyers are of foreclosed homes versus non-foreclosed homes, but for a rough, very rough, sense for what is going on in different markets it's a decent slideshow to look at.

Geithner Conspires to Dupe Investors

Taylor Conant emails:
Geithner just told Cummings that the reason they don't want to disclose who the counter-parties in the AIG fiasco were is because it would threaten their ability to recoup taxpayer money spent on these bailouts. Essentially, if the market had this info, it would value related securities more realistically and the Treasury/Fed would lose out on their operation, costing the taxpayers money.

So, Geithner just admitted that they are trying to pull one over on investors and deny them material information in order to trick them into paying more for various assets than they're worth, in order to be able to pay back the taxpayer.

Isn't this called fraud?

Geithner – Written Testimony For AIG Hearing Is Released

If you like BS in heavy doses, you'll find it here.

In addition to pulling a trick out of Henry Paulson's bag and claiming that the financial world was coming to an end (although he mentions a number of questionable situations that could have been handled differently, including Lehman and Washington Mutual) to support the bailout of AIG, he then passes the buck, on the attempted cover-up of the details of the AIG bailout, to Christine Cummings a Fed lifer, who has been there since 1979.

According to Geithner he stopped managing the NY Fed on a day-to-day basis in late November, 2008 and that First Vice President Cummings was in charge, with the implication that it was her or a lower level Fed employee that was at the heart of the cover-up attempt.

Geithner doesn't leave fingerprints via emails where it can be conclusively determined he is in on the discussion about the cover-up, so like his earlier tax problem where he "forgot" to pay taxes, those so inclined can look the other way--and will probably do so.

Geithner has a real good chance of surviving this unless he has a Youtube moment.

(Thanks to Rayne Woo for the heads up on the transcript.)

Procedural Vote to End Debate on Bernanke Scheduled for Thursday

The procedural vote to end debate on the confirmation of Ben Bernanke to a second term as Fed chairman has been scheduled for Thursday, according to Politico.

This is the key vote. Several Senators have put a block on the vote for a Bernanke confirmation. This is the vote that will end the block. It will require 60 yes votes. If Bernanke gets this vote, it is pretty much a done deal that he then gets the confirmation vote.

Generally, it would be highly unlikely that this vote would be scheduled without the 60 votes in place. However, Bernanke's term ends on Sunday, January 31, so the scheduling of this vote may simply be a scheduling move before the deadline with the hope of that the Senate leadership will have the votes all lined up by tomorrow.

Either way, it's moving very close to zero hour for Bernanke.

Class Warfare in Oregon

Michael Berger sends along an AP report on a tax just approved by voters in Oregon.

The AP notes that Oregon voters have consistently rebuffed legislative attempts to take more in tax revenue — such as a cigarette tax to pay for health insurance for children three years ago, two previous income tax measures that would have hit most Oregonians and nine sales tax measures over the decades.

So what kind of tax were government officials finally able to get through? A tax on those earning over $150,000. AP again:
Oregon has set aside its history of shooting down tax increases on statewide ballots, with voters endorsing higher taxes on businesses and the rich... The increases approved Tuesday will hit people with taxable income upward of $125,000 — estimated at fewer than 3 percent of filers. Many businesses who had been paying an annual $10 minimum will see that rise to at least $150.
Mike notes that it is a small tax, but an indication of the growing tax the rich mentality.

Also of note is union involvement in pushing for the tax. AP says:
It was a victory for public employee unions who were the spearhead of the campaign for the taxes and raised enough money to outspend the opponents.
As I have noted before, President Obama's strongest allies are unions, especially service unions. Andy Stern, president of the SEIU, has been one of the most frequent visitors to the Obama White House.

"Troubling Details" of Bernanke's Role in the AIG Bailout

Do emails exist that show the Federal Reserve staff didn't believe a bailout of AIG was necessary? If so, what caused Bernanke to overrule his staff in favor of a bailout? Is Bernanke hiding documents to keep investigators from probing in this direction?

These are the latest questions surfacing as Bernanke's confirmation vote hangs in the balance.

Ryan Grim reports:
A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide "troubling details" of Bernanke's role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that's the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke's motives were.

A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an "[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner" in March 2009.
What's going on here? Are events and emails simply starting to catch up to Bernanke and Geithner, or is this a controlled demolition of the two by forces unknown?

End the Fed

This is the best written End the Fed rap video I have seen in terms of correct and detailed economic knowledge. Best line: "Call the witch doctor" and they flash a picture of Paul Krugman. You'll also recognize other names, a book cover and sound economic theory.

Roubini: Greece Is Bankrupt

“Greece is bankrupt,” Nouriel Roubini told at WEF. “Look, they have to ask China to help them out.”

Greece is trying to get China to buy 25 billion euros ($35 billion) in bonds, according to published reports Wednesday.

If the situation becomes dire enough the European Union will be forced to help bail Greece out because it’s such a threat to the monetary union, Roubini said.

Note what Roubini is saying in this last comment: the EU will bailout Greece. This is not the impression EU leaders have been giving publicly. As the most wired in economist in the world is Roubini hearing things on background that the public isn't, specifically, if things come down to bankruptcy, the EU will bailout Greece?

It's a ballsy trade, but do you buy Greek debt if bankruptcy is near on the bet that the EU will bail Greece out?

They're Going After Geithner: Issa Report Very Damaging

A Special Report by Darrell Issa: "Public Disclosure As A Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout From the American People," is out.

Issa is the ranking Republican on the House Committee where Geithner will testify today.

Here are some key excerpts from the report:

Officials from the Federal Reserve and the Treasury Department have repeatedly attempted to mislead the American people into believing that these transactions were a responsible use of taxpayer money.

For example, Treasury spokesman Andrew Williams recently argued,

Those investments have turned out to be very sensible, and the fund at the center of the controversy [ML3] is on track to return every dollar to
taxpayers, and may well yield a profit.

These claims assume that one focuses only on the $27.1 billion in direct outlays to AIG’s counterparties, and measures the current value of the securities in ML3 against this price. However, this comparison is deceptive and dishonest, since it ignores the fact that the FRBNY also allowed the counterparties to keep an additional $35 billion in collateral.


Members of Congress continued to try to obtain information about thecounterparty payments. On March 5, 2009, Fed Vice Chairman Donald Kohn testified before the Senate Banking Committee, where Senators criticized the FRBNY’s decision to keep the names of the counterparties secret. After Vice Chairman Kohn’s disastrous appearance before the Senate Banking Committee, FRBNYAssistant Vice President.

Alex Latorre mused: “I wonder if there is away to get [Congress] off the fixation on counterparty names ….”

The day after Vice Chairman Kohn’s testimony, the FRBNY began to comprehend that they weren’t going to be able to keep the names of the counterparties from Congress. FRBNY staff member James Bergin e-mailed several other FRBNY staff:

I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals – too many counterparties, too many lawyers and advisors, too many people from AIG – to keep a determined Congress from the information.


Throughout the fall of 2008 and the spring of 2009, the FRBNY and its lawyers at Davis Polk reviewed and approved all of AIG’s draft SEC filings, not just those that dealt directly with the counterparty payments. The FRBNY used this power to prevent embarrassment to the Fed. On at least one occasion, pressure from the FRBNY appears to have resulted in a violation of disclosure rules.

On November 17, 2008, AIG was about to make a required filing to disclose a new compensation package for its CFO, David Herzog. AIG shared its draft filing with Davis Polk. The filing disclosed that Herzog was about to rake in millions of dollars in bonuses.

Less than 40 minutes after receiving the draft filing from AIG, Davis Polk senior partner Marshall Huebner sent a frantic e-mail, entitled “READ ME,” to the FRBNY’s General Counsel, Thomas Baxter: “Sometimes I really do feel like evil gremlins are running this deal somehow. Very bad timing to have this [filing] come out just before the Secretary [Henry Paulson] and the Chairman [Ben Bernanke] go before Waxman …”72 Huebner asked Baxter, “Is there any chance – and maybe it is just too late – to get the Herzog comp package unagreed to? … [W]e could help get the package changed/fixed before itis disclosed.” This issue, Huebner said, needed
to go “right to [AIG CEO] Ed [Liddy] right now."

Apparently, the FRBNY’s coercion succeeded in getting Herzog’s compensation package “unagreed to,” for AIG never made the filing.


The SEC’s disclosure rules are intended to protect investors by ensuring that they receive all material information about public companies’ business and financial condition. The FRBNY’s interference with AIG’s disclosure obligations was not in AIG’s investors’ interests, or in the public interest. Instead, the FRBNY’s goal was
to avoid public scrutiny of the embarrassing details of the bailout.


When asked directly if he was involved in the efforts by the FRBNY to prevent disclosure of the AIG counterparty payments, Secretary Geithner responded, “I wasn’t involved in that decision.” On January 8, 2010, FRBNY General Counsel Thomas Baxter wrote Ranking Member Issa to clarify the role of then-President Geithner:


M]atters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner …. In my judgment as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president.

Mr. Baxter reiterated this claim in an interview with Committee staff. Questions of securities disclosure, Baxter said, were “legal stuff,” and Baxter did not bring legal stuff to the attention of then-President Geithner. However, Baxter said that “on significant policy issues, of course I would go” to Geithner.

However, documents received by the Committee suggest that Secretary Geithner was, at a minimum, engaged personally in reviewing what information about the AIG bailout would be revealed to Congress and the public. On November 6, 2008, Sarah Dahlgren, the FRBNY’s lead staff member in AIG’s operations, e-mailed Geithner with a proposed statement regarding AIG’s upcoming equity capital raise for Geithner’s approval:

I]n terms of saying something publicly about our intentions, we … think that saying something that conveys the following … makes sense:

It is our(Federal Reserve/Treasury) continued intention to put the company in a sound capital position and exit the facility/preferred securities/common stock ownership as soon as practicable…

[I]f you are good with this, …we would also make sure that the company
sticks to this line (echo)….

At a minimum, the cover-up of the details about AIG’s counterparty payments began on Secretary Geithner’s watch, and the culture of the FRBNY in which this behavior occurred reflected his leadership. Secretary Geithner needs to explain his role in the cover-up, and if he thinks the behavior of his staff at the FRBNY was appropriate.


According to SIGTARP:

Then-FRBNY President Geithner and the FRBNY General Counsel [Tom Baxter] told SIGTARP that the financial condition of the counterparties was not a relevant factor in the decision to create [ML3] and pay counterparties effectively at par.
Secretary Geithner’s claim is contradicted by internal FRBNY communications obtained by the Committee.


Secretary Geithner’s claim to SIGTARP that the backdoor bailout of AIG’s counterparties had nothing to do with the health of AIG’s counterparties also raises questions about why AIG was bailed out in the first place.


Secretary Geithner’s inconsistent statements and apparent contradictions raise important questions about the decision to not only funnel billions of taxpayer dollars to AIG’s counterparties, but also the decision to bail out AIG itself.

A Big Day for Geithner

At 10:00 AM, Treasury Secretary Geithner will testify before the House Committee on Oversight and Government Reform.

According to the Treasury, "the Secretary will discuss in detail the steps the government took to rescue AIG and how the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses. "

Expect heavy grilling of Geithner, especially by those up for re-election in the fall.

The members of the Committee include:

•Chairman, Edolphus Towns, New York
•Rep. Paul E. Kanjorski, Pennsylvania
•Rep. Carolyn B. Maloney, New York
•Rep. Elijah E. Cummings, Maryland
•Rep. Dennis J. Kucinich, Ohio
•Rep. John F. Tierney, Massachusetts
•Rep. Wm. Lacy Clay, Missouri
•Rep. Diane E. Watson, California
•Rep. Stephen F. Lynch, Massachusetts
•Rep. Jim Cooper, Tennessee
•Rep. Gerald E. Connolly, Virginia
•Rep. Mike Quigley, Illinois
•Rep. Marcy Kaptur, Ohio
•Rep. Eleanor Holmes Norton, District of Columbia
•Rep. Patrick Kennedy, Rhode Island
•Rep. Danny Davis, Illinois
•Rep. Chris Van Hollen, Maryland
•Rep. Henry Cuellar, Texas
•Rep. Paul W. Hodes, New Hampshire
•Rep. Christopher S. Murphy, Connecticut
•Rep. Peter Welch, Vermont
•Rep. Bill Foster, Illinois
•Rep. Jackie Speier, California
•Rep. Steve Driehaus, Ohio
•Rep. Judy Chu, California

•Rep. Darrell Issa, California, Ranking Minority Member
•Rep. Dan Burton, Indiana
•Rep. John L. Mica, Florida
•Rep. Mark E. Souder, Indiana
•Rep. John J. Duncan, Jr., Tennessee
•Rep. Michael Turner, Ohio
•Rep. Lynn A. Westmoreland, Georgia
•Rep. Patrick T. McHenry, North Carolina
•Rep. Brian Bilbray, California
•Rep. Jim Jordan, Ohio
•Rep. Jeff Flake, Arizona
•Rep. Jeff Fortenberry, Nebraska
•Rep. Jason Chaffetz, Utah
•Rep. Aaron Schock, Illinois
•Rep. Blaine Luetkemeyer, Missouri
•Rep. Anh "Joseph" Cao, Louisiana

Geithner appears to be a pretty protected guy, on the other hand, the recent leaks of New York Fed emails from the period when Geithner was president there suggests he may be someone's target.

Never one to think quickly on his feet, the danger for him comes if he gets a question he is not prepared for and creates a Youtube moment.

In the evening, Secretary Geithner will attend the President’s State of the Union address before a Joint Session of the United States Congress.

Tuesday, January 26, 2010

Will Paul Volcker Tell Congress What the Volcker Rule Is?

As John Carney has pointed out, no one really knows what the Volcker Rule is, though somehow it appears to be the key to understanding what the impact of the new financial regulations will be.

Perhaps the man himself will tell us. He is going to have the opportunity.

The Senate Banking committee is expected to have a hearing Tuesday, Feb. 2, to hear from former Federal Reserve Chairman Volcker about the White House’s recent proposal to limit the size and risk of big U.S. banks.

The very tied in Nouriel Roubini seems to think the Volcker Rule is about splitting up the big banks. If so, that would mean Goldman Sachs may suffer a huge division between their trading apparatus and the cheap Fed money they have access to at the present time.

Richard Nixon's Grandson, Running For Congress

Chris Cox, grandson of former president Richard Nixon and son of current New York State GOP Chairman Ed Cox, is running for Congress.

Cox, a former associate at Weil, Gotshal & Manges, where he worked in their private equity group, and Executive Director of the New York arm of John McCain's 2008 presidential campaign, is running in NY's 1st Congressional for the seat now held by Democrat Tim Bishop.

While Cox's grandfather is most well known for resigning from the Office of the President as a result of his role in the Watergate cover-up, it should be noted that, while president, Nixon cut the final links between the dollar and gold.

In the eyes of a few, including Hans Hermann-Hoppe, this act removed the final key economic restraint on government, a restraint that prevented the government at some future point from blundering into a destructive hyper-inflation.

Roubini Supports Reappointment of Bernanke, Praises Volcker

Federal Reserve Chairman Ben Bernanke should be reappointed for a second term because of his success in battling the worst economic downturn since the Great Depression, Nouriel Roubini said.

“I support the reappointment of Bernanke,” Roubini told Bloomberg Radio ahead of the World Economic Forum in Davos, Switzerland. “He made lots of mistakes before, during the crisis. But all in all, the final response of the Fed was the right one.”

No surprise here. Bottom line, with Roubini being one of the most connected economists in the world, he is not going to potentially cut off access to the guy who may continue to be chairman of the most powerful central bank in the world.

Me and My Droid: A User Review

By Taylor Conant

I've had the Motorola Droid (with Verizon Wireless) since late November and at this point I think I can speak with confidence when I say, undeniably, this phone is great... and not so great.

The display is great. It's quite large (larger than the iPhone's, the seemingly most important and relevant way to describe via comparison). It's also sharper, more vivid and brighter. If you show your Droid to an iPhone person whose heart has not completely calcified with fanboy jealousy they will likely admit this to you, sometimes grudgingly but most times with wondrous enthusiasm.

It's a touchscreen display, too. You can interact with the phone by tapping and dragging all over the place. The built in browser is not as intuitive as the iPhone-- double tap to zoom in, double tap again to zoom out, and flick your fingers across the screens surface to scroll. No precision-pinching. When entering data on the screen (such as composing a text, e-mail or typing in a URL) a large keyboard appears. The Droid can be turned 90-degrees at any time and the screen will reorient horizontally, along with the keyboard, which allows for quick dual-thumb typing.

Even better, the Droid has a full slide out QWERTY-keyboard, with Alt-key presses on most keys and a 4-way directional thumb pad and enter button on the side. When I first got the Droid, I hated the keyboard. Hated it. It's a little cramped. The buttons are small. It's too flat! I don't even have large hands and I was seriously fumbling on the thing after experiencing the joy of rapid-fire texting on my old LG enV2 (dang, I still need to sell that thing on eBay or something!) But my frustration gave way to determination and, low and behold, I got used to it with some practice. I'm now a whizbang. I've had a few people comment to me in various settings that I seemed to be hammering out an essay on my phone. When someone says that to you, you know you've arrived in Phone-Keyboard Heaven.

There are four buttons along the bottom of the display, on the exterior case of the Droid: Search, Home, Menu and Back. This should be pretty self explanatory but, Search lets you search anything within whatever program you're using at the time if that's available (search your e-mail, search the web, search Google Maps, search your phone), Home gets you back to your main, icon-scattered home screen, Menu brings up a menu with additional options based on context and Back will navigate you back through pages and menus and eventually to Home if you press it enough.

It doesn't always work as nicely as it should, though. Say you get a text-message. You read it. You hit Back. Sometimes Back dumps you into your text-messaging "app" where you can see a list of your other text-messages. Other times, Back dumps you into the Home screen. Why? I haven't figured it out yet but I am guessing if I tested it more it's got something to do with whether I accessed my text-message via the Notification Bar, or by going through the Messaging program from the Home screen. It's inconsistent, even if it is user-error, and it's middling on frustrating.

And how about that Notification Bar, huh? It seems to be something the Droid marketing machine has been proud of, but it's not as glitzy as it could be. Yes, it does a good job of keeping all notifications in one central, easy to find location, and it does keep the user from being annoyed by constant pop-ups. But much seems to be lost in the simplicity. If you don't happen to look at your phone right as or right after you're receiving a notification (such as a new text), you'll have to go into the Notification Bar and see what is bothering you specifically if you want more information than a program-specific icon.

Perhaps even more disturbing than this is the fact that, aside from incoming phone calls, the screen does not light up and display information when new notifications occur! I'll admit this could be a Droid noob's mistake as my phone, for whatever reason, did not come with a user manual, but I could find no setting within the phone anywhere that might change this. This is one of the incredibly not great things about the Droid-- even if you memorize the various custom notification sounds associated with your various programs (messaging, e-mail, Gmail, general phone notification, etc.), you still have to 1.) press the display power button to activate the display, 2.) slide your finger to unlock the phone and 3.) check the Notification Bar or relevant program to get an idea of what just happened. Oh, and then you have to 4.) decide if it was important enough to go through all that effort.

This is cumbersome. If the phone operated in a more intuitive manner in this regard all one should need do is 1.) look at the screen and decide if it's worth going through the other steps to retrieve the full message.

Something else you may have to get used to, which I realize now is cool, but was extremely annoying before I understood what was going on-- when you hold the phone up to your ear the display turns off so you save battery and don't accidentally press a key with your ear and say, hang up unexpectedly. If you need to interact with the touch pad (say you're accessing your voicemail) or you want to check your contacts, Messaging list or e-mail while on the phone and you remove the phone from your ear to more in front of your face, the Droid's gyroscopes sense this and turn the screen back on automatically. It takes a split-second though... until I figured that out, I'd hit the screen power button right away and inadvertently turn the screen off when it was trying to turn on, leaving me convinced that for some reason it took two presses of the power button to get the screen back on in this situation!

The 5MP on board camera is not so hot. It does video as well. And it has a flash. But it has trouble focusing a lot of the time. And the pictures aren't that crisp. Don't buy this phone for the camera, okay?

The Droid comes with a 16GB flash memory stick. Frustratingly, it's buried underneath the battery so you must power down the phone if you have some reason to remove it and put it inside something else. Luckily, the micro-USB (mini-USB? whatever it's called) port on the side of the phone that's used to charge it is also a quick and easy way to mount the phone's memory card via USB to any computer as an external drive, at which point one can easily get files onto or off of the phone's memory. This is also the way you can dump all your music onto the memory, which you can then access with the not-so-robust-but-still-usable Music "app" the Droid comes with. A 3.5mm jack on top of the Droid allows you to use your phone as an MP3-player on the subway or in your car hooked up to the speakers through an auxiliary cable.

What else? The Droid comes with Google Maps and real-time, turn-by-turn GPS navigation. It can give you directions for a vehicle or even on foot. It is sweet. You can go sell your Garmin on eBay once you pick up the Droid (eats through the battery fairly quick, though). The Droid supports the Android App Market-- it's not that exciting a place right now in terms of free apps, but it will get there. I've got Google Finance and the US Debt Clock apps, along with a few others, but there are no Droid versions of popular apps like Yelp, yet. The built-in personal e-mail app is pretty weak, and recently decided to stop checking for new e-mails according to the schedule I gave to it (it keeps forgetting), so if you're looking for something with Blackberry-like e-mail prowess, keep looking, and maybe even try a Blackberry.

As a heavy Google user, I think the biggest selling point of the Droid (and other Google Android OS-based phones) is the way the phone syncs with your Google accounts. Anytime I update my contacts on my phone, they are instantly updated on the web as well, or vice versa. I can access my GCalendar with the related app and the same syncing occurs. Same with GFinance. I'd just like to see some official GNotepad, GReader and GBlogger apps, as well. Picasa, too... the mobile version accessible via phone browser is cool, but wonky, and provides no way to really upload and manage my pictures.

Finally, the phone supports voice-recognition and voice-search, which are especially handy while driving. There's even a special Car Home screen that offers large, easily identifiable icons of things like Contacts, Maps, etc. along with a Voice Command button so you can simply tap the button and say "Dial ________ " and keep your eyes on the road (hopefully you've got a Bluetooth-enabled car audio system, too).

And the external-speaker (speakerphone) on the phone is LOUD. But the vibrate is feeble... be prepared to miss all kinds of calls as you walk around town with your Droid in your pocket set to vibrate.

Taylor Conant writes about economics, politics and liberty from Texas. He believes that no matter what we do, the jungle is everywhere.

Berkshire Hathaway Added to S&P 500

S&P said tonight that Warren Buffett's Berkshire Hathaway will replace Burlington Northern Santa Fe in both the S&P 500 and the S&P 100.

Berkshire is acquiring BNSF in a deal expected to close next month.

Berkshire B shares were up 8 percent in after-hours trading minutes after the news hit .. rising to $73.50 from today's 4p ET close of $68.06. Buffett recently split the shares 50 for 1.

The higher-priced Class A shares were up 5 percent to $107,000 from today's 4p ET close of $102,010.

The big index funds that try to mimic the returns of the S&P 500 will now need to buy Berkshire Class B shares.

Only 35 Subscribers Pay to Enter Through Newsday Pay Wall

In late October, Newsday, the Long Island daily put its web site,, behind a pay wall.

So, three months later, how many people have signed up to pay $5 a week, or $260 a year, to get unfettered access to

New York Observer's John Koblin has the answer:
35 people. As in fewer than three dozen. As in a decent-sized elementary-school class.

That astoundingly low figure was revealed in a newsroom-wide meeting last week by publisher Terry Jimenez when a reporter asked how many people had signed up for the site. Mr. Jimenez didn't know the number off the top of his head, so he asked a deputy sitting near him. He replied 35.

Michael Amon, a social services reporter, asked for clarification.

"I heard you say 35 people," he said, from Newsday's auditorium in Melville. "Is that number correct?"

Mr. Jimenez nodded.

Hellville, indeed.

The web site redesign and relaunch cost the Dolans $4 million, according to Mr. Jimenez. With those 35 people, they've grossed about $9,000.

In that time, without question, web traffic has begun to plummet, and, certainly, advertising will follow as well.

Of course, there are a few caveats. Anyone who has a newspaper subscription is allowed free access; anyone who has Optimum Cable, which is owned by the Dolans and Cablevision, also gets it free. Newsday representatives claim that 75 percent of Long Island either has a subscription or Optimum Cable.

Was This 'Spending Freeze' Proposal Just a Saturday Night Live Skit?

By Mario Rizzo

The Wall Street Journal print edition has a headline today: Budget Freeze is Proposed. At first I thought it was going to be about some Republican plan. But the first sentence said: “President Obama intends to propose a three-year freeze in spending …” What? Did The Onion take over the WSJ? Is it April Fools Day?

Then the sentence continues, the freeze will be “in spending that accounts for one-sixth of the federal budget — a move that is meant to quell rising concern over the deficit but whose practical impact will be muted.” We further read that, if enacted and (by implication) not violated over the next three years it will save $250 billion over the next decade.

What? A three-year freeze saves $250 billion over a decade ? First, of all, that is just $25 billion per year. Second, it depends on whether, after the freeze is over, the next Administration decides to make up for the years of no growth.

Where will the savings come from? Social Security and Medicare are untouched (presumably also Medicaid as the states are going nuts over their shortfalls here). The savings will come vaguely from the Departments of Housing and Urban Development. Justice, Energy, Transportation, Agriculture, and Health and Human Services — areas that Obama requested a 7.3% increase in spending last year.

He thinks Americans are fools. Yes, many of them are. But not enough of them for this new policy.

Read the rest here.