Tuesday, March 31, 2009

Guarantees on Money Market Funds Extended

The Treasury Department today announced an extension of its temporary Money Market Funds Guarantee Program through September 18, 2009. The Program was scheduled to end on April 30, 2009.

As a result of this extension, the temporary guarantee program will continue to provide coverage to shareholders up to the amount held in participating money market funds as of the close of business on September 19, 2008. All money market funds that currently participate in the Program and meet the extension requirements under the Guarantee Agreements are eligible to continue to participate in the Program. Funds that are not currently participating in the Program are not eligible to participate.

Why Is the Adminstration Keeping Krugman at Arms Length?

I'm not much for Paul Krugman economics. His economics would appear to fit in nicely, though, with the current White House. However, they keep him at a safe distance, and as Krugman himself put it, they aren't making much of an attempt to reach out to him. They are also leaking to reporters that he is naive. What's the deal?

Dean Baker has an interesting theory:

While it is possible that Obama officials actually think that Krugman is naive there are other plausible explanations for their behavior and comments. For example, the Obama administration is closely tied to many top Wall Street executives. It is possible that it is designing its bank policy to serve the interests of Wall Street rather than the country as a whole, as has been argued by people like MIT professor Simon Johnson, the former chief economist at the IMF.

If the Obama administration is actually designing its financial policies to serve the interests of Wall Street, it is unlikely that its top officials would ever admit to this fact. It is far more likely that they would make anonymous complaints to reporters that the people who make such allegations are "naive."

Wow, A Power Punch Out of England for Less Government

One thing this global financial crisis is doing is bringing to the forefront a new group of free market leaders. Some may fall by the wayside, but great future free market spokesmen are also likely in the group. The latest to speak truth to power is Daniel Hannan a “writer and journalist, and has been Conservative MEP for South East England since 1999.”

This is a must view video. You have never heard anyone speak to a major government leader like this before.

Be sure to listen to this Cavuto interview of Hannan at least as far as Hannan's comment on Keynesianism.

And, don't forget to listen to this audio broadcast of Glen Beck interviewing Hannan.


Dr Boom: 6 Reasons I'm Calling a Bottom and a New Bull

Long-time analyst Paul Farrell of Market Watch writes:

OK, so you're one of millions of investors impatiently waiting on the sidelines, sitting with $2.5 trillion cash under your mattress, waiting for the right moment, that signal screaming: "Bottom's in, start buying!" Yes, it'll go down again, but the bottom's in, thanks to a great March, possibly the third best month since 1950, so it's time to jump back in and buy, buy, buy!

You heard me, I'm calling the bottom, beating Dr. Doom [Nouriel Roubini] to the punch again (yes, again). Last time we were predicting the recession. This time we're calling the market bottom and a new bull.
Farrell then lists "6 Reasons to Buy". In actuality, they are not reasons to buy, but rather 6 reasons why most miss the starts of bull markets. Nevertheless they are worth reading. (Note: His reasons are in italics, with my commentary following each reason):

1. The stock market turns before the economy bottoms

Farrell has this right. It does so because it is the ultimate capital goods market, and when the Fed injects money, it  generally flows into the capital goods sector first.

2. Stocks make big money fast then go to sleep

This is why you need to be in early before the up move, and out early before the end. Farrell writes:

"Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900." He "found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market's 10 worst days, you would have tripled the actual return of the Dow."
3. No one can predict the next big move

True. It often is a very specific news event that causes the big move. You can often sees tons of money on the sidelines and know the big move is coming, but you generally can't tell in advance what the big news will be.

4. Famous media-darling pundits inevitably flameout

A lot of the media darlings are one note Charlies. More than understanding the markets, they tend to strike one note forever. When the market hits that note, they look like geniuses--especially if they tend to be bearish, since most are usually optimistic, the bear will stand out.

5. Even the best economists make huge errors

Farrell doesn't understand why, but he simply notes the problem.

In actuality, the problem is that most economists are trend followers, they will never catch the major changes in trend--by definition. And a lot of Austrian economists who understand the business cycle are way off on their forecasts because they do not study the economy in enough detail. This happens partially because some Austrians, such as Joe Salerno, promote the idea that Austrians should be wasting their time studying voodoo equations instead of the economy. You will never know enough about the economy to make accurate forecasts if you waste hours, days, semesters and graduate studies learning voodoo equations. In truth, what the Austrian school needs is a bit of division of labor where some study and understand in detail the voodoo equations so that they can be blown up, and others who spend time understanding the real economy in detail. The latter is pitifully lacking, and there is an over supply of new Austrians who spend way too much time with the voodoo economists.

6. Will the real Dr. Doom please stand up?

Here Farrell questions Roubini's forecasting credentials:

Roubini actually shares the Dr. Doom title with many others, including Hong Kong economist Marc Faber who publishes the "Gloom Boom Doom Report;" legendary Salomon Bros. strategist Henry Kaufman; and Houston billionaire Richard Rainwater, whom Fortune mentioned as Dr. Doom...the "Roubini Hype Machine" may well be the "one-hit wonder" Portfolio calls him. He was not ahead of the competition with his December 2007 recession call. So if you're one of America's 95 million investors waiting for Roubini to call a bottom before getting back in the market, you'll miss the real turning point.
Farrell then ends with this gem that nails the current situation:

One final, crucial warning: This next bull will be short. First, it will suck money out of the mattresses of investors who are sitting on cash. Then Wall Street will recreate the insanity of the '90's dot-coms and the recent subprime-credit mania.
But underneath it all, Wall Street's bulls will be setting the stage for yet another catastrophic bubble and meltdown. So please be careful when "Dr. Doom's PR Hype Machine" proclaims that Roubini's finally morphed into "Dr. Boom" later this year. It'll be too late.

Let the Show Trials Begin

A scapegoat has been found. NyPo reports:

A former AIG executive could be brought up on federal fraud charges for his role in precipitating the global economic crisis, according to published reports.

FBI investigators and federal prosecutors are eyeing Joseph Cassano, 54, whose shady investments cost the insurance giant hundreds of billions of dollars, according to ABC News.

Cassano, who grew up in Brooklyn and now lives in London, earned upwards of $300 million running the company's now-infamous Financial Products division. That department insured what have since become more than a trillion dollars in virtually worthless bank loans.

"He almost single-handedly is responsible for bringing AIG down, and by reference the economy of this country," said Rep. Jackie Speier (D-Calif.) told ABC.

Prosecutors are still trying to determine if Cassano's actions are criminal.
While the real criminals get away:

There is no way that Cassano is in the same league as Ben Bernanke, and his forerunner Alan Greenspan, when it comes to "precipitating the global economic crisis." Not even the crook Henry Paulson matches up to Bernanke and Greenspan. Casssano. a criminal? Give me a break. Stupid maybe, criminal no.

This crisis was caused by Federal Reserve manipulation of the money supply creating the boom and bust business cycle, pure and simple. Last I looked, Cassano didn't have a printng press.

It's Over for the Dollar

The forecasts of the dollar's demise are getting more aggressive.

The dollar’s days as the world's reserve currency are numbered says Chief Investment Officer V. Anantha-Nageswaran of the respected private Swiss bank, Bank Julius Baer.

A Move Away From the Dollar: China-Argentina Currency Swap

China has agreed to a 70 billion remnbi currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.

Xinhua, the official Chinese news agency, said the deal was signed on Sunday by Zhou Xiaochuan, governor of the People’s Bank of China, and Martín Redrado, Argentine central bank president, in Medellín, Colombia, where they are attending a meeting of the Inter-American Development Bank.

You are witnessing the demise of the dollar as the world's reserve currency.

Monday, March 30, 2009

How the Big Banks Turned Profitable In January and February

Bob Murphy sends me an email with a link that was sent to him by von Pepe. The link is to a blog post by Zero Hedge which details how the AIG bailout has been used to pump billions into the likes of Citigroup, Goldman Sachs and Bank of America.

That this has been going on doesn't surprise me, but the details of the operation are fascinating. In essence, AIG is unwinding its portfolio of default products at below market prices, thus pumping huge amounts of money into the favored banks, since they liquidate the portfolios after buying them. Thus, Treasury continues to need to pump more money into AIG to prop it up from the additional losses it suffers when the portfolios are sold off at below market prices.

There is still a lot more of AIG that needs to be unwound, so the profits will continue to roll in. We are talking billions upon billions.

Interesting, Goldman is returning the $10 billion in TARP money it received. (I hear mid-April). This money is too hot to hold, since Congress is anxious to limit bonuses and activities of those who have received these funds. Thus, this leads to the interesting possibility that AIG could sell Goldman a portfolio or two to unwind that is sold to Goldman at $10 billion under market. Goldman then "pays back" the $10 billion it received from Treasury. The Treasury then turns around and gives the money to AIG because it is showing more losses, because it just sold portfolios at $10 billion under market price. Final result, net, net Goldman still has $10 billion, but no Congressional oversight--which allows Goldman to pay out to its people huge bonuses for all the, ahem, hard work they have done.

I fully expect that something similar is going to happen when private equity gets involved in the Public-Private-Partnerships. That's why Geithner is so sure more bailout money is going to be needed. The play has already been mapped out. The banks that "fail" the "stress test" will be forced to liquidate mortgage securities at below market rates into the waiting arms of Carlyle Group, etc. Thus, new capital will be needed to prop up these banks. Of course, a bank CEO doesn't have to go along with the program. The Obama Administration today showed there is an option B for those who aren't "doing enough" "quick enough". It's called the Rick Wagoner option. You remember him? He was CEO of GM, once.

Russia Calls for a Role for Gold in a New International Reserve Currency

It is only a matter of time before the dollar is replaced as the international reserve currency. Quite simply, the credit of the United States of America is being downgraded by market forces. Too many understand, including Russian and Chinese leaders, that the only way the U.S. governmant will be able to pay its debts is by printing even more money. The dollar and dollar based debt are going to have extremely tough sledding.

The latest development out of Moscow is a call for a return to a role for gold in the international monetary system.

Ambrose Evans-Pritchard reports that Arkady Dvorkevich, Russia's top economist, is calling for gold to be part of a currency basket that would be part of a revised Special Drawing Right (SDR) issued by the International Monetary Fund that would become the world's reserve currency.

Dvorkevich said he also sees a role for Russia's ruble and China's yuan as part of in the SDR currency basket.

The best the U.S. can do at this point is attempt to influence some role for the dollar in any currency basket.

Does Krugman Fear the Cover Story Curse?

Keep in mind that Paul Krugman was just featured on the cover of Newsweek, when he wrote this:

Ten years ago the cover of Time magazine featured Robert Rubin, then Treasury secretary, Alan Greenspan, then chairman of the Federal Reserve, and Lawrence Summers, then deputy Treasury secretary. Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis that seemed terrifying at the time, although it was a small blip compared with what we’re going through now...Never mind the fact that two members of the committee have since succumbed to the magazine cover curse, the plunge in reputation that so often follows lionization in the media

Note to Paul: What really destroyed Rubin and Greenspan was the fact that they didn't understand business cycle theory, and neither do you. In his well worth reading autobiography, The Age of Turbulence, Greenspan spends nearly the entire book discussing his analytical methods, but barely mentions the business cycle.

Consumer Confidence Numbers Released Tuesday

Consumer Confidence Index for the month of March will be released tomorrow at 10:00 AM ET. The February consumer confidence reading, provided by the Conference Board, dropped to a record low 25.0 from a downwardly revised reading of 37.4 (from 37.7) in January.

Obama's fear mongering stopped in the middle of March, so we will see if that had any impact on the index. Further, it appears that the economy started to turn slightly upward in March. However, it is probably too early to have an impact on sentiment. Overall, sentiment is one of my least favorite of the leading indicators. Give me money supply numbers over sentiment data, any day.

Obama: "We need stimulus and regulation."

Obama tells FT:
Two points I want to make on this, Number one: The press has tended to frame this as an “either or approach”. There are some G20 participants that are arguing fiercely for stimulus, others for regulation. What I have consistently argued is that what is needed is a “both and approach”. We need stimulus and we need regulation.
Of course, the "stimulus" package simply distorts the structure of the economy by taking from those low on the political power totem poll and transferring to those with political power,

And, regulation is always about forcing the economy in a direction it does not want to go, with insiders, generally, determing the direction for their own advantage. You can't have regulatory capture, if you don't have regulators. But, if you have regulators, you will have a distorted economy.

Bottom line, Obama has never moved passed the very strong economic coercion formula that surrounded his thinking during his youth and early adult life. From the search to understand his father's thinking to the influence of "Frank", Obama was surrounded by socialist thought. His father a Harvard educated economist called for all sorts of nationalizations in his native land of Kenya.

As for the man Obama only identifies as "Frank" in his autobiography, Dream's From My Father, Cliff Kincaid writes:

...through Frank Marshall Davis, Obama had an admitted relationship with someone who was publicly identified as a member of the Communist Party USA (CPUSA). The record shows that Obama was in Hawaii from 1971-1979, where, at some point in time, he developed a close relationship, almost like a son, with Davis, listening to his "poetry" and getting advice on his career path. But Obama, in his book, Dreams From My Father, refers to him repeatedly as just "Frank."

The reason is apparent: Davis was a known communist who belonged to a party subservient to the Soviet Union. In fact, the 1951 report of the Commission on Subversive Activities to the Legislature of the Territory of Hawaii identified him as a CPUSA member. What's more, anti-communist congressional committees, including the House Un-American Activities Committee (HUAC), accused Davis of involvement in several communist-front organizations.

Sunday, March 29, 2009

Geithner to Meet With China's Liu He

On Monday afternoon, Secretary Geithner is scheduled to meet with Liu He, Vice Chairman of China’s Central Leading Group on Financial and Economic Affairs.

GE Sees First ‘Glimmers of Hope’ in Economy

The Bernanke helicopter drops are starting to impact the economy.

General Electric has started to see the first “glimmers of hope” in the world economy, according to a senior executive at GE, reports FT.

Nani Beccalli, who as chief executive of GE International is in charge of all its business outside the US, said he saw several encouraging bits of economic data from round the world.

These included “signs of life” in the US and European retail sectors and improving profits among European banks as foreign competitors leave the market.

My only problem with Beccali's statement is that he sees strength in the "retail sales" area. Of course, I would prefer that this was broken down more in terms of capital goods (i.e. consumer durables) and immediate consumption goods. If he is seeing strength in immediate consumer goods, that is not as positive as growth in consumer durables. However, given that whatever he is talking about seems to have stopped and started, it's probably durable goods type stuff. For example he continues by mentioning the "inversion" of trends ":

“The first glimmers of hope are there. This is the inversion of trends, which for a long period have been going down. The glimmers weren’t there two months ago”. ..

Becalli’s comments on the first signs of an upswing were shared by other business participants at a European House-Ambrosetti conference – sponsored by FT– that took place last week in Brussels.

Bernd Geilen, the head of retail bank ING Direct in Italy, said there were signs of stabilisation returning to the banking market, while Stefano Pambianchi of Cisco said technology companies were also seeing some rebound in orders.

Remember, first the rebound, stronger than almost all expect, then the inflation (But, it is still sometime before the inflation hits at dramatic rates).

Cover Boy: Paul Krugman

Newsweek profiles Paul Krugman in its cover story.

In the profile, we learn:

"Krugman is a European Social Democrat. Brought up to worship the New Deal"

That, "Krugman generally applauds Obama's efforts to tax the rich in his budget and try for massive health-care reform. "

He says he is "more of an interventionist" than Director of the White House's National Economic Council Larry Summers.

"Krugman has a bit of a reputation for settling scores. 'He doesn't suffer fools. He doesn't like hauteur in any shape or form. He doesn't like to be f––ked with,' says his friend and colleague Princeton history professor Sean Wilentz. "

Uh oh.

"Krugman's fellow geniuses sometimes tease him or intentionally provoke his wrath. At an economic conference in Tokyo in 1994, Krugman spent so much time berating others that his friends purposely started telling him things that they knew weren't true, just to see him get riled up. "He fell for it every time," said a journalist who was there but asked not to be identified so she could speak candidly. "You'd think that eventually, he would say, 'Oh, come on, you're just jerking my chain'." Krugman says he doesn't recall the incident, but says it's 'possible'."

"His model and hero is John Maynard Keynes"

"The Obama White House is careful not to provoke the wrath of Krugman any more than necessary. Treasury officials go out of their way to praise him by name (while also decrying the bank-rescue prescriptions of him and his ilk as 'deeply impractical'). But the administration does not seek to cultivate him."

Components of the Index of Leading Economic Indicators

It's time to start keeping an eye on the components:

1. Average number of initial applications for unemployment insurance

2. Number of manufacturers' new orders for consumer goods and materials

3. Speed of delivery of new merchandise to vendors from suppliers

4. Amount of new orders for capital goods unrelated to defense

5. Amount of new building permits for residential buildings

6. The S&P 500 stock index

7. Inflation-adjusted money supply (M2)

8. Spread between long and short interest rates (the yield curve)

9. Consumer sentiment

10 .Average weekly hours worked by manufacturing workers

I rank most of the components neutral to positive right now. Consumer sentiment is the weakest, and S&P stock performance and money supply growth the strongest. Most of the others could go either way, depending on results of incoming data. But, this recession is for all practical purposes over. Most of the leading indicators are very close to turning positive. It'll be big news for mainstream media about a month or two down the road, but it is time to make your plans as though the Bear is in hibernation. As the March data is released next month, I'll break each category down in more detail, but major downside just doesn't look to be anywhere in the cards.

Saturday, March 28, 2009

Lessons on the Rise of Totalitarianism

Ambrose Evans-Pritchard is a bit confused on the economic goings on during the Hoover Administration, as evidenced by a recent column. Evans-Pritchard advances the incorrect line that Hoover was a laissez faire do nothing president. It was quite the opposite. (Bob Murphy's upcoming book, The Politically Incorrect Guide to the Great Depression and the New Deal, discusses the topic in detail.)

Evans-Pritchard is much better on his European history and reminds us that:
It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932).

However, by pointing this out, it appears that Evans-Pritchard is attempting to argue that deflation and recession are more of a danger than hyperinflation in forcing a country towards totalitarianism. Which is preposterous. While deflation and recession are no picnic and may cause the masses to move towards Daddy government, there is nothing, zero, that is more beneficial in terms of political trends or economic consequences about hyperinflation. I'll take deflation any day.

That said, the masses are very susceptible to dictatorial change even during recession. Evans-Pritchards, for example, reports in his column on the scary development that in the east German state of Thuringia, "The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll."

Thuringia isn't Baden-Württemberg or Berlin, but, if say, Rhode Island suddenly went neo-Marxist here in the states, I think we would all take notice.

And, of course, this says nothing about the sneaky totalitarian type legislation that is snuck in by governments around the world during crisis periods-sneaky legislation that the Obama Administration may be at the forefront of attempting to get on the books.

Obama One-on-One Meetings

While at the G-20 meetings in London, on Wednesday, April 1 President Obama will have one-on-one meetings with Chinese leader Hu Jintao, Russian President Dmitry Medvedev, British Prime Minister Gordon Brown and Britain's Queen Elizabeth II.

On Thursday, he will meet King Abdullah bin Abdul Aziz Al Saud of Saudi Arabia, Prime Minister Manmohan Singh of India and President Lee Myung-bak of South Korea.

G-20 to Target Tax-Haven Nations

With the world in crisis, and a dollar collapse possible at any minute, the G-20 spends time trying to get at the only free capital still left in the world. WSJ has the details:

The 20 largest economic nations in the world are expected to produce a new set of rules for oversight, transparency and conduct for offshore tax havens next week as part of a broader effort to overhaul the regulatory structure of the world economy, White House officials said Saturday.

The new "rules of the road" for Caribbean and other tax havens will be included in a communiqué issued by the Group of 20 nations at a much-anticipated London economic summit on Thursday, said Michael Froman, a deputy White House national-security adviser for international economic affairs.

The Attack from the Left on the Obama/Geithner Rescue Plan

They really don't have a clue as to how to fix things, but FT has a nice piece showing that left wing economists sure do get what the rescue plan is really all about.

Edward Luce from FT reports:

The liberal backlash against President Barack Obama has begun with many prominent left-leaning economists in the US attacking the administration’s plans
to bail out the banks.

Paul Krugman describes the toxic asset purchase plan as “cash for trash”.Jeffrey Sachs calls it “a thinly veiled attempt to transfer hundreds of billions of US taxpayer funds to the commercial banks”. Robert Reich depicts Tim Geithner, Treasury secretary, as a prisoner of Wall Street while Joe Stiglitz says the plan “amounts to robbery of the American people”.
Reich is even good on the continuity between the Paulson-Geithner balout the bankers approach. Luce writes:

Mr Reich now talks of the “Paulson-Geithner approach” to demonstrate what he sees as the continuity between Hank Paulson, George W. Bush’s last Treasury secretary, and the current administration.
Amazingly, as much as they correctly understand what is going on, they are way off base on the way to fix things. For example, "Mr Reich says bank nationalisation is the only answer to today’s crisis."

Roger Altman on the Dollar and Geithner's Rescue Plan

FT has an interesting interview with Roger Altman of Evercore.

Altman, even if the U.S. is pro a change in the reserve currency behind the scenes, answers the question about the China proposal the way Geithner should have answered it, i.e., the dollar will remain the reserve currency but China is now an important citizen so we must look at whatever they have to say.

Then he backs Geithner up in probably a stronger fashion than Geithner's mother even would. I told you he wouldn't embarrass anyone in public, but this is over the top. Makes you wonder if he is angling for Geithner's spot. Remember, he served as Deputy Treasury Secretary under Bill Clinton.

His comments on the latest rescue plan are pretty much in line with what he told me at FFI. (Actually, I think I got a little more out of him than the FT interviewer, since he told me that he couldn't participate because the threshold to participate was $10 billion under management, and he also mentioned to me that the biggest problem was likely to be the banks unwillingness to sell troubled loans they have on their books, rather than the mortgage securities.

The video interview is here.

Friday, March 27, 2009

A Little Noted Fact About AIG

San Jose State University's Jeffrey Rogers Hummel, who does some of the best deep thinking about the banking sector, sends along an email that includes this gem:

In all the recent brouhaha over American International Group, very few have pointed out that AIG is not just an insurance company but also a THRIFT HOLDING COMPANY...the fact that AIG was a thrift holding company meant that several of its subsidiaries were, of course, receiving the deposit-insurance subsidy. I have frequently suggested that deposit insurance has played a bigger role in causing the current crisis than is generally acknowledged, and this just reinforces my suspicion. Not only might the moral hazard from leaking deposit insurance have encouraged excessive risk taking on the part of AIG itself. But this is probably one reason that AIG's counterparties put so much confidence in its credit default swaps.

Although neither bank nor thrift holding companies qualifies for deposit insurance directly, the FDIC or Fed had often bailed them out along with their depository subsidiaries prior to the current crisis.
Jeff's going to be posting a more detailed comment on this at Liberty & Power.

I'm with Jeff in his thinking on the moral hazard damage that has been caused because of government near-blanket insurance against bank failures. It has literally taken away the fear of losing money from hundreds of millions of depositors, and has also taken away the eyes and ears of hundreds of millions of potential monitors, who have no reason to fear losing their money. Thus, taking away a very important check on irresponsible bank management.

Do you want a new regulatory system? Forget the Geithner proposal which will result in more control by insiders, eliminate FDIC insurance and you will have literally hundreds of millions of people trying to find out, real fast, which banks are safe, and which are not.

UPDATE: I hasten to add that in the world of realeconomik, you wouldn't end FDIC insurance overnight but rather announce its slow demise 12 months out, so that in 12 months you start lowering coverage, month 13 only 90% coverage, month 14 only 80%, etc.

S&P 500 Set for Highest Monthly Rise Since 1987

Here we go again. I told you so. On February 8, I wrote:

This M2 nsa growth is going to be highly inflationary, but what it is going to do first is rocket the stock market...
On March 10, just a couple of weeks before the recent rocket ship day when markets were up over 7%, I wrote:

...as far as some upside action in the market... I don't see it coming from the stimulus package, but from the huge Fed money printing. I really think it could be rocket ship like when the move starts. You need to be positioned in advance.
And so, today FT reports:

US stocks gave up some of their gains on Friday as the likelihood of a third consecutive positive week put the benchmark S&P 500 index on course for its highest monthly rise since 1987....
Most people are trend followers without understanding the business cycle theory behind market moves in a central bank money manipulated economy. That's why they never get in until the move is very obvious, and they never get out until far after the market peaks.

Last night I ran into a former finance professor who follows the market very closely. Her claim to fame is she got out of the market with "only" losses of 20%. She told me that she was now waiting to find the right time to get back into the market. When I told her I thought she should already be in, there couldn't have been more shock on her face if I asked her to take all her clothes off in the very crowded bar that we were in. She's a trend follower and knows her stuff, so she won't be the last one in, but there are a lot of trend followers. You need to be in and positioned before the trend followers get in--and the trend followers will be really sniffing hard if the market does close out the month at monthly gains not comporable to anything this side of 1987.

John Crudele with the Big Questions

Writes Crudele:

Tim Geithner admitted to Congress that he had to consult with "market participants" before putting together the plan announced last week to take troubled assets off banks' books in a partnership with private investors.

I wonder: Did Geithner prohibit these "market participants" from buying stocks and bonds ahead of the plan's announcement?

Or were these insiders able to use this confidential information to profit from the nearly 500-point jump in the Dow on Mon day?

Hank Paulson, Geithner's predecessor, also admitted regularly talking with market participants.

And I've always wondered how many times Paulson gave away inside information under the pretext of needing to get Wall Street's opinion.

'This Week' Coming Up: Treasury Secretary Tim Geithner

George Stephanopoulos is reporting that Geithner on Sunday will be on "This Week".

It's another "friendly" interview conducted by a former Clinton Administraton operative. Though Geithner can even have trouble with these.

Bankers' Fools Day and Angry Mobs

The G-20 meetings are set to open in London on April 2. It's being dubbed by anti-G-20 groups as "Banker's Fools Day".

Mayhem is expected outside the Excel Exhibition Centre, and major plotting inside.

While Americans have seemed to have lost, at the end of the Vietnam War, the handbook on how to throw a good protest/riot, things on the other side of the pond are a bit different.

In America, you now file a permit to protest. WTF? This is something like raising your hand in second grade for permission to go to the bathroom. In London for the G-20, according to an Aussie article sent to me by a friend, the rallying cry will be, "storm the banks." Heh, heh. Try filing that on an American protest permission form.

Australia's theage.com reports:

Next Thursday...the G20 leaders gather in London. [The mob] will be huge, it will be angry and the City will take a terrific pounding, although the move to the Excel Centre might tax the ingenuity of the demonstrators. But they will find a way to mark this event and, as I write, there is alarm among the the hierarchy of the British, European and American police forces and anti-terrorist units....
Inside, the insiders will plot. At the top of the agenda will be co-ordinated global regulation of banks and other financial entities. Of course, the demonstrators have a good gut sense that something evil is going on with this planning, and they are right. The planning going on is not about global free trade and protecting the world from global financial crisis, though it will be marketed as such. It will be about global domination of the financial world by the ultimate insiders.

Not far behind on the agenda, but only on the "unofficial" agenda, will be discussions re a new international currency. Prime Minster Rudd has, LOL, already made clear that discussion of a new reserve currency is not on the official agenda.

theage.com has a pre-game report on who is where on the reserve currency question:

The Chinese have floated the new currency plan to the Russians (who love it, as they do anything that brings the gringos down a notch), to India (warm), to South Korea (not cold), Thailand (hot) and to a mix of other interested nations including some from the Middle East.
The big secret is that the U.S., behind the seasons, is also in favor of a new reserve currency. Well, it was a secret until Treasury Secretary Geithner, in a further demonstration that he is in over his head, blurted out the insider truth they “are quite open to” the Chinese proposal.

Thus, as April begins, perhaps the most important G-20 meeting ever will result in tests for protesters and insiders. They have both become very sophisticated at advancing their aims and are both likely to dramatically advance their agendas.

The destruction by the demonstrators will be obvious and clear for all of us to see. The destruction created by the insiders will be much more difficult to see and understand, but it will impact us for the rest of our lives.

Thursday, March 26, 2009

Congresswoman Bachmann Questions Geithner & Bernanke

 to After I commented on the bill by Congresswoman Michele Bachmann to ban the replacement of the dollar, I came across this YouTube video of her questions to Geithner and Bernanke.

I think we have a star in the making. She sure looks sharp to me.

She is going to need a bit of tutoring around edges of the basics of finance and economics, but she will pick it up fast. I understand she is part of Ron Paul's Liberty Committee.

The Populist Rage Continues...

...even if it is somewhat charmingly clueless.

Representative Michelle Bachmann has introduced legislation that “would bar the dollar from being replaced by any foreign currency.” Since what China, Russia , the UN [and the Obama administration behind the scenes], etc. are proposing is a new reserve currency and not a new currency for daily exchanges in the U.S., Bachmann needs to spend more time with Rep. Ron Paul to be schooled on what is really going on.

It is impossible for Congress to legislate what China and Russia will use as a reserve currency. The real problem is Fed printng right here at home.

That said, the rage against the machine is not a bad thing. Her sentiments are correct, even if her legislation is a bit off. I think I'll see if can catch up with her over the next day or two.

UPDATE: Bachmann seems to be doing a little backpedaling in the form of a clarification:

...a Bachmann spokesperson clarifies that Bachmann understands she can't legislate foreign countries' behavior and that "This legislation would ensure that the U.S. dollar remain the currency of the United States." But nobody -- not Russia not China not Tim Geithner -- has ever proposed changing this.

Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says

EPJ reader No Axe spotted this Bloomberg story on the reason behind the Fed's desire to issue debt.

As readers know, and I hate to be a broken record about spotting something else ahead of the pack, but early last year I commented that the Fed wanted to issue debt as a way to drain reserves.

The Fed's Janet Yellen has now confirmed this. Reports Bloomberg:

The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last week to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets. The central bank cut its main rate to almost zero in December and switched its focus to emergency credit programs.

On the power to sell debt, “I would feel happier having it now” so the Fed could use that authority to adjust its balance sheet, Yellen told reporters yesterday after a New York speech. Even without that tool, “there is a great deal we can do,” she said, “but it would certainly be a nice thing to have.”

Yellen said she was unsure whether the central bank has formally requested authority to sell its own bonds or informed Congress it plans to make such a request....

“For all the people sitting here expressing their concern about how will we avoid inflation, it would be nice to have that tool and be able to say, ‘Look, when the time comes, we’ve got this and we can use it in an unlimited sense,’” Yellen told reporters yesterday.
All this talk about "tools" is Bernanke talk. He is truly using the American economy as a private laboratory. And, I honestly believe he is going to blow the economy up.

Whether he has this tool, or not, the minute he starts to drain reserves, in a manner that slows money growth, the stock market and economy crash. He is in a major box. If he money growth slows, the economy will crash, and what has occurred so far will look like a mild burp. If he doesn't drain, we are headed for major stagflation---with an interim period where things look good for awhile.

Geithner Statement Very Strong on New Reserve Currency

Treasury Secretary Geithner's comment re a plan to replace the dollar as a reserve currency was much stronger than reported by FT.

Here's what FT reported:

Mr Geithner told the Council for Foreign Relations that he had not studied the proposal by Chinese central bank governor Zhou Xiaochuan for greater use of Special Drawing Rights in international reserves, but said “we are quite open to that”.

Here's more of what Geithner said, via Ben Smith at Politico:

"I haven’t read the governor’s proposal. He’s a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue," Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund's special drawing rights -- shares in the body held by its members -- not creating a new currency in the literal sense.

"We’re actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union," he said.

"The only thing concrete I saw was expanding the use of the [special drawing rights]," Geithner said. "Anything he’s thinking about deserves some consideration.

And here is Smith on Altman bailing out Geithner:

UPDATE: Evidently sensing a gaffe, moderator Roger Altman told Geithner that it would be "useful" to return to the question, and asked if he foresaw a change in the dollar's centrality.

"I do not," Geithner said, adding several forceful promises, including, "We will do what's necessary to say we're sustaining confidence in our financial markets."
Either Geithner is totally clueless or the Administration has chosen planned confusion as a way to introduce the concept of a new reserve currency, since Obama, last night, expressed confidence in the dollar and said: "I don't believe that there's a need for a global currency." Notice, he did say no need for a "global currency" which is technically different from a new "reserve currency".

To further complicate matters, White House economic adviser Austan Goolsbee appeared on Wolf Blitzer's show yesterday. And although he did nothing to promote the idea of a new reserve currency, many interpreted his remarks as insufficiently forceful in knocking down the likelihood of a new reserve currency.

My own belief is that, as I have been reporting, something is brewing, but it is early stage. The Obama Administration is trying to figure a way to get the dialogue going without crashing the dollar. Their effort, par for the course, has resulted in their appearing as total bunglers.

Here Comes the Regulatory Expansion Program

Treasury Secretary Geithner will testify before the House Financial Services Committee tommorow.

Treasury is reporting that, "Secretary Geithner will lay out a broad framework to establish the rules of the road needed to restore faith in the financial system." 

Geithner Let's the Secret Out: The Coming New Reserve Currency

The dollar jackknifed Wednesday on comments by Treasury Secretary Geithner as he accidentally sent out a dollar sell signal and was given the opportunity to correct his question under friendly questioning.

This could have been an even greater faux pas if it wasn't corrected quickly.

As for the correction, they have obviously brought in some heavy duty handlers to protect Geithner. As I have pointed out, his briefings with the press are now, mostly, pen and pad deals.

This morning when I posted that Geithner would be speaking at the Council of Foreign Relations, Bob Murphy (Who else?) asked in the comment section:

Are these talks going to be pen and paper only? Check your iPhone at the door?
Since, Bob is an economist and not a reporter, and I wear both hats at various times, in the comment section, I provided Bob with a bit of background on what was going on:

Oh Bob,

I have to update you in the subtleties of reporting. This is not a "press conference," so reporters are banned from asking questions. It's Q&A from the audience where you likely have a moderator who has the questions written down from the audience on index cards and he picks and chooses which questions to ask. Geithner would be glad to field questions all day with this set up even if it is being streamed live over CNN, given Geithner usually brings along the moderator's last tax return, and there's a big yellow stickie on the front that says, Audit, yes or no with a big question market.

At FFI, I tried to ask Prime Minister Rudd a question and the WSJ staff nearly tackled me
My point being, the reporters are there as stenographers and the moderator is friendly. I wrote this before I was aware of who the moderator was. Since then I have learned that it was Roger Altman.

Coincidentally, the evening before I had a talk with Altman, at FFI. Altman is as sharp as a whip, but he is really a true gentleman. Whoever is handling Geithner made a perfect choice in Altman as moderator. Altman would never try to embarrass someone in public, and indeed as this FT report shows, Altman actually managed to bail Geithner out of a potential worldwide embarrassment:

The dollar fell briefly on Wednesday after US Treasury secretary Tim Geithner said he was open to exploring a Chinese proposal to reduce reliance on the US dollar as the world’s reserve currency.

Mr Geithner told the Council for Foreign Relations that he had not studied the proposal by Chinese central bank governor Zhou Xiaochuan for greater use of Special Drawing Rights in international reserves, but said “we are quite open to that”.

The dollar fell 1.3 per cent against the euro as headlines saying “Geithner open to SDR currency” flashed across traders’ screens. With the currency falling, Mr Geithner’s interviewer – Roger Altman, a deputy Treasury secretary in the Clinton administration – gave Mr Geithner the chance to clarify his remarks.

The Treasury secretary said: “I think the dollar remains the world’s dominant reserve currency”. The dollar subsequently recovered much of its losses.

Now the reaction of the dollar to Geithner's comment shows you that there are still a lot of traders that need to be reading EPJ, since I have been reporting, for at least two months now, the fact that the U.S. was not against a new reserve currency. This should not have come as a surprise to traders.

Interestingly, at FFI, when I brought up the question of a new reserve currency, many pooh, poohed the idea. Others seemed to be more in the know and felt something was starting to happen, but were very hazy on details.

As best I can tell, here's what is going on. The Treasury is fully aware that the dollar could collapse at any time. It's like the expected southern California Big One earthquake. Earthquake specialists tell us that it will happen, only the timing is uncertain. It's the same with the timing on the collapse of the dollar, the dollar will collapse at some point given its current condition, only the date is just unsure.

The thinkers at the Treasury appear to have reached the conclusion that the best way to handle the inevitable is to accept reality and make the best of it. The "best of it" appears to be a new reserve currency that the U.S. somehow stick handles. This could be SDR's, or some other basket of currencies formula.

I call it the "gin and tonic formula." Suppose you are looking for a good strong drink and all you have is a glass of tonic. Now one option is to throw away the tonic, and get yourself a shot of whiskey, but another option would be to add gin to your glass of tonic. This is what the U.S. is going to attempt to pull off. A shot of whiskey means the dollar has collapsed and a new currency will emerge. The gin and tonic approach means the dollar (the tonic) stays right where a lot of it is, with central banks around the world, but it is mixed with stronger currencies (the gin) in some new basket of currencies.

If the U.S. can pull this off, it would calm markets. Of course, if the Fed prints money at a faster rate than other currencies in the basket, the basket will fall apart.

Geithner's comment on China's plan is the first public acknowledgement that the Treasury is thinking in this direction. The reaction in the markets clearly means the markets had no clue. In terms of realeconomik, a market basket protects the dollar from total collapse. The dollar should have rallied on the news. The traders were just taken by surprise by Geithner's off hand method of launching the debate. And, I am very sure that the Treasury insiders are very glad that Altman was in the boat doing the steering when necessary.

One more comment must be made with regard to the gin and tonic formula. This does not cure all the economic ills. If the madman Bernanke continues to print money as though he is trying to seduce Robert Mugabe's wife away from Mugabe, a gin and tonic formula will be patchwork that will collapse within two years. And let's hope there are other countries besides Germany and the Czech Republic that will likely fight any structure that will tend to promote global inflation.

Thus, the real key is responsible money supply management. In realeconomik terms, the ideal would be a money supply that is not increased or decreased. I am not sure there are even many supporters for that in Germany or the Czech Republic.

Expect the G-20 meeting to be a launching pad for the formation of study groups. Who is on the groups will provide a good sense as to the direction a new reserve currency is likely to take.

Wednesday, March 25, 2009

A Few Final Notes Out of FFI

Short seller Jim Chanos was on a panel at FFI and said he did not care if the uptick rule was reinstated. He said that short-sellers had done fine in the past with the uptick rule in place, and if some key stock or the overall market dropped in the future, without the uptick rule in place, then everyone would blame short-sellers.

Chanos' thinking seemed to be to throw regulators and legislators a bone. My thinking is that this is poor strategy. Once regulators and legislators get the uptick rule in place, it is not as though they are going to go away. They are going to look for the next bone to chew on. It's best to keep them busy chasing that inconsequential bone so that they don't have the time to notice that on the table is filet mignon.


George Soros, at a number of the sessions, pointed out that while everyone keeps talking about systemic risk, that what has been going on is not protection against systemic risk, but only protection of the financial sector.


Martin Weiss' father was one of the few people, perhaps the only one, who made money shorting stocks in 1929 and also 1987. Weiss' father was also a friend of Bernard Baruch. At FFI, I told Weiss that I suspected that Baruch (and Keynes) influenced FDR to prop up the gold price for personal gain. Weiss wasn't willing to go that far, and said we will probably never know what really happened. But, he told me that his father, and a few others, were hanging around with Baruch at the time, and that while Baruch never leaked any information to them, Martin's father and the others were all buying gold stocks aggressively and that Baruch was aware of this and, at a minimum, he certainly didn't do anything to discourage them.


BTW: Weiss has a new book coming out in April on how to protect your assets in turbulent times. I've seen an advance copy of the book and it is a winner. I'll review it once it is available for purchase by the general public.


Will Obama Get Re-Elected?

I think it is much too early to tell.

However, it appears that the economy will be in some kind of inflationary wreck by the time of the next election, but don't think this is necessarily a re-election stopper. As Bob Murphy reminds us:

Yes, the economy will be in the tank, but if [Obama] can casually and persuasively explain his programs are the way to counteract leveraged debt financing, speculation, inflated house prices, and out of control government deficits, then he will be able to convince voters he is part of the solution in 2012.Remember kids, FDR won four elections. And things weren't exactly rosy on his watch.

Bob thinks Obama will be back for another four. Money manager Nick, who seems to have a knack for getting these things right, also thinks Obama has a shot. I still think it is much too early to tell, but these two guys don't make a lot of mistakes.

There's Some Important Exchanges Going on in the Comment Section

...of my post about today's durable goods numbers.

All the comments and my replies are worth reading, but you had to figure Robert P. Murphy, Ph.D. would have the real doozy of a question. His question and my reply are must reading. It's all right here.

The Strongest Banks and Thrifts in the U.S.

I ran into Martin Weiss at FFI and I reminded him that he owed me a list of the safest banks in the country. True to his word, he sent along a link, and wrote me:

If you click on http://tinyurl.com/d2fgmz it will take you to our report for consumers on safe investing during the banking crisis.

Then, if you scroll down to the Contents page, just click on item #13, "The Strongest Banks and Thrifts in the U.S." This list has a cut-off point in terms of size. So the tiny institutions are not included. If you would like those as well, please let me know.
The banks he has listed with an A+ rating are:

Bank of Commerce Idaho Falls ID
Broadway NB San Antonio TX
City NB of Florida Miami FL
Rosedale FS&LA Baltimore MD
Sumitomo Tr & Bkg Co USA Hoboken NJ

Bloomberg: U.S. Durable Goods Orders Unexpectedly Jumped 3.4%

Not "unexpected" if you read EPJ.

Orders for U.S. durable goods rose in February on a rebound in demand for machinery, computers and defense equipment. Outside of defense, this is capital goods stuff.

The 3.4 percent increase was the biggest gain in more than a year and the first in seven months. In addition, recent report show improvements in residential construction and home resales. I always caution about winter construction and home sales, but coupled with the durable goods order and stock market action, we may be on our way, which I have been pointing out will come sooner than most expect.

Alert: Geithner Speaks in NYC

Secretary Geithner will attend a breakfast hosted by the Partnership for New York City – a nonprofit membership organization comprised of two hundred CEOs from New York City’s top corporate, investment and entrepreneurial firms.

At 9:15 am, Geithner will speak at the Council on Foreign Relations. Following brief remarks, Secretary Geithner will participate in a question and answer session.

Tuesday, March 24, 2009

Most Embarrassing Moment for the United States at FFI

In a private conversation with Central Bank Governor Durmuş Yılmaz of the Republic of Turkey, Yilmaz told me that the largest bank in Turkey, Ziraat Bank, could easily buy Citigroup at its current market cap. He then laughed and told me that they didn't want Citigroup.

Best Joke Told at FFI

Seantor Evan Bayh quoted Mark Twain:

"You can lead a man to Congress, but you can't make him think."

Sanity from Volcker and Schiller

The number of participants at today's sessions who discussed the shape of new regulatory agencies and legislation as a foregone conclusion was astounding. There was simply no one who rose to defend free market principles and to speak of the dangers of further regulation. And, of course, the chance that anyone would mention the money supply and the business cycle was near zero.

The only two voices of sanity came from former Fed chairman Paul Volcker and and Yale economist Robert Schiller. Volcker, clearly concerned, spoke in his carefully chosen central banker's moderation, and advised participants that they should go slow and not act in any haste in creating new legislation or agencies. A person close to Volcker privately told me that Volcker was very concerned about these issues and also the way Bernanke was handling the crisis overall and also the money supply.

Schiller spoke openly of the growing fear that the U.S. will default on its debt. He said he did not consider a default likely, but fully expected the fear to increase. He said that the U.S did default once in its history, when FDR went off the gold standard. He said this isn't brought up much, but it will in the future. He said a default was unlikely, in the traditional sense, because the Fed could default by creating enough inflation that the value of current debt outstanding would be minimal. He said that is a great fear.

Mixed Administration Responses on the Big Question

The big question at FFI was what is going to happen to the Giethner plan when a bank is forced to writedown assets to get them sold and this creates a serious hole in the capital of a bank. Why would the bank sell? How could they? Would the government step in to add more capital to the bank?

As I reported yesterday, WSJ's Alan Murray asked Geithner this question:

Murray asked Geithner right out of the gate if Geithner thought banks would be willing to sell assets that weren't completely marked down. Geithner danced around the question, but on further Murray probing signalled that the Treasury was willing to pump more money into any bank that needed further capital--including if it is a result of liquidating assets via the Treasury plan. I took this to me that the Treasury is protecting all major banks, currently standing, from failure.

That was yesterday.

Today, some of the FFI participants went over to the White House to get an off the record briefing from Director of the White House's National Economic Council, Larry Summers. Two of the attendees told me that at the briefing Summers was asked the same question and completely dodge it.

Which means the administration still is far from having their act together. You would think that Geithner would tell one of his assistants to put together a list of the most likely questions that will be asked about the plan, and then go over with Summers and Bernanke a common response to the questions.

"Will a serious hole in bank capital, as a result of markdowns, be filled?", would have been at the top of the list. The fact that Summers dodged it, and Geithner attempted to, suggests that there was not proper preparation for the release of the plan.

Now the question comes up, did Geithner really mean what he said when he said that all banks would be kept whole. Or did he simply answer the question that way because of the aggressive questioning by Murray and not because he had thought about the question in detail. Summers, ducking the question, suggests that they don't have a plan for the problem raised by the question and perhaps have not even thought about the problem. Scary.

Janet Tavakoli versus Meredith Whitney

Janet Tavakoli of Tavakoli Structured Finance has put together a paper questioning the view in parts of the media that bank analyst Meredith Whitney has been early on her calls warning about problems in the financial sector.

Tavakoli writes:

Much of the financial media blows in the wind of PR machines. AIG, Washington, Congress, various former investment banks, banks and others worked overtime to spin financial information over the past several years forcing competent reporters to engage in time intensive research on complex financial products. Other times, the press simply misinterprets the facts.

Last week, Charlie Rose billed Meredith Whitney on his show as the woman who gave early warning about AIG. I found that surprising given that as far as I know, she did not. The L.A. Times’ review of House of Cards, a book about Bear Stearns, says author William Cohen gave Whitney credit for warning for some years that trading in credit derivatives and mortgage backed securities set us up for a credit implosion. This is not her expertise, but it is mine, and to the best of my knowledge she did not. Ironically, Whitney rated Bear Stearns perform and only downgraded it to underperform on March 14, 2008 as it tumbled 53% in one day Whitney rated Lehman outperform in March 2008, while beleaguered Bear Stearns merged with JPMorgan Chase. She downgraded Lehman to perform towards the end of March 2008, and Lehman went under the following September...Meredith Whitney seems best known for her analysis of Citigroup at the end of October 2007. Jim Rogers appeared with Whitney earlier in the year on Cavuto on Business and stated he was short Citigroup (he shorted C in late 2006/early 2007), and he said Citigroup was going to $5. Whitney rated it sector perform from October 3, 2005 until October 31, 2007. The stock lost 7.9% versus a 7.5% gain for the Philadelphia Stock Exchange/KBW Bank Index during this period (David Gaffen, WSJ, Nov 1, 2007)...
In a chart, Tavakoli then chronicles the ratings that Whitney had on Citigroup at various times, here.

Coincidentally, Whitney is at the FFI conference I am attending. I showed Whitney the article that Tavakoli wrote and asked her to comment.

Whitney replied, "Why should I? She is just jealous."

UPDATE Tavakoli responds to Whitney:

The facts in the article speak for themselves.

It’s a shame what happens with PR spin.

Report from FFI

By Robert Wenzel

It's a small group. Most weddings have more people attending. But the heavy hitters are all here at FFI. Last night as the meetings began, Treasury Secretary Geithner sat at a table with Australia's Prime Minister Kevin Rudd. At the same table were George Soros and Robert Rubin, in intense conversation. A table over sat Carlyle's David Rubenstein, with former SEC Chairman Arthur Levitt on one side of him and Roger Altman of Evercore Partners on the other side.

A row of tables back was bank analyst Meredith Whitney, and in the back row of the small room was author, Nassim Nicholas Taleb. It was a suit and tie crowd, except for Taleb who came sans tie, and like a true black swan was the only one to then take off his jacket. After a Giethner Q&A, Taleb was also the only one to leave. He left 5 minutes into Rudd's speech.

The staff is super attentive, I asked one staff member where the press room was. She smiled and said, "I'll be glad to take you there." She then walked me the three and a half feet to the press room.

The talk of yesterday's events was the impressive performance by WSJ's Alan Murray in questioning Geithner. I heard at least three others comment on his no punches pulled questioning.

Murray asked Geithner right out of the gate if Geithner thought banks would be willing to sell assets that weren't completely marked down. Geithner danced around the question, but on further Murray probing signalled that the Treasury was willing to pump more money into any bank that needed further capital--including if it is a result of liquidating assets via the Treasury plan. I took this to me that the Treasury is protecting all major banks currently standing, from failure.

From Geithner's comments, it's clear there's more regulation of the financial sector coming. You would have to think the people in the room will have major input on what the regulations will look like. Geithner also mentioned the upcoming G-20 meetings and the fact that any changes in regulation will have to be global in nature. My thought, the One World financial plan is near.

Geithner appeared much more relaxed at this Q&A then he has appeared during press conferences. After the Q&A, he shook hands with Rubin, Soros, Rubenstein and Altman. Meredith Whitney approached him, they spoke for a minute and he left.

Prime Minister Rudd followed at the podium. He backed up Geithner's call for global financial regulation and the importance of the up coming G-20 meetings. A questioner asked him about reports yesterday that China’s central bank proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

Rudd quite aggressively dismissed the notion saying that he had received his copy of the G-20 agenda and there was nothing on it about discussing a new international reserve currency. As EPJ readers know, I have been pointing out for some time there is a strong movement to replace the dollar and the U.S. seems to be part of the movement, thus, Rudd's comments seem to becoming out of left field- or, perhaps from fear of more influence from Australia's major trading partners China and Japan.

Following, Rudd's speech, I had the opportunity to speak one on one with a number of the participants.

I asked Carlyle's David Rubenstein what he thought of Geithner's plan. He told me his people were briefed on the plan on Sunday, but the devil was in the details, and his people were still looking it over. He told me that Carlyle needed an internal rate of return of 20% on the plan. He seemed genuinely concerned that Congress might, down the road, attempt to take profits away from participants. I took this as a talking point that we will be hearing more about in the future. Something like, "We need to allow P3 participants to make a profit with protection that will prevent Congress from taking profits away down the road."

How insider is this plan? I asked Altman if he was going to participate. He told me he can't that it is only open to firms with $10 billion or more. His firm does mostly consulting and has only $2 to 3 billion available for investments.

As for the plan, he reminded me that in the 1980's when the Resolution Trust Corp was formed it took a year before there was any significant participation. He then added, "But,of course, this is getting a lot more publicity." Which may go a bit to Obama's point that things move faster these days.

Altman also told me that he thought there will be more reluctance by banks to liquidate some of their bad loans versus their mortgage securities.

I then spoke with Princeton University professor Alan Blinder, who was Vice Chairman of the Federal Reserve from June 1994 until January 1996. I asked him if he thought Fed money printing would cause inflation down the road. He said, no that "I'm not one of those who thinks inflation is going to be way out of control.". I then told him I am one of those who does think inflation is going to go out of control. I asked him if he knew of any other period in the history of the Federal Reserve when the Fed had increased the money supply at a 15% rate. He seemed to think about it for a minute and then switched the topic a bit and said, "You should be talking about the monetary base which is even going up faster." I said I'd rather look at money supply which is actually money in the economy. He agreed. He then sort of shrugged and said that he could see inflation, "maybe going to 5%." I replied, "Alan, I'm going to quote you on that, but I'm going to have to beat you up about it." He left agreeing that we would revisit the issue in a year or two to see who was right. So we are both correctly on record, my view is that, given the incredible money printing that Bernanke is doing, inflation will easily be over 10%.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.

Monday, March 23, 2009

Update on Posting for the Remainder of Today and Tomorrow

I am about to head over to The Future of Finance Initiative.

Lap tops are not allowed at most of the events, so my posting is likely to be more sporadic than usual. The Wall Street Journal will provide computers in the press room, but that means I will have to be in the press room rather than where the action is. Rest assured, I will eventually post on whatever I see and hear.

The most up to date way for me to post immediate news will be through Twitter. There are three ways to get access to my Twitter comments. On the right column of EPJ, my five most recent Twitter comments are listed.

To follow all my comments that I make on Twitter you can go to this page.

And to follow my Twitter comments over your cellphone, you can also sign up here, there's no charge.

I'm off.

PEU Slices and Dices What the Geithner Plan is Really All About

Forget the soaring stock market today, given how much money Bernanke has pumped into the system, it would have gone up if DJ put across its wire today that Geithner tied his shoes all by himself. That's what up markets do, they react to the upside on any kind of news.

The most important indicator to me was not the latest move by Geithner to shovel more money to insiders, but the Simon Property Group debt raise last week.

That was real money put up by people who don't have printing presses, and they put it in the REIT sector!

As for the latest Geithner scam, I like the way PEU put it:

The U.S. government must be one ugly date. Treasury Secretary Tim Geithner will offer up to 97% taxpayer financing for public private partnerships (PPP). Private investors only need pony up 3% to have a shot a big profits from toxic bank assets. Up to 85% of funds come from cheap nonrecourse loans. If the products implode, the PPP can hand back the junk and walk away from the taxpayer subsidized loan.

However, those terms aren't attractive enough. What do the private equity underwriters (PEU's), hedge funds and sovereign wealth funds want? The NYT reported:

1. Non or limited disclosure
2. No compensation limits or special tax increases
3. Clear, unchanging governance rules

The Obama team has given the big money boys reason to participate. Another $1 trillion round of corporafornication is in order. Belly up to the bar!
Keep this in mind when you read all those stories about how the Treasury has to twist private investors to get in on this deal.

The New Treasury Proposal for Public Private Investment Program

Here's a quick analysis of the P3 program announced by Treasury:

1. The program will pump enormous new sums of money into the banking system, since the Treasury will pump in 50% of equity into the P3's, and because the huge debt (6 to 1 debt ratio, in parts of the program) will be government guaranteed, it is for all practical purposes government financed debt.

2. The program will distort money flows away from where markets would direct money flows, thus distorting the structure of the economy---and crowding out borrowers who are not part of the government favored bank and real estate sectors.

3. I suspect the FDIC will place enormous pressure on some banks to offer assets for sale, regardless of the price they will receive. Thus, benefiting the P3's.

4. The players in the P3 game have hit a gold mine at the expense of a properly structured economy. Further, the inflation that will develop out of all these plans, along with other Fed money printing, will result in the P3's benefiting by being able to generate cheap dollars to pay off the debt they are taking on.

In conclusion, this is a huge, sophisticated play to shovel money to the private P3 partners. And, it is based on huge inflation down the road to lift the asset prices of the stuff the P3's buy. However, my entire analysis is based on the assets that banks liquidate being worth something. I don't see this program getting off the ground unless the FDIC hammer, to force banks to liquidate some of their good assets, is right over the banks' heads. On the other hand, if the banks attempt to liquidate only truly junk assets , then even a David Rubenstein lookalike is unlikely to go near them.

How well Treasury understands the key is the willingness of banks to let go of good assets is not clear to me.

In today's NYT, Paul Krugman makes an interesting observation, in an otherwise mad column about nationalizing the banks:

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.
It is obsessive. And it is because Treasury continues to try and work these assets into the hands of the Carlyle Group and the like, and they are really not interested in any other direction.

Treasury Department Releases Details on Public Private Partnership Investment Program

The Treasury has released the following fact sheet on its new Public Private Investment Partnership Program.

The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:

Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.

Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.

Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.

The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of "legacy assets" – both real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities"). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.

Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.

Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.
The Public-Private Investment Program for Legacy Assets

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.

Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.

Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.

Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.

Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.

The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:

Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.

Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.

Private Sector Partners Manage the Assets:

Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

The Legacy Securities Program:

The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.

Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market:

The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).

Providing Investors Greater Confidence to Purchase Legacy Assets:

As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.

Working with Market Participants:

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds:

Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.

Side-by-Side Investment with Qualified Fund Managers:

Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.

Offer of Senior Debt to Leverage More Financing:

Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.

Sample Investment Under the Legacy Securities Program

Step 1:Treasury will launch the application process for managers interested in the Legacy Securities Program.

Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.

Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.

Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.

Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.

Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.