May 7 2009 2: Truth is irrelevant

Walker Evans Once were bountiful Summer 1936
Roadside stand near Birmingham, Alabama.

Ilargi: Message to the board at Friedman, Billings, Ramsey: you guys may want to take a serious second and third look at your analyst Paul Miller. Boy, was he off. The banks didn't need $150 billion, as he claimed. Turns out, after the results of Tim Geithner's thorough and transparent stress tests were announced, that Miller missed the boat by $75.4 billion. And you Goldman boys should take a look at your experts as well: only yesterday did they claim US banks would need $130 billion. Sure, they didn't specify if they meant just the 19 biggest, but still, those are mistakes that must hurt.

One more employer who needs to check on one of his employees is Barack Obama. You see, Mr. President, Steve Friedman resigned today as Chairman of the New York Fed. He did so because the Wall Street Journal recently found out that he made millions on illegal purchases of Goldman stock, behind the veil of a waiver bestowed on him by then New York Fed President Tim Geithner. If you would like to find out exactly how illegal all this was, just ask Friedman why he resigned. And once you have the answer, tell Geithner to publicly explain his role in Friedman's millions.

Oh, and while you're busy providing the transparency we can believe in, make sure to give Andrew Cuomo a call and demand he start an investigation and, if he finds any wrongdoing, prosecute Friedman to make sure he's held accountable to the full extent of the law, no matter what that may mean for your Treasury Secretary. The only society people can possibly believe in is one in which the law is upheld. Anything else is just a hugely expensive waste of time. Like all the rescues and bail-outs to date in your first hundred plus days, and those muddy water stress debacles.

There are thousands who understand that it's ridiculous to pretend that all 19 biggest banks in the US are solvent, or even healthy. They will keep telling others about it, you can't stop them. You can't fool all the people all the time, and even though democracies can all too easily turn into dictatorships of majorities, those that do don't survive, especially when the idea takes hold that it's fine to ignore the law, since you make the law. The land of the free has become a joke, and a bitter one at that for those at the bottom. If you don't take your appointees to task, others will. For now, it's still your choice.

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Goldman & J.P. Morgan: Your New Banking Overlords

Jamie Dimon and Lloyd Blankfein, the chief executives of J.P. Morgan Chase and Goldman Sachs Group, are poised for world domination. After the Treasury Department released the results of its stress tests today, six financial institutions were spared from having to raise any more capital: J.P. Morgan, Goldman Sachs, MetLife, American Express, Bank of New York Mellon and Capital One Financial. J.P. Morgan and Goldman were the only banks that made the cut. All of their biggest rivals have to raise boatloads of capital. Bank of America needs roughly $34 billion; Wells Fargo, $13 billion; Citigroup, $5 billion; and Morgan Stanley, $1.5 billion. For some of those big banks, the need for capital will push them even further into bed with the government, because federal funds remain the most reliable source of capital. Consider the two favored methods for the banks to raise cash, both of which depend on government intervention, from today’s Wall Street Journal:

Administration officials continue to believe many banks will be able to add to their capital without tapping the TARP’s remaining $109.6 billion. They are optimistic much of the money will come from private investors, selling assets or offloading bad debt to a program set up by the Treasury.

Those that can’t tap private markets would be encouraged to replenish their coffers through a novel form of capital known as "mandatory convertible preferred" shares. Banks could apply for new funds from the government by agreeing to sell these preferred shares to the Treasury. Now, put that together with what Wachovia analyst Matthew Burrell pointed out today, which is that one of the requirements to exit the Trouble Asset Relief Program is "successfully accessing the unsecured debt markets without the backing of the FDIC for maturities greater than five years." What the equation adds up to is that Bank of America, Wells Fargo, Citigroup and Morgan Stanley will be more dependent on government capital at a time when freedom is defined by not needing it.

Meantime, J.P. Morgan and Goldman Sachs can focus on their businesses–and, as a result, pick up the business at the expense of their rivals. Even more threatening to rivals is that J.P. Morgan, in particular, has been currying government goodwill, most notably with its purchase of Bear Stearns, which can only help the bank in a time when financial regulation and government control is a major deciding factor in the health of a bank. Oppenheimer analyst Chris Kotowski, who spoke with J.P. Morgan Chief Financial Officer Mike Cavanagh, in a research report today noted J.P. Morgan’s savvy play as it relates to subject of how banks slip off their TARP binds:

On the subject of TARP Mr. Cavanagh said that he hoped that they would be able to repay TARP before year end. However, in contrast to Goldman Sachs, which has put in a very brazen manner, is publicly insisting that it be permitted to repay TARP as soon as is possible, JP Morgan seems to be bending over backward to be a good corporate citizen and not put the regulators in a potentially embarrassing position. He repeated the now familiar refrain that the company would like to repay TARP as soon as possible and has ample balance sheet capacity to do so, but that it would do whatever is best for the system. We view this as a smart strategy. In our view, as long as the TARP monies are repaid before year-end they will not have any impact on the major compensation decisions. By being patient, well capitalized and supportive, J.P. Morgan probably remains a favored "go to" solution for regulators in solving other problem situations when otherwise their size might have started to become a constraint.

J.P. Morgan is also playing its size as an advantage. While BofA and Citigroup have to sell assets and restructure businesses, J.P. Morgan will remain at full strength. Again from Kotowski:

Mr. Cavanagh proudly (and justifiably so) pointed out that the company’s size is in large part a function of its success; that it had grown substantially in 2008 as a result of using its strength to help the government out of difficult situations by buying Bear Stearns and Washington Mutual. ‘Fair enough’ we said, ‘But $2.1 trillion in assets, JPM accounts for about 17% of the $12.1 trillion in assets in the Federal Reserve system. All the FDIC depository institutions combined have just $13.8 trillion. How can the authorities let JP Morgan grow beyond this?’ We were expecting Mr. Cavanagh to quietly concede the point but got none of that.

Goldman, for its part, is paring its holdings of toxic assets, reducing its loan exposures and trimming risk–all moves that will signal to regulators that Goldman is safe for independence. According to Goldman’s 10K filing, the bank trimmed its Level 3 assets–the hard-to-sell and value kind–to $59 billion from $66 billion. Goldman also reduced its lending exposure on noninvestment-grade debt 19%. As Barclays Capital analyst Roger Freeman pointed out, "during 1Q09 GS did not have a single $100mm loss day, something that was not seen during 2008."

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Fed Stress Tests Find 10 U.S. Banks Need Total Capital of $74.6 Billion, Loan Losses May Top $600 Billion

The Federal Reserve determined that 10 U.S. banks need to raise a total of $74.6 billion in capital, concluding its unprecedented probe of the health of the nation’s 19 largest lenders. The results showed that losses at the banks under ‘more adverse" economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion. Trading accounts were the second-largest vulnerability, with potential losses of $99.3 billion. For some banks, today’s results open an exit from a tense partnership between Wall Street and the government. Others will have six months to fill their capital shortfalls, and may be forced to accept expanded federal ownership that could prompt changes in their management.

"The results released today should provide considerable comfort to investors and the public," Fed Chairman Ben S. Bernanke said in a statement. "The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario." Almost half of the banks "need to enhance their capital structure to put greater emphasis on common equity," the Fed chief said. The reviews showed that supervisors can work together to make rapid assessments about risks embedded in the U.S. financial system, as lawmakers and the Obama administration consider an overhaul in regulations later this year. Bernanke and other agency heads insisted on transparency, overcoming the tendency of supervisors within their institutions to avoid public disclosure.

After an internal debate, the regulators decided to publish firm-specific results themselves, rather than risk letting private accountants and lawyers manage the outcome. Bank of America Corp. was judged to need $33.9 billion in additional capital under regulators’ criteria. Wells Fargo & Co.’s shortfall is $13.7 billion, while Citigroup Inc.’s gap is $5.5 billion. New York-based Citigroup has already announced plans to bolster its tangible common equity ratio by converting some of its preferred shares into common stock. Fifth Third Bancorp’s capital need is $1.1 billion, KeyCorp’s is $1.8 billion, PNC Financial Services Group Inc.’s is $600 million, Regions Financial Corp.’s is $2.5 billion and SunTrust Banks Inc.’s is $2.2 billion. GMAC LLC needs $11.5 billion, while Morgan Stanley’s assessment was $1.8 billion. Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp., MetLife Inc., American Express, State Street Corp., BB&T Corp., US Bancorp and Capital One Financial Corp. were deemed not to need additional funds, according to the results. Residential mortgages and consumer loans, including credit cards, "account for $322 billion, or 70 percent of the loan losses projected under the more adverse scenario," the Fed said in its report.

Banks that need to raise capital under the government’s stress tests will have until June 8 to develop a plan and until Nov. 9 to implement it. "The doomsday predictions in January and February that banks were insolvent is just wrong," David Trone, senior analyst at Fox-Pitt Kelton Cochran Caronia Waller, said before the announcement. The tests "did succeed and genuinely stressing the banks and I think that would give confidence to people." The capital buffer for each bank "is sized to achieve a Tier 1 risk?based ratio of at least 6 percent and a Tier 1 common risk?based ratio of at least 4 percent at the end of 2010, under a more adverse macroeconomic scenario than is currently anticipated," the regulators said. The total loss rate for loans calculated by the regulators was 9.1 percent, a level that exceeded that seen in the 1930s, the Fed said.

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U.S. banks need total capital of about $130 billion: Goldman

U.S. banks will need about $130 billion in capital this year -- for the weaker banks to fill shortfalls and the stronger ones to repay government rescue funds, analysts at Goldman Sachs said, ahead of a release of banks' stress test results due later Thursday. The results of the government's stress tests of the top 19 U.S. banks will show which banks need to raise capital to bolster their balance sheets should the economy weaken further in the years ahead. Results are expected to show about half the banks need more capital.

Goldman analysts said their total capital need estimate for banks include $100 billion for weaker banks that need to raise capital to plug holes, and $30 billion for banks that may raise capital to repay funds from the Treasury's Troubled Asset Relief Program. U.S. Treasury Secretary Timothy Geithner, in an opinion piece in the New York Times on Thursday, said he expects banks will pay back more than the $25 billion of government rescue funds that he had previously estimated. Geithner also wrote that recently completed bank stress tests applied "exacting" loss estimates and conservative earnings estimates, an apparent rebuff to critics who have questioned whether the tests are tough enough.

Goldman analysts said bank stocks were now "moving to the next phase." "Investors are now looking to diluted, normalized, and discounted earnings with the assumption that stress test induced capital raises are both successful and credible and therefore banks will be able to absorb the losses to come," the analysts said. They upgraded Capital One Financial Corp to "buy," and Fifth Third Bancorp and American Express Co to "neutral." The analysts downgraded SunTrust Banks Inc and Comerica Inc to "sell," and cut its rating on KeyCorp to "neutral."

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Bank of America Needs to Raise $33.9 Billion After Stress Test

Bank of America Corp., the largest U.S. bank, must raise $33.9 billion after the government’s stress test found the bank had too little common equity to withstand a prolonged recession.
The Charlotte, North Carolina-based lender could face losses for 2009 and 2010 of $136.6 billion, or 10 percent of total loans, according to results from the Federal Reserve today. Regulators included 19 companies in the tests and gave the ones that need money until June 8 to develop a detailed capital plan. The lenders have until Nov. 9 to implement it. Common equity is a measure of capital that strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the Treasury.

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GMAC Faces Capital Drain

GMAC LLC faces a difficult headwind as it seeks to bolster its capital. The auto lender will lose $2.75 billion through 2010, including $1.49 billion this year, as it amortizes some of the gains stemming from a debt restructuring last year. This capital erosion likely played a role in the government's determination that GMAC needs a hefty $11.5 billion in capital. GMAC was one of the 19 banks put through stress tests by the government; GMAC's need for $11.5 billion, a huge amount relative to the bank's $21.85 billion in total equity on Dec. 31, was reported by The Wall Street Journal, citing people familiar with the matter. The stress tests were undertaken to check the financial soundness of the U.S.'s largest financial institutions in the event economic conditions worsen.

GMAC, a recent bank convert and the lender affiliated with General Motors Corp., incurred a $267 million non-cash expense in the first-quarter due to amortizing the gains from its debt exchange. Regulatory filings indicate that GMAC, in total, would incur $5.5 billion of such non-cash interest expenses related to its complex $38 billion debt overhaul in November. This amount will be spread over the next several years. GMAC's need to amortize the gains will cost it precious capital at a time when the lender has to fill its $11.5 billion hole. The capital shortfall also comes in an environment where traditional sources of funding remain elusive. GMAC's non-cash interest expenses "could be one of the factors in the government's evaluation of the company's capital position," said Mark Wasden, an analyst at Moody's Investors Service. "This is one of multiple headwinds that GMAC faces from a capital standpoint."

Wasden declined to comment on the outcome of GMAC's stress test as the final results will only be released Thursday after the close of trading. To be sure, GMAC could get some relief as the U.S. government has promised more funds to GMAC. GMAC received that assurance after it last week assumed the mantle of lender for new financing to Chrysler LLC's dealers and consumers while the auto maker restructures in bankruptcy court. The size of these funds isn't yet known. GMAC is also in line to gain access to a federal program that has allowed an array of financial institutions to raise financing when they were otherwise shut out from repaying or refinancing debt as a result of the credit crisis. More than four months after turning itself into a bank, GMAC is still waiting for the green light from the Federal Deposit Insurance Corp. to issue FDIC-insured debt under the Temporary Liquidity Guarantee Program. Under the program's guidelines, as time passes without such approval, the amount of debt GMAC can raise decreases.

The $5.5 billion in non-cash interest expenses are aimed at reversing a portion of the gains from the company's complex $38 billion debt restructuring in November. A part of the gains from GMAC's debt overhaul came from GMAC swapping its existing debt for debt that has a lower market value. GMAC tacked this gain, along with broader gains associated with the debt restructuring -- such as those fueled by reduced principal -- to its earnings. Accounting rules require companies to reverse the nominal gain related to the lower market value of the new debt over the life of these new securities. The bond exchange "was a key component of GMAC's capital raising efforts and a critical step in receiving approval to become a bank holding company," said Gina Proia, a GMAC spokeswoman.

The strapped lender turned itself into a bank in December in efforts to garner federal funding. On the heels of its bank registration, GMAC got $5 billion under the U.S. Treasury's Troubled Asset Relief Program.
Companies typically offset non-cash interest expenses with new earnings or by raising fresh capital. But "capital markets are not conducive to raising capital for firms such as GMAC and the company faces earnings headwinds," said Wasden at Moody's. GMAC reported a first-quarter loss of $675 million, widening from a loss of $589 million a year earlier. Its results were aided by a $631 million after-tax gain from retiring debt. Without this gain, GMAC's loss totaled about $1.3 billion amid continued harsh market conditions.

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Wells Fargo Needs $13.7 Billion in Capital After Stress Test

Wells Fargo & Co., the biggest U.S. mortgage originator, must raise $13.7 billion after the government’s stress test found the bank had too little common equity to withstand a prolonged recession. The San Francisco-based lender could face losses for 2009 and 2010 of $86.1 billion, or 8.8 percent of total loans, according to results from the Federal Reserve today. Regulators included 19 companies in the tests and gave the ones that need money until June 8 to develop a detailed capital plan, regulators said in a statement yesterday. The lenders have until Nov. 9 to implement it. Common equity is a measure of capital that strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the Treasury. Bloomberg News reported before the official release of the results that Wells Fargo’s assessment showed a capital shortfall of $15 billion, citing people familiar with the matter. Earlier today, Wells Fargo announced plans to sell $6 billion of common stock in a public offering.

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Citigroup to Raise $5.5 Billion By Expanding Equity Exchange

Citigroup Inc., the U.S. bank propped up by $45 billion of bailout funds, will exchange an additional $5.5 billion of preferred securities into common stock after the government’s stress test found the bank had too little equity to withstand a prolonged recession. The bank will exchange $33 billion of preferred securities and trust preferred securities into common stock, New York-based Citigroup said today in a statement. Under a plan announced Feb. 27, Citigroup offered to exchange $27.5 billion of the preferred securities for common. The U.S. still plans to exchange as much as $25 billion of its preferred stock in the bank into common, leaving the government with a 34 percent voting stake, Citigroup said in the statement. Existing shareholders would see their ownership percentage slashed by 76 percent.

Citigroup expanded the offer after the government’s stress tests determined that the lender could face $104.7 billion of losses through 2010 in an "adverse" economic environment, the Federal Reserve said today in its report on the tests. Such losses would erode the bank’s common equity, leaving it shy of regulators’ requirements. The government said it must raise $5.5 billion. The equity "buffer" required by the government assumes $29 billion of equity gains from first-quarter earnings, asset sales and other "capital actions" completed since the end of last year, according to the report. It’s also in addition to $58.1 billion raised from the Feb. 27 plan announced to convert preferred stock into common. Regulators included 19 companies in the tests and gave the ones that need money until June 8 to develop a detailed capital plan, regulators said in a statement yesterday. The lenders have until Nov. 9 to implement it. Common equity is a measure of capital that strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the Treasury.

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Wells Fargo, Morgan Stanley selling new common stock

Wells Fargo and Morgan Stanley are selling billions of dollars in new common stock as the companies try to meet capital requirements from the government's stress tests of the largest U.S. banks. Wells said late Thursday that it plans to sell $6 billion in new common stock. The stress test concluded that Wells needs to raise $13.7 billion in new capital. Wells shares slipped 2.4% to $24.17 during after-hours trading Thursday. Morgan Stanley said late Thursday that it's selling $2 billion in new common stock. The government's stress test concluded that the investment bank needs to raise $1.8 billion in new capital. Morgan Stanley also said it plans to sell roughly $3 billion of senior notes in a public offering that will not be guaranteed by the Federal Deposit Insurance Corporation. Issuing debt without a government guarantee is one of the requirements banks have to meet to extricate themselves from the governments Troubled Asset Relief Program.

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Regional Banks Might Face More Pitfalls

Stress test news has been leaking for days, but investors haven't gotten much clarity on results for the regional banks. Most of the leaked results have been good news, particularly for big banks and credit card lenders. While the results so far indicate that banks will need at least $65 billion in capital, investors say the news was less negative than had been feared. The belief is that many banks will be able to raise their capital without needing government assistance. But regional banks struggle much more with commercial real estate and construction loans, which are a concern for investors and regulators alike. So is the lack of reassuring leaks from the government a bad omen? The government also remained mum about U.S. Bancorp and BB&T Corp, but those two banks considered among the strongest. A possible pattern emerging is that the news deemed reassuring is coming out while the worse results are still being hidden.

Regions Financial Corp. is believed to need more capital, according to people familiar with the situation. It isn't known what the results were for KeyCorp, Fifth Third Bancorp and SunTrust Banks Inc., though analysts expect they will need capital bolstering. The latter two may need to buffer their exposure to construction loans in Florida and other troubled markets because they are struggling with credit card loans or capital-markets-related write-downs. "My gut is that" the leaks focused on banks that can easily raise capital, said Gerard Cassidy, an analyst with RBC Capital Markets. Had government leaks also covered U.S. Bancorp, that message would have been clear, but even with the information available, investors may have to brace themselves for unpleasant surprises, he said. Banks themselves have been under strict orders to remain silent.

It has already emerged how much capital Bank of America Corp. and Citigroup Inc. need, and also that big credit card lenders like Capital One Financial Corp. and American Express Co. don't need any. But the sources went dry when it comes to those companies that focus on bread-and-butter banking. If those fare badly in the test, it could spell trouble for those regional banks that were too small to be stress tested. "We expect the government to quietly move onto the next 20 to 30 bank-holding companies following completion of the largest banks' stress test," Jeff K. Davis, the director of research at Howe Barnes Hoefer & Arnett Inc., wrote in a research report.

The markets' reaction clearly saw the leaked information as a positive. If things are not as bad as some investors and analysts had thought at Bank of America and Citigroup, surely the potential capital whole for Regions Financial and KeyCorp should be manageable too. So the stress test cloud is evaporating from investors' minds. But capital issues might not be going away just yet; once the test results are officially unveiled this afternoon, the question is how those in need of fresh capital will get it. It might be easy for Citi to find $5 billion in capital, and for Wells Fargo to raise up to the $15 billion it is said to need. But for KeyCorp to raise $2 billion to $3 billion may well turn out to be another story.

"We do not expect private investors to line up to invest with the government for those companies that receive a capital call," Davis wrote. The government has promised to help with capital, including convertable preferred stock, but banks have been trying to get away from government support rather than to rely on more. SunTrust might have the easiest time to convert its $500 million of preferred stock into common, and raise whatever might be left, Davis said. Others are unlikely to be able to rely much on that option, analysts said. Some might try to convert trust preferred securities into common stock to help common equity along, but that too might prove difficult because of the status of the trust preferreds in concert with the preferred stocks that the government owns, Davis said.

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Geithner's stress tests likely to prove too little too late

When Tim Geithner, the US Treasury Secretary, first announced plans to strengthen the American banking system in February, he was met with widespread derision. The Dow Jones Industrial Average fell 381.99 points on the day of the announcement – its biggest one-day fall in two months – as investors and analysts questioned the lack of detail in his new "Financial Stability Plan" (FSP) and wondered whether any of it would ever come to fruition. The FSP consisted of three parts – a "comprehensive stress test" of America's largest financial institutions, the creation of a public-private investment fund, and up to $1 trillion (£668bn) to support consumer and business lending. Three months on, and just one of those three parts, the stress test, is now complete. With the full results expected late last night, investors will have a full diagnosis of the health of the banking sector – or at least that's the theory.

Although it has taken 150 or so Treasury officials nearly 10 weeks to devise and undertake the tests on 19 of America's largest financial institutions, the tests remain flawed. Take the economic assumptions against which each bank is tested, assumptions which were designed in February but look increasingly dated. The first test envisioned unemployment reaching 8.8pc by 2010 and house prices falling by 14pc this year. The second scenario involved unemployment rising to 10.3pc and homes falling by 22pc this year. At the end of March, unemployment stood at 8.4pc, with Jan Hatzius, chief US economist at Goldman Sachs, estimating that April unemployment – due to be released today – will stand at 8.9pc. Jason O'Donnell, senior analyst at Boenning & Scattergood, said: "There is a real question as to the legitimacy of these results."

The tests' legitimacy has also been questioned by Elizabeth Warren, who chairs the Congressional panel overseeing the Treasury's $700bn bank bail-out fund. "It looks disturbingly close to where we are now," said Ms Warren late last month of the economic assumption used in the tests. Given that the tests will show that no bank is insolvent, what is the point of the tests? The data to be published by the Treasury will show how institutions measure up against its desire for each bank to have a Tier One capital ratio of at least 6pc now, and at least 4pc by the end of 2010 under the second set of assumptions. What does that mean for investors? The Tier One ratio is important because it shows a bank's ability to absorb future losses and to protect investors from further write-downs. But what none of the results will show, however, is what those future losses or write-downs are actually likely to be.

Bizarrely, many of those answers are known by the Treasury – due to the breadth of the data collection exercise undertaken at each bank – but very few will be published as a decision was taken from the outset that the investing public should be given only the simplest of explanations of the results. In essence, the stress test results will not actually tell investors very much that they didn't already know. They will reinforce the received wisdom that the likes of Goldman Sachs are in reasonable health but banks such as Bank of America, which bought Merrill Lynch, are not. Yes, more information will be in the public domain, but given the turnaround in banking sector share prices in recent weeks, plus the apparent tempering of the economic downturn, the stress test results will appear to many as too little, too late.

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US Treasurys Extend Losses After Lousy 30-Year Auction

Treasurys added to their losses Thursday afternoon, driven by a poor $14-billion 30-year bond auction, the last leg of the government's $71 billion May refunding this week. Selling intensified after the auction at 1 p.m. EDT, pushing the 10-year and 30-year Treasury yields to fresh session highs and the highest levels since November. The 30-year bond's yield jumped more than 20 basis points while the yield on the seven-year note and the 10-year note rose more than 14 basis points. At the peak of the selling, the 10-year note's yield touched 3.34% while the 30-year bond's yield hit 4.309%. The 10-year yield breached 3% on April 24, breaking out of the trading range of 2.5%-3% since mid-March, and since then, the yield has been pushed higher despite $92.2 billion Treasury purchases from the Federal Reserve since late March. In recent trading, the two-year note's price was down 3/32 at 99 23/32 to yield 1.01%, the 10-year note was down 1 6/32 at 98 11/32 to yield 3.32%. The 30-year bond was down 3 9/32 to 86 24/32 to yield 4.29%. Bond yields move inversely to prices.

In a sharp contrast with the first two legs of the refunding in three-year note and 10-year note auctions earlier this week, the auctioned yield on the 30-year bond came at 4.288%, much higher than 4.203% traded just before the auction. The higher yield, which is called a tail in technical terms, suggests lackluster demand from investors for the long bond as economic data signaling the worst of the recession is over, reducing the appeal of holding safe-haven government securities. Auctions of 30-year bonds "are so sloppy, it's always been the case," said Carl Lantz, fixed-income strategist at Credit Suisse in New York. "There was a lot to take down, and there's a more limited set of players in the very long end. It's not central bank territory, so foreign central banks" can't be depended on to boost demand, he added. Lantz also noted that the record tail since the 30-year bond was reintroduced was 9 basis points in November 2008.

Tony Crescenzi, chief bond market strategist in New York at Miller Tabak & Co., noted the 30-year bond auctions tend to either tail or trade through their 1 p.m. price by a relatively large amount. But he pointed out that the bid/cover ratio, a gauge of demand, was 2.14, which is roughly normal for a 30-year but solid when considering the record auction size. The percentage of the auction that went to indirect bidders, which groups both domestic and foreign investors - including foreign central banks, was 33%, which was "fairly good," said Crescenzi. Treasurys were already under water before the auction as a drop in weekly jobless claims, a day after a private report showing a slower pace of job cuts in the private sector, lifted speculation that Friday's official non-farm payroll report for April may be less dire compared to those in March and February.

Leaks of the results of the government's stress tests on the nation's 19 largest banks have also raised optimism that, while some banks still need additional capital to withstand the likelihood of further deterioration of the economy, the outlook for the banking sector in general may be less dire than feared. The government is set to release the results Thursday afternoon. Actions from major central banks also spurred risk appetites and spurred selling in government bonds from the U.S. and euro zone to the U.K. The European Central Bank on Thursday cut its benchmark interest rate by 25 basis points to 1% and signaled to buy EUR60 billion of euro-denominated covered bonds to further provide liquidity to the banking sector. Covered bonds are issued and usually partially guaranteed by banks. The Bank of England kept its key interest rate at 0.5% but increased its bond-buying plan by GBP50 billion ($75.71 billion) to GBP125 billion.

The yield on the 10-year German government security, the benchmark for the euro zone government debt, rose 14 basis points to 3.384% while the yield on the 10-year U.K. government debt was up 9 basis points to 3.686%. But Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, said yields at the long end of the Treasury curve have risen to such areas they started to entice real money investors. Tucci noted buying interest from investors such as pension funds and insurance companies, which may provide support for Treasurys over the next couple of weeks as the May refunding is out of the way and there will be no further U.S. government note or bond sales until late May. Tucci said the 10-year note's yield between 3% and 3.3% provides value.

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Pound Down Sharply As Bank of England Expands Quant Easing

The U.K. pound retreated sharply Thursday after the Bank of England expanded its asset-purchase program while the euro gained as the European Central Bank unveiled its own relatively modest version of quantitative easing. After reaching $1.5195 in London trading, its highest level since Jan. 9, the pound eventually slumped to a session low at $1.4945 after the BOE said it would expand its asset-purchase program by GBP50 billion to a total GBP125 billion. The euro hit a one-month high against the dollar at $1.3471 Thursday after the ECB announced plans to buy around EUR60 billion in debt securities outright. It ceded much of its gains in North American trading as equity markets proved unable to hold on to early advances. Trading in currency markets was constrained Thursday afternoon ahead of the release of details from the U.S. government's stress test for major banks, set for 5 p.m. EDT (2100 GMT).

The weakness in the pound suggests the market is drawing a contrast between the ECB, which seems to be dragging its legs on quantitative easing, and the BOE, which is still "full-steam ahead," said analysts at Barclays Capital. Until the market interpreted the ECB's quantitative easing move as less rather than more, the pound's move seemed relatively modest, they said. The announcement by ECB President Jean-Claude Trichet of the central bank's plans came in addition to its rate cut to 1.0% from 1.25%. Analysts say that while the ECB program's details remain unclear, it is likely an attempt to liquefy Eastern European banks, letting them swap local currency bonds into euro-denominated bonds. "It would be the same concept the Federal Reserve is using (although in much smaller quantities), taking weaker, poor-quality debt and swapping it for Treasurys," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets. "This provides for additional risk-taking." Market players were reassured by the relatively modest scale of the ECB's program.

"The size of what they're doing is much smaller than what they've done in the U.K. and done in the U.S.," said Steve Butler, director of foreign exchange at Scotia Capital in Toronto. "I think there was some pent-up demand for euro, anyway," he added. Thursday afternoon in New York, the euro was at $1.3383 from $1.3335 late Wednesday, while the dollar was at Y99.04 from Y98.28. The euro was at Y132.58 from Y131.01. The U.K. pound was at $1.5020 from $1.5140 late Wednesday, while the dollar was at CHF1.1307 from CHF1.1315. The retreat in the pound and the weakness in some other currencies against the U.S. dollar also reflected a corrective bounce by the greenback after its broad depreciation in markets in earlier sessions, analysts said. "The dollar's moved a long way. It's fallen a long way," said Meg Browne, senior currency strategist at Brown Brothers Harriman in New York.

After rallying sharply in earlier sessions and in overnight trading, the Canadian dollar retreated against the U.S. dollar in North American activity Thursday as it also was buffeted by the weakness in stocks. The U.S. dollar was trading at C$1.1730 late Thursday, up from C$1.1675 late Wednesday and from a six-month low at C$.1638 in overnight trading. The Central Reserve Bank of Peru intervened Thursday in the foreign exchange market to buy $7 million. That follows a purchase of $2 million Monday, which was the first intervention to buy U.S. dollars this year. The sol ended weaker Thursday at PEN2.967 per U.S. dollar. The sol closed the previous session at PEN2.962 per U.S. dollar. The central bank says that it intervenes in order to smooth out volatility.

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US Consumer Credit Drops by Record Amid Job, Bank Losses

Consumer credit in the U.S. contracted by a record in March after the jobless rate reached its highest level in a quarter century and banks made it harder to get loans in an effort to buttress their balance sheets. Consumer credit fell by $11.1 billion, almost three times more than forecast and the most since records began in 1943, to $2.55 trillion, according to a Federal Reserve report released today in Washington. The 5.2 percent drop at an annual rate was the biggest since 1990, the Fed said. Credit also decreased by $8.1 billion in February, more than previously estimated. Today’s report reflects a campaign by both consumers and financial companies to strengthen their books in the aftermath of the bursting of the credit bubble. It also offers evidence that lenders are reducing access to borrowing even after unprecedented efforts by the Fed and Treasury to sustain credit, including purchases of more than $200 billion of bank stakes.

"When you have record job losses, you have to expect record declines in spending and economic activity in general," said Richard Yamarone, chief economist at Argus Research Corp. in New York, referring to the 5.1 million jobs lost since the recession started in December 2007, pushing the unemployment rate to a 25- year high of 8.5 percent. Economists had forecast consumer credit would drop $4 billion in March, according to the median of 26 estimates in a Bloomberg News survey. Projections ranged from a $7 billion drop to a gain of $1.5 billion. The Fed initially reported a $7.5 billion decrease in consumer credit for February. Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.2 percent annual rate in the first quarter, the most in two years and may be helped further as banks resume normal lending following government stress tests that Treasury Secretary Timothy Geithner called "reassuring."

Revolving debt such as credit cards decreased by $5.41 billion in March, according to the Fed’s statistics. Non- revolving debt, including auto loans and mobile-home loans, fell by $5.69 billion. The Fed’s report doesn’t cover borrowing secured by real estate. Auto sales declined 37 percent in March from a year earlier, according to industry statistics. Sales incentives reached an average $3,169 for each vehicle sold in March, according to pricing monitor Edmunds.com, a 30 percent increase from a year earlier. Even after signs that housing and manufacturing, two of the hardest-hit industries during the recession, were stabilizing, banks remained skittish about extending credit. The Fed’s quarterly survey of senior loan officers released on May 4 showed a larger share of banks reported tightening terms on residential mortgages compared with the previous survey, even as more domestic respondents saw increased demand for prime mortgages.

That survey indicated most banks anticipate loan delinquencies and losses to increase this year, and that more banks also made it tougher for consumers to get credit-card loans in the past three months. Capital One Financial Corp., based in McLean, Virginia, said U.S. credit card charge-offs, or loans deemed uncollectible, reached 8.4 percent in the first quarter, exceeding an estimate given late last year. Economic figures in the past two weeks have shown smaller declines in U.S. house prices and a stabilization in sales, a jump in consumer confidence and the smallest contraction in manufacturing in seven months. The number of jobless claims in the U.S. unexpectedly fell last week to a three-month low, the Labor Department said today.

The London interbank offered rate, or Libor, for three- month loans in dollars remained below 1 percent for a third day today, indicating revived lending among financial institutions. David Wyss, chief economist at Standard & Poor’s in New York, said lending may be "a little more restrained" at Bank of America Corp. and other major institutions that need to raise significant amounts of capital. Otherwise, Wyss said, the credit crunch "is letting up." Still, in March banks -- which have taken billions of dollars in government bailout funds and sold bonds guaranteed by the Federal Deposit Insurance Corp. -- remained less willing to lend than before Lehman Brothers Holdings Inc. collapsed last September. The rate decreased one basis point, or 0.01 percentage point, to 0.96 percent today, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, reached 4.82 percent after Lehman folded, narrowing today to the least since Aug. 4. It fell gradually as the U.S. government and the Fed spent, lent or committed $12.8 trillion to stem the longest recession since the 1930s.

The Fed will unveil today the results of its bank stress tests, which according to Geithner will give a "reassuring" picture of the U.S. financial system. "The fall in Libor is driven by the improvement in risk appetite," said Guillaume Baron, fixed-income strategist at Societe Generale SA in Paris. "The results of the stress tests were well taken by the market." Fed stress tests on the 19 biggest lenders show Bank of America, Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, people familiar with the conclusions said. Financial institutions posted almost $1.4 trillion in writedowns and losses since August 2007, when banks became reluctant to lend to each other following the collapse in the U.S. subprime- mortgage market.

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Goldman Sachs's $100 Million Trading Days Hit Record

Goldman Sachs Group Inc. reaped more than $100 million in trading revenue on a record 34 separate days during the first three months of 2009, up from the previous peak of 28 in last year’s first quarter. For December, there were 10 trading paydays bigger than $100 million, the New York-based firm said today in a filing with the U.S. Securities and Exchange Commission. The first- quarter number was almost double the total for all of 2005. Goldman Sachs, which took $10 billion from the U.S. Treasury’s bank-rescue program in October, reported a record $6.56 billion in revenue from trading fixed-income, currencies and commodities in the first quarter.

David Viniar, the company’s chief financial officer, said on April 14 that the trading success was due to "favorable competitive dynamics," wider margins and higher volatility. "It was a good trading quarter," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman Sachs "market perform." "Their revenue return on trading assets was very, very high because bid-offer spreads were very high." Goldman Sachs lost money on eight trading days in the first quarter and six in December, the filing showed. The December period included a single day in which the firm lost $859 million, reflecting an $850 million writedown of bridge and bank loans related to LyondellBasell Industries AF SCA, which filed for bankruptcy protection on April 24.

The firm had 90 days in which traders made more than $100 million in fiscal 2008, compared with 88 in 2007. In fiscal 2006, the figure was 49 days, up from 18 in 2005 and 14 in 2004. Goldman Sachs’s trading results reflected the firm’s willingness to take on more risk during the period. Value-at- risk, an estimate of how much the firm could lose in any given day, surged to an average of $240 million in the first quarter from $157 million in the first quarter of 2008. Most of the increase came from bets on interest rates, the company said. "The increase in interest rates was primarily due to higher levels of exposure and volatility, and wider credit spreads," Goldman Sachs said in the filing. The bank’s trading revenue per dollar of value-at-risk was "not unreasonable," said Bernstein’s Hintz. "It only brought it back to the mean that they had historically run at," he said. "The risks they were taking didn’t imply they were doing a Hail Mary pass," Hintz said, referring to a high-risk play made late in a football game.

Trading and principal investments accounted for 61 percent of the bank’s revenue in the first quarter of 2009, up from 59 percent in the first quarter of 2008. Net interest income, the difference between the interest the firm pays and what it charges, doubled from the first quarter of 2008 as the company’s interest expense dropped 76 percent, the filing showed. Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs has issued about $22 billion of debt that’s guaranteed by the FDIC, according to data compiled by Bloomberg. Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 2.14 percent in March from 3.37 percent in November.

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Asia’s Export-Led Growth Model 'Broken,' Roubini Says

Asia’s export-driven growth model is "broken" and nations in the region need to do more to boost domestic demand, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis. "The old model of export-led growth is broken," Roubini said in an interview with Bloomberg News yesterday. "Unless policy makers find ways of stimulating consumption and private domestic demand, then the growth recovery is going to be, even over the medium term, weaker than otherwise." Asia’s developing economies are almost twice as reliant on exports as the rest of the world, with 60 percent of their overseas sales ultimately destined for the U.S., Europe and Japan. The International Monetary Fund yesterday said it expects recessions this year in South Korea, Singapore, Taiwan, Malaysia and Thailand.

"Asia has to find a new model of growth," Roubini said in Singapore, where he is attending a conference organized by Bank of America-Merrill Lynch. "This is happening too slowly and this will make Asia’s recovery lag." Asian nations must implement more policies to boost domestic consumption as advanced nations are unlikely to absorb the region’s excess production, Asian Development Bank President Haruhiko Kuroda said May 4. To boost local demand, Asian governments need to spend more on health and education and boost social safety nets to encourage consumer spending and reduce precautionary savings, he said. Exports by developing Asian economies may shrink 10.3 percent this year, after growing 14.7 percent in 2008, the Manila-based ADB predicts. Global trade may contract for the first time since World War II this year, according to the World Trade Organization, as U.S. and European demand slumps.

"A good chunk of Asia is going to be in recession this year, with the exception of China and India," Roubini said. "Recovery is going to occur next year, but even then I see a weak outlook for the U.S., Europe and Japan, and unless there is a recovery in these economies, the recovery in Asia is going to be less than otherwise." Asian policy makers have been responding to the global recession by slashing interest rates and implementing fiscal stimulus packages. Governments in the region have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending.

"The economies of Asia, like the rest of the world, have slowed significantly," Monetary Authority of Singapore Managing Director Heng Swee Keat said in a speech today. "While actions taken by governments and financial authorities have helped to stem the sharp deterioration, the road to full economic recovery is likely to be bumpy." Further fiscal stimulus may be required in Asia given the likely weakness of the recovery in the U.S., Europe and Japan, Roubini said. "Greater fiscal stimulus might be necessary," he said. "One way to stimulate domestic demand in the short run is domestic public demand." Economies in Asia face a "long recovery ahead" from the global slowdown and "forceful" fiscal measures are still needed to lift the region out of the recession quickly, the IMF said in a report yesterday.

"Asia’s strong reliance on external demand weigh against the prospects of a speedy turnaround," the IMF said. "Despite governments’ efforts to invigorate domestic demand, the prospects of a recovery at this stage hinge critically on a rebound in global activity." The IMF last month lowered its world economic growth forecasts and said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The world economy will contract 1.3 percent, it predicts. The U.S. remains weak and the consensus among analysts that the world’s largest economy may expand in the third and fourth quarter is "too optimistic," Roubini said. "Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters," he said. "We are going to have negative growth to the end of the year and next year the recovery is going to be weak."

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Friedman Resigns as Chairman of New York Fed

Stephen Friedman, the chairman of the New York Federal Reserve Board, abruptly resigned on Thursday, days after questions arose about his ties to Goldman Sachs. Mr. Friedman was chairman of the New York Fed at the same time he was a member of Goldman’s board. He also had a substantial stake in the firm as the Fed was crafting a solution to keep Wall Street banks afloat. Denis M. Hughes, deputy chair of the board, will take over as the interim chairman, the New York Fed said in a statement. Because the New York Fed approved a request by Goldman to become a bank holding company, the chairman’s involvement in Goldman was a violation of Fed policy, The Wall Street Journal said in an article earlier this week.

The New York Fed asked for a waiver, which, after about two and a half months, the Fed granted, the newspaper said. During that time, Mr. Friedman bought 37,300 more Goldman shares in December, which have since risen $1.7 million in value. In his resignation letter, Mr. Friedman said his public service on the board was being characterized as "improper" despite his compliance with the rules. "The Federal Reserve System has important work to do and does not need this distraction," he said. "With respect to Steve’s purchases of Goldman shares in December of 2008 and January of 2009, which have been the object of some attention lately, it is my view that these purchases did not violate any Federal Reserve statute, rule or policy," Thomas C. Baxter, the general counsel of the New York Fed, said in a statement. "I enjoyed working with Steve, and will miss his contributions in the boardroom."

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Cashing in on 'Government Sachs'

We are so inured to tales of business corruption that even a devastating expose in the Wall Street Journal no longer shocks us. The fact that the chairman of the New York Federal Reserve Bank made millions off his secret purchase of Goldman Sachs stock, "in violation of Federal Reserve policy," as the Journal put it, at a time when the N.Y. Fed was ostensibly overseeing the antics of the Wall Street firm, has barely registered a blip of outrage. When N.Y. Fed Chairman Stephen Friedman bought stock in the company that he once headed, and where he still serves as a director, he was already in violation of Federal Reserve policy and was hoping for a waiver to permit him to hold his existing multimillion-dollar stock stash and to remain on the Goldman board.

The waiver was requested last October by Timothy Geithner, then the president of the N.Y. Fed and now Treasury secretary. Yet, without having received that waiver, Friedman went ahead in December and purchased 37,300 additional shares. With shares he added in January, after the waiver was granted, he ended up with 98,600 shares in Goldman Sachs, worth a total of $13,330,720 at the close of trading on Monday. Friedman was in violation of the Fed's policy because, thanks in part to the urging of Geithner and the N.Y. Fed, Goldman Sachs was allowed to become a bank holding company, making it eligible for government bailout funds (an option that Geithner had denied to Goldman rival Lehman Brothers). But that shift also put Goldman under more rigorous banking regulations that required Friedman as Class C director of the N.Y. Fed, a position in which he ostensibly represents the public instead of the banks who dominate the board, to step down as a Goldman director and divest his holdings.

Instead, he stayed on the Goldman board and added additional shares while waiting for the Fed waiver. Nor did he inform the Federal Reserve of his additional purchases last December, and the lawyers for the N.Y. Fed didn't know about that purchase until the Journal raised questions in April. Friedman has made a profit of about $3 million on the additional shares. The significance of this conflict of interest was summarized by the lead of the Journal story: "The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after."

In addition to that capital injection, which at least carries some expectation of being repaid, Goldman received an additional $8.1 billion that will not have to be returned to taxpayers. This is a result of the bailout engineered by then-N.Y. Fed President Geithner of AIG, which listed Goldman as its top insured credit-swap customer. As Jerry Jordan, former president of the Fed Bank in Cleveland, told the Journal in reference to Friedman's obvious conflict of interest, "He should have resigned." Unfortunately, this was not the view during the reign of Geithner, who argued that Friedman needed to remain chairman of the N.Y. Fed board to find a suitable replacement for Geithner as he moved on to be secretary of the treasury. Friedman chose a fellow former Goldman Sachs exec for the job.

All of which calls into question the unique power of Goldman Sachs over the federal government, as described in another important, but largely ignored, article from the New York Times last October headlined, "The Guys From 'Government Sachs.' " Their power is vast, no matter which party controls the White House. As the Times noted, two leaders of Goldman Sachs - Robert Rubin, who co-chaired Goldman with Friedman, and Henry Paulson - had become secretaries of the Treasury in the Bill Clinton and George W. Bush administrations, respectively.

Under Paulson, the bailout of Wall Street was dominated by Goldman Sachs alums, and as the Times noted, "Indeed, Goldman's presence in the (Treasury) department and around the federal response to the financial bailout is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs." That power continues unabated in the Obama administration. Geithner is a protege of former Goldman Sachs Chairman Rubin. And it was therefore not surprising when he picked Mark Patterson, a registered lobbyist for Goldman Sachs, to be his chief of staff at the Treasury Department. That appointment was made on the same day that Geithner announced new rules for limiting the influence of registered lobbyists. Need more be said?

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Buying Brand Obama

Barack Obama is a brand. And the Obama brand is designed to make us feel good about our government while corporate overlords loot the Treasury, our elected officials continue to have their palms greased by armies of corporate lobbyists, our corporate media diverts us with gossip and trivia and our imperial wars expand in the Middle East. Brand Obama is about being happy consumers. We are entertained. We feel hopeful. We like our president. We believe he is like us. But like all branded products spun out from the manipulative world of corporate advertising, we are being duped into doing and supporting a lot of things that are not in our interest.

What, for all our faith and hope, has the Obama brand given us? His administration has spent, lent or guaranteed $12.8 trillion in taxpayer dollars to Wall Street and insolvent banks in a doomed effort to reinflate the bubble economy, a tactic that at best forestalls catastrophe and will leave us broke in a time of profound crisis. Brand Obama has allocated nearly $1 trillion in defense-related spending and the continuation of our doomed imperial projects in Iraq, where military planners now estimate that 70,000 troops will remain for the next 15 to 20 years. Brand Obama has expanded the war in Afghanistan, including the use of drones sent on cross-border bombing runs into Pakistan that have doubled the number of civilians killed over the past three months. Brand Obama has refused to ease restrictions so workers can organize and will not consider single-payer, not-for-profit health care for all Americans. And Brand Obama will not prosecute the Bush administration for war crimes, including the use of torture, and has refused to dismantle Bush’s secrecy laws or restore habeas corpus. 

Brand Obama offers us an image that appears radically individualistic and new. It inoculates us from seeing that the old engines of corporate power and the vast military-industrial complex continue to plunder the country. Corporations, which control our politics, no longer produce products that are essentially different, but brands that are different. Brand Obama does not threaten the core of the corporate state any more than did Brand George W. Bush. The Bush brand collapsed. We became immune to its studied folksiness. We saw through its artifice. This is a common deflation in the world of advertising. So we have been given a new Obama brand with an exciting and faintly erotic appeal. Benetton and Calvin Klein were the precursors to the Obama brand, using ads to associate themselves with risqué art and progressive politics. It gave their products an edge. But the goal, as with all brands, was to make passive consumers mistake a brand with an experience. 

"The abandonment of the radical economic foundations of the women’s and civil-rights movements by the conflation of causes that came to be called political correctness successfully trained a generation of activists in the politics of image, not action," Naomi Klein wrote in "No Logo." Obama, who has become a global celebrity, was molded easily into a brand. He had almost no experience, other than two years in the Senate, lacked any moral core and could be painted as all things to all people. His brief Senate voting record was a miserable surrender to corporate interests. He was happy to promote nuclear power as "green" energy. He voted to continue the wars in Iraq and Afghanistan. He reauthorized the Patriot Act. He would not back a bill designed to cap predatory credit card interest rates. He opposed a bill that would have reformed the notorious Mining Law of 1872. He refused to support the single-payer health care bill HR676, sponsored by Reps. Dennis Kucinich and John Conyers. He supported the death penalty. And he backed a class-action "reform" bill that was part of a large lobbying effort by financial firms. The law, known as the Class Action Fairness Act, would effectively shut down state courts as a venue to hear most class-action lawsuits and deny redress in many of the courts where these cases have a chance of defying powerful corporate challenges. 

While Gaza was being bombarded and hit with airstrikes in the weeks before Obama took office, "the Obama team let it be known that it would not object to the planned resupply of ‘smart bombs’ and other hi-tech ordnance that was already flowing to Israel," according to Seymour Hersh. Even his one vaunted anti-war speech as a state senator, perhaps his single real act of defiance, was swiftly reversed. He told the Chicago Tribune on July 27, 2004, that "there’s not that much difference between my position and George Bush’s position at this stage. The difference, in my mind, is who’s in a position to execute." And unlike anti-war stalwarts like Kucinich, who gave hundreds of speeches against the war, Obama then dutifully stood silent until the Iraq war became unpopular. Obama’s campaign won the vote of hundreds of marketers, agency heads and marketing-services vendors gathered at the Association of National Advertisers’ annual conference in October. The Obama campaign was named Advertising Age’s marketer of the year for 2008 and edged out runners-up Apple and Zappos.com. Take it from the professionals. Brand Obama is a marketer’s dream. President Obama does one thing and Brand Obama gets you to believe another. This is the essence of successful advertising. You buy or do what the advertiser wants because of how they can make you feel. 

Celebrity culture has leeched into every aspect of our culture, including politics, to bequeath to us what Benjamin DeMott called "junk politics." Junk politics does not demand justice or the reparation of rights. Junk politics personalizes and moralizes issues rather than clarifying them. "It’s impatient with articulated conflict, enthusiastic about America’s optimism and moral character, and heavily dependent on feel-your-pain language and gesture," DeMott noted. The result of junk politics is that nothing changes – "meaning zero interruption in the processes and practices that strengthen existing, interlocking systems of socioeconomic advantage." It redefines traditional values, tilting "courage toward braggadocio, sympathy toward mawkishness, humility toward self-disrespect, identification with ordinary citizens toward distrust of brains." Junk politics "miniaturizes large, complex problems at home while maximizing threats from abroad. It’s also given to abrupt unexplained reversals of its own public stances, often spectacularly bloating problems previously miniaturized." And finally, it "seeks at every turn to obliterate voters’ consciousness of socioeconomic and other differences in their midst." 

An image-based culture, one dominated by junk politics, communicates through narratives, pictures and carefully orchestrated spectacle and manufactured pseudo-drama. Scandalous affairs, hurricanes, earthquakes, untimely deaths, lethal new viruses, train wrecks—these events play well on computer screens and television. International diplomacy, labor union negotiations and convoluted bailout packages do not yield exciting personal narratives or stimulating images. A governor who patronizes call girls becomes a huge news story. A politician who proposes serious regulatory reform, universal health care or advocates curbing wasteful spending is boring. Kings, queens and emperors once used their court conspiracies to divert their subjects. Today cinematic, political and journalistic celebrities distract us with their personal foibles and scandals. They create our public mythology. Acting, politics and sports have become, as they were during the reign of Nero, interchangeable. 

In an age of images and entertainment, in an age of instant emotional gratification, we do not seek reality. Reality is complicated. Reality is boring. We are incapable or unwilling to handle its confusion. We ask to be indulged and comforted by clichés, stereotypes and inspirational messages that tell us we can be whoever we seek to be, that we live in the greatest country on Earth, that we are endowed with superior moral and physical qualities, and that our future will always be glorious and prosperous, either because of our own attributes, or our national character, or because we are blessed by God. Reality is not accepted as an impediment to our desires. Reality does not make us feel good. In his book "Public Opinion," Walter Lippmann distinguished between "the world outside and the pictures in our heads." He defined a "stereotype" as an oversimplified pattern that helps us find meaning in the world. Lippmann cited examples of the crude "stereotypes we carry about in our heads" of whole groups of people such as "Germans," "South Europeans," "Negroes," "Harvard men," "agitators" and others. These stereotypes, Lippmann noted, give a reassuring and false consistency to the chaos of existence. They offer easily grasped explanations of reality and are closer to propaganda because they simplify rather than complicate.

Pseudo-events—dramatic productions orchestrated by publicists, political machines, television, Hollywood or advertisers—however, are very different. They have, as Daniel Boorstin wrote in "The Image: A Guide to Pseudo-Events in America," the capacity to appear real even though we know they are staged. They are capable, because they can evoke a powerful emotional response, of overwhelming reality and replacing reality with a fictional narrative that often becomes accepted truth. The unmasking of a stereotype damages and often destroys its credibility. But pseudo-events, whether they show the president in an auto plant or a soup kitchen or addressing troops in Iraq, are immune to this deflation. The exposure of the elaborate mechanisms behind the pseudo-event only adds to its fascination and its power. This is the basis of the convoluted television reporting on how effectively political campaigns and politicians have been stage-managed. Reporters, especially those on television, no longer ask if the message is true but if the pseudo-event worked or did not work as political theater. Pseudo-events are judged on how effectively we have been manipulated by illusion. Those events that appear real are relished and lauded. Those that fail to create a believable illusion are deemed failures. Truth is irrelevant. Those who succeed in politics, as in most of the culture, are those who create the brands and pseudo-events that offer the most convincing fantasies. And this is the art Obama has mastered.

A public that can no longer distinguish between truth and fiction is left to interpret reality through illusion. Random facts or obscure bits of data and trivia are used to bolster illusion and give it credibility or are discarded if they interfere with the message. The worse reality becomes—the more, for example, foreclosures and unemployment skyrocket—the more people seek refuge and comfort in illusions. When opinions cannot be distinguished from facts, when there is no universal standard to determine truth in law, in science, in scholarship, or in reporting the events of the day, when the most valued skill is the ability to entertain, the world becomes a place where lies become true, where people can believe what they want to believe. This is the real danger of pseudo-events and why pseudo-events are far more pernicious than stereotypes. They do not explain reality, as stereotypes attempt to, but replace reality. Pseudo-events redefine reality by the parameters set by their creators. These creators, who make massive profits peddling these illusions, have a vested interest in maintaining the power structures they control. 

The old production-oriented culture demanded what the historian Warren Susman termed character. The new consumption-oriented culture demands what he called personality. The shift in values is a shift from a fixed morality to the artifice of presentation. The old cultural values of thrift and moderation honored hard work, integrity and courage. The consumption-oriented culture honors charm, fascination and likability. "The social role demanded of all in the new culture of personality was that of a performer," Susman wrote. "Every American was to become a performing self." The junk politics practiced by Obama is a consumer fraud. It is about performance. It is about lies. It is about keeping us in a perpetual state of childishness. But the longer we live in illusion, the worse reality will be when it finally shatters our fantasies. Those who do not understand what is happening around them and who are overwhelmed by a brutal reality they did not expect or foresee search desperately for saviors. They beg demagogues to come to their rescue. This is the ultimate danger of the Obama Brand. It effectively masks the wanton internal destruction and theft being carried out by our corporate state. These corporations, once they have stolen trillions in taxpayer wealth, will leave tens of millions of Americans bereft, bewildered and yearning for even more potent and deadly illusions, ones that could swiftly snuff out what is left of our diminished open society.

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