"Young homesteader, Westmoreland Homesteads. Mount Pleasant, Pennsylvania"
Ilargi: Dear readers,
As you probably know, there has been a enormous amount of interest in the North American and European speaking tour for Stoneleigh's live presentation: "A Century of Challenges". The high levels of interest and participation have truly been as gratifying as they are encouraging.
We know that, obviously, not everyone can make it to these events, so, by strong popular demand, we have recorded the speech for viewing online. To ensure the best possible audio and video quality, we hired a professional media company to record and edit it. This has resulted in an interactive presentation that we feel proud of.
At this point in time, "A Century of Challenges" will be available only as a streaming file. That means you will not be able to download it to your computer or other device, and you will not need a box to put it in. We do plan to produce a DVD of the presentation at some time in the future (Christmas comes to mind), provided there's enough interest.
The streaming file format we have opted for will cost you only $12,50. Purchasing it will give you unlimited access for as many repeated viewings as you desire. Yes, there are some drawbacks: for instance, you need to be where you have access to a reasonably high-speed internet connection. And we do realize that some people don’t have that, even as most of you do.
So we decided that if enough people purchase the streaming file, part of the revenue generated will go into producing the DVD, and those who purchase both won't need to pay the full price twice, so there's no need to wait. Also, an added feature of the presentation are subtitles; these, as well as the graphs presented, will be translated in several other languages, such as French, German, Italian and Spanish.
This way we will manage to make the whole process something that pays for itself as we go along. That is, if a sufficient number of you show the same interest that our live audiences have. Judging for instance by the amount of time Stoneleigh has spent answering questions in each of the dozens of locations where she has presented "A Century of Challenges", we feel certain the level of interest will be considerable.
The process for ordering will be explained to you on the page you reach when you click RIGHT HERE or on the new button located in the right hand column of the TAE site, directly below the banner. We sincerely hope you enjoy the presentation, learn from it as well, and get back to us with your questions and remarks.
Kindness and regards,
Stoneleigh and Ilargi at The Automatic Earth.
Relationships of trust are the glue that holds societies together. Trust takes a long time to establish, and much less time to destroy, hence societies where trust is wide-spread, particularly for long periods of time, are relatively rare. In contrast, societies where trust does not extend beyond the family, or clan, level are very common in history.
The spread of trust is a characteristic of expansionary times, along with increasing inclusion, and a weakening of the 'Us vs Them' divide. Essentially, the trust horizon expands, both within and between societies. Over time it can encompass higher levels of organization - from family to community to municipality to region to nation and beyond - so long as the expansionary dynamic continues to support it.
Within societies this leads to relatively stable and (at least temporarily) effective institutions, and bolsters the development of the rule of law. The rule of law means that law constrains the powerful (more than usual), and there is a reasonable degree of legal transparency and predictability, so that people are prepared to trust in the fairness and accessibility of justice. Naturally, the ideal is never reached, human nature being what it is, but it can be approached under the most favourable of circumstances.
Within societies, trust also confers political legitimacy (ie a widespread buy-in as to the right of rulers to rule). Where there is legitimacy, there is relatively little need for surveillance and coercion. A high level of trust (all the way up to the level of national institutions) is thus a prerequisite for an open society.
Between societies, an expansion of the trust horizon tends to lead to political accretion. Larger and more disparate groups feel comfortable with closer ties and greater inter-dependence, and are prepared to leave past conflicts behind. The European Union, where 25 countries with a very long history of conflicts have come together, is a prime example.
However, all expansions have a limited lifespan, as do the benefits they confer. They sow the seeds of their own destruction, especially when they morph into a final manic phase and begin to hollow out the substance of social structures. Institutions, whether public or private, retain the same outward form, but cease to operate as they once did. For a while it is possible to maintain the illusion of business as usual (or effectiveness and accountability as usual), but not indefinitely. Everything is subject to receding horizons eventually, and trust is no exception.
Over time institutions become sclerotic, unresponsive, self-serving and hostage to vested interests, at which point they cannot be reformed, as the reform would have to come from those entrenched individuals who have benefited most from the status quo. Institutions become demonstrably less effective, while consuming more and more of society's resources. Corruption, abuses of power, lack of accountability and the loss of the rule of law become increasingly evident, exactly as we have seen with unauthorized wire-tapping, extra-ordinary rendition and many other actions undermining the open society. Once this happens, trust is living on borrowed time. That is very clearly the case in many developed societies today.
Trust in existing organizational structures does not disappear overnight, but ebbs away as institutions decay or the extent of their corruption is revealed. The loss of trust from higher levels of organization undermines the fabric of a society now operating beyond the trust horizon. When trust contracts, socioeconomic contraction is just around the corner. Bank runs are a particularly good example of this. People are currently waking up to the extent of the recklessness, irresponsibility and self-serving short-termism of the banking system, and realizing that reliance on top-down human promises is far riskier than they had supposed. When they cease to trust in those promises, they will are very likely to vote with their feet.
Societies in this position lose a critical pillar of support - the collective acceptance of their people. Governing institutions lose legitimacy, at which point the cost of governance increases significantly, because where there is no trust, resource-intensive surveillance and coercion develop instead. Our societies in the developed world, where institutional decay is well underway, stand on the brink of such a transition.
Where resources are scarce, as they will be soon enough, the diversion of a larger percentage of what remains towards this purpose will aggravate that scarcity considerably. This will further anger people, which is likely to lead to a downward spiral of mutual provocation and recrimination. Most of us have not seen this vicious circle of human sentiment to any great extent, but this is the natural consequence of the collapse of trust.
On the way down, as on the way up, there are effects both within and between societies, as the 'Us vs Them' dynamic sharpens once again. 'Us' becomes ever more tightly defined, and 'Them' becomes an ever more pejorative term. The result is division between disparate groups of people within a society, for instance the unionized and non-unionized, the haves and the have-nots, or different religious or ethnic groups. When there is a paucity of trust, and not enough resources to go meet highly inflated expectations, the risk of conflict is very high. Previously formed political accretions are at a high risk of coming unglued as they will no be longer supported by trust. The European Union should take note.
Between societies, where the existing range of divisive parameters is likely to be much larger, and where there may be a past history of conflict, the risk of conflict flaring up again rises significantly. This is especially likely if societies attempt to deflect blame for the situation they find themselves in towards other nationalities.
We are already seeing evidence of the growing anger, and the change it will usher in as the trust horizon shrinks. In the US, the Tea Party movement is the most obvious example. All major change comes from the ground-up, where the power of the collective is expressed in ways that either support or undermine the actions and intentions of central authorities. It is the interaction between the power of the collective and central authority that determines where a society will head.
The Tea Party movement is a ground-swell of public anger, very much in the tradition of major transformative grass-roots initiatives. It is exactly what one would expect to see at the brink of a collapse in the trust horizon - a movement grounded in negative emotion that both stems from a loss of trust and in turn acts to aggravate it in a self-reinforcing positive feedback loop. The danger with such a movement manifesting such powerful negative emotions is that it will precipitate a major over-reaction to the downside, commensurate with the irrational exuberance we saw to the upside. The anger is largely unfocused, and where it is specific, it is not fully-informed.
The primary target of the Tea Party is big government, but this ignores a major part of the big picture. The abuses of power we have seen are not purely a manifestation of metastatic public authority, but an expression of corporate fascism - the blending and merging of public and private interests in social control. One look at the revolving door between the banking system (where banking law is written) and the US treasury should be enough to demonstrate this.
The Tea Party movement represents largely (but not solely) the unfocused anger of people who know they have suffered, or are about to suffer, substantial losses, but do not (typically) understand the system well enough to understand why. The movement is casting about for someone to blame, as such movements always do on the verge of a trust collapse. The danger is that someone with facile populist answers will come along, offering a target for the urgent desire to blame someone for what has happened and is happening.
This is already happening, as powerful funding sources and nascent populists circle around and seek to tap into the trend for their own purposes. It is absolutely to be expected that existing top-down power structures, or political opportunists with their own agenda, will seek to hijack bottom-up movements as they develop. My primary concern is that in doing so they will lay the foundation for a society attempting to live far beyond the trust horizon, and where there is no trust, and consequently no political legitimacy, there will be surveillance, coercion and repression instead.
It will be easy for movements grounded in negative emotion to gain a foot-hold in the coming environment, as this is very much where the collective mood will lie in the aftermath of a Ponzi collapse. Blame-games will be very tempting (and populists have their own prejudicial ideas as to who should be blamed). However, this would not be compatible with maintaining the constructive and cooperative mindset we need if we are to have a hope of avoiding an over-reaction to the downside that has the potential to magnify the impact of what is coming enormously.
Personally, I would like to encourage the development of a different kind of grass-roots momentum for change, along the lines of what is being developed (albeit not nearly quickly enough so far) by the Transition Towns movement and other comparable initiatives. The key advantages that this kind of approach has are two-fold - the scope of its component activities, based on relocalization, match where the trust horizon is headed, and its driving force is the desire to build rather than to tear down.
Working within the trust horizon is important, as it means individual small-scale initiatives can benefit from the same kind of social support at a local level that larger-scale ones once did at a societal level, when trust was more broadly inclusive. Local currencies work for exactly this reason. While the task will still be difficult, it has a chance of being achievable, especially where the necessary relationships of trust have been established before hard times set in. It is very much more difficult to build such relationships after the fact, but relationships built beforehand may actually strengthen when put to the test.
Trying to maintain a positive and constructive focus at the local level, where trust has a chance to survive, and perhaps even thrive in hard times, and to avoid being drawn into a blame-game, will be an uphill battle. It is nevertheless something we need to do as a society, if we are to have a chance to preserve as much as possible of who we are through what is coming.
Big Bank Foreclosure Delays Signal Big Trouble
by Diana Olick - CNBC
JP Morgan Chase told CNBC on Wednesday that it will delay more than 56,000 foreclosure proceedings due to paperwork that was signed, "without the signer personally having reviewed those files." That came on the heels of GMAC halting foreclosures and evictions in 23 states for roughly the same reason. All this leads anybody with a heartbeat to figure that other large servicers will likely follow suit, as potential lawsuits abound.
So what will that mean to the larger foreclosure crisis and the already weakening housing recovery? "It's clear the pace of foreclosures will slow down," says Laurie Maggiano, Policy Director in the Treasury Department's Homeownership Preservation Office. "I would suspect that most responsible lenders are going to be looking at their processes and making sure that they've done everything properly, so they're not subject to the same accusations and lawsuits."
So far the largest lender/servicer, Bank of America has not returned my request for information, but you can imagine the level of scrambling going on right now at all the major servicers, now that a big name like JP Morgan Chase has made its move. Whether or not the foreclosures are bad, and I suspect the majority of them are valid in their claims if not in their procedures, the potential for a much bigger mess is high.
"As of right now this is a policy and procedure issue until proven otherwise, but never underestimate mid-term electioneering," says mortgage consultant Mark Hanson. "If this does go to the next level (i.e. national foreclosure moratorium, fear that hundreds of thousands of foreclosures have been performed illegally, etc.), the unintended negative consequences on the mortgage market, MBS investors, banks' balance sheets and ultimately the housing market will be significant. "
We're already seeing threats of ratings agency downgrades on all the major servicers, not to mention the threat to housing's overall recovery. If the bulk of these cases are valid, then delaying them is only going to prolong the pain. "Worst case is that the current foreclosure problems turn out to be industry-wide and trigger a landslide of legal challenges that lock up foreclosures resolutions for a year or more," says Guy Cecala, publisher of Inside Mortgage Finance.
That means all kinds of borrowers would sit in their homes free of charge, banks would be unable to get any return at all, and the housing market would still be facing the inevitable: "We may then see a [foreclosure] surge at some point in the future," notes Treasury's Maggiano. We've talked an awful lot about artificial government stimulus skewing the housing recovery as it tries to help; that's nothing compared to the potential for this latest scandal to wreak havoc on housing yet again.
Meredith Whitney's new target: The states
by Shawn Tully - Fortune
The housing crash not yet realized its full impact on budgets in the most vulnerable states. It's the banking crisis all over again – and it's time to stop ignoring it.
Meredith Whitney, the superstar analyst who famously forecast disaster for America's big banks before the credit crisis struck, is now warning about another looming threat: The wreckage from over-stretched state budgets. [This week], Whitney is releasing a 600-page report, colorfully entitled "The Tragedy of the Commons," that rates the financial condition of America's 15 largest states, measured by their GDP. Whitney claims that the study is the most comprehensive, in-depth analysis of the states' murky patterns of spending, revenues and benefits programs ever assembled by the government, foundations, or another research firm.
What Whitney found reminds her of the poor disclosure and arcane accounting rules that hid the fragile condition of the banks and monoline insurers that she unmasked. "The states represent the new systemic risk to financial markets," says Whitney. "I see a lack of transparency and an abundance of complacency on the part of investors and politicians, just as we saw before the banks imploded."
The study represents a departure for Whitney, whose boutique research firm specializes in providing its clients, including hedge funds, big institutions and banks, with proprietary research on the financial condition of consumers, ranging from projections on credit card defaults to regional employment trends. So why the mega-work on the states?
"It's not that my clients requested it," says Whitney. "I was just so shocked by what I was seeing that I couldn't stop. Any long-term strategic plan needs to take account of the dangerous, mostly overlooked problems in the state finances." Whitney describes the reports as "her favorite child."
The title, "The Tragedy of the Commons", comes from a parable about greedy farmers who let their sheep gobble up all the grass in a pasture, leaving the land barren and unfarmable––reflecting the spending frenzy that promises to decimate the prospects for many of America's largest, and formerly most prosperous, states.
Bigger economies, lower ratings
In the report, Whitney rates the fifteen states on four criteria, their economy, fiscal health, housing, and taxes. For each category, she assigns a rating of one, two or three for best, neutral or negative. Only two states get positive overall ratings: Texas and Virginia. Eight are either negative, or rated neutral, with a negative bias. The rub is that those are typically the states with the biggest economies: California, Ohio, New Jersey, Michigan, and Illinois (all negative) and Florida, Georgia, and New York (neutral, negative bias).The full rankings:
2. New Jersey, Illinois, Ohio (tie)
5. New York
4. North Carolina
Neutral states: Pennsylvania, Maryland, Massachusetts
Put simply, the study warns that the giant gap between states' spending and their tax revenues, estimated at $192 billion or 27% of their total budgets for the 2010 fiscal year, presents two dangers that investors are seriously underestimating. First, municipalities could start defaulting on their bonds guaranteed by the cities and towns themselves, an exceedingly rare event over the past three, mostly prosperous, decades. "People keep saying it can't happen, just as they said national housing prices could never go down," says Whitney. "Now, it's a real danger."
The reason: the municipalities receive one-third of their revenue from the states. If the states hold back that money for their own stricken budgets, towns and cities won't have the funds to make their interest payments. "It has to happen," says Whitney. "The states will secure their own shortfalls, and leave the cities to fend for themselves." It's all about inter-dependency, she says, with the federal government aiding the states, and the states funding the last and most vulnerable link, the municipalities.
Housing fallout continues
Second, Whitney sees the budget shortfalls as a far stronger leash on both employment growth and overall expansion than investors realize. The common thread between the banking and looming state financial crises, she says, is housing. "The entire financial system was over-leveraged to real estate," says Whitney. "So were the states."
During the boom years from 2000 to 2008, the states that grew the fastest were the ones where housing prices grew fastest, and where construction flourished, including California, Florida, New York, and New Jersey. In Florida, almost 30% of income growth came from real estate, an astoundingly high figure. Tax revenues soared during the real estate frenzy, and spending soared along with them. Now, revenues have collapsed with housing prices, and spending is proving far stickier. The legacy: Today's gigantic deficits.
Then, as housing prices fell, the states that grew the fastest and outperformed in the strong years, are now posting the worst economic performance––for the obvious reasons that they face the biggest mortgage delinquency and foreclosure rates, as well as high unemployment due to the collapse in construction and mortgage lending. The "haves," says Whitney, have suddenly evolved into the "have-nots."
The problem is that the states that benefited disproportionately from housing are generally the biggest economies, so their woes have become a deadweight on overall economic growth. "Other states such as Nebraska, even with larger ones like Texas, aren't large enough in total to offset the weak growth in the states that depended on real estate," says Whitney.
What investors are missing, says Whitney, is that growth in those states is destined to remain feeble because of the drastic measures needed to redeem their finances. By law, almost all states are required to balance their budgets. Right now, the Obama stimulus package is making up over $60 billion of the $192 billion shortfall for fiscal 2010. But that money is slated to disappear next year. States are already raising taxes, or planning to -- voters in Washington will soon vote on a referendum to levy an income tax.
The biggest source of funds to fill the still-giant gaps is especially worrisome: Raiding pension and healthcare funds. States from California to New York are shifting contributions needed to pay workers' benefits in the future toward funding current expenses. The housing collapse will leave a different legacy by forcing big tax increases, and cutbacks in benefits including a rise in retirement ages. Millionaires who provide a huge share of the revenues will leave the high tax states, leaving the poor who need most of the services.
"The scary thing," says Whitney, "is that no one wants to talk about it. When you get the data and mechanics together the situation is as basic as it was for banks or consumers." "The Tragedy of the Commons" should get people talking, and the daunting scale of the numbers should get them outraged.
The ugly reality of lowering debt by default
by Nin-Hai Tseng - Fortune
There have been at least a few seemingly positive signs of progress during this anemic economic recovery: U.S. households are spending less. They're saving more. Debt is steadily falling.
But don't be fooled by the cheery headlines. The trend toward fiscal discipline might sound uplifting, especially at a time when many have learned all too painfully that they spent too much in the years leading up to the financial crisis. But dig a little deeper and you'll find that even the best economic news is masking something ugly. It turns out that many households aren't exactly tightening their wallets and using all their saved cash to pay down debts. They're simply defaulting on them.
Total household debt fell by $77 billion during the three months ending in June, but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans, according to Capital Economics Group. In a recent report, the London-based economic research consultancy found that this isn't necessarily a new development. Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak, which is the equivalent of reducing debt at every household by $4,200.
Shedding away debt - however it's done - is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.
This will probably prolong the de-leveraging process further, say analysts at Capital Economics. Until households can meaningfully shed off debt, it will likely be one of the key factors stalling economic growth and the job market as many companies wait for GDP to pick up significantly before hiring more workers.
Cutting plastic or cutting credit card bills?
The wave of defaults on mortgage loans is no surprise, given the rise in foreclosures and the fall in housing prices. But perhaps even more troublesome is the increase in consumer defaults on credit card debt. It's been widely reported that debt levels on credit cards have fallen - at one point surprisingly dropping below the level of outstanding student loans, according to an August story in The Wall Street Journal.
But consumers haven't exactly discovered a newfound sense of frugality. In 2009, outstanding credit card debt dropped by about $93.2 billion compared with the previous year, according to a report from CardHub.com, a credit card comparison website. This might sound like good news, but the reality is that the majority of the drop -- $81.6 billion -- is due to Americans defaulting on their debt.
So the real decrease is much smaller - about $11.6 billion - and much of that came during the first quarter when many people used tax returns to pay down card debt. At this rate, CardHub.com predicts consumers in 2010 will actually accumulate at least $26.2 billion more in credit card debt over last year. "It's alarming," CardHub.com CEO and founder Odysseas Papadimitriou says. "We cannot revert to pre-recession debt levels."
Household debt might generally be falling, but at what cost? Those who default, depending on the size of the loan, take sizeable hits to their credit background, which could impact the terms of future loans. So while consumers' debt burdens might technically be less today than they were just a few years ago, at least on paper, the burden is still quite heavy on the minds of consumers.
Blame Nobel for crisis, says author of "Black Swan"
by Adam Cox - Reuters
Did the Nobel prize help trigger the worst financial crisis since the Great Depression? Nassim Taleb, who shot to fame with his ideas about risk in the book "The Black Swan," believes the economics award and the theories it celebrates deserve their share of blame. "I want to remove the harm from these economic models. And the Nobel is not helping. They should be held partly responsible, if not largely responsible, for the crisis," Taleb told Reuters by telephone.
The first of the Nobel awards will be announced next Monday, with the economics prize due a week later on Oct 11. According to Taleb, there are a number of mistaken ideas about forecasting and measuring risk, which all contribute to events like the 2008 global crisis. The Nobel prize, he says, has given them a stamp of approval, allowing them to propagate. Taleb is a former trader who took advantage of the mispricing of derivatives to make his fortune in the years before the crisis. He published "The Black Swan" in 2007 and went on to make millions more during the upheaval.
He rattles off a list of Nobel prize winners who make his blood boil. They include: Harry Markowitz, William Sharpe, Robert Merton, Myron Scholes, Robert Engle, Franco Modigliani and Merton Miller -- a virtual "Who's Who" of the economic world. Merton and Scholes, for instance, were recognized for their work in valuing derivatives. Modigliani and Miller are known for a theory which some have argued promotes financing by debt. Taleb attacks their works for how they are constructed and what they lead to. "There is no world in which these ideas can work mathematically," he said.
Forecasting methods, which he discusses in detail in his book, create a false sense of security or, worse, send people in the wrong direction. Universities then compound the problem by teaching these Nobel-approved ideas as orthodoxy. His conversation is peppered with metaphors. "If I give you a map of Sparta when you're in Johannesburg, you will definitely have a problem," he says of the tools used in modern finance. Taleb said he has met with the King of Sweden and suggested he do something about the economics prize, which was an addition in the 1960s to the roster of prizes awarded since 1901 for science, literature and peace.
"He Crashed The Plane"
But if he is unable to make headway in Stockholm, does Taleb believe his new influence can help him change the practices of important policy makers? He will be the first to say that his blunt, uncompromising manner make that highly unlikely. He says he walked out of a meeting that included Treasury Secretary Timothy Geithner and other luminaries and wouldn't feel comfortable shaking their hands.
Obama's Economic Team May Be Disbanding But They've Already Done The Damage
by L. Randall Wray - Benzinga
Isn't it remarkable that President Obama's economic team is suddenly itching to return to academia? The latest economic advisor to give in to the clarion call of the classroom is Larry Summers, following closely on the heels of Christina Romer, who surprised her department chair by announcing that she'd be teaching this year. To be sure, in Summers's case, it is not so clear that his Harvard colleagues are looking forward to his return—as President of the university he offended most of the faculty by arguing that women are inherently inferior when it comes to science.
That was by no means the first time he behaved like a bull in a china shop. As chief economist at the World Bank he had argued that developing nations ought to serve as toxic waste dumping grounds for rich countries. He also wrongly claimed that California's energy crisis in 2000 was caused by excessive government regulation—rather than by fraudulent dealings of Enron.
Still in terms of the real damage he has done, nothing comes close to his actions when he was serving Wall Street's beck and call in the administration of President Clinton. He lobbied for repeal of the Glass-Steagall Act, letting banks get more involved in the securities business that blew them up in 2007. He also opposed regulation of the derivatives market, attacking the head of the Commodities Futures Trading Commission - Brooksley Born - perhaps the only member of the Clinton administration who had any sense about financial markets. Summers helped to ban the federal government from regulating credit default swaps, and helped to deregulate the commodities markets. Most importantly, he helped to make it possible for pension funds to speculate in commodities like food and oil. Thus, he contributed directly to the speculative frenzy that drove up gas prices at the pump, and inflated food prices that brought on starvation around the globe.
Wall Street immediately rewarded Summers with $8 million in consulting and speaking fees. Most amazing of all, President Obama thanked him for helping to create the global crisis by appointing him as top economic advisor in his administration. Summers was the gift that just kept on giving—to Wall Street. He helped to devise the bail-out that spent, lent, or guaranteed more than $20 trillion to rescue the financial sector. Whilst providing barely a few peanuts for main street.
There are probably only two individuals who bear more responsibility for the crisis than Summers—Robert Rubin and Timothy Geithner. As Treasury Secretary under Clinton, Rubin helped to hand economic policy-making over to Wall Street—most notably to his former employer, Goldman Sachs. We haven't heard much from Rubin in recent weeks (since some rather embarrassing revelations of a somewhat sordid relationship he had with a younger woman). Of the triumvirate that oversaw the creation of the crisis, only Geithner remains on the front lines.
As NY Fed president he stood idly by, watching those Wall Street institutions under his supervision as they manufactured the debacle. Apparently, Geithner never saw a risky practice he did not like. He famously told Congress that as head of the NY Fed he had never been a financial regulator—an accurate statement even if it utterly conflicted with his job description. For this failing, he was rewarded by Obama, who made him Treasury Secretary. Unfortunately, with the resignations of Summers, Romer and Peter Orszag, the weight of Geithner's opinion rises—not a good thing.
And Orszag was recently replaced as budget director by Jack Lew, who now holds the position he held in the Clinton administration. Almost two years into the Obama administration and three years into this crisis, policy is still dominated by the Clintonites. Look, if the voters had wanted a Clinton, they could have had a Hillary. No doubt she would have brought in the Clinton team, with a somewhat more legitimate claim to the Clinton mantle than Obama enjoys.
The Clintons and their team firmly believe that they did a good job with the economy in the 1990s. That is belied by the evidence--their policies set the stage for the current economic collapse. They are the ones who unleashed Wall Street, allowing it to create toxic financial instruments that were designed to explode. They ran the budget surpluses that killed the economy—and left poor President Bush with a deep recession. In truth, there wasn't much that Bush could do given the state of the economy except to allow Chairman Greenspan and Treasury Secretary Paulson to run serial bubbles to try to temporarily jump start the economy. The crash was inevitable—what goes up must come down, and by 2007 Wall Street had run out of borrowers willing to take on debt they could not possibly repay, and suckers willing to hold ever more debt that would never be serviced.
Two years on, there is still no hint that Obama wants change. Voters are tired of audacity. They were promised the audacity of hope, not the audacity to continue to shift income to the wealthy. And yes, the data are out. President Obama is presiding over the biggest wealth redistribution in favor of the rich the US has ever seen. Forty million Americans are on food stamps; forty four million are living below the poverty line. And the rich are richer than ever before. This is not a coincidence—it was the Clinton strategy of shifting an ever larger share of GDP and corporate profits to the financial sector. The economy has collapsed under the weight of all that finance. And yet we still see no evidence that the President plans to change course.
L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City.
Currency Wars: A Fight to Be Weaker
by Tom Lauricella and John Lyons - Wall Street Journal
Tensions Grow in Foreign-Exchange Market as Countries Scramble to Tamp Down Their Money
Tensions are growing in the global currency markets as political rhetoric heats up and countries battle to protect their exporters, raising concerns about potentially damaging trade wars. At least half a dozen countries are actively trying to push down the value of their currencies, the most high-profile of which is Japan, which is attempting to halt the rise of the yen after a 14% rise since May. In the U.S., Congress is considering a law that targets China for keeping its currency artificially low, and in Brazil, the head of the central bank said the country may impose a tax on some short-term fixed income investments, which have contributed to a rise in the real.
Businesses always want to be more competitive and politicians often talk a big game. But in the current environment, as many economies are still struggling to recover from the global financial crisis, worries are growing that policy makers could be more aggressive in protecting their nation's business interests. Rising protectionism is "a very big risk," says Erin Browne, a macro stock market strategist at Citigroup. "And it's something that could move more into the spotlight after the [U.S.] election."
Currency-market strains could also be a topic of discussion at next week's IMF/World Bank meeting in Washington where central bank and government finance officials will be gathering. The Japanese government earlier this month stepped into the currency markets for the first time in years. To counter the yen's rise, Japan sold some $20 billion worth of its currency, which traders said was its biggest-ever effort in a single day.
Japan joined many other Asian emerging-market countries that have fighting rising currencies on a near daily basis, such as Taiwan, South Korea and Thailand. In Latin America, Brazil, Colombia and Peru have also intervened to tamp down their currencies. In the U.S., protectionist efforts have been on the rise, especially when it comes to China, which is widely seen as keeping its currency, the yuan, at artificially low levels in order to boost its exports and make it more expensive for the Chinese to purchase goods produced abroad.
The House of Representatives is expected to pass legislation on Thursday that would let U.S. companies argue that Chinese currency policy represents an unfair subsidy. Democratic Senator Charles Schumer plans to push similar legislation to punish China for currency manipulation in the lame-duck session following the election. But it is considered unlikely the bill will pass.
Even so, the administration could use the threat of congressional action to press Beijing to make further adjustments in its currency, particularly as a summit of the Group-of-20 leaders in mid November draws closer. IMF Managing Director Dominique Strauss-Kahn said he wouldn't rule out a currency war and that officials at both the fund and the Group of 20 nations were actively working to prevent such a battle of competitive depreciations. However, in a press briefing in Washington, Mr. Strauss-Kahn said he didn't believe there was a big risk of such a war. "There is no good to expect from intervention," he said. "History has shown that the effect of this kind of intervention doesn't last for very long."
Part of the challenge is that the moves in the currency markets that are raising the ire of central banks and politicians are being driven by longer-term investors. Stronger economies in the emerging markets are attracting capital from the developed world, pumping up demand for local currencies. Talk of additional quantitative easing in the U.S. signals to investors that interest rates there will remain close to zero for a long time.
Meanwhile, inflation is building in Asia, forcing interest rates higher. Investors see that mismatch and are shuttling money from west to east, attracted to the higher yields. "The flows that we're seeing are soundly based," says Richard Yetsenga, global head of emerging-market currency strategy at HSBC. Some countries intervene more forcefully than others. Technology exporter Taiwan sees little fluctuation in its currency, thanks partly to heavy government intervention. Its currency is up less than 2% against the dollar this year. Malaysia, on the other hand, has allowed a stronger ringgit for the independence a free-floating currency gives its monetary policy makers, and the spur it gives to its exporters to become more efficient.
Government officials outside China for the most part step gingerly when it comes to the region's largest economy and its approach to currency reform, if they say anything at all. Singapore Prime Minister Lee Hsien Loong said last week in an interview with The Wall Street Journal regarding China's appreciation: "I can understand their caution, but on balance they need not go so slow." The rhetoric was much hotter this week out of Brazil, where its currency has risen more than 30% against the dollar since last year partly because investors flock to its relatively high interest rates.
On Monday, Brazil's Finance Minister Guido Mantega lashed out at the U.S., Japan and other rich nations he says are letting their currencies weaken to spur growth—growth that comes at the expense of other exporters like Brazil. "We're in the midst of an international currency war," Mr. Mantega said during an event in São Paulo. "This threatens us because it takes away our competitiveness."
The head of Brazil's central bank, which has been intervening in the currency markets to slow the real's rise, was more circumspect on Tuesday. "There is a very serious currency problem which should be addressed," Henrique de Campos Meirelles said. Mr. Meirelles said that raising taxes on flows into Brazil was a possibility. Officials say Brazil's 10.75% benchmark interest rate is necessary to squelch inflation and keep the Latin America's biggest economy from overheating. But it attracts a flood of investment from speculators who borrow in the U.S. or Japan where money is cheap, and deposit it in Brazil. The inflows of cash propel the real even higher.
With Brazil's presidential elections scheduled for Sunday, dealing with a strong currency is shaping up as the first major economic issue to face Brazil's next president. Dilma Rousseff, the former Energy Minister and handpicked successor to President Luiz Inácio Lula da Silva leading the polls, is an advocate of Brazil's 11-year-old floating exchange rate. But she is likely to face pressure from economists within her left-wing party, including Mr. Mantega, to intervene more heavily.
Capital controls eyed as global currency wars escalate
by Ambrose Evans-Pritchard- Telegraph
Stimulus leaking out of the West's stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies. Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.
Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. "It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said. "I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up."
Brazil's finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a "currency war" as funds flood the local bond market to take advantage of yields of 11pc, vastly higher than anything on offer in the West. "We're in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies," he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.
Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be "direct capital controls", the bank warned. Brazil's real has been one of the world's strongest currencies over the past two years, aggravating a current account deficit nearing 2.5pc of GDP. The overvalued exchange rate endangers Brazil's industry, especially companies that compete with Chinese imports. The real has appreciated to 1.7 to the dollar from 2.6 in late 2008, and by almost the same amount against China's yuan.
"Everybody is worried that global growth is fading and they are trying to use exchange rates to protect exports. Brazil has watched as the Asians intervened and feels it can't stand by," said Ian Stannard, a currency expert at BNP Paribas. Brazil has used taxes to slow the capital inflows but the allure of super-yields and the country's status as a grain, iron ore, and commodity powerhouse have proved irresistible. It is a textbook case of the "resources curse" that can afflict commodity producers.
A $67bn share issue by Petrobras has been a fresh magnet for funds, forcing the central bank to buy an estimated $1bn of foreign bonds each day over the past two weeks. Such action is hard to "sterilise" and can it fuel inflation. Japan has begun intervening to stop the yen appreciating to heartburn levels for Toyota, Sharp, Sony and other exporters. A strong yen risks tipping the country deeper into deflation.
Switzerland spent 80bn francs in one month to stem capital flight from the euro, only to be defeated by the force of the exchange markets, leaving its central bank nursing huge losses. Stephen Lewis from Monument Securities said the Fed is playing a risky game toying with more QE. There are already signs of investor flight into commodities. The danger is a repeat of the spike in 2008, which was a contributory cause of the Great Recession. "Further QE at this point may prove self-defeating," he said.
Meanwhile, Dominique Strauss-Kahn, managing director of the International Monetary Fund, tried to play down the fears of a currency war, saying he did not think there was “a big risk” despite “what has been written”.
Asian central banks act to stem rises
by Peter Garnham - Financial TImes
Central banks across Asia stepped in to stem the rise of their currencies as the continued slide in the dollar raised concerns over the competitiveness of exporters across the region. Dealers said central banks in South Korea, India, Malaysia, Taiwan, the Philippines and Singapore were all suspected of being active in the currency markets. However, there was no suggestion that Wednesday’s action by the region’s central banks was co-ordinated, merely a unilateral response by policy-makers to the weakening dollar.
But analysts said the trend was set to intensify. “Just look at how many central banks intervened,” said Maurice Pomery of Strategic Alpha. “If central banks adopt a policy to buy their neighbours’ bonds to keep them less competitive, all hell could break loose. “This will only get worse when the Federal Reserve launches the second round of quantitative easing, which it surely will, as the dollar will fall and disinvestment from the developed world into emerging economies intensifies.”
Weaker-than-expected US economic data have raised expectations that the Federal Reserve will extend its quantitative easing programme before the end of the year. The anticipation of intervention has driven the dollar lower and a wall of money has flooded into emerging markets in Asia, as well as South America, in search of yields that are not on offer in developed economies. Indeed, Guido Mantega, Brazil’s finance minister, said on Monday that an “international currency war” had broken out as governments around the world competed to lower their exchange rates.
The action from Asian central banks only succeeded in slowing the appreciation in the region’s currencies, however. By late afternoon in New York, the South Korean won rose 0.4 per cent to a four-month high of Won1,142.10 against the dollar, the Malaysian ringgit climbed 0.3 per cent to M$3.0846 and the Taiwanese dollar gained 0.6 per cent to T$31.237. The dollar also lost ground elsewhere as the prospect of further quantitative easing from the Fed kept the currency under pressure.
The dollar dropped to a fresh five-month low against the euro, easing 0.3 per cent to $1.3627 and eased 0.1 per cent to a two-and-a-half year low of SFr0.9765 against the Swiss franc. It added 0.1 per cent to $1.5788 against the pound The dollar also fell to a 26-month low against the Australian dollar, dropping 0.1 per cent to $0.9682. A robust survey of Chinese manufacturing activity boosted demand for the Australian dollar. Elsewhere, the dollar lost 0.3 per cent to Y83.65 against the yen.
Ambac Sues Bank of America Over Countrywide Bonds
by Karen Freifeld and David Mildenberg - Bloomberg
Ambac Assurance Corp. sued Bank of America Corp. over $16.7 billion of mortgage-backed securities, saying the bank’s Countrywide Financial Corp. unit fraudulently induced Ambac to insure bonds backed by improperly made loans. Ambac found that 97 percent of 6,533 loans it reviewed across 12 securitizations sponsored by Countrywide didn’t conform to the lender’s underwriting guidelines, according to the complaint filed yesterday in New York state Supreme Court. Many of the loans were made to borrowers with limited or no ability to meet their payment obligations, Ambac said.
The lawsuit follows negotiations between Bank of America, which acquired Countrywide in 2008, and Ambac over mounting losses caused by loans made during the early 2000s as U.S. housing prices soared. Ambac has paid $466 million in claims from more than 35,000 Countrywide home-equity loans that have defaulted or been charged off, according to the lawsuit. “Bank of America probably didn’t settle because they didn’t want to swallow the amount of money that it’s going to take to satisfy Ambac,” said Alan White, a law professor at Valparaiso University who specializes in housing industry issues. “Nobody wants to be left holding the bag.”
Repurchase of Billions
Repurchases of home loans from buyers and insurers of mortgage securities have already cost the four biggest U.S. lenders $9.8 billion, according to Credit Suisse Group AG. Bank of America has said it faces $11.1 billion of unresolved claims. MBIA Insurance said it paid more than $459 million in claims stemming from losses on Countrywide-sponsored mortgage- backed bonds, according to a 2008 lawsuit in New York State Supreme Court.
The Ambac case involves 12 Countrywide-sponsored pools of home loans that were created from 2004 to 2006, including nine involving home equity lines of credit and three that involve fixed-amount second-lien loans. Bank of America should repurchase as much as $20 billion in home loans that were based on wrong or missing information, the Association of Financial Guaranty Insurers said in a Sept. 2 letter to Bank of America Chief Executive Officer Brian Moynihan. More than half of the soured home-equity credit lines and residential mortgages created from 2005 through 2007 that insurers examined were candidates for repurchase, the group said.
Bank of America has reported $7.6 billion in losses from home-equity loans over the past four quarters, stemming from slumping U.S. home prices. Losses related to Countrywide loans, including repurchase requests, will continue through mid-2012, Moynihan said at a Sept. 14 investor conference. Bank of America in 2008 acquired Countrywide, the largest U.S. home lender at the time. “They’re manageable numbers, not pleasant numbers, but manageable numbers,” Moynihan said.
Moynihan and other Bank of America officials have said the bank must review each loan to verify whether it met company guidelines. That process has delayed Ambac’s demands that Bank of America repurchase the loans, causing a breach of contract, according to the lawsuit. Ambac said in its complaints that it’s “entitled to redress for Countrywide’s massive fraud and pervasive and material breaches, including damages sufficient to place Ambac in the same position it would have been in had it never insured the transactions.”
FASB to Fold on Mark to Market
by Dena Aubin - Reuters
Strong opposition to a controversial proposal to expand fair value accounting could sway rulemakers to modify the plan, a member of the U.S. accounting rule-making board said on Tuesday. The proposal by the Financial Accounting Standards Board calls for loans and other financial assets to be valued based on what they would fetch in the market, known as mark-to-market, or fair value. That change is intended to give investors a clearer picture of assets held on banks' books.
The banking industry has opposed the measure, saying it does not make sense to assign market prices to loans that will never be sold. "Thus far, I think the count is up to about 1,500 or so comment letters," said Lawrence Smith, a board member of FASB, which sets U.S. accounting rules. "I think I've read one that supports what we propose." Smith added that board members will probably be influenced by the opposition. "If I were a betting person, I would bet on some type of hybrid model being adopted," he said.
The proposal differs from an approach taken by the International Accounting Standards Board, which has said loans should be valued based on amortized costs. FASB has been working with IASB to reach agreement on one set of global standards. Mark-to-market is a key area where the rule-makers remain far apart. Based in London, IASB sets rules that are used in more than 110 countries.
FASB is taking written comments on its proposal until September 30 and will hold public round tables until mid-October. It will meet with IASB in November, Smith said. "We're hopeful we can still come to a converged solution, although the time frame is very tight," he said.
FASB and IASB are trying to achieve a convergence of their accounting rules by June 2011, a timeline being pushed by leaders of the G-20 group of nations.
The U.S. Securities and Exchange Commission is also pushing for FASB and IASB to finish, so it can decide by 2011 whether to move U.S. companies to the international standards.
Ilargi: A useful addition to the CMI numbers I talked about in (most recently) A Graphic Peek Into Our Economic Future. Adding in the government's contributions to the GDP doesn't exactly make things look rosier.
Why the Statistical "Recovery" Feels Bad
by Mike Shedlock
Inquiring minds might be interested in charts of GDP minus the effect of increased government spending. The charts are from reader Tim Wallace who writes ...Dear Mish -Take a look at the following spreadsheets of GDP from 2001 to 2010, in chained 2005 dollars to account for [price] inflation.U.S. GDP and Net GDP (subtracting government spending)
The above chart clearly demonstrates that there really is no recovery, just increased federal spending and debt.
Here are the GDP numbers chained to 2005 dollars (Millions):
Year GDP Gov't Spending Net GDP 2001 11,371.3 2,056.4 9,314.9 2002 11,538.8 2,188.6 9,350.2 2003 11,738.7 2,303.3 9,435.4 2004 12,213.8 2,377.7 9,836.1 2005 12,587.5 2,486.0 10,101.5 2006 12,962.5 2,578.5 10,384.0 2007 13,194.1 2,570.1 10,624.0 2008 13,359.0 2,753.3 10,605.7 2009 12,810.0 3,210.8 9,599.2 2010 13,191.5 3,470.0 9,721.5
Note that the chained GDP number less the federal spending nets out to a number less than the GDP of 2004. So basically, our economy is back where it was seven years ago.
Private Sector GDP
Private sector GDP continues to shrink as the above chart and following table shows.
Year Private GDP% 2001 81.9% 2002 81.0% 2003 80.4% 2004 80.5% 2005 80.3% 2006 80.1% 2007 80.5% 2008 79.4% 2009 74.9% 2010 73.7%
Moreover, over 40% of government spending is deficit spending. That increase in deficit spending accounts for the alleged rebound in GDP. Clearly that deficit spending is unsustainable.
How much of that increased government spending made it into your pocket or benefited you in any way? While your are pondering that, remember that all government spending adds to GDP whether or not anything is actually produced.[..]
Just as happened in Japan, all we have to show for our stimulus is bigger and bigger deficits with a corresponding increase in the percentage of revenues needed to finance that debt.
All this talk of a "recovery" is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending. Meanwhile, the real economy is mired at the 2004 level. Simply put, the recovery "feels bad" because there is no recovery in the first place, only a statistical illusion of one.
Nic Lenoir Turns Bearish With Conviction
by Nic Lenoir - ICAP
All forward looking indicators point to severe economic weakness, I am talking recession here, not just a sub-par 1.5% growth. Most economists like my friends Julian Brigden and Jonas Thulin who do cycle analysis using leading indicators have highlighted this much more eloquently than I could quantify my bearishness which in economical terms is the summation of a lot of observations but lacks the timing and numerical dimension they can provide. The following link I found very interesting in that perspective:
Where my timing leaves less to be desired is in terms of technicals. 3 weeks ago now I recommended buying VIX calls, specifically I like the 37.5 November expiry calls. We had a signal in VIX to sell stocks with a reversal outside the bollinger band, which historically precedes the highs in stocks. The lag has recently been 7 to 10 business days, but I was definitely open to a longer lag this time around since there are many people trying to get involved from the short side and the specter of the Fed and the plunge protection team looming. That is mainly why I suggested buying November expiry and wait before getting outright short.
After observing the price action a bit more and reflecting on the patterns, I have come to the conclusion that the market will top between 1,155 and 1,164. In that zone we have in order the top of the channel (120-minute chart) guiding the consolidation since July, the 61.8% retracement of the sell-off since April's highs, the resistance joining the 2007 tops and the 2010 tops, and the C=A of the correction start in July (daily chart). I add to that relatively convincing divergence and the incapacity of daily 21-RSI to bypass 60 which is an excellent confirmation of a correction in bear market and not a new bullish impulse. Gathering all that and adding to it the VIX signal we had early in September, the economic mix which is turning very sour, the start of trade wars, the ever present sovereign default crisis in Europe, the common knowledge that bank balance sheets are marked to solvency and the housing double dip, and I think it's fair to say the pricing for the major equity indices is rather generous. I did say yesterday that it all starts and ends with the USD. Well, the attached chart says that based on M2 EURUSD is headed back to 1.10 or even parity, and USD bullish sentiment according to CFTC is pretty much 0%. We also had Fed speakers on the air today saying that more Treasury purchases may not be the answer.
I will have much more on M2 considerations and currency valuation in the next few days but I have not yet sufficient proof to support my theory. When I do I will share!
Good luck trading,
ECB hawks spook debt markets
by Ambrose Evans-Pritchard- Telegraph
Eurozone experts are increasingly worried that the European Central Bank (ECB) is moving too fast in pulling the prop from under the financial systems of Greece, Ireland, Portugal and Spain, risking a repeat of the premature tightening in mid-2008 that ended in grief.
A string of ECB governors have said this week that emergency support must be withdrawn soon, signalling a phasing out of the unlimited lending facilities that have acted as life-support for banks of high-debt states. This puts the ECB on a very different tack from the central banks of the US, Britain, and Japan, which have abandoned "exit strategies" and begun to prepare for fresh quantitative easing as a precaution against a possible growth relapse. "The ECB seems set on a pre-ordained course, oblivious to other subtleties," said Julian Callow from Barclays Capital.
An ECB report on Wednesday said several EU banks are having trouble raising money on the wholesale funding markets and that some "remain overly reliant on credit support from central banks and governments, which continues to be a cause for concern." The ECB's response to this worry has baffled investors. Jürgen Stark, Germany's hardline member of the ECB, said the bank is "in the process of phasing out some of the non-standard measures".
The comments have since been echoed by more dovish members, suggesting that the ECB has now decided on its exit strategy regardless of the crisis in Ireland and Portugal, where bond spreads have hit fresh records. "The market has been a bit spooked by this," said Nick Matthews from RBS. Hans Redeker from BNP Paribas said the ECB was taking a gamble by shutting its various lending facilities, and letting its three-month operations run out at the start of next year.
"Is it wise even to have this kind of conversation at the moment? The ECB is taking a very strong view on recovery and if they are wrong it is not clear that the weaker countries can cope. We think there is going to a double-dip recession in eurozone periphery," he said. Mr Redeker said the main buyers of bonds in Southern Europe and Ireland are banks playing an internal "carry trade" where they borrow from the ECB and purchase the debt of their own governments at a higher yield, so the ECB is propping up sovereign states as well.
Lenders from Greece, Ireland, Portugal, and Spain have borrowed €361bn from the ECB, or 60pc of the total. EU officials describe them privately as "addict banks". Ireland is expected to announce today that it will inject a further €5bn into Anglo Irish, bringing the total cost of rescuing the bank to nearly €30bn. Finance minister Brian Lenihan said default on Anglo's senior debt would be "unthinkable". Junior debt is another matter.
The ECB has bought €60bn of EMU bonds directly, including an estimated €18bn of Irish debt. This backstop was not available for Greece when it blew up in April. As long as the ECB plays this role it can protect Ireland indefinitely. The question is whether the German-led bank is willing to so. "The ECB was left carrying the can in the financial crisis and they are tiring of this role," said Mr Callow. The ECB is implicitly shifting the burden of any rescue on to the EU's €440bn bail-out fund. This adds a new twist to the EU's saga.
More than 7,000 complaints lodged against UK banks every day
More than 7,000 complaints are lodged against banks in Britain every day, according to a damning report by the Financial Services Authority, Britain's financial regulator. The figures, released by the City watchdog, show that 1.3 million grievances were raised against the high street banks in the first six months this year. Substandard service and poor advice on insurance and mortgages are among the chief complaints of angry customers. Bailed-out banks such as Royal Bank of Scotland (RBS) and its subsidiary NatWest were found to have upheld the most complaints received from customers.
It is the first time the FSA has forced banks to disclose the number of complaints made against them and is aimed at improving customer service by naming and shaming offenders. The report shows that from January to June, Barclays received the most complaints with 245,348, followed by Santander with 244,978, Bank of Scotland (including HBOS) with 115,638, and Lloyds TSB with 146,846.
NatWest generated almost 84,300 customer complaints, of which 66 per cent concerning home loans were upheld, 46 per cent on insurance policies and 23 per cent on general banking. RBS received 38,100 complaints during the same period, of which 71pc about mortgages were upheld by the bank, 35 per cent on insurance policies and 27 per cent on general banking. Fifty-four per cent of insurance-related, and 12 per cent of general banking complaints were upheld against Lloyds. Of Barclays’s giant share of the complaints, two thirds related to insurance were upheld, 60 per cent on mortgages and 32 per cent on general banking.
The report also indicates that the banks drag their feet in resolving customers’ complaints, with less than half dealt with within the recommended time limit of eight weeks. Marc Gander, of the Consumer Action Group, told the Daily Mail: “We’re used to banks treating their customers shabbily, however these figures are quite extraordinary. “You have to wonder where these billions of pounds of taxpayers’ money are being spent – it’s certainly not on complaints handling.”
Ireland faces €34 billion bill for Anglo Irish Bank, forced to redraft budget
Ireland has put the cost of bailing out Anglo Irish Bank at €34bn (£29bn), lifting the country's budget deficit to a massive 32 per cent of GDP as it attempts to draw a line under a crippling banking crisis. Ireland's central bank said the extra cost of bailing out the banks - Allied Irish Banks and building society Irish Nationwide also need more capital - would force the government to make further budget cuts. Irish borrowing costs have hit record highs and triggered jitters across Europe as investors worried about the final bill for bailing out the banks and the ability of the country to push through the austerity measures needed to cut its massive debts.
Brian Lenihan, the Finance Minister who has warned that the failure of Anglo Irish Bank would “bring down” the whole country, said Dublin would aim to slice more than an existing target of €3bn off its 2011 budget. He said he would also outline a four-year plan in November to get its shortfall to below 3pc of GDP by 2014. "I want to stress today to all, including our European partners, that Ireland remains fully committed to reducing our deficit below 3pc of GDP by 2014 as agreed," he said.
European Union officials had pressed Dublin to come up with a detailed plan for getting its fiscal gap - the worst in the bloc - under control. The country has so far ploughed €29.3bn into Anglo Irish Bank, and the country's Central Bank said on Thursday the lender could need an additional $5bn under a worst-case scenario. “The market had come to expect the Anglo Irish figures,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin, told Bloomberg. “The surprise here is Allied Irish.” Allied Irish Banks will need to raise an additional €3bn by the end of the year. Support for Irish Nationwide will rise to €5.4bn from €2.7 bn.
The bailout of the banks has cost Irish taxpayers the equivalent of 20pc of GDP. Mr Lenihan said the bank costs would be spread over more than 10 years but said Ireland was likely to take a majority stake in Allied Irish Banks, because it would not be able to conduct a privately underwritten capital raising transaction. The government is hoping the concerns of debt investors will have been eased now that it has quantified the full cost of bailing out the lender and laid out further measures to bring its public finances under control.
“Today’s announcements take the Irish banking system closer to a final resolution of its restructuring, which is a prerequisite for sustained economic recovery,” Partick Honohan, the Governor of the central bank, said. "At €30bn, the cost of the bail-out is very similar to the annual Irish tax take," said Jane Foley, senior foreign-exchange strategist at Rabobank. "It follows that there is no quick fix to the appalling state of Irish government finances," she said.
The extra yield investors have demanded for the risk of holding 10-year Irish bonds over equivalent German bunds eased in early trading on Thursday to 4.37 percentage points. However, it still remains closed its all-time high of 4.49 percentage points hit this week. Standard & Poor’s, which cut Ireland’s credit rating in August, had estimated that Anglo Irish’s bailout may cost €35bn. It is keeping a close eye on the country's debt and has warned it could downgrade further.
Why Ireland can't afford to punish reckless lenders to its banks
by Robert Peston - BBC
The only time I was taken aback when interviewing the Irish finance minister Brian Lenihan on Friday was when he said - with striking passion - that he did not wish to see losses for international banks and other financial institutions that have lent to Ireland's bloated, ailing banks.
More or less the same point, that Irish banks' wholesale creditors must be protected from the error of their lending ways, was delivered to me with equal vehemence by Peter Sutherland, the grandest of Ireland's globetrotting financial grandees (at various times chairman of BP, chairman of Goldman Sachs International, a European commissioner, director-general of the precursor of the World Trade Organisation, and so on and so on).
We can assume this is the view of the Irish political establishment, since Sutherland is not a supporter of Lenihan's weakening Fianna Fail government.
Which may strike you as a bit odd, given that Ireland's economy has been taken to the brink of bankruptcy, by the reckless lending of its banks to property developers, home builders and house buyers - and that this reckless lending wouldn't have been possible if the banks themselves had not been able to obtain cheap money from overseas banks and institutions.
So there is a strong argument that since Irish taxpayers are incurring huge and rising losses to clear up this mess, the pain should be shared with all the guilty parties, who surely include the sophisticated financial professionals at foreign banks that foolishly provided Irish banks with the means to mortgage an entire economy.
But here's why for Lenihan, Sutherland and Ireland's mainstream political class it is heresy to adopt a policy of caveat emptor (or buyer beware) to the distribution of banking losses: Ireland's dependence on credit from abroad is so great that the economic consequences of that credit being withdrawn would be catastrophic.
Take a look at the latest figures from the central bankers' bank, the Bank for International Settlements, on just the exposure of overseas banks to Ireland (in other words, credit provided by pension funds, hedge funds and wealthy individuals would be on top of this). Total foreign bank exposure to Ireland's economy is $844bn, or five times the value of Ireland's GDP or economic output. Of that, German and UK banks are Ireland's biggest creditors, with €206bn and €224bn of exposure respectively.
To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn't sound altogether prudent, does it? As for direct bank-to-bank lending, overseas banks have provided Ireland's banks with €169bn of loans, which is also greater than Irish GDP.
Here's the point: an economy as open and as dependent on foreign finance as Ireland's cannot afford to alienate its creditors. If those overseas lenders asked for their money back now, Ireland's recent fall back into a modest economic contraction could spiral into dark deep prolonged recession or even depression.
There are two big conclusions to be drawn. First Ireland's inability to let market forces take their course will be seen by many as another example of why the banking industry has lost any semblance of right to operate according to normal commercial freedoms. Second, the Irish economy is hideously and perilously balanced between recovery and Armageddon.
The Irish government has extended till the end of the year its formal guarantees to protect from losses more than €400bn of retail and wholesale loans to Irish banks (banks' subordinated debt is excluded). But, to state the obvious, those guarantees are only reassuring to creditors if the Irish government is perceived as able to honour its own debts.
The credit-worthiness of the Irish government is largely dependent on two related factors: the delivery of its promise to reduce the public-sector deficit from an unsustainable 14.3% of GDP in 2009 to less than 3% of GDP by the end of 2014; the stabilisation of losses at Irish banks that are being underwritten by the government.
Here's one of many paradoxes about the Irish crisis: the losses at Irish banks are being crystallised by the activities of a fund set up by the Irish government, called the National Asset Management Agency (NAMA), to buy an estimated €80bn of bad loans from the banks. NAMA tries to buy these loans at the price which captures how much will eventually be repaid by overstretched borrowers. And the average price it paid for the first €27bn of transfers was 47.5 cents per euro of debt. Which means that the banks on average lost €14.2bn on these transfers to NAMA.
In one way, it looks like good news for the Irish taxpayer that NAMA is purchasing these dodgy loans at the market price. Except for one thing. The huge losses incurred by the banks on the NAMA transfers deplete banks' capital - which then has to be topped up by (you guessed it) Irish taxpayers and the National Pension Reserve Fund, a state pension fund created for the long term benefit of Irish citizens.
The government has already nationalised the most breathtakingly imprudent lender, Anglo Irish Bank, into which it has injected €23bn. And later this week, Mr Lenihan is expected to announce how much more capital needs to go into Anglo Irish (Mr Lenihan wouldn't disclose the size of the future financial injection, but it'll certainly be a good few billion euros).
There is also a reasonable probability that the state, through the National Pension Reserve Fund, will end up as the majority owner of Allied Irish Banks: AIB is being obliged to raise the ratio of its equity capital to assets to 7%, and may only be able to achieve this if the National Pension Reserve Fund converts all or part of its €3.5bn of preference shares into ordinary shares.
All of which is to say that the banks and the Irish state are more-or-less one and the same thing right now. And the greater are the banks' losses, the greater the strain on taxpayers. What will determine those losses - in part - is whether house and property prices stabilise after their 40 to 60% falls since the end of 2006. It hasn't happened yet, though the rate at which prices are falling has slowed down.
Of course, the great fear for the Irish government is that its putative virtue in making deep public spending cuts - and Mr Lenihan conceded that there are some big and painful decisions ahead - will further undermine confidence in the value of Irish assets, triggering further losses at banks, and thus eliminating the fiscal benefits of the deficit reduction programme. Or to put it another way, it will be many months yet before Ireland can be certain it's over the worst.
That's presumably why Mr Lenihan didn't rule out in his interview with me that the Irish government might eventually be obliged to ask for financial support from the European Financial Stability Facility, the special €440bn fund set up by eurozone members to lend to financially challenged eurozone states.
Naturally Mr Lenihan doesn't want the national humiliation for Ireland of being the first eurozone member to tap the special bail-out fund set up after Greece went to the brink of insolvency in the spring. Nor does he expect it. But he daren't say no, nay, never - for fear that those all-important overseas creditors lose confidence in the existence of backstop insurance to cover their cripplingly huge claims on the Irish banks and the Irish state.
Europe's austerity anger grows
by Ambrose Evans-Pritchard- Telegraph
More than 100,000 marchers converged on Brussels from across the EU to protest austerity measures on Wednesday, while Spanish unions took the extraordinary step of breaking ranks with Spain's socialist government by launching a general strike.
"Workers are on the streets today with a clear message to Europe's leaders," said John Monks, head of the European Trade Union Confederation. "There is a great danger that workers are going to pay the price for the reckless speculation that took place in financial markets. You have to reschedule these debts so that they are not a huge burden and cause Europe to plunge down into recession," he said, reflecting growing bitterness among ordinary people that they are bearing the brunt of austerity while bondholders have been shielded from losses.
Spain's car industry was entirely paralysed with the exception of the Mercedes plant in Vitoria, and transport stoppages caused severe disruption. Ignacio Fernandez Toxo, head of the country's CCOO trade union, said premier Jose Luis Zapatero was committing "political suicide" by carrying out harsh cuts while unemployment hovers at 20pc, or 41pc for youths.
Austerity fatigue is surfacing across a large arc of Eastern and Southern Europe, raising concerns that electorates may start to rebel. The Fidesz government in Hungary has already sent the EU and the International Monetary Fund packing, opting for "economic nationalism". Even the police joined demonstrations last week in Romania, hurling their kit at the presidential palace to protest public sector wage cuts of 25pc.
The pro-Russian Harvest Party is leading the polls in Latvia's election this week, threatening to tear up its EU-IMF rescue deal. Critics say the country should have devalued in order to cushion the blow rather than undergoing to harsh deflation under its euro peg. Latvia's economy has contracted 18pc since the peak. Unemployment is 20pc, and teachers, nurses and police have seen wage cuts of up to 30pc. Diplomats suspect Harvest may try to play off Moscow against Brussels to extract better terms.
France bowed to pressure for further fiscal tightening yesterday, pledging to cut its deficit from 7.7pc of GDP this year, to 6pc next year, still a modest effort by EU standards. "Considering the current monetary disorder, investors who finance our debt are attentive to our debt-reduction effort," said finance minister Christine Lagarde, alluding to a rise in spreads on France's 10-year bonds to 55 basis points over German Bunds.
In Italy, premier Silvio Berlusconi warned foes that they were playing with fire as his government faced a confidence vote last night after weeks of paralysis, in part triggered by cuts in grants to the regions. "It is absolutely not in the interests of our country to risk a period of instability at a moment when the crisis is not yet over," he said. Italy's public debt is 118pc of GDP and the world's third biggest in absolute terms.
The protests in Spain and Brussels came as the Commission proposed plans for automatic sanctions of up to 0.2pc of GDP on states that persistently breach the EU's debt and deficit ceilings of 60pc and 3pc of GDP. The mechanism is tougher than the old Stability Pact since states need a qualified majority to stop punishment. There will also be a 0.1pc fine for states that run trade imbalances, including surpluses – a twist likely to anger Germany.
"The EU politicians think they can somehow wipe away economic reality and the structural differences between these countries by bureaucratic means. It's ludicrous," said Ruth Leae, economic adviser to Arbuthnot Banking Group. Mr Monks said the proposals totally misguided. "How is that going to make the situation better? It is going to make it worse," he said.
Geir Haarde, Iceland Ex-PM, Indicted For Role In Financial Crisis
by Gudjon Helgason and Paisley Dodds - AP
Iceland's former Prime Minister Geir Haarde has been referred to a special court in a move that could make him the first world leader to be charged in connection with the global financial crisis. After a heated debate Tuesday, lawmakers voted 33-30 to refer charges to the court against Haarde for allegedly failing to prevent Iceland's 2008 financial crash – a crisis that sparked protests, toppled the government and brought the economy to a standstill by collapsing its currency.
Haarde faces up to two years in jail if found guilty. The court, which could dismiss the charges, has never before convened in Iceland's history. A hearing date has not yet been set. Haarde, ex-leader of the Independence Party, is no longer in parliament and stepped down from office last year following widespread protests and treatment for esophageal cancer. "I will answer all charges before the court and I will be vindicated." Haarde, 59, told the Icelandic Broadcaster RUV. "I have a clean slate. This charge borders on political persecution."
Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold. After dizzying economic growth that saw banks and companies in this tiny Nordic nation snap up assets around the world for a decade, the global financial crisis wreaked political and economic havoc in Iceland. Its banks collapsed in October 2008. Unemployment has soared since then and the country has lurched from crisis to crisis. In April, an eruption at Iceland's Eyjafjallajokull volcano triggered a giant ash cloud that disrupted global air travel for weeks and later restricted travel to and from the island nation.
In the same month, a report into the banking collapse accused Haarde and the central bank chief of acting with "gross negligence" in allowing the financial sector to overheat without adequate oversight. The 2,300-page government-commissioned report detailed a litany of mistakes made in the lead-up to the bank meltdown. Pall Hreinsson, the supreme court judge appointed to head the Special Investigation Commission that issued the report, singled out seven former officials including Haarde and central bank chief David Oddsson for particular criticism.
No other officials besides Haarde were referred for prosecution to the court on Tuesday. Lawmakers decided Tuesday not to charge three other former ministers, which angered some who felt the blame extended beyond Haarde. "You could say that all of the four former ministers should have been charged or none at all," says Thorkell Sigvaldason, 35, a university student. "But on the other hand, Geir Haarde was the leader and sometimes they have to pay for the mistakes of their men."
Teacher Bragi Johannnsson, 41, agreed that all four should face charges. He said the laws are too lenient and must be toughened. "I think there is a need for reform on the laws on politicians," he said. Haarde has blamed the banks in the past, and said he felt government officials and regulatory authorities tried their best to prevent the crisis. The report found that the country's three leading banks – Glitnir, Kaupthing and Landsbanki – got too big and overwhelmed the financial system when they ran into trouble with excessive risk-taking.
By the time the banks dropped in a domino-like sequence within a week of one another in October 2008, the banking sector had grown to dwarf the rest of the economy by around nine times. In one major blunder detailed in the report, staff at the Icelandic central bank forgot to extend a $500 million loan agreement, reached in March 2008, with the Bank of International Settlements in Basel, Switzerland. A belated attempt to receive an extension was not granted by the international bank. The report said that it was a key error at a time when few things were more important than building up Iceland's foreign currency reserves.
The central bank then turned to the Bank of England in April 2008, seeking a currency swap agreement. Mervyn King, the British central bank's governor, refused, but offered to help Iceland to reduce the size and burden of its banking sector. Iceland rejected the offer at the time. Before Haarde was prime minister, he also held the posts of finance minister and foreign minister. The special court will consist of 15 members – five supreme court justices, a district court president, a constitutional law professor and eight people chosen by parliament every six years.
America on the brink of a Second Revolution
by Paul B. Farrell - MarketWatch
“What’s distinctive about the Tea Party is its anarchist streak -- its antagonism toward any authority, its belligerent self-expression, and its lack of any coherent program or alternative to the policies it condemns,” warns Jacob Weisberg in Newsweek. But why not three cheers for the Tea Party Express?
Admit it, something historic is brewing. And yes, it’s good for America, even the anarchy. Revolution is renewal. Tea-baggers want to take on both parties, “restore honor” and “take back the country.” Bring it on, the feeling’s mutual.
OK, maybe most Americans just silently mimic the words, “we’re mad as hell, won’t take it any more.” But watch out: After November the campaign’s shrill rhetoric explodes into action.
Tea-baggers are kicking the revolution into high gear. Debt is sinking America. Both parties are to blame. So vote out incumbents. Spare no one. We need new leadership, another Reagan or Truman. Congress better get the message: Cut that budget, or they’ll dump the rest of you in the coming Great Purge of 2012.
Unfortunately they’re tone deaf. Congress cannot see past the election. All that changes in November.
So thanks Tea Party, Vegas odds must favor a Second American Revolution. Actually, the revolution is already roaring, hot, it’s about time. The GOP and the Dems had more than a decade. But America’s worse off. We need a real revolution to restore sanity … or we can kiss democracy and capitalism good-bye, permanently.
Warning: Another revolution will cost investors 20% more losses
Yes, big warning, the Second American Revolution will extract painful austerity, not the “happy days are here again” future touted by tea-baggers. For years it’ll be impossible for most of America’s 95 million investors to develop a successful investment or logical retirement strategy.
Why? Political chaos will translate into extreme volatility and a highly unpredictable stock market. Result: Wall Street will lose another 20% of the value of your retirement portfolio in the next decade, just as Wall Street did the last decade. So if you think you’re “mad as hell” now, “you ain’t seen nuthin’ yet!”
Here’s the timeline:
Stage 1: The Dems just put the nail in their coffin by confirming they are wimps, refusing to force the GOP to filibuster the Bush tax cuts for America’s richest.
Stage 2: The GOP takes over the House, expanding its war to destroy Obama with its new policy of “complete gridlock,” even “shutting down government.”
Stage 3: Obama goes lame-duck.
Stage 4: The GOP wins back the White House and Senate in 2012. Health care returns to insurers. Free market financial deregulation returns.
Stage 5: Under the new president, Wall Street’s insatiable greed triggers the catastrophic third meltdown of the 21st century Shiller predicted, with defaults on dollar-denominated debt.
Stage 6: The Second American Revolution explodes into a brutal full-scale class war rebelling against the out-of-touch, out-of-control greedy conspiracy-of-the-rich now running America.
Stage 7: Domestic class warfare is compounded by Pentagon’s prediction that by 2020 “an ancient pattern of desperate, all-out wars over food, water, and energy supplies would emerge” worldwide and “warfare is defining human life.”
What’s behind our 2010-2020 countdown? It became obvious after reading the brilliant but bleak “Decadence of Election 2010” report by Prof. Peter Morici, former chief economist at the International Trade Commission. He sees no hope from America’s political parties, just a dark scenario ahead.
Here are the 10 points we see in his message:
1. Expect nothing positive from Dems, the GOP or Tea Party
Yes, we’re all “justifiably ticked off.” But “Democrats, Republicans, and yes the Tea Party offer little that is encouraging.” Earlier Morici warned: “Democratic capitalism is in eclipse. … Politicians have deceived voters,” and are “suffering from delusions of grandeur, self deception and good old-fashioned abuse.”
2. Democracy has become too-big-to-govern … by anyone
“The current economic quagmire is a bipartisan creation.” Bush failures led to a “Great Recession … reckless Wall Street pay and fraud, a breakdown in sound lending standards by Fannie Mae, Freddie Mac … Countrywide, and a huge trade deficit with China and on oil” leaving “Beijing and Middle East royals with trillions of U.S. dollars that they invested foolishly” in bonds “financing the housing and commercial real estate bubbles.”
3. Clinton, Bush, Obama policies all feeding revolutionary flames
Even before Bush, “all was set in motion by bank deregulation engineered by Clinton … Secretaries Robert Rubin and Lawrence Summers … Clinton’s deal to admit China into the World Trade Organization” handed “China free access to U.S. markets” while blocking exports. Earlier Dems blocked “domestic oil and gas development” and froze “auto mileage standards.” Obama “finally imposed higher mileage requirements,” but after pushing offshore drilling, he “punished the entire petroleum industry” for the BP disaster.
4. Bush’s biggest mistake: Goldman CEO Hank Paulson
Morici admits: If Bush is “culpable for anything, it was to not see the gathering storm on Wall Street.” Worse, his Treasury picks were disasters: [John] Snow was clueless, Paulson devious. He conned a clueless Congress into bailout trillions, “believing banks could borrow at 3% and lend at 5 and pay MBAs three years out of school five-million-dollar bonuses to create mortgage backed securities.” Greed drove the Bush Treasury.
5. All partisan political leaders are destined to sabotage America
One thing is clear to Morici: Not only were America’s leaders a “bunch of second-rate incompetents” on both the Clinton and Bush teams, “Obama’s ratcheting up government spending and taxes won’t fix what’s broke, and neither will the GOP prescription of tax cuts and deregulation.” Get it? Democracy is in a classic double-bind, no-win scenario.
6. America’s democratic capitalism trapped in systemic failure
Morici simply dismisses “Obama’s two signature initiatives -- health-care reform and financial services reregulation.” They “simply don’t work.” Why? Politicians “failed to address the root problem, Americans pay 50% more for doctors, hospitals and drugs, than subscribers to national health plans in Germany, France and other decadent socialist European countries.” Yet, insurers hate reform, will self-destruct America first.
7. Wall Street’s insatiable greed is a virus that never sleeps
Wall Street banks are “back to their old tricks,” warns Morici, “hustling municipal governments into the kind of quick-fix budget schemes, like selling parking meters and airport fees.” Why? Wall Street’s “hustling shoddy corporate bonds that lack adequate collateral and may never be repaid” to justify their absurd mega-bonuses. And they’ll keep doing it till the revolution creates a new non-capitalist banking system.
8. New political leaders offer no hope -- Wall Street rules America
GOP’s next leaders will fail: “Cutting taxes and mindless deregulation are not the answer.” We need the revenue. They have no real plan to trim “$1 trillion from federal spending … few believe deregulation will fix health care or Wall Street.” The GOP has no “effective government solutions to health care, Wall Street, fixing trade with China, and dependence on foreign oil.” And the Tea Party “only offers a purer form of failed Republicanism. Tax and spend less, and turn the country over to the robber barons.”
9. Praying for a messiah, we’re sleepwalking till the revolution
Morici’s solution: America “needs a prophet, another Harry Truman or Ronald Reagan.” But we’ll never get one, until a catastrophe hits. Wall Street’s so greedy, so corrupt, so untouchable, so much in control, they will bankroll and control all future “prophets.”
10. The Second American Revolution coming
Yes, extreme austerity: “Americans must accept fewer government-paid benefits -- for the rich, the poor and those in between -- and must acknowledge the market works best most of the time, but it is not working in health care, banking, China, and oil.” Huh? Sounds like classic economist’s double-speak: “The market works most of the time” … except the market doesn’t work at all in the four biggest economic sectors? Fuzzy thinking?
Morici warns, we need “new approaches to regulating, yes regulating, what the medical industry charges, bankers pay themselves, what Americans tolerate and buy” and “guiding big oil and car companies to sustainable solutions.”
Holy cow, he suddenly sounds more like a liberal politician than conservative economist. Yes, he’s reflecting the total chaos coming on the short road to the Second American Revolution.
In the end, however, you have to admit the good professor does make a lot of sense: “Sounds radical but running the world has never been a choice between statism and anarchy,” says Morici.
Choice? Unfortunately, he offers a false choice: Running America effectively means accepting “that the private sector is not the enemy and government is not evil, but neither can serve the other, and us, if value is not seen in each.”
Laudable, but impossible because once the GOP Tea Party of No-No is back in power, compromising is not on their agenda, “gridlock” is. So anarchy is the only choice -- they will never, never work with Democrats … until forced by the Second America Revolution when the middle class finally rises up and overthrows the greedy wealth conspiracy of Wall Street, Washington, CEOs and the Forbes 400.
Till then, anarchy rules as the conspiracy keeps looting Treasury, stealing from taxpayers, conning us all.
The Mystery of Disappearing Proprietary Traders
by Michael Lewis - Bloomberg
In the run-up to the vote on the financial overhaul bill, the big Wall Street banks squashed an attempt by Senator Carl Levin to pass a simple ban on any form of proprietary trading. A Senate staffer close to the process told me the amendment was one of Wall Street’s highest priorities, spreading money around to exert as much pressure as possible.
It worked: Levin’s amendment never reached the Senate floor for a vote. The final version of the bill restricts proprietary trading but allows big Wall Street firms to invest as much as 3 percent of their capital in their own internal hedge funds. How exactly the new rules are enforced is left to regulators inside the Federal Reserve, but it’s not hard to see how a wholly owned hedge fund might become a proprietary trading group, with a different name.
The 3 percent loophole amounted to an invitation for the big banks to keep on doing at least some of what they had been doing -- which is why Levin felt compelled to remove it, and the banks fought so hard to keep it. Yet in just the past few weeks news has leaked that Morgan Stanley, JPMorgan and Goldman Sachs all intend either to close their proprietary trading units or to sell their interests in the hedge funds they control.
Obviously, something is wrong with this picture. Why fight for a right, and win, only to proceed as if you have lost? Why take prisoners only to surrender to them? Having preserved their loophole the big American banks now appear to be freely abandoning any attempt to exploit it. (Credit Suisse, on the other hand, just bought a stake in a hedge fund.)
To see Wall Street turn its back on money is as unsettling as watching a shark’s fin veer away, and then sink from view. It leaves you wanting to know where the shark has gone, and why. None of the firms have offered a good explanation for their new and seemingly improved behavior, but it’s not hard to think up several. From least plausible to most:
No. 1 -- Having not merely preserved but bolstered their place at the heart of capitalism -- with little banks failing everywhere, the big keep getting bigger and stronger -- the major Wall Street firms have experienced an epiphany about their relationship to wider society. They don’t need to screw people! Newly able to raise their prices, they want to return to serving their customers, rather than exploiting them. Whatever they lose from prop trading they will be more than compensated for through new and more trusting relationships with their clients -- who will now have no reason to suspect they are merely a tool for the firm’s trading desk.
In a smaller and less competitive financial industry, it will pay to be the nice guy, and so Goldman Sachs now wants to play nice. The only problem with this explanation is that I don’t believe it. More likely:
No. 2 -- The big Wall Street firms have looked anew at proprietary trading and seen a dying business. For a start, their proprietary traders, put off by subpoenas and government inquiries and the new internal aversion to short-term pain on big trading positions, are fleeing for the privacy of hedge funds. But the exodus of trading talent is only part of the problem. A general malaise has come over the world of big time financial risk taking. Everywhere you look hedge funds are either closing or shedding employees or, most shockingly, cutting their fees. At the bottom of this depressing new trend lies a deeper problem: a scarcity of suckers.
The proprietary trading business turns in part on one’s ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game. It’s as if a casino owner awakened one morning to find the tourists had all gone, and the only remaining patrons are pros counting cards at his blackjack tables. As he looked around his casino, for the first time in his life, he couldn’t find the fool. And the first rule of the casino business is: if you don’t know who the fool is, it’s probably you.
Prop trading isn’t as promising as it used to be. At the same time it’s a far greater nuisance than it ever was: The regulators might actually be paying attention to what your traders get up to; if they screw up the financial press is poised to write a story about them; and so on. It’s just not worth the trouble to prop trade, unless you can prop trade in some wholly novel way. Which brings us to a third possible explanation:
No. 3 -- Goldman Sachs, Morgan Stanley and JPMorgan are not in fact abandoning proprietary trading. They are just giving it a different name. They are dismantling the units called “proprietary trading” and shifting the activity onto trading desks that deal directly with customers. (Which would explain why so few prop traders are being let go.)
After all, you don’t need a proprietary trading desk to engage in the two activities that any proprietary trading ban would seek to prevent: 1) running huge trading risks, and 2) taking the other side of the customers’ stupid trades. Goldman Sachs’ infamous Abacus program -- the one that talked American International Group into selling vast amounts of cheap insurance to offset subprime mortgage risk, and then shorted the instruments they themselves had created -- wasn’t dreamed up by the prop trading desk. It was the brainchild of what customers knew as the “Client Facing Group.”
In short, there are any number of explanations why Wall Street firms are all at once letting it be known they intend simply to walk away from what has been, until very recently, their single most lucrative line of work.
None of the Above
The answer may be none of the above or some mixture of the three. But what’s really striking is how little ability the outside world retains to find out what is going on inside these places -- even after we have learned that what we don’t know about them can kill us. It would be nice to know, for instance, if the big banks are making these moves with the tacit understanding that the regulators, going forward, won’t be looking too closely at the activities of the “Client Facing Group.”
And yet news of the death of the Wall Street prop trader has been greeted with hardly a peep. And I wonder: is this the nature of our new financial order? Big decisions, in which the public has a clear interest, being made outside public view, with little public discussion or understanding. If so, it isn’t a future at all. It’s just the past, repeating itself.