Sunday, April 25, 2010

April 25 2010: Jimmy Stewart is dead: Break up the banks

Hubble Telescope Carina Nebula 2008
Star-forming region in the Carina Nebula. The enormous pillar of gas and dust is 3 light-years tall. The seam in the middle is the result of new stars forming and emitting powerful gas jets that are ripping the pillar apart.

Ilargi: It promises to be an interesting week, the one we're entering. 44 House Democrats have signed a petition for criminal investigations against Goldman Sachs. Goldman's executives (including Fabrice Tourre?!) will be heard on Tuesday by Carl Levin and his Permanent Subcommittee on Investigations. Levin released tons of internal Goldman emails over the weekend, which at the very least appear to contradict former statements by the firm that it did not profit from the housing and financial collapse.

It's not hard to predict that Blankfein c.s. will be insulted, furious and indignant. These are people for whom $10 million is NOT a lot of money. And however you think about that, it is still a sharp contrast with the millions of American citizens who've come to rely on foodstamps and emergency extended unemployment checks, to a large extent because of the financial crisis. For them, $10 million is an enormous amount of money, so large they can't even fathom it.

I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the "lower classes" have at least a decent life. A chance to feed their kids and send them to a proper school, to get proper medical treatment for their families if and when required, and, when they age, to draw sufficient retirement funds not to suffer from hunger and cold.

The Blankfeins and Jamie Dimons of the planet have no idea who these people are, or what they think, what they're going through, many hundreds waiting in line for an entire day for a handful of low-paid jobs. See, if you make $20,000 a year, and many wish they'd make that much, you have to work for 500 years to get to that $10 million. Lloyd Blankfein made over $400 million in the past decade. John Paulson, the hedge fund man who Goldman devised the Abacus deal with that the SEC has stated is fraudulent (on Goldman's part, Paulson is not mentioned in the civil case), mae $1 billion on that deal alone. The American low-paid worker would need to work for 50,000 years to get to $1 billion.

And still, this could go on, or could have gone on, for much longer, provided the wealthy part of society had remained aware of how the poor were doing. They didn't, they look only at the next $10 million. It’s a common gambler's affliction, or an alcoholic's: forget the world around you exists.

I'd say Barry Ritholtz has it just about right (and he'll bet anyone he does). The SEC's case against Goldman has been called weak or worse from all sorts of corners, but director of SEC enforcement Robert Khuzami is not a two-bit fool. The case has been prepared over a long period of time, way more even than the 9 months since Goldman was told there was an investigation going on. Now, as I said before, it may be that Khuzami, who can only file civil cases, is just handing a handy set of tools to anyone wanting to go after Goldman in criminal court. Carl Levin and his committee may use Khuzami's research. There are at least two complaints filed vs Goldman in criminal court that are derivative cases, meaning the lawyers who filed them represent not themselves, but groups of clients.

Really, all Khuzami may have wanted is to shake the barrel, confident that this would draw out the snakes. But, as RItholtz says, he may have a whole army of additional evidence that he hasn't yet published, simply because the initial filing didn't require it.

The call to break up the big six banks is getting louder all the time. The New York Times is not an anti-elite paper by any stretch, but today, its new hero Gretchen Morgenson (she had the scoop on SEC vs Goldman) phrases it like this:
It is a shame that Congress is moving forward with financial regulations that do not eliminate the heads-bankers-win, tails-taxpayers-lose mentality that has driven most of the bailouts during this sorry episode. Companies that are too mighty to fail must be broken up.

And incentives in the nation’s regulatory system that reward size with subsidies should not be enshrined into law. They should be eliminated. Only then will America be safe from toxic banking practices and the burdensome rescues they require.

Good morning! She cites that even a man like Richard Fisher, president of the Dallas Fed, calls for the big banks to be broken up. Now, you may have noticed that what Morgenson is saying is radically different from what President Obama said in his speech last week. He said nothing about breaking up banks, or about restricting their use of swaps and other derivatives, he asked them to join "us" (it wasn't very clear who "us" included). It sounded something like: "Join us in taking your money away from you (if you don’t, we won't, promise), it's good for the country and ultimately it's good for you too (who needs all that money?).

What needs to happen, and soon, if anyone is to be left with a few pennies to their name, is easy to formulate. Just for starters:
  • Break up the big banks
  • Take away -investment- banks' access to Fed discount windows
  • Separate consumer banking and investment banking (Glass-Steagall)
  • Deal with outstanding derivatives positions at the expense of shareholders and bondholders (including China)
  • Eliminate corporate (not just banks) funding for A) Washington lobbyists and B) Election campaigns

As for the last point, the present bunch of representatives will never agree; their livelihood depends on it. Still, it will get increasingly harder to call for banks to be broken up on the one hand, and throw Wall Street fundraising events on the other. They may well fall in their own sword, raised to take advantage of the shift in public mood.

As McClatchy's David Lightman pointedly writes:
What do both parties have in common? Wall Street donations
In recent days, critics and journalists have been asking lawmakers to return certain funds, notably those from Goldman Sachs. Most lawmakers find the suggestion ridiculous. "This is our system," [Sen. John Cornyn of Texas, the chairman of the National Republican Senatorial Committee] said.

"I think the system needs more transparency, so people can more easily reach their own conclusions. But if you didn't have this system, the alternative would be to have taxpayers fund elections, and I'm not in favor of that."

Well, US election campaigns are either going to be funded by the taxpayer, or they'll be funded by Goldman Sachs. Which would you prefer? Which sounds more democratic? Please realize that taxpayer funded means much more sober; just imagine the amount of nonsense that would disappear from view.

So, finally, whither the banks? Here's Sewell Chan on Laurence J. Kotlikoff's intriguing ideas (intriguing for me since I’ve long said people don’t need banks, they merely need access to their money, which they incidentally are presently losing to those same banks):
Jimmy Stewart Is Dead: Take the Money Out of Banks
Instead of checking accounts, people would place money in all-cash mutual funds. Savings accounts would be replaced by short-term funds that make conservative investments. And people could also place money in more adventurous funds that made mortgage loans, or extended lines of credit or played the market in derivatives.

It is a system designed to reduce risk taking by preventing banks from gambling with other people’s money. Depositors now relinquish control when they place money in a bank. The institution decides how to use the money and it keeps the profits — or suffers any losses. Most banks also borrow large sums of money from investors to increase their lending and profits.

Under Mr. Kotlikoff’s model, called “limited purpose banking,” banks would manage families of mutual funds. No more borrowing. No more gambling. Except for office space, computers and furniture, banks could not hold any assets.

“Banks would simply function as middlemen,” Mr. Kotlikoff writes in “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague With Limited Purpose Banking” (Wiley, 2010). “Hence, banks would never be in a position to fail because of ill-advised financial bets.”

From now on in, it's just a question of catching where the people's moods swing, and how desperate politicians are for their votes. Still, even though we may yet be greatly surprised by the turn of events, holding your breath for your representatives to break up their puppetmasters is not a good idea. Vocally siding with the SEC's Khuzami might be a start though. And if you holler loud and numerous enough, your president may turn on a dime and join you. Hey, it’s nothing personal; it's just politics.

The Bailout Buffet: Why Can't Reform Apply to the Biggest Banks?
by Gretchen Morgenson

Every once in a while, Congress awakens from its lobbyist-induced torpor, realizes that the masses are cranky and sets out to appease them. Such a moment occurred last week when lawmakers finally got the message that Main Street is disgusted with Wall Street and wants them to do something about it. Financial reform, which had been stumbling along, suddenly got traction. Bills and proposals began flying around Capitol Hill, and President Obama chided the bankers in an appearance in New York.

Unfortunately, the leading proposals would do little to cure the epidemic unleashed on American taxpayers by the lords of finance and their bailout partners. The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size. The bills also don’t eliminate the prospect of future bailouts of interconnected and powerful companies.

Too big to fail is alive and well, alas. Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.

Here’s an example of this special treatment: Both bills would establish a specific process to resolve big-bank failures. Smaller institutions, by contrast, would be allowed to go bankrupt without a new resolution scheme. This special resolution system is not only unfair; it also sends a pernicious signal to the market about large and intertwined institutions. The message is this: Subject as they will be to a newly codified "resolution authority," these institutions and their investors and lenders can expect to be rescued if they get into trouble.

This perception delivers lucrative advantages to these institutions. The main perquisite is lower borrowing costs, a result of lenders’ assumptions that the giants are less risky because they will be in line for government assistance if they become imperiled. Think Fannie Mae and Freddie Mac. And remember all those folks on Capitol Hill and elsewhere who assured taxpayers that we would never lose a dime on those companies? It is disappointing that none of the current proposals call for breaking up institutions that are now too big or on their way there. Such is the view of Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

"The social costs associated with these big financial institutions are much greater than any benefits they may provide," Mr. Fisher said in an interview last week. "We need to find some international convention to limit their size." Limiting their leverage is another way to begin defanging these monsters, Mr. Fisher said. But he concedes that there is little will to do either. "It takes an enormous amount of political courage to say we are going to limit size and limit leverage," he said. "But to me it makes the ultimate sense. The misuse of leverage is always the root cause of every financial crisis."

The idea for a special resolution authority appears to rest on the belief that large, troubled institutions cannot be allowed to go bankrupt because their collapse will cause other entities to fail. Again, this seems exactly backward. If imperiled banks are too large and interconnected to go through our nation’s time-honored bankruptcy process, then they are too big to exist.

A two-tiered system, where large entities are more equal than others, is also deeply unfair. Smaller banks cannot hope to compete with institutions that have significant cost advantages. "Why should you have a small group of institutions get an advantage simply because they have grown too large?" Mr. Fisher asked. "It’s un-American; it’s not what makes this country great." Indeed, removing the subsidies awarded to big banks would give Main Street lenders — most of which did not bring the financial system to its knees — a chance to win market share.

Mr. Fisher also disputes the view often taken by defenders of the status quo that financial institutions hoping to compete for business in huge global markets must be gigantic. "There are those who say that America has to have the largest financial institutions to be an international player," he said. "But I don’t think that’s a strong argument. Good companies will always find bankers and investors."

Edward Kane, a finance professor at Boston College and an authority on financial institutions and regulators, said that it was not surprising that substantive changes for both groups are not on the table. After all, powerful banks want to maintain their ability to privatize gains and socialize losses. "To understand why defects in insolvency detection and resolution persist, analysts must acknowledge that large financial institutions invest in building and exercising political clout," Mr. Kane writes in an article, titled "Defining and Controlling Systemic Risk," that he is scheduled to present next month at a Federal Reserve conference.

But regulators, eager to avoid being blamed for missteps in oversight, also have an interest in the status quo, Mr. Kane argues. "As in a long-running poker game in which one player (here, the taxpayer) is a perennial and relatively clueless loser," he writes, "other players see little reason to disturb the equilibrium."

It is a shame that Congress is moving forward with financial regulations that do not eliminate the heads-bankers-win, tails-taxpayers-lose mentality that has driven most of the bailouts during this sorry episode. Companies that are too mighty to fail must be broken up. And incentives in the nation’s regulatory system that reward size with subsidies should not be enshrined into law.

They should be eliminated. Only then will America be safe from toxic banking practices and the burdensome rescues they require.

The Sickening Abuse Of Power At The Heart of Wall Street
by Simon Johnson

Here’s where we stand with regard to democratic discourse on the future our financial system: leading bankers will not come out to debate the issues in the open (despite being approached by reputable intermediaries after our polite challenge was issued) – sending instead their “astro turf” proxies to spread KGB-type disinformation.

Even Larry Summers, who has shifted publicly onto the side the angels (surprising and rather late, but welcome anyway), cannot – for whatever reason – bring himself to recognize the dangers inherent in our unstable and too-big-to-manage banks.  Or perhaps he is just generating excuses that will justify not bringing the Brown-Kaufman amendment to the floor of Senate?

So let’s take it up a notch.

I strongly recommend that the responsible congressional committees request and require all assistant secretaries at the US Treasury (and other relevant political appointees over whom they have jurisdiction) to appear before them early next week.

The question will be simple: Please share your calendar of meetings this weekend, and provide us with a complete accounting of people with whom you met and conversed formally and informally. 

The finance ministers and central bank governors of the world are in Washington this weekend for the spring meetings of the International Monetary Fund.  As is usual, the world’s megabanks are also in town in force, organizing big meetings and small dinners.

Through these meetings dutifully troop US treasury officials, providing in-depth and off-the-record briefings to investors.

Banks such as JP Morgan Chase and the other top tier financial players thus peddle influence, leverage their access, and generally show off.  They accumulate information from a host of official contacts and discern which way policymakers – their “good friends” – are leaning.

And what is the megabank whisper mill working on?  Ignore the "economic research" papers these banks put out; that is pure pantomime for clients-to-be-duped-later.  I’m talking about what they are telling the market – communicated in specific, personal conversations this weekend.

They are telling people that, based on their inside knowledge, Greece and potentially other eurozone countries will default on their debt.  Perhaps they are telling the truth and perhaps they are lying.  Most likely they are – as always – talking their book.

But the question is not the substance of their whisper campaign this weekend, it is the flow of information.  Have they received material non-public information from US government officials?  Show me the calendar of the top 10 treasury people involved, and then we can talk about whom to summon from the private sector to testify – under oath – about what they were told or not told.

There is no question that the megabanks derive great power and enormous profit from their web of official contacts.  We should reflect carefully on whether such private flows of information between governments and "too big to fail" banks are entirely suitable in today’s unstable financial world.

Large global banks make money, in part, through nontransparent manipulation of information – this is the heart of the SEC charges against Goldman Sachs.  But the problem is much broader: the Wall Street-Washington corridor is alive and well on its way to another crisis that will empower, enrich, and embolden insiders (public and private) while impoverishing the rest of us.

The big players on Wall Street are powerful like never before – and they use this power to press for information and favors from sympathetic (or scared) government officials.  The big banks also appear hell-bent on abusing that power.  One consequence will be further destabilizing global financial markets – watch carefully what happens to Greece, Portugal, Ireland, and Spain at the beginning of next week. 

It is time for Congress to step in with a full investigation of the exact flow of information and advice between our major megabanks and key treasury officials.  Start by asking tough questions about exactly who exchanged what kind of specific, material, market-moving information with whom this weekend in Washington.

$1000 says Goldman Sachs can’t win against the SEC
by Barry Ritholtz

I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case.

I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions, and no one elses).

Ten Things You Don’t Know (or were misinformed by the Media) About the GS Case

1. This is a Weak Case:  Actually, no — its a very strong case. Based upon what is in the SEC complaint, parts of the case are a slam dunk. The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.

2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor:  This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”

When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.

3. Goldman lost $90 million dollars, hence, they are innocent:  This is a civil, not a criminal case. Hence, any mens rea — guilty mind — does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking — or their P&L.

4. ACA is a victim in this case: Not exactly, they were an active participant in ratings gaming. Look at the back and forth between Paulson’s selection and ACAs management. 55 items in the synthetic CDO were added and removed. Why?

What ACA was doing was gaming the ratings agencies for their investment grade, Triple AAA ratings approval. Their expertise (if you can call it that) was knowing exactly how much junk they could include in the CDO to raise yield, yet still get investment grade from Moody’s or S&P. They are hardly an innocent party in this.

5. This was only one incident: The Market sure as hell doesn’t think so — it whacked 15% off of Goldman’s Market cap. The aggressive SEC posture, the huge reaction from Goldie, and the short term market verdict all suggest there is more coming.

If it were only this one case, and there was nothing else worrisome behind it, GS would have written a check and quietly settled this. Their reaction (some say over-reaction) belies that theory. I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it.

And not just at GS. I suspect the kids over at Deutsche bank, Merrill and Morgan are working furiously to review their various CDOs deals.

6. The Timing of this case is suspect. More coincidental, really. The Wells notice (notification from the SEC they intend to recommend enforcement) was over 8 months ago. The White House is not involved in the timing of the suit itself, it is a lower level staff decision.

7. This is a Complex Case:  Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine.  But complex? Not even close.

8. The case looks thin: What we see in the complaint is the bare minimum the prosecutor has to reveal to make their case. What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not. During the litigation discovery process, this material slowly gets turned over (some is held back if there are other pending investigations into GS).

Going back to who the prosecutor in this case is: His legal reputation is he is very thorough, very precise, meticulous litigator. If he decided to recommend bringing a case against the biggest baddest investment house on Wall Street bank, I assure you he has a major arsenal of additional evidence you don’t know about. Yet.

Typically, at a certain point the lawyers will tell their client that the evidence is overwhelming and advise settling. That is around 6-12 months after the suit has begun.

9. This case is Political: I keep hearing that phrase, due to the SEC party vote. It is incorrect. What that means is the case is not political, it means it has been politicized as a defense tactic. There is a huge difference between the two.

10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.

I have $1,000 against any and all comers that GS does not win — they settle or lose in court. Any takers? My money is already in escrow — waiting for yours to join it. Winnings go to the charity of the winners choice.

44 House Democrats call for criminal investigation of Goldman
by Eric Zimmermann

We reported on Wednesday that 18 House Democrats are calling for a criminal investigation of Goldman Sachs. As of today, that number has more than doubled, reaching 44 lawmakers.

You can see the full list of signing members at the website of the Progressive Change Campaign Committee (PCCC), which is organizing a grassroots campaign to get more lawmaker support.

The SEC has of course filed a civil action against Goldman for allegedly selling investmant packages that were designed to fail. The SEC does not have authority to launch a criminal investigation, however, so the letter-signers are urging the Department of Justice to open their own probe.

The effort was spearheaded by Rep. Marcy Kaptur (D-Ohio).

What do both parties have in common? Wall Street donations
by David Lightman

Although painting Republicans as pawns of Wall Street is a cornerstone of the Democratic strategy to overhaul financial regulation, financial interests have given campaign money generously to both political parties for years. "No one party has any firm hold on righteousness here," said David Levinthal, a spokesman for the Center for Responsive Politics, which tracks donations.

In the past two election cycles, when Democrats controlled Congress, the Democrats benefited most. So far in the 2010 cycle, the finance/insurance/real estate sector has given $65.2 million, or 56 percent of its contributions, to Democrats. Republicans have received $51.7 million. People and political committees affiliated with securities and investment banking interests have been particularly kind to Democrats, giving them $21.7 million, or 63 percent of their donations so far. Commercial banks, though, prefer Republicans; they've given GOP hopefuls $4.7 million so far, or 54 percent of their total.

According to the Sunlight Foundation, an independent research group, lobbyists with connections to the financial sector have hosted 10 fundraisers this year for members of the Senate Banking and Agriculture committees - six for Democrats and four for Republicans. The two panels wrote different parts of the financial overhaul bill. None of that has stopped Democrats from insisting that they're the party of Main Street, not Wall Street. "To those still willing to do what is right, to those still willing to help us slam the brakes on Wall Street's joyride, we're ready to work with you," Senate Majority Leader Harry Reid, D-Nev., said at a news conference last week. "If anything, some of us would like further consumer protections that go beyond what is in the bill," added Sen. Charles Schumer, D-N.Y.

Among members of Congress, Schumer so far this cycle has received $3 million from financial interests, more than twice as much as the runner-up, Sen. Kirsten Gillibrand, D-N.Y. Both are up for re-election and are considered heavy favorites. Reid, who has a difficult re-election, is third, at $1.26 million. The three also top the list of recipients of money from the securities and investment banking industry - Schumer at $1.5 million, Gillibrand at $639,450 and Reid at $533,025. Gillibrand leads the list of commercial bank recipients, followed by Rep. Roy Blunt, R-Mo., who's running for the Senate, and Schumer.

Reid raised about $37,000 in January at a New York breakfast set up by Goldman Sachs, the investment firm recently sued by the Securities and Exchange Commission, which alleges civil fraud. Though Reid reportedly was taken to task by executives at the breakfast for harshly criticizing Wall Street, he refused to provide details about the event. Republicans gleefully point the finger back at Democrats. "Democrats have had so many conversations with people in the industry about this legislation," said Senate Republican leader Mitch McConnell of Kentucky.

McConnell and Sen. John Cornyn of Texas, the chairman of the National Republican Senatorial Committee, visited hedge fund investors in New York two weeks ago and raised money at KKR, a private equity firm. The Republican senators said they wanted Wall Street executives to understand their positions better. "Democrats have had no conversations with these people?" McConnell asked.

Levinthal and groups advocating changes to the campaign finance system contend that the flood of money into both parties amounts to "buying long-term influence. They develop relationships and make sure their views are heard." Nonsense, countered industry spokesmen. "I refute it," said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, which represents the nation's largest finance companies, about charges that contributions buy access to lawmakers. "It's not that contributors want anything. You're supporting candidates who understand the industry."

"We give to candidates from both sides of the political aisle, and that's a matter of public record," said Peter Garuccio, a spokesman for the American Bankers Association. The Senate is expected to begin consideration of the financial overhaul bill on Monday. Several factors go into who gets money, including who needs it and who's on key committees. Securities and investment banking interests, for instance, gave more to Republicans in the 1996 to 2004 cycles, when the GOP controlled Congress.

In recent days, critics and journalists have been asking lawmakers to return certain funds, notably those from Goldman Sachs. Most lawmakers find the suggestion ridiculous. "This is our system," Cornyn said. "I think the system needs more transparency, so people can more easily reach their own conclusions. But if you didn't have this system, the alternative would be to have taxpayers fund elections, and I'm not in favor of that."

Rating Agencies Shared Data, and Wall Street Seized on It
by Gretchen Morgenson and Louise Story

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them. In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.

The major credit rating agencies, Moody’s, Standard & Poor’s and Fitch, drew renewed criticism on Friday on Capitol Hill for failing to warn of the dangers posed by complex investments like the one that has drawn Goldman Sachs into a legal whirlwind. But while the agencies have come under fire before, the extent to which they collaborated with Wall Street banks has drawn less notice.

The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate. But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.

"There’s a bit of a Catch-22 here, to be fair to the ratings agencies," said Dan Rosen, a member of Fitch’s academic advisory board and the chief of R2 Financial Technologies in Toronto. "They have to explain how they do things, but that sometimes allowed people to game it." There were other ways that the models used to rate mortgage investments like the controversial Goldman deal, Abacus 2007-AC1, were flawed. Like many in the financial community, the agencies had assumed that home prices were unlikely to decline. They also assumed that complex investments linked to home loans drawn from around the nation were diversified, and thus safer. Both of those assumptions were wrong, and investors the world over lost many billions of dollars.

In that Abacus investment, for instance, 84 percent of the underlying bonds were downgraded within six months. But for Goldman and other banks, a road map to the right ratings wasn’t enough. Analysts from the agencies were hired to help construct the deals. In 2005, for instance, Goldman hired Shin Yukawa, a ratings expert at Fitch, who later worked with the bank’s mortgage unit to devise the Abacus investments. Mr. Yukawa was prominent in the field. In February 2005, as Goldman was putting together some of the first of what would be 25 Abacus investments, he was on a panel moderated by Jonathan M. Egol, a Goldman worker, at a conference in Phoenix.

The next month, Mr. Yukawa joined Goldman, where Mr. Egol was masterminding the Abacus deals. Neither was named in the Securities and Exchange Commission’s lawsuit, nor have the rating agencies been accused of wrongdoing related to Abacus. At Goldman, Mr. Yukawa helped create Abacus 2007-AC1, according to Goldman documents. The safest part of that earned an AAA rating. He worked on other Abacus deals. Mr. Yukawa, who now works at PartnerRe Asset Management, a money management firm in Greenwich, Conn., did not return requests for comment.

Goldman has said it will fight the accusations from the S.E.C., which claims Goldman built the Abacus investment to fall apart so a hedge fund manager, John A. Paulson, could bet against it. And in response to this article, Goldman said it did not improperly influence the ratings process. Chris Atkins, a spokesman for Standard & Poor’s, noted that the agency was not named in the S.E.C.’s complaint. "S.& P. has a long tradition of analytical excellence and integrity," Mr. Atkins said. "We have also learned some important lessons from the recent crisis and have made a number of significant enhancements to increase the transparency, governance and quality of our ratings."

David Weinfurter, a spokesman for Fitch, said via e-mail that rating agencies had once been criticized as opaque, and that Fitch responded by making its models public. He stressed that ratings were ultimately assigned by a committee, not the models. The role of the rating agencies in the crisis came under sharp scrutiny Friday from the Senate’s Permanent Subcommittee on Investigations. Members grilled representatives from Moody’s and Standard & Poor’s about how they rated risky securities. The changes to financial regulation being debated in Washington would put the agencies under increased supervision by the S.E.C.

Carl M. Levin, the Michigan Democrat who heads the Senate panel, said in a statement: "A conveyor belt of high-risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on." As part of its inquiry, the panel made public 581 pages of e-mail messages and other documents suggesting that executives and analysts at rating agencies embraced new business from Wall Street, even though they recognized they couldn’t properly analyze all of the banks’ products.

The documents also showed that in late 2006, some workers at the agencies were growing worried that their assessments and the models were flawed. They were particularly concerned about models rating collateralized debt obligations like Abacus. According to former employees, the agencies received information about loans from banks and then fed that data into their models. That opened the door for Wall Street to massage some ratings. For example, a top concern of investors was that mortgage deals be underpinned by a variety of loans. Few wanted investments backed by loans from only one part of the country or handled by one mortgage servicer.

But some bankers would simply list a different servicer, even though the bonds were serviced by the same institution, and thus produce a better rating, former agency employees said. Others relabeled parts of collateralized debt obligations in two ways so they would not be recognized by the computer models as being the same, these people said. Banks were also able to get more favorable ratings by adding a small amount of commercial real estate loans to a mix of home loans, thus making the entire pool appear safer.

Sometimes agency employees caught and corrected such entries. Checking them all was difficult, however. "If you dug into it, if you had the time, you would see errors that magically favored the banker," said one former ratings executive, who like other former employees, asked not to be identified, given the controversy surrounding the industry. "If they had the time, they would fix it, but we were so overwhelmed."

Abacus might have had other benefits for Goldman
by Matthew Goldstein

Goldman Sachs Group may have used a subprime mortgage-linked security that is the focus of a U.S. civil fraud lawsuit against the bank to unload other complex bonds it created, according to a deal document obtained by Reuters. Some of the proceeds from the sale of Abacus 2007-AC1 notes were used to buy a $192 million portion of another security that Goldman also arranged and peddled in early 2007. The 196-page prospectus for Abacus reveals that the initial collateral for the deal's so-called funded notes was supposed to include a big chunk of another security underwritten that same year by Goldman Sachs called Greywolf CLO 1.

Goldman arranged and marketed the Greywolf CLO for Greywolf Capital Management, a Purchase, New York, investment management firm founded by a group of former Goldman distressed bond traders. Derivatives consultant Janet Tavakoli said the use of Abacus funds to buy Greywolf assets may have posed a conflict of interest for Goldman. The Greywolf link could prove problematic if institutional buyers were not told Goldman underwrote the Greywolf deal, or did not know that Goldman had relevant information about the quality of the Greywolf portfolio, she said. "Goldman's paw prints were all over this," said Tavakoli. "There is a conflict of interest between investors and underwriters who are putting their own deals into CDOs."

The Abacus prospectus said a copy of the Greywolf CLO prospectus was also provided to prospective investors. But the Greywolf offering document was not attached to the Abacus prospectus obtained by Reuters. The U.S. Securities and Exchange Commission claims Goldman misled institutional investors in the Abacus deal by failing to disclose that hedge fund manager John Paulson was shorting the synthetic collateralized debt obligation and also had help to pick the underlying portfolio of 90 mortgage-backed securities. Goldman has said it did nothing wrong in marketing the Abacus deal and has begun mounting a vigorous defense. The SEC has not raised any allegations about the use of the Abacus proceeds to buy Greywolf CLO assets.

The Greywolf CLO deal closed on January 18, 2007, roughly four months before Goldman began looking for institutional investors to sink money into Abacus, which tracked the performance of a bundle of mortgage bonds-backed, mostly subprime loans. Greywolf CLO, meanwhile, was a $502 million collateralized loan obligation, a complex bond backed by debts often used to finance corporate buyouts. The deal was one of the first complex securities put together and managed by Greywolf, which later went on to do a $1 billion CDO backed by mostly subprime assets called Timberwolf 1.

The Timberwolf deal also was underwritten by Goldman Sachs. In March 2007, Goldman sold a $300 million slug of the Timberwolf deal to the now-infamous Bear Stearns hedge funds, which was the single biggest investor in the transaction, said people familiar with the now-defunct hedge funds. A week after closing the deal with Bear, Goldman began marking down the value of Timberwolf securities, said people familiar with the situation but who declined to be identified because they still work on Wall Street. Greywolf, which manages about $700 million in assets, is led by Jonathan Savitz, who helped run Goldman's distressed trading desk before leaving to start the firm in 2003. In August, Greywolf lost one of its key employees when partner Greg Mount died. At Goldman, the 44-year-old Mount had helped build the investment firm's CDO business.

The Abacus prospectus does not disclose from whom the $192 million "tranche" of the Greywolf deal was being purchased. The Abacus prospectus said the decision to purchase the Greywolf assets was made by Goldman Sachs Capital Markets, a division of the investment firm. But it is not unusual for an underwriter of a security to retain some of the deal on its balance sheet until it is able to sell it. In fact, Goldman claims it lost more than $90 million on the Abacus deal because it had retained a portion of the notes, some of which were purchased by Germany's IKB Deutsche Industriebank AG.

The Greywolf deal was given a Triple A rating by Moody's Investors Service in February 2007. The Abacus deal also got a Triple A rating from Moody's. But Greywolf fared better. In March 2009, Moody's downgraded the security. But a few months later, the Greywolf deal saw new life when Morgan Stanley repackaged some of its pieces into a new $130 million CLO. By contrast, the Abacus deal was dead by summer 2008. The SEC said institutional investors lost $1 billion on the deal, while Paulson's hedge fund, Paulson & Co, made $1 billion from shorting the transaction. Securities regulators have said there is no indication that anyone from Paulson did anything wrong in the Abacus transaction.

Goldman Sachs Emails: Firm Had 'The Big Short' As Economy Fell
by Shahien Nasiripour

As homeowners were falling behind on their subprime mortgages, wreaking havoc for investors that owned slices of their mortgages in securities peddled by Wall Street, Goldman Sachs was "well positioned," according to internal company emails from top executives.

The firm had "the big short," declared chief financial officer David Viniar -- Goldman Sachs was making money off the souring of the very securities it had peddled to the market.

The internal emails released Saturday by the Senate Permanent Subcommittee on Investigations paint a picture long known by most of the country, yet never before so vividly and explicitly articulated by Goldman officials. (Scroll down to see the full text of the emails.) As early as May 2007, as homeowners were being crushed under the weight of subprime mortgages, the most profitable firm on Wall Street had long taken out a form of insurance on those delinquencies.

The firm made money on the upside -- originating, securitizing and selling subprime mortgage-based securities to investors -- and on the downside, thanks to the insurance. "Bad news," a May 17, 2007, email began from one Goldman employee to another. A security the firm had underwritten and sold had just lost value, costing Goldman about $2.5 million. Further down in the email, the employee, Deeb Salem, wrote "Good news...we own 10mm protection...we make $5mm." The firm made $5 million betting against the very securities it had underwritten and sold.

In a July 25 email that year, Gary Cohn, the firm's chief operating officer, wrote Viniar to update him on the firm's mortgage market activities. The firm lost about $322 million on residential mortgages -- but it made $373 million on its bets against the market, bets that increased in value as the market tanked. About 25 minutes later, Viniar wrote back, "Tells you what might be happening to people who don't have the big short." The firm made $51 million that day.

"There it is, in their own words: Goldman Sachs taking 'the big short' against the mortgage market," subcommittee chairman Sen. Carl Levin (D-Mich.) said in a statement accompanying the release of the internal emails.

"Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," Levin said. "They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."

Levin's panel points out that in the firm's 2009 annual report, Goldman Sachs stated that the firm "did not generate enormous net revenues by betting against residential related products." "These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market," Levin said.

Top Goldman Sachs executives will testify before Levin's panel on Tuesday to answer for their subprime activities. The panel is using the firm as a case study to focus on the role played by investment banks in contributing to the worst financial crisis and economic downturn since the Great Depression.

The nearly 18-month-long investigation has already netted impressive results. The panel exposed the subprime shenanigans at failed lender Washington Mutual, and how lax federal supervision allowed it to become the biggest bank failure in U.S. history, and this week it showed how the major credit rating agencies essentially worked with Wall Street in allowing the firms to peddle AAA-rated securities that had no business ever earning top ratings. That lulled investors into buying what they were told was gold but was really just lead.

Goldman Sachs is under a particularly harsh glare, as its profits have engendered the kind of enmity normally reserved for swindlers. The Securities and Exchange Commission filed charges against the firm April 16 for defrauding investors. Goldman vigorously denies that it did anything wrong.

In a Nov. 17, 2007, email, Goldman's chief executive officer, Lloyd Blankfein, wrote to his top lieutenants in response to an upcoming New York Times story about how the firm had profited off the souring subprime market: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts."

Blankfein is one of the top executives to be questioned Tuesday by Levin.

In an Oct. 11 email that year, one Goldman employee, reacting to news that Moody's Investors Service had downgraded $32 billion in mortgage-related securities, wrote to a colleague: "Sounds like we will make some serious money." "Yes, we are well positioned," the colleague responded.

Most investors lost money off that downgrade. But Goldman had been shorting the market.

As of November 2007, Goldman had about $2.1 billion worth of long positions in subprime mortgage products, meaning it was betting that those securities would increase in value, according to the firm's 2008 annual filing with the SEC. But in a cautionary note to investors and regulators, the firm also noted that "At any point in time, we may use cash instruments as well as derivatives to manage our long or short risk position in the subprime mortgage market."

See the full emails:

Goldman Sachs Emails

Goldman Insiders Sold Shares As SEC Probed Firm
by Randall Smith

Five senior executives of Goldman Sachs Group Inc., including the firm's co-general counsel, sold $65.4 million worth of stock after the firm received notice of possible fraud charges, which later drove its stock down 13%. Sales by three of the five Goldman insiders occurred at prices higher than the stock's current level. The stock sales by co-general counsel Esta Stecher, vice chairmen Michael Evans and Michael Sherwood, principal accounting officer Sarah Smith and board member John Bryan occurred between October 2009 and February 2010. It was the most active spate of insider selling in three years, according to in Princeton, N.J., which tracks and analyzes purchases and sales of stocks by top executives and directors.

Goldman received notice of the possible charges last July, but didn't publicly disclose that fact, later explaining that it didn't consider such a notice material information investors would have needed to value the stock. A week ago, on April 16, the Securities and Exchange Commission filed civil-fraud charges against Goldman for failing to disclose that a short seller, Paulson & Co., participated in selection of assets in a pool tied to subprime mortgages. The charges drove Goldman stock down from a closing price of $184.27 on April 15 to $160.70 on April 16. The stock hasn't recovered any of the first-day loss. It closed out the week at $157.40 in 4 p.m. trading on the New York Stock Exchange.

It isn't clear whether any of the sales could be questioned under insider-trading rules, which bar stock purchases or sales in violation of a duty by investors who have non-public, market moving information. "You've got to have material, nonpublic information that you misappropriate from someone to whom you owe a duty," said John Coffee, a professor at Columbia law school in New York. The Goldman officials could have believed that such a probe was routine or wasn't likely to affect the stock price, he said. And some of them may not have known of the possible charges. The trades are "something that investors look very closely at—are high level insiders selling stock when they have information that the public doesn't have?" said Darren Check, a lawyer in Radnor, Pa., who represents investors in class-action cases against several financial-services giants.

Messrs. Bryan and Sherwood and Ms. Stecher sold some or all of their shares after exercising options to buy at lower prices that would have expired between November 2010 and November 2012. Ms. Smith sold 16,129 shares on Oct. 16 for $3 million at $186.57 a share, according to Mr. Sherwood sold shares between Nov. 13 and 24 for $31.9 million, or $174.65 a share, said. Mr. Evans sold shares between Nov. 23 and 27 for $23.7 million, or $169.56 a share. Ms. Stecher sold shares on Feb. 8 and 26 for $5.8 million, or $153.38 a share. And Mr. Bryant sold shares on Feb. 18 for $932,223, or $155.37 a share.

Mr. Sherwood, co-chief executive of Goldman sachs International in London and Mr. Evans, chairman of Goldman Sachs Asia in Hong Kong, are on the Goldman management committee with Ms. Stecher. Ben Silverman, director of research at, said the insider selling since October "was the most aggressive" at Goldman in three years, since late 2006 through early 2007. Securities rules require directors, 10% holders and executives with a significant function to report their sales and purchase promptly. Some investors track such transactions as a sign of a company's future prospects.

How Goldman Sachs Screwed Ghana
Goldman Sachs, the global financial institution, with fraud allegations levied against it has a long history of setting up its clients for a fall...and making handsome profits. This is a story of how this global investment banking and securities firm screwed Ghana In 1998, Ashanti Gold was the 3rd largest Gold Mining company in the world. The first "black" company on the London Stock Exchange, Ashanti had just purchased the Geita mine in Tanzania, positioning Ashanti to become even larger. But in May 1999, the Treasury of the United Kingdom decided to sell off 415 tons of its gold reserves. With all that gold flooding the world market, the price of gold began to decline. By August 1999, the price of gold had fallen to $252/ounce, the lowest it had been in 20 years.

Ashanti turned to its Financial Advisors - Goldman Sachs - for advice. Goldman Sachs recommeded that Ashanti purchase enormous hedge contracts - "bets" on the price of gold. Simplifying this somewhat, it was similar to when a homeowner 'locks in' a price for heating oil months in advance. Goldman recommended that Ashanti enter agreements to sell gold at a 'locked-in' price, and suggested that the price of gold would continue to fall. But Goldman was more than just Ashanti's advisors. They were also sellers of these Hedge contracts, and stood to make money simply by selling them. And they were also world-wide sellers of Gold itself.

In September 1999 (one month later), 15 European Banks with whom Goldman had professional relationships made a unanimous surprise announcement that all 15 would stop selling gold on world markets for 5 years. The announcement immediately drove up gold prices to $307/ounce, and by October 6, it had risen to $362/ounce. Ashanti was in trouble. At Goldman's advice, they had bet that gold prices would continue to drop, and had entered into contracts to sell gold at lower prices. These contracts were held by a group of 17 other world banks. Ashanti found themselves being forced to buy gold at high world prices and sell it at the low contract prices to make good on the contracts. The result? In a few weeks time, Ashanti found itself with 570 million dollars worth of losses. It had to beg the 17 banks not to force the execution of the contracts.

Who served as the negotiator for the 17 banks and Ashanti? Goldman Sachs. The same company that designed the contracts for Ashanti (making a profit in their sale). The basic bankruptcy of Ashanti drove its stock price from an all time high of $25 per share to a paltry $4.62 per share. Thousands of investors - your blogger among them - lost their investments almost overnight as Ashanti was declared insolvent. In the end (2003), Ashanti was purchased by their largest African competitor, AngloGold, a British company headquartered in South Africa, who bought them for a song. The Financial Advisors to AngloGold? You guessed it: Goldman Sachs.

The destruction of Ashanti Gold by Goldman Sachs was saturated with fraud and conflicts of interest: Goldman Sachs served as Ashanti's Financial Advisors; profitted form the contracts they designed and marketed for Ashanti; was involved in the manipulation of the gold prices on which the contracts depended; represented Ashanti's creditors when the contracts went bad; and profitted as the Financial Advisors to the company that picked up the Ashanti corpse for pennies on the dollar.

Galleon Probe Turns to Goldman Buffett Deal
by Susan Pulliam

A Goldman Sachs Group Inc. director tipped off a hedge-fund billionaire about a $5 billion investment in Goldman by Warren Buffett's Berkshire Hathaway Inc. before a public announcement of the deal at the height of the 2008 financial crisis, a person close to the situation says.

The revelation marks a significant turn in the government's case against Raj Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation. Mr. Buffett's investment in Goldman in September 2008 was a watershed moment in the financial crisis. One of the world's savviest investors, Mr. Buffett helped allay fears about the instability of the financial system by backing America's leading investment bank.

The new disclosure stems from a government examination into whether the Goldman director, Rajat Gupta, gave inside information to Mr. Rajaratnam. In a court filing March 22, the government alleged that Mr. Rajaratnam or "co-conspirators" traded on non-public information about Goldman. In a filing last week, the government provided more details about the information it alleges Mr. Rajaratnam received, including advance notice about the Buffett transaction with Goldman.

That information came from Mr. Gupta, a person familiar with the matter says. Federal prosecutors notified Mr. Gupta in a letter that they had intercepted phone conversations between him and Mr. Rajaratnam. Mr. Gupta told Goldman last month he wouldn't seek re-election as a director.

[Gupta]Mr. Gupta hasn't been charged in the case, and denies any wrongdoing in the matter. The government's examination of him was first reported last week in The Wall Street Journal. Mr. Rajaratnam, founder of the Galleon Group hedge fund, is fighting criminal insider-trading charges in the case. He declined to comment on any discussions with Mr. Gupta. Goldman also declined to comment.

"Rajat has neither violated any law nor done anything else improper. He has always conducted himself with integrity in his business, philanthropic and personal life," says Mr. Gupta's lawyer, Gary Naftalis. A spokeswoman for the U.S. Attorney's office declined to comment.

The Buffett investment buoyed Goldman's shares. In the days leading up to the deal, the firm's stock had slid more than 40%—to $86 intraday on Sept. 18. By the time the deal was announced, on Sept. 23, its shares surged 45% to $125. On Thursday, Goldman's shares were up 12 cents to $159.05.

The investment, preferred shares in Goldman paying a 10% dividend, has been lucrative for Mr. Buffett: Berkshire has reaped profits totaling $750 million.

In papers filed in a New York federal court late last week, the government disclosed for the first time details about inside information Mr. Rajaratnam allegedly obtained regarding Goldman. Prosecutors said this included non-public information about the Berkshire investment in Goldman in September 2008, as well as Goldman earnings before their release to the public between June and September 2008, a time of market tumult.

Mr. Gupta wasn't mentioned in the filing. A person familiar with the matter says that Mr. Gupta spoke with Mr. Rajaratnam about the non-public data regarding Berkshire. Goldman has made no public disclosures about the U.S. notification received by Mr. Gupta in the insider-trading probe. he firm says Mr. Gupta will remain on as a director until next month, when his term ends. Since 2006, he has received a total of $1.7 million in compensation as a Goldman director. Goldman's in-house lawyers interviewed Mr. Gupta about the matter, and he denied wrongdoing, a person familiar with the matter says.

Mr. Gupta didn't participate in a Goldman board meeting this Monday after the Securities and Exchange Commission charged the firm in a separate civil case with fraud over a derivatives deal it arranged; Goldman denies wrongdoing in the SEC case. Mr. Rajaratnam is one of 21 people who have been charged in the Galleon insider trading case. Of those, 11 have pleaded guilty while Mr. Rajaratnam and former hedge fund consultant, Danielle Chiesi, have vowed to fight the charges.

Mr. Gupta was told by prosecutors in a letter that his conversations with Mr. Rajaratnam were intercepted through wiretap recordings by the government of Mr. Rajaratnam's phones. It couldn't be determined whether wiretap recordings include discussion between Mr. Gupta and Mr. Rajaratnam of the Berkshire investment. Such wiretap recordings are at the center of the government's case against Mr. Rajaratnam.

Under the federal statute governing wiretaps by the government, prosecutors send letters to some of the individuals whose conversations are captured in the recordings. Not everyone who turns up on the government's recordings receives such a letter, however, unless the conversation in question is of interest to the government.

In order to bring charges against Mr. Gupta, prosecutors would need to believe that they could prove that Mr. Gupta knowingly provided Mr. Rajaratnam with inside information. Mr. Gupta, 61 years old, and Mr. Rajaratnam were close associates and once had a business partnership together. They met frequently, sometimes several times a month, at Galleon's midtown Manhattan offices, people familiar with the matter say. Mr. Gupta was invited to attend parties hosted by Galleon, one of those people says.

Mr. Gupta was head of consulting firm McKinsey & Co. from 1994 to 2003 and remained at the firm until 2007; he also sits on the board of AMR Corp. and Procter & Gamble Co. There is no indication that trading in shares of either of those companies is being scrutinized by the government. McKinsey, AMR and Procter & Gamble declined to comment.

The exact nature of the conversation between Mr. Gupta and Mr. Rajaratnam couldn't be determined. Goldman declined to comment on when its board was notified about the Buffett transaction.

In the weekend leading up to the 2008 Buffet deal, Goldman Chief Executive Lloyd Blankfein, co-presidents Gary Cohn and Jon Winkelried, Chief Financial Officer David Viniar and others discussed ways to raise capital. They zeroed in on Mr. Buffett. His Goldman broker, Byron Trott, who has since left Goldman, called Mr. Buffett, asking him what it would take to get him to do a deal, says a person close to the situation.

Mr. Buffett responded that he wanted preferred shares with a 10% dividend and warrants. By the time the market closed that day, Sept. 23, 2008, Mr. Buffett's deal had been nailed down.

Goldman, meanwhile, worked the phones to sell an additional $5 billion in common stock to other investors. The two deals—$5 billion from investors and the $5 billion preferred stock investment—from Mr. Buffett were announced that day, helping set the stage for a powerful recovery for both Goldman and the financial world.

Check Out The New Housing Frenzy Our Government Engineered
by Vincent Fernando and Kamelia Angelova

Thanks to the upcoming April 30 expiration of the government's new-home-buyer tax credits, in March the U.S. just experienced the sharpest spikes in new home sales back to 1963. According to the U.S. Census Bureau, new homes sales leaped at an annualized 27% rate in March. You'll see this below, on the right.

It's clearly an abnormally high jump -- welcome to the distorting force of government in markets. People were rushing to buy ahead of the April 30th deadline to qualify for the tax incentives. Thing is, this isn't healthy buying behavior. Given we just came off a housing mania, creating new mini-buying manias seems a bit dangerous. It's kind of like taking shots to cure a hangover.

Number of the Week: 103 Months to Clear Housing Inventory
by Mark Whitehouse

103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.

How much should we worry about a new leg down in the housing market? If the number of foreclosed homes piling up at banks is any indication, there’s ample reason for concern.

As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That "shadow inventory" was up 30% from a year earlier.

Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices — and thus boost their losses.

The government is understandably worried about the situation, and its Home Affordable Modification Program has made an impact by helping people stay in their homes and avoid foreclosure. As people who enter the program catch up on their payments, the number of homeowners 60 or more days delinquent has fallen 9% over the past two months.

Now, though, the effect of modifications could be on the wane. According to Goldman Sachs, HAMP started less than 80,000 trial modifications in March, less than half the number in the peak month of October 2009. At the same time, a growing number of modifications are being canceled as borrowers prove unable to pay. By Goldman’s count, about 68,000 were canceled in March.

All this means that little can stop banks’ inventory of distressed homes from growing. Too many people owe too much more on their homes than they can afford. For the housing market, that could mean a long-lasting hangover.

Inching Toward FDR: President Obama and the Struggle for Financial Reform
by by David Woolner

Over the weekend, President Obama asserted that although there were many causes of the turmoil that ripped through our economy in the past two years, it was first and foremost “caused by failures in the financial industry.” He then suggests that the crisis could have been avoided “if Wall Street firms were more accountable, if financial dealings were more transparent, and if consumers and shareholders were given more information and authority to make decisions.” Interestingly, these goals mirror many of those articulated by FDR when he sought to establish the Securities and Exchange Commission (SEC) in 1934.

President Obama also asserts that the reasons we have lost control over the financial industry is due largely to the special interests that “have waged a relentless campaign to thwart even basic, common-sense rules” that would prevent abuse and protect consumers. Thanks to these special interests-best represented by the powerful lobby that represents the financial industry-and the obstructionism of the GOP leadership, whom he accused of waging a “cynical and deceptive attack” against” financial reform, even modest safeguards against the kinds of bad practices that led to this crisis are in jeopardy of being stalled in the Senate.

In taking on his opponents directly, President Obama has inched towards the tactics used by FDR to carry his landmark reforms through Congress. But to date he has avoided using perhaps FDR’s most effective weapon-a direct and hard hitting appeal to the populist anger that had swept the country in the wake of the 1929 crash; a populist anger that is not unlike the mood of the country today.

In FDR’s speech to the 1936 democratic convention, for example, Roosevelt, reflecting on the greed that led to the economic crisis, remarked that

" was natural and perhaps human that the privileged princes of these new economic dynasties thirsting for power, reached out for control over government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man."

In another speech given two years later, FDR noted that
"Unhappy events abroad have re-taught us two simple truths about the liberty of a democratic people. The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic State itself. That, in its essence, is fascism –ownership of government by an individual, by a group or by any other controlling private power.

The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living."

It certainly a good thing that President Obama, noting the loss of eight million jobs and the other terrible consequences of the recent financial crisis believes “we have to do everything we can to ensure that no crisis like this ever happens again.” But if we are to ensure this then perhaps we also need to look much more closely at the root causes, which are not merely economic, but also moral, having to do with the nature of democracy itself.

As to the desire to be bi-partisan, FDR also once said:

"The true conservative seeks to protect the system of private property and free enterprise by correcting such injustices and inequalities as arise from it. The most serious threat to our institutions comes from those who refuse to face the need for change. Liberalism becomes the protection for the far-sighted conservative."

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

Financial Reform Freak Outs
by Mike Konczal

Over the weekend, Kevin Drum joined those who have had the "Seriously? This is all we are going to do in response to the largest financial crisis in 80 years!?" freak-out moment. (I’ve had several. Trust me, I’ve had several.)

The realization, and I’ve reflected on this a lot, is that we are rebuilding the 2007 financial sector with some additional legal powers for regulators to exercise in the middle-of-the-next financial crisis. I encourage Kevin, when he’s in a safe place, to reflect on it from the point of view of the biggest players, if they had survived.

Over the next few years your major competitors in the regionals are going to be crushed by the wave of CRL losses, while the government is never going to touch your second-lien exposures, furthering that concentration. We’ll see what happens with derivatives, and I am rooting for the Lincoln Bill to survive. Maybe we’ll actually get involved with suing the banks for fraud. There’s still some hope out there. But it’s very likely you’ll look at it all and think things are pretty much ok.

A few additional things:

1) Break up the largest banks in addition to the current bill. Forget feasibility. Once you stand back and realize that structural change is necessary in addition to the prudential regulation stuff, the whole things feels better. It’ll probably lose – but what a good idea to lose on.

Because it is right. The concentration is from non-existent anti-trust law over the past few decades. There’s no advantage to them that anyone can quantify.

2) The new status quo will be even worse. Listen for allusions to the canadian banking sector. It’s a poor analogy, first off. But it also involve an even higher level of, as Steve Randy Waldman horrified me a little over a year ago by pointing out, the largest parts of the financial sector shaking hands with the government in a way that should scare us. What percent of the corporate profits that go to finance look like in 2014?

3) In some ways it’s a very exciting time to be thinking about financial reform. I’m thinking about Dean Baker’s financial transaction tax, Zephyr Teachout’s new financial anti-trust law, Jane D’Arista new financial regulatory infrastructure, Waldman-ian delinking of FDIC insurance, and a ton of other things. So is the Right, thinking through CDS as a resolution mechanism.

We could do all this now, especially a financial transaction tax or a really serious tax on liabilities. But most of this will have to wait until the next financial crisis to come under serious discussion again, but hopefully we’ll be ready this next time, and sadly the doom loop might amplify to the point where we have to take more serious action. I wish we could sail this reform into the sunset, but most of the major players say that a financial crisis every 6-10 years is the new normal.

And our last financial crisis was already 2 years ago.

Bank failure Friday: 7 in Illinois, one tied to Obama
by Rolfe Winkler

FDIC may be using up all available hotel rooms in Chicago this weekend as it closes five banks in the city and two others elsewhere in Illinois.

But the big news is that one in particular has close ties to the whippersnapper Democratic candidate for IL’s U.S. Senate seat, and peripheral ones to President Obama. The Senate Candidate, Alexi Giannoulias, was an executive at Broadway Bank, owned by his family. While he was there, the bank morphed into an aggressive commercial real estate lender, funding itself primarily with high interest-rate brokered deposits.

Using brokered deposits to expand quickly in CRE is a common recipe for failure ever since the S&L crisis.

Most interesting are the characters that Broadway lent to. The Chicago Tribune reported earlier this month that it had lent $20 million to two known felonswhile Giannoulias was a senior loan officer.

It’s a must read story:

Shortly after Broadway began lending money to a Chicago firm the pair formed, Giorango and Stavropoulos used that company to launch their own lending business and make more than 40 short-term loans to borrowers who might not qualify for traditional bank financing, the Tribune found. Such so-called hard-money loans are typically riskier than long-term mortgages offered by banks.

Broadway officials say they were unaware of the pair’s lending operation and believe the bank’s loans were used solely to fund real estate purchases. They acknowledged they did not inspect or audit the company’s business records, though Broadway’s loan provisions allowed the bank to do so.

They were lending millions to these guys and they didn’t even know where the money was going?!?
In a two-hour interview this week with the Tribune, Giannoulias’ older brother, Demetris Giannoulias, the bank’s president and CEO, said he established Broadway’s relationship with Giorango in the mid-1990s. Giorango began investing in Chicago properties after completing two federal prison stints for running bookmaking schemes….

Demetris Giannoulias said the bank learned of Giorango’s bookmaking and prostitution promotion convictions from a spring 2004 Tribune report detailing those cases.

“But we’re a relationship bank,” he said. “So somebody comes in and in all his dealings with the bank seem to be on the level, everything makes sense, nothing seems illicit or untoward. Just because somebody gets a bad article written about them there’s no reason to say, ‘Hey, listen, I’m going to kick you out the door because you don’t win a popularity contest.’ We didn’t think he was doing anything illegal.”

Alexi Giannoulias happens to be an old basketball buddy of the President and his is just the latest seedy story in Chicago politics. He was elected state Treasurer at 29 thanks to an endorsement from then Senate candidate Barack Obama. His only experience had been at Broadway.

How did he get elected Treasurer? Because Obama endorsed him. Why did Obama endorse him? Because the Giannoulias family had been big financial supporters for Obama’s Senate campaign (Alexi continued his financial support for presidential candidate Obama).

Another well-known felon also got loans from Broadway: Tony Rezko.

Giannoulias continues to dodge questions about his time at the bank. As I noted in February, he won the Democratic primary despite Broadway having received a rebuke from FDIC just days before the election.

Now that the bank has officially been seized, it will be a tougher topic to avoid. Hopefully Democrats will lean on Giannoulias to quit the race. He has no business being there in the first place.

Is the US Facing a Cash Crunch?
by Gordon T. Long

The US government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts.” Those receipts require an explanation that isn’t well publicized since it begs the question of what happens next month without the $117 billion journal entry.

The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover, which is affecting urgently required tax receipts.

If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply. Since the US government has steadily reduced maturity duration over the last few years to obfuscate a growing debt problem, the issue is compounded by the rapidly increasing levels of rollover funding now additionally being required.

It’s a tricky balance between gauging how fast tax receipts will return and what supply the monthly Treasury auction is able to absorb. Cash flow is the primary reason small businesses fail unexpectedly. This is also why sovereign governments fail abruptly.

We witnessed in Greece what happens when investors get nervous. Yields not only spike but typically move to even higher levels than most originally thought possible.

US Treasury Cash Requirements

On April 14 the Financial Management Service, a bureau of the US Department of the Treasury, released its Monthly Treasury Statement for March 2010. I was waiting for it because of what I saw in February: The gap between receipts and outlays was widening disturbingly.

I knew the US Treasury was going to have to pull a rabbit out of a hat, or we might see a similar scare in the US Treasury auction, with a spike in treasury yields that occurred in Greece. What was reported was a mystery and for those that read Extend & Pretend: Gaming the US Tax Payer, I’ll call this Suspicious Clue #8.

Suspicious Clue #8

The report shows US Treasury receipts were down disturbingly and almost all government outlays were up. I personally have had Profit & Loss responsibility on numerous occasions during my career and I would have been apprehensive facing the auditors or board of directors with such a blatant example of mismanagement. Absolutely no cuts in expenses, with falling revenues, all made to marginally appear better than the February report by a single line item called “other.” Executives get fired for such a report but governments just carry on until the inevitable crisis event finally occurs. Then the traditional blame game begins, blame is assigned and belated and poorly formulated policy responses are enacted.

So what is this “other”? When you examine the Outlay Ledger of the Department of the Treasury for March 2010 (below), you see it to be a one-time item classified as a negative outlay. For the non accountants, this is a government receipt that is placed in the outlays as a negative amount, thereby showing government outlays to be smaller than they otherwise would have been. Though this is acceptable accounting, it would lead to the wrong conclusions, unless you read the details buried in the back pages. This “other” is referred to as a “Proprietary Receipt from the Public.”

An IRS document explains just what that means in an accounting context (source: 04-13-10 The Incredible Shrinking Deficit

Proprietary Receipts from the Public are collections from outside the Government that are deposited in receipt accounts that arise as a result of the Government’s business-type or market-oriented activities. Among these are interest received, proceeds from the sale of property and products, charges for non-regulatory services, and rents and royalties.

This is a $117.3 billion amount! The total 2010 US tax receipts for US corporations is only budgeted to be $157 billion!

My investigations suggest that it’s likely TARP (Troubled Asset Relief Program) money being returned to the US Treasury, along with a slowdown in TARP issuance versus budget. Assuming this is the case, and not simply an aircraft carrier or two we’ve sold and are now leasing back like California is doing with all state-owned buildings, we still have a major problem. What happens next month? The TARP fund returns will stop or we will run out of aircraft carriers. Is unemployment going to surge or are corporate tax receipts going to expand by over $117 billion next month?

Timothy Geithner and the US Treasury somehow dodged the bullet because of “other” this month. How does it look for next month for cash management? Let’s consider tax receipts to see if there is a possible rabbit in the hat there.

Tax Receipts

You personally met your April 15 tax filing deadline and you likely took some consolation in your tax frustrations by knowing you weren’t alone. The quiet truth is you’re becoming more alone each year if you haven’t understood the new realities of the US tax game. Forty-seven percent of Americans (source: Nearly Half of US Households Escape Fed Income Tax -- AP) and two-thirds of US corporations (source: 04-11-04 Most US Firms Paid No Income Taxes in '90s -- Boston Globe) will pay no taxes in 2010. Where do you fit? These are pretty startling revelations to most of us and don’t bode well to fixing the monthly Treasury cash requirements quickly, especially with unemployment still stubbornly elevated.

Personal Income Tax

The Associated Press reported on April 7, 2010:
About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government.


The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769. With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly. The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

With the government presently talking about once again extending unemployment benefits, it appears we have more downside than upside on the income tax revenue receipt line item going forward.

Corporate Tax

The Center for American Progress reported in 2004, while fighting President George W Bush’s further cuts in corporate taxation:
The news that more than 60 percent of US corporations failed to pay any federal taxes from 1996 through 2000 when corporate profits were soaring and that corporate tax receipts had fallen to just 7.4 percent of overall federal tax revenue in 2003 -- the lowest since 1983 and the second-lowest rate since 1934 -- is an outrage. But it should come as no surprise to anyone who has been paying attention to national tax policy over the past few years. The General Accounting Office (GAO) report also found that an astonishing 94 percent of corporations reported tax liability of less than 5 percent of their total income during the same time period.

The last special General Accounting Office (GAO) study concerning corporate taxation was in 2004 and it showed:
The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits. US companies paid an average of $11.88 (1.19 percent) in corporate taxes for every $1,000 in gross receipts, the study said.

Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income.

The GAO didn't attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years, and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between US and foreign operations could contribute to tax avoidance.

The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO. (Boston Globe 04-11-04)

In 2005 the GAO issued another report. The Washington Post’s analysis in "Many Firms Didn’t Pay Taxes" highlighted:
About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005. In 2005, after collectively making $2.5 trillion in sales, corporations gave a variety of reasons on their tax returns to account for the absence of taxable revenue. The most frequently listed included the cost of producing their goods, salary expenses and interest payments on their debt, the report said. The GAO did not analyze whether the firms had profits that should have been taxed.

Sen. Byron L. Dorgan (D-N.D.) called the findings "a shocking indictment of the current tax system."

"It's shameful that so many corporations make big profits and pay nothing to support our country," he said. "The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls."

Eric Toder, a senior fellow at the Urban Institute, said the vast majority of corporations are small businesses and start-ups that have adopted a corporate structure that allows them to lower their tax bills.

"I'm not trying to imply that there aren't tax-compliance issues among small corporations," he said. "But when you are talking about businesses that size, I would suspect the norm would be to not pay taxes, and there's nothing nefarious about that." Toder had not yet seen the GAO study.

A greater proportion of large corporations pay taxes, according to the GAO. In 2005, about 28 percent of large corporations paid no taxes. Of the 1.3 million corporations included in the study, 998 were categorized as "large."

Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using "transfer pricing" to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates.

The GAO said data on transfer pricing were scarce. Instead, it compared the percentages of foreign- and U.S.-controlled corporations that are paying taxes.

In general, the GAO found that slightly more foreign firms paid no taxes. From 1998 to 2005, 68 percent of foreign-controlled corporations sent nothing to the Internal Revenue Service, compared with 66 percent of U.S. companies. The report noted in an opening paragraph, however, that the GAO did not study whether the foreign companies were using transfer pricing.

Still, Levin said: "This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States."

It’s only become worse, with President George W. Bush tax cuts and corporate-friendly tax policy. President Barack Obama has been too preoccupied with spending to consider revenue receipts as a priority.

Additionally, offshore tax accounting is completely un-policed and highly secretive with approximately 30 countries serving as tax havens to help corporations avoid taxes. The addition of $605 trillion derivatives market now makes it almost impossible to police global corporations from tax avoidance.

When we compare corporate tax receipts to Nominal GDP we see huge disparities that are now built into the US Corporate Taxation policy. When GDP was growing, US Taxation wasn’t. The effective rates after loopholes and offshore accounting created the following results.

A Horrific Chart

This alarming chart suggests one or more of three possibilities:

1. There’s no relationship between corporate taxes and GDP.

2. Corporate pretax profits have seen near exponential growth over the last 30 years without being reflected in US taxes receipts.

3. Pretax corporate profits have become more and more an offshore phenomenon.
In an analysis of taxes paid by 275 of the largest U.S. corporations, the liberal watchdog group Citizens for Tax Justice found that effective corporate tax rates have fallen by 20 percent since 2001, even as pretax profits jumped 26 percent. Between 2001 and 2003, the 275 companies paid taxes totaling 18.4 percent on their total profits, about half the 35 percent corporate income tax rate. Of the 275, 82 either paid no taxes or received large refunds in at least one of the past three years. (The Washington Post 12-26-04)

Investors are operating under the notion that an improvement in the economy and employment will alleviate the pressures on the Treasury auction. This notion I believe is misplaced. Though I’m skeptical about significant improvements in either the economy or employment, this view is moot in comparison to what will actually be required to make a material difference to tax receipts. The problems described above are intractable without major congressional policy initiatives. Congress is presently doing nothing to address them. In fact they’re headed in absolutely the opposite direction.

Corporate and personal taxes aren’t going to materially fix the US cash crunch short-term.

So the question is even more difficult to answer. Where will tax receipts come from to keep the US Treasury from being forced to place accelerating supply on the monthly Treasury auction?

Debt Issuance

I know many of you are saying we’ll just be forced to place more supply on the Treasury auction and accept higher rates. As I mentioned earlier, the US has already moved down the duration curve steadily over the last few years to make increasing debt levels less onerous. It obviously comes with huge risk, considering interest rates are at all-time historic lows.

If we were forced to refinance the national debt at 5.5% versus the present average maturity of just over 2%, we’d have a serious problem. We need to place corporate tax receipts versus interest payment rate charges in perspective.

This is too far out to be critical to our monthly cash management concerns, but is still a major strategic consideration affecting short-term US Treasury auction options. Closer in however, the US Treasury is obviously caught in a vise about not pushing rates up any faster than absolutely necessary for concern that in the not-too-distant future the very existence of the US and its ability to service its debt may be at stake.


The US cash-management challenge is significant. Taking out this month’s “plug” number, any surprises or further delays in economic rebound will likely trigger serious market reactions.

"This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics."
-- Moody’s Investor Services

Gordon Long is a former senior group executive with IBM and Motorola, a principal in a high tech public start-up, and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development and application of Chaos Theory and Mandelbrot Generator algorithms.

Humiliation as Papandreou accepts IMF terms
by Kerin Hope

It was inevitably a humbling moment for George Papandreou, Greek prime minister, as he faced the television cameras on Friday against a backdrop of the shimmering blue Aegean. The proud son and grandson of Greek prime ministers, he was having to admit failure in his four-month crusade against "market speculators" and appeal for outside help to rescue his struggling economy from collapse.

His formal, and abrupt, policy switch came after four days of intense market pressure pushed Greek bond yields to record highs, triggering speculation that the country would soon be forced to restructure its debt. Yet he still went ahead with a planned trip to the remote island of Kastelorizo off the coast of Turkey, leaving his finance minister to arrange details of activating the €30bn ($40bn, £26bn) loan package. "We are on a difficult course, a new odyssey ... but we have charted the waters and we will reach our destination safely," Mr Papandreou said, addressing the nation from Kastelorizo’s modest waterfront. It was an apt metaphor for an island that in the 19th century was home to one of Greece’s wealthiest shipping fleets but now has fewer than 500 residents.

The prime minister announced his decision in telephone calls on Thursday night to José Luis Rodríguez Zapatero, prime minister of Spain, the current European Union president, and Angela Merkel, German chancellor.
It was a humiliating climbdown, given Mr Papandreou’s insistence since coming to power six months ago that Greece could solve its economic problems on its own. Greece has to accept the surveillance of the International Monetary Fund as part of the deal – a fate avoided by both his father Andreas and grandfather George in spite of challenging economic times.

"Our final goal, our final destination is to liberate Greece from supervision, from trusteeship," Mr Papandreou said, referring obliquely to the IMF structural programme that will accompany the loan package. Greece will sign up next month for a separate €10bn-€15bn loan from the fund in return for rigorous reforms of healthcare and pension funds – both riddled with wasteful spending – and liberalising the labour market. But as his trip indicated, Mr Papandreou is anxious to keep a distance from economic policymaking.

He is expected to appoint a special co-ordinator to oversee the implementation of Greece’s IMF programme. But finding a suitable candidate might be hard. Mr Papandreou’s first choice, Lucas Papademos, a former Greek central bank governor who is due to retire shortly as deputy president of the European Central bank, has made clear that he is not interested in the job. Mr Papandreou’s aim is to spend more time on running Greece’s foreign policy – he is also his own foreign minister – and on his supranational role as chairman of the Socialist International group of left-of-centre political parties, say officials in his socialist party.

After his announcement, Mr Papandreou went ahead with his own programme on Kastelorizo: discussing ways of attracting more people to live permanently on small Greek islands and of boosting Greek-Turkish co-operation at a local level. With Recep Tayyip Erdogan, Turkey’s prime minister, due to visit Greece in two weeks’, Mr Papandreou wants to ensure that his foreign policy is not derailed by the debt crisis.

New austerity a precondition for Greek aid: Germany
by Noah Barkin

Greece must agree to tough new austerity measures before it receives any financial aid from the European Union and failure to do so would endanger such support, German Finance Minister Wolfgang Schaeuble told a newspaper. "The fact that neither the EU nor the German government have taken a decision (on providing aid) means that the response can be positive as well as negative," Schaeuble told the Sunday edition of Bild. "This depends entirely on whether Greece continues in the coming years with the strict savings course it has launched. I have made this clear to the Greek finance minister."

Greece bowed to pressure from financial markets on Friday, making a formal request for the activation of a joint aid package from the EU and International Monetary Fund (IMF) that is valued at up to 45 billion euros ($60.49 billion). The debt-saddled euro zone member has already announced billions of euros in austerity measures, including tax hikes and public sector wage cuts, but is talking with the EU and IMF about additional steps. Opposition to aid for Greece runs deep in Germany and Chancellor Angela Merkel, who faces a crucial regional election on May 9, has been at pains to stress that aid will only flow if Athens takes further steps to cut a budget deficit which soared to 13.6 percent of gross domestic product (GDP) last year.

Schaeuble said a "tough restructuring program" for the next years was "unavoidable and an absolute prerequisite" if Germany and the EU were to approve the aid Greece has requested. But he also made clear that Germany had to be ready to support Greece to ensure the stability of the common currency. "We are defending the stability of the euro, because Germany benefits (from the currency) at least as much as all the others. Help for Greece is therefore not a waste of taxpayer money, but a move based on fundamental German interests.

UK economy grew half as fast as expected in first quarter
by Katie Allen and Larry Elliott

Britain's economy grew at only half the pace expected in the first quarter of this year, according to official data released today, prompting warnings from Alistair Darling that Conservative plans for £6bn of spending cuts would push the country's "fragile" recovery back into recession. The economy grew by just 0.2% in the first three months of 2010, down on the 0.4% expansion in the final quarter of 2009 and weaker than the City had been expecting.

Speaking to the Guardian from Washington, the chancellor said that David Cameron would be forced to axe jobs in order to pare public spending. "Confidence is everything," Darling said. "If you break that confidence you run the risk of going back into recession." "The recovery is still fragile" he said. "To start taking money [out of the economy] now would be madness. If we derail the recovery all the progress we have made will have been for nothing."

With the economy again moving to centre stage in the election campaign, Darling warned that the psychological impact of the Tory cuts would be far greater than their monetary value. "Our stimulus package was worth £6bn but the impact on confidence would be far greater. It would be the same with the Tory cuts, which would come in a quarter of the way through the year and would inevitably fall on jobs".

Economists said the gross domestic product (GDP) growth figure was likely to be revised higher when the Office for National Statistics (ONS) issues two more detailed estimates in May and June once it has collated more data. There were signs that the harsh weather at the start of the year had hurt growth as restaurants, shops and building companies lost business. Nevertheless, analysts backed Labour by citing the anaemic growth as proof that spending cuts too soon could derail the recovery.

Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said: "It does seem that following the bounce back in February from the fall in output in January, momentum in the economy is waning. "Downside risks to economic growth remain, not least the extent of the fiscal tightening we will see after the election," she said.

The Liberal Democrat Treasury spokesman, Vince Cable, said today's figures showed "the promised recovery is barely visible" and also rounded on Tory plans for spending cuts. "There is a real danger of the UK going into a double-dip recession. As people deal with their own debts and as the banks continue to strangle good British businesses by starving them of credit the recovery will remain fragile," he said. "The British economy has had a massive heart attack – it has just emerged from the intensive-care unit into the recovery ward. The worst possible action is the Tory proposal to pull out the drip-feed when the patient is still in a critical condition."

The shadow chancellor, George Osborne, used the GDP data to again highlight the Tory proposal to reverse a planned rise in national insurance and reassert claims that a hung parliament could be dangerous for the recovery. "What Britain doesn't need now is a jobs tax that would kill the recovery or a hung parliament that would lead to economic paralysis. What we need is a new government ready to take decisive action to stop the jobs tax, deal with our debts and get the economy working for everyone," said Osborne.

The ONS echoed business surveys blaming the harsh weather, saying there was anecdotal evidence it had depressed output from the retail sector and industry. The service sector – which spans shops to banking – grew just 0.2% in the quarter, less than half the 0.5% pace recorded in the final three months of 2009. Within the sector, the component that includes retail – distribution, hotels and restaurants – contracted by 0.7%, the biggest fall for a year.

However, the industrial output figures told a different story, with production up 0.7%, almost double the previous quarter and the strongest in four years. There were signs that the cold had brought a big boost to energy companies as households cranked up their heating. Utilities' output grew at the fastest pace in more than two years, up 2.5%. The chancellor said he had not been surprised by the sluggish performance of the economy between January and March. "A lot of the stimulus measures designed to bring spending forward into 2009 came off, so it was in line with what I had been expecting. I still believe the economy will grow by between 1% and 1.5% this year."

Darling said that there was a good chance that the early estimate of GDP for the first quarter would be revised later, noting that growth in the final three months of 2009 had been pushed up from 0.1 to 0.4% once more data was available to the ONS. But he added that recovery was not being aided by the weak performance of the eurozone, the destination for more than half of Britain's manufactured exports.

At a press conference, Gordon Brown also seized on the figures as evidence of the delicate nature of the recovery and the need for caution. "The reason growth has been slow is in January, February retail sales were very difficult after the VAT reduction was withdrawn; then we had the terrible month of weather, which hindered transport and communications in business in the country," the prime minister said. "Obviously it has been a difficult few months but that just shows how fragile the recovery is."

The data rounds off a week laden with politically charged economic indicators that saw inflation come in far above target, unemployment hit a 15-year high and the public finances record their worst year on record since the 1940s, although they were not as bad as the Treasury had forecast. Although inflation is high, experts said today's growth data reinforced the view that the Bank of England will keep interest rates at their record low for many months to come.

James Knightley, economist at ING Financial Markets, said: "We remain cautious on the UK recovery story. Confidence is falling, real wage growth is negative and with fiscal consolidation set to kick in over coming quarters the household savings ratio will have to fall sharply in order for the household sector to generate any growth in spending. "We look for growth of just 1% this year and 1.5% in both 2011 and 2012. This should help to limit inflation pressures in the economy and so we continue to doubt the Bank of England will raise interest rates before the end of this year."

City bonuses forecast to rise to £6.8 billion in 2010, £7.7 billion in 2012
by David Teather

The amount paid in bonuses to City workers is forecast to rise to 6.8bn this year, up from 6bn in 2009, according to figures published today. The forecast is likely to spark further outrage over excesses in the Square Mile, as ongoing investigations at Goldman Sachs continue to sully the already tarnished image of the banking industry. It will also be unwelcome for prime minister Gordon Brown, who has been forced to defend himself against accusations that he has failed to be tough enough with the banking sector.

The figures from the Centre for Economic and Business Research show the bonus pool still some way from the peak of 10.2bn in 2007, the year that cracks began to appear in the financial system. But the amount of cash being handed out is again on the rise. It forecasts that 7.2bn will be paid out next year and 7.7bn in 2012.

Brendan Barber, general secretary of the Trades Union Congress, said: "Ordinary people will not understand why City bonuses are on the rise again. The economy is still fragile. Businesses can't get the loans they need, public and private sector workers are frightened of losing their jobs, yet the banks and finance houses that caused the crash are laughing all the way to the City champagne bars." In 2008, the bonus pool fell to 4bn.

Despite sluggishness in other parts of the economy, some of the biggest investment banks have been reporting a surge in profits and are again paying out large amounts to their staff. On Tuesday, Goldman released better than expected first quarter revenues and admitted its bonus and pay pool had reached $5.5bn (3.3bn) in the first three months of 2010. JP Morgan enjoyed a 55% surge in first-quarter profits to $3.3bn compared with a year earlier. The CEBR said yesterday that the number of jobs in the City is set to increase by 14,000 this year, as the banks shrug off the recession and forecast that employment in the financial services industry would be back above 2008 levels next year.

Barack Obama this week accused banks of losing touch with broader society, as he continues to press for a package of regulatory overhaul that is finally gaining momentum in Congress. "Some on Wall Street forgot that behind every dollar traded or leveraged is a family looking to buy a house, pay for an education, open a business or save for retirement," he told an audience in New York.

The CEBR suggested the enlarged bonus pool will however be good news for the Treasury, with the new tax rate of 50% on income over 150,000. After income tax and national insurance contributions, the taxman is set to take around 4bn.

"The recent change to the tax system has shifted the balance of rewards from City bonuses in favour of the government."said Benjamin Williamson, CEBR economist and co-author of the research. "Despite contributing billions of pounds in tax already the public's appetite for a larger slice of City bonuses will not go away"

Budget crisis puts LA court system at risk
by Linda Deutsch

The nation's largest court system is in the midst of a painful budget crisis that has shut down courtrooms and disrupted everything from divorce and custody proceedings to traffic ticket disputes. The Los Angeles court system has already closed 17 courtrooms and another 50 will be shut down come September unless something is done to find more money. The judge who presides over the system predicts chaos and an unprecedented logjam of civil and family law cases in the worst-case scenario.

The crisis results from the financially troubled state's decision to slash $393 million from state trial courts in the budget this year. The state also decided to close all California courthouses on the third Wednesday of every month. What has emerged is a hobbled court system that is struggling to serve the public. Custody hearings, divorce proceedings, small-claims disputes, juvenile dependency matters and civil lawsuits have been delayed amid the courtroom shutdowns in Los Angeles. Drivers who choose to fight traffic tickets now have to wait up to nine months to get a trial started.

Complex civil lawsuits, those typically involving feuding businesses, could really feel the hit. It now takes an average of 16 months for such cases to get resolved, but court officials expect the cuts to bog down these civil matters to the point that they take an average of four years to finish. "On any given day, 100,000 people go in and out of our courthouses," said Superior Court Judge Charles W. McCoy Jr., who presides over the Los Angeles system. "That's a Rose Bowl full of people."

The criminal courts are immune from the cuts out of concern for public safety. The Administrative Office of the Courts accuses McCoy of being "overly pessimistic" about the future. Its chief financial officer, Stephen Nash, is opposing McCoy's stopgap proposal to divert $47 million from a courthouse construction fund into the general operating budget to keep courtrooms open. A hearing scheduled for Friday in San Francisco could decide whether the plan to divert construction funds moves forward.

Nash says there are other ways to avert disaster and a report by his staff holds out hope that the state budgetary crisis will ease, providing new funds for the courts. "We think you need to be more creative than what Los Angeles is offering," he said. "I'm saying we are going to be able to craft a solution." Asked what alternatives he proposes, Nash was vague. "We're going to be looking under every rock at every fund we have. Four months from now, there will be offsets identified," he said.

Communities around the country have had to deal with various levels of cutbacks to government services and courts, but California's situation is especially dire. Citizens with court business who aren't aware of the Wednesday furloughs are showing up on those days only to find the courts are closed. Those with traffic matters are being diverted to automated call centers, but they can't talk to a person because traffic call staff was laid off. "Thousands of people needing court services unfortunately are turned away on court closure days," said McCoy.

The Los Angeles courts launched a public awareness campaign this week with large signs posted at courthouses and notices on the court's website to notify people that the system is closed every third Wednesday. The Los Angeles system has already laid off 329 workers — about 6 percent of its 5,400-person work force. About 500 more jobs are at risk later this year. Other courts statewide are suffering as well. San Francisco has plans to lay off 122 court employees — 21 percent of the staff — by mid-May unless a solution is found to its budget crisis. The California Supreme Court closed its satellite office in downtown Los Angeles to reduce its spending.

With employees going unpaid on furlough days, Supreme Court Justice Ronald George asked all of the state's 1,700 judges to forgo a day's pay each month. More than 85 percent of the judges agreed, with the money saved going to operation of all courts or back to their own courts. George has opposed diverting courthouse construction funds because he said such projects would be a boon to the state's hard hit construction industry.

Gov. Arnold Schwarzenegger in January proposed restoring $100 million to the courts as part of his budget proposal, but George characterized that funding as uncertain. Much of the money would materialize only if the federal government gives states extra money to help balance their budgets. McCoy said the Los Angeles court's budgetary shortfall is $133 million which will be permanent each year unless there is an influx of funds from somewhere. He raised the prospect of a cumulative cut of 1,800 people from the 5,400-member work force over two and a half years. With resulting cutbacks in services, he said, "Confidence in the courts would be lost." "It's unprecedented," said McCoy. "Even during the Great Depression we did not close down court operations. We kept the courts open."

Deficit Group Formed By Barney Frank Looks Where Others Dare Not -- At Defense Budget
by Dan Froomkin

Concerned that President Obama's deficit-reduction commission is going to look in the wrong places for budget cuts, Barney Frank has appointed his own bipartisan commission. This one will specifically look at ways to reduce the bloated military budget. Defense cuts seems to be politically off-limits these days, but the group convened by the outspoken liberal congressman from Massachusetts shares a belief that America is "overextended and overcommitted" and that there should be a "substantial reduction in the reach of American military commitments," Frank told HuffPost.

He expects the group to propose reducing the number of overseas bases, especially in the rich countries of Western Europe and Japan. "There's a big debate right now about where 3,000 Marines in Okinawa should go. My suggestion is Nebraska," he said. And he expects it will propose cutting weapons systems that don't meet any plausible need.. "No matter how good a weapon is technically, we shouldn't buy it unless it has an enemy," he said.

Frank despairs that the deficit-reduction debate plays out in Washington as if there are only two choices: raise taxes or cut entitlements, such as Social Security and Medicare. Even President Obama's proposed freeze on discretionary spending explicitly rules out any defense cuts, which Frank describes as "my biggest difference" with the president since he came into office.

The group has met twice already, and expects to complete its recommendations shortly. Once that happens, Frank said, "what we are going to do is tell the deficit reduction commission that they have to include substantial reductions in military spending if they want our support." Frank said he imagines many politicians avoid the topic for fear of being assailed as weak on terror. But, he said, "I don't think any terrorist has ever been shot by a nuclear submarine."

There's also some skittishness because our troops are currently in harm's way. "Once American troops are in the field, it becomes a tougher issue for a lot of people," he acknowledged. As a result, cutting spending for Afghanistan, at least for now, is not on his group's agenda. But spending has increased completely out of proportion with the need, he said. "During the Cold War, 26 percent of military spending in the world was American; now it's 41 percent. So we have fewer enemies and we're spending more money."

The key to defense budget cutting, Frank said, is to attack the notion that the U.S. military needs to be everywhere in the world militarily. "If you let them insist that there is a need for worldwide military engagement, we will be at a disadvantage when we fight the specific fights" to cut programs, he said. Once you drop that notion, he said, "I believe we would save over $100 billion a year over what's been proposed." The F-35 fighter program alone may end up costing $338 billion or more. And according to author Chalmers Johnson, the U.S. military currently spends as much as $250 billion a year maintaining approximately 865 facilities in more than 40 countries and overseas U.S. territories.

Frank is particularly critical of the proposed missile defense shield in Eastern Europe -- a Bush idea that Obama has adopted. "Defending Poland, the Czech Republic and I think it's Bulgaria against Iranian missile attack? I think what happened is the software from a video game escaped" and got into the Pentagon's computers, he said. Task force member Charles Knight, who is co-director of the Project on Defense Alternatives at the Commonwealth Institute, told HuffPost that the group is making good progress.

"We all agree that the defense budget has objectively grown enormously in the last decade and there's lot of room in which it could be reduced. And there's also reforms to the practices that could yield savings," Knight said. "We think there are real reasons for [Obama's] Commission on Fiscal Responsibility to be taking a close look at the DOD budget."

The best financial reform? Let the bankers fail
by James Grant

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits. Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail.

Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors. Of course, there are only so many mansions, Bugattis and Matisses to go around. And many, many such treasures would be needed to make the taxpayers whole for the serial failures of 2007-09. Then again, under my proposed reform not more than a few high-end sheriff's auctions would probably ever take place. The plausible threat of personal bankruptcy would suffice to focus the minds of American financiers on safety and soundness as they have not been focused for years.

"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it. No surprise, then, the perversity of Wall Street's incentives.

For rolling the dice, the payoff is potentially immense. For failure, the personal cost -- while regrettable -- is manageable. Senior executives at Lehman Brothers, Citi, AIG and Merrill Lynch, among other stricken institutions, did indeed lose their savings. What they did not necessarily lose is the rest of their net worth. In Brazil -- which learned a thing or two about frenzied finance during its many bouts with hyperinflation -- bank directors, senior bank officers and controlling bank stockholders know that they are personally responsible for the solvency of the institution with which they are associated. Let it fail, and their net worths are frozen for the duration of often-lengthy court proceedings. If worse comes to worse, the responsible and accountable parties can lose their all.

The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used to bear the cost of failure, even as they enjoyed the fruits of success. If the bank in which shareholders invested went broke, a court-appointed receiver dunned them for money with which to compensate the depositors, among other creditors. This system was in place for 75 years, until the Federal Deposit Insurance Corp. pushed it aside in the early 1930s. One can imagine just how welcome was a receiver's demand for a check from a shareholder who by then ardently wished that he or she had never heard of the bank in which it was his or her misfortune to invest.

Nevertheless, conclude a pair of academics who gave the "double liability system" serious study (Jonathan R. Macey, now of Yale Law School and its School of Management, and Geoffrey P. Miller, now of the New York University School of Law), the system worked reasonably well. "The sums recovered from shareholders under the double-liability system," they wrote in a 1992 Wake Forest Law Review essay, "significantly benefited depositors and other bank creditors, and undoubtedly did much to enhance public confidence in the banking system despite the fact that almost all bank deposits were uninsured."

Like one of those notorious exploding collateralized debt obligations, the American financial system is built as if to break down. The combination of socialized risk and privatized profit all but guarantees it. And when the inevitable happens? Congress and the regulators dream up yet more ways to try to outsmart the people who have made it their business in life not to be outsmarted. And so it is again in today's debate over financial reform. From the administration and from both sides of the congressional aisle come proposals to micromanage the business of lending, borrowing and market-making: new accounting rules (foolproof this time, they say), higher capital standards, more onerous taxes. If piling on new federal rules was the answer, we'd long ago have been in the promised land.

Until 1999, Goldman Sachs was a partnership, with the general partners bearing general and unlimited liability for the firm's debts. Today, Goldman -- like the vast majority of American financial institutions -- is a corporation. Its stockholders are liable only for what they invested, no more. And while there are plenty of sleepless nights, the constructive fear of financial oblivion is, for the senior executives, an all-too-distant nightmare. The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair's fair. James Grant is editor of Grant's Interest Rate Observer.

And the spin goes on
by Anthony Cherniawski

Compare the U.S. Census Report… “New orders for manufactured durable goods in March decreased $2.2 billion or 1.3 percent to $176.7 billion, the U.S. Census Bureau announced today. This decrease followed three consecutive monthly increases, including a 1.1 percent February increase. Excluding transportation, new orders increased 2.8 percent.  Excluding defense, new orders decreased 1.2 percent.”         

To the Bloomberg news article…“Orders for durable goods excluding transportation surged in March by the most since the recession began in December 2007, adding to evidence the U.S. recovery is broadening and strengthening.

The 2.8 percent increase in bookings for goods meant to last at least three years, excluding cars and aircraft, was four times larger than the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Total orders unexpectedly dropped 1.3 percent, depressed by a 67 percent plunge in demand for commercial aircraft that is often volatile.”   It’s all in the spin. 

Dodd Bill Would Allow Fed To Hide Its Spending.

The Wall Street reform bill headed for a test vote on the Senate floor Monday night will allow the Federal Reserve to continue to pump trillions of dollars into major banks largely in secrecy, the co-author of House language that would open the central bank to an audit charged in a memo to the Senate.

"The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn't do anything of the sort. I'm going to run down the details for you, and reprint the legislative language so you can read it yourself," writes Rep. Alan Grayson (D-Fla.).

The incredible world of government interference.

SPX.png-- American Banking News opines: It’s incredible to me to see the U.S. government take taxpayer money, use it absolutely to not allow this giant bank to fail, then turn around after bailing it out and putting a huge portion of what Citigroup owes them in common shares of the company, then manipulating their position in the company in an effort to inflate the share price of Citigroup in order to make a huge profit. If this was being done by a private company I wonder if there would be any screaming and hollering over what was being done? I wonder if there would be any investigations?

The rally in Treasury bonds doesn’t last.

Bonds.png--Treasuries headed for a weekly loss, snapping two weeks of gains, as signs the economy is improving and the government’s plans to sell a record amount of debt overshadowed concern Greece will default.        Two-year notes were poised for the biggest weekly decline this month before government reports that economists said will show bookings for durable goods rose for a fourth month and new home sales ended four months of declines. The Treasury will sell a record $129 billion in notes next week, with the auctions to be held on four consecutive days beginning April 26.

Gold rises, but will it last?

Gold.png-- Gold rose the most in two weeks after the dollar halted a six-session rally against the euro, boosting the appeal of the precious metal as an alternative investment.  The euro rebounded from the lowest level in almost a year after Greece asked for a bailout from the European Union and the International Monetary Fund, easing concern that mounting debt will erode the value of the 16-nation currency.

Nikkei retreats even more.

Nikkei.png-- Japanese stocks fell, capping its biggest weekly retreat in almost three months, on concern swelling government debt will derail the global economic recovery.  The Nikkei 225 fell 0.3 percent to close at 10,914.46 in Tokyo. The broader Topix index was little changed at 978.20, with almost twice as many shares rising as declining. Fitch Ratings said yesterday that Japan’s swelling debt may put “downward pressure” on the nation’s sovereign AA-rating.

China wants to tax third houses.

Shanghai Index.png-- China stocks fell, sending the benchmark index to its biggest weekly decline in five months, as retailers and automakers slid on concern government measures to curb the property market will reduce spending.  The Chinese government is considering property taxes on third homes owned by individuals.  This is thought to put a damper on other consumer goods associated with home ownership.

The U.S. Dollar continues its rally.

US Dollar.png-- The dollar pulled back today, still ending higher for the week.  The reason given for the dollar rally is not so much that our economy is so strong, but the Euro and the Yen are so weak.  There is currently more concern over Germany dropping its ties with the European Union than with the Greek bond implosion.             That would cripple the value of the Euro and leave the EU hobbled financially and unable to deal with its own problems.

Schiller concerned about another “mini-bubble” in stocks and housing.

Housing Index.pngRobert Shiller: Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices ... Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities -- and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed.

Biodiesel still garnering interest.

Gasoline.png  The Energy Information Agency weekly report observes,Biodiesel is a renewable fuel derived from animal and vegetable oils, including waste oils, used in diesel engines. The idea of using vegetable-oil-derived fuels to power diesel engines is not new – in fact, it can be traced back to 1897, the year Rudolf Diesel invented the engine that bears his name. Interest has surged in recent years as concerns over the environment and national security have produced policies in the United States and other countries that encourage use of renewable fuels for transportation.”

Natural Gas prices follow lower consumption.

Natural Gas.png--The Energy Information Agency’s Natural Gas Weekly Update reports, “Prices fell at all market trading locations in the lower 48 States during the week, with declines averaging around 20 cents per MMBtu, reversing gains that occurred at most market locations last week. The Henry Hub spot price fell 19 cents, or about 5 percent.”   Commercial and residential consumption was up .6%, while industrial use was down .5%.

The best financial reform? Let the bankers fail.

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

We cannot afford (Goldman Sachs to do) God’s work anymore.

The US Senate this week will debate Chris Dodd’s bank reform proposals. Folded into the bill that is supposed to come out of the debate, will be a separate bill on derivatives.  Which, just off the press, apparently was voted in by the Senate Agriculture Committee. Who else? You thought the Banking, Housing, and Urban Affairs or Economic Policy or Financial Institutions or Securities, Insurance, and Investment committees might have been more appropriate? You’re so new school. In the US, that's not how they do things.

American Deadbeats
Is the current economic crisis creating a generation of American deadbeats?  Once upon a time in America, we were taught that no matter how much financial trouble we get in we pay our debts - no matter what.  But now that has fundamentally changed.  Today, record numbers of Americans are filing for bankruptcy and a new term had to be invented ("strategic defaults") to describe the large number of people who are making "business decisions" to walk away from underwater mortgages. 

Meanwhile, many of these same individuals who are walking away from their debts are spending big money on cruises, vacations and new cars - as if they were still entitled to all of the good things that come with living the American Dream.  Below you will read some incredibly disgusting examples of this.  It is as if a whole generation of Americans has decided that "financial responsibility" is a problem that they don't care to be bothered with.  But what is it going to do to the U.S. financial system if we can no longer count on people to honor their debts?

What we have got is a big mess on our hands.  Most Americans were never taught how to responsibly handle their finances.  Decades of easy credit cards and easy mortgages is starting to catch up with us.  We created the biggest credit bubble in the history of the world, and now that things are coming apart we don't know quite what to do.

The reality is that the American people know that the U.S. economy is in really bad shape and that things are not going to get significantly better any time soon.  According to a recently released AP poll, just 25 percent of Americans believe that the economy is getting better.  The same poll found that 76 percent of Americans rate the economy as "poor", compared to just 21 percent who said that the economy is "good" overall.

But it doesn't take a genius to figure out that the economy is a mess.  For example, in Clark County, Nevada (home to Las Vegas) the unemployment rate has increased from 10.1 percent to 13.9 percent in just the past year. In California's Central Valley, 1 out of every 16 homes is in some phase of foreclosure.

An increasing number of Americans are responding to this economic mess by running off to bankruptcy court.  Federal courts reported over 158,000 bankruptcy filings in March, which represented a 35 percent rise from February.  In fact, more Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened back in October 2005.

Foreclosures also continue to explode.  According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March.  This represented an increase of nearly 19 percent from February, and it was also the highest monthly total since RealtyTrac began issuing its report in January 2005.

But foreclosures are soaring not just because people can't pay their mortgages.  One of the biggest reasons why the number of foreclosures is flying into the stratosphere is the huge number of Americans that are opting for "strategic defaults".  Many Americans are simply deciding that it is just not worth it to pay a $500,000 mortgage on a home that is only worth $300,000.

"People who have prime jumbo loans, people with good jobs, with assets and nice cars are talking a hard look at this investment and making a decision, a conscious decision, to strategically default on their loans." Bankruptcy attorney Chip Parker told CBS News from his Jacksonville, Florida office. "These are professionals making business decisions about their homes. Subprime is over -- these are Alt-a and option arms loans....people with 700 and above credit scores. They are treating their homes like a business deal."

But shouldn't these people honor their financial commitments?  Well, yes.  But what is even sadder is that many of these Americans who are walking away from their debts are turning right around and are spending big money on cruises, vacations and new cars.  Just check out the following anecdotes from The Market Oracle website....

*My 25 year old niece had $10,000 of outstanding credit card debt. Recently, she told the bank she couldn't pay. She is not unemployed so the 'hardship' is all relative. Nevertheless, the bank offered her a concession which she refused. They offered another concession, she refused again. Finally, they told her if she paid $150/month for 2 years (total of only $3600 with no interest), they would call it paid in full! She accepted in a heartbeat. It is less than a month later, and she celebrated her good fortune by going on a cruise to Hawaii.

*A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down pmt. One year after her purchase she pulled $75,000 home equity and purchased 'fun stuff' including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister's name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.

*My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn't like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven't yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.

*My brother-in-law wanted to know if he should stop making payments on everything. He lives in Virginia and his carpentry skills are not as marketable as they were in the height of the boom. He and his wife's best friend have lived close-by for many years. For the past 13 months since they strategically decided to stop paying their mortgage, they had yet to be contacted by their bank. Not even one letter! My brother-in-law doesn't understand how they get to pocket the mortgage and spend carefree, including a 10-day Caribbean vacation.

Do the above stories bother you?

They should.

If Americans are going to file for bankruptcy or walk away from their mortgages they should at least start showing some signs that they have learned something.  They should at least start tightening their belts and begin acting like responsible members of society.

But this is 2010.  Today most Americans feel like they are entitled to live the American Dream.  Most Americans feel like we all owe them something.

The end result of this is going to be the breakdown of the system of credit in this nation as we get to the point where we can't really count on anyone to fulfill their financial obligations.

And once that happens we will have one gigantic mess on our hands.

Generation Y: The Broke Generation
No group in America has been hit harder during the current recession than young adults.  Millions of Americans are graduating from college with virtually no money, lots of debt and with very dim employment prospects.  Those who don't go to college are even worse off.  All their lives these young Americans were taught if they studied hard, got an education and worked within the system that good jobs and the American Dream would be waiting for them.  But now millions of them are realizing that all of their studying and hard work is not providing them with the rewards that they always thought they would get.  This is causing large numbers of young American adults to become depressed and disillusioned.  In fact, record numbers of them are moving back in with their parents.  But without decent jobs, what are they supposed to do?  

According to the Bureau of Labor Statistics, in March the national rate of unemployment in the United States was 9.7%, but for Americans younger than 25 it was 18.8%.  In fact, according to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession. Things are even worse for those under the age of 20.  According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low since statistics began to be kept back in 1948.

But the inability to get good jobs is only part of the story....
  • The Pew Research Center study also found that only 61% of Americans between the ages of 18 and 29 are covered by some form of a health plan.
  • According to a National Foundation for Credit Counseling survey, only 58% of those in "Generation Y" pay their monthly bills on time.
  • Not only that, but according to a November MetLife poll, nearly 70% of those in "Generation Y" are not building up a cash cushion, and 43% are accumulating too much credit card debt.
  • According to Fidelity Investments, those in Generation Y have more than three credit cards on average, and 20 percent of them carry a balance of at least $10,000.

So what does all this mean? It means we are raising a generation of young Americans that are a financial mess.  But isn't that our own fault? After all, most young Americans have never received any formal training on how to manage their money, and the role models of financial responsibility they do have (the rest of us) are hardly worth emulating. But if each generation of Americans is becoming increasingly financially irresponsible, what does that mean for the future of this nation?

The Ballad Of Francis Timothy Coleman
by Arthur Delaney

Francis Timothy Coleman first heard of "Privacy Assist" when a salesman called him at the end of 2009, saying he needed to verify Coleman's information.

"He starts reading me my address," said Coleman, who lives in Bethlehem, Pa. "He had my name, my age, my phone number."

When the guy demanded Coleman's checking account number, Coleman got angry. "I'm not giving you anything," Coleman said. "And he said, 'That's OK, I have all I need anyway.'"

In January, Coleman was shocked to find a $12.99 Privacy Assist charge had taken his last $3 of unemployment benefits and put his Bank of America checking account into the red. He called an 800 number for Privacy Assist to complain and was told the money would be refunded. When he called Bank of America, they said they'd take away the $35 overdraft charge, but he couldn't have his $3 back until Privacy Assist, which was described to him as a "partner company," delivered it.

"I didn't think that was OK," said Coleman, who goes by his middle name.

That was Saturday, Jan. 23. The following Monday, an angry Coleman showed up at his bank to demand his money back in person. "That money needs to be returned immediately," said Coleman, 40. But the manager told him it would take seven to ten business days. "That's just not acceptable," Coleman said before leaving.

Next stop: the office of Rep. Charlie Dent (R), his congressman. A staffer there promised to forward details of the situation to the state attorney general and relevant banking authorities. Coleman went home, feeling his identity had been attacked and that he'd been the victim of a crime -- and that there was nothing he could do about it.

None of this -- the unwanted credit monitoring, the unfair fee, the unhelpful bank employees, the polite-but-useless response from his congressman's office -- is what caused Coleman to finally lose control.

The next day, he did a Google search for Bank of America and Privacy Assist and turned up hundreds of complaints similar to his own (indeed, Privacy Assist has prompted a lawsuit seeking class-action status). "I read at least 200 or better complaints and I just kept reading them, looking at each next one, and the next one. There had to be thousands of them that said basically that the bank had either stolen from or charged fees they weren't supposed to -- a lot of these older people were close to wiped out," he said.

"At that point, between being very aggravated and being upset looking at all the complaints -- I snapped."

Coleman picked up the phone and called the local TV station. "Tomorrow I'm gonna get my satisfaction. I'm gonna rob the place," Coleman said, according to the producer who answered the phone. "Satisfaction is going to be had, one way or another."

The producer, Dan Rinkus, had been preparing for that evening's State of the Union address when he took the call from the man who said he was "down and out and at the end of his rope." Coleman readily gave him his address and said he expected him to call the police. Rinkus felt bad for him, and was amused he'd publicly announce a bank robbery, but in this "weird conflict of emotions," as Rinkus called it, concern won out. He had an assignment editor call the police. Rinkus worried he'd have blood on his hands if this guy went bonkers.

But Coleman didn't have a gun. He didn't have a weapon of any kind. He says he's never even been in a fistfight in his entire life. He watched himself announce his threat and didn't even understand what he was doing. All he knew was that he didn't want to be the only one watching.

"I wanted the media there and I wanted them to witness the bank telling me, 'No, we won't pay you that money back,'" he said. "I guess in a real strange way I was trying to right a situation I felt was very wrong. The largest bank in America. They got probably the largest bailout money from the government and they don't need to be stealing from their customers."

Around 11 p.m. that night, police showed up at the white two-story house where Coleman lived with his 72-year-old mother. They rang the bell; Coleman told his mother to go to the back room, then he answered the door.

"I know why you're here. It's because of what I said to Channel 69 News,'" Coleman said, according to Colonial Regional Police Deputy Chief James DePalma. "He said something was going to happen at the bank tomorrow and he needed witnesses, people to see it... He was a little upset with the bank because of an overdraft."

DePalma said officers know Coleman because he'd made a few complaints to the department over the years. The arresting officer was impatient, Coleman said, and "mentioned to me the number of times I had called the police over the years over a disturbance in the neighborhood, things I had been touchy about." Coleman wouldn't elaborate on his previous calls to police, saying it had to do with an anxiety problem.

After arresting Coleman, an officer walked into the house and explained to his mother that they were driving him to a local hospital for a psychiatric evaluation before taking him to jail. Coleman's mother, who had been relying on her son to take care of her, would have to fend for herself for a while. "I've had two knee replacements, my gall bladder, my eyes," she said. "He's always been there to help me. He's really been my right hand."

The crisis worker who interviewed Coleman said she couldn't think of a reason he needed to be held at the hospital. "I did tell them that I did have a history with having some problems with anxiety," Coleman said. "For the past year I had been unemployed and things were getting a little bit tough, maybe a little bit out of control -- and I told them that when I made the call that basically I realized I was making the call."

Coleman had moved in with his mother after being laid off from Allentown Metal Works in 2009. He'd been working as an apprentice machinist -- or "Class C machinist," in his words. It's a vocation Coleman said he'd aspired to since high school. He said his grandfather worked as a master machinist at Bethlehem Steel; his father worked there as a chief clerk. He wanted to work there, too, figuring that he had a good chance of getting a job. So he studied machining.

But the year he graduated from high school, 1987, was not a good time to look for work at the third-largest steel manufacturer in the country. When he stepped up to the window at the company's employment office, the woman inside looked at him and said, "Where have you been the past couple years?"

Coleman didn't understand.

"Where have you been? They're not going to hire you," the woman said. She explained that Bethlehem Steel, which employed about 3,400 workers at that plant, had just laid off 550 workers. Coleman told her to have a nice day, turned around and left.

He bounced around from job to job, sometimes quitting on his own accord, sometimes being let go as part of a mass layoff. He said he'd been at Allentown Metal Works for nine months when they let him go. By the time President Obama visited Allentown in December to launch a still-ongoing "White House to Main Street" campaign, the factory had already let go of 35 percent of its workforce. The unemployment rate in the Allentown-Bethlehem area stands at 10.5 percent.

"One of their projects is actually related to the rebuilding of the World Trade Center and the Twin Towers down there," Obama said in a speech after visiting the factory. "Like so many others across America, these workers have also been doing the best they can to stay afloat in a brutal recession that has hit folks like them hardest of all."

After his psychiatric evaluation, police hauled the unemployed Coleman to jail, where they booked him and a magistrate judge (via videoconference) set bail at $75,000, on the recommendation of the annoyed arresting officer. The charge: making terroristic threats.

A prison guard asked a series of health questions -- something about swine flu, something about pneumonia. Coleman remembers only one question vividly: "When you get out of here, do you feel that you have anything to live for?"

"I used to, but not anymore," he told the guard. Coleman thought about how he'd started looking into getting some retraining via the state's Workforce Development system. Maybe that could have helped him.

The guard escorted him to a suicide watch cell and gave him a "turtle suit" -- a single-piece smock he couldn't use to kill himself -- and spent the next few weeks pretty much doing nothing.

When he merged with the general population, he learned he was famous: His threat against Bank of America made it into local and national media outlets. "I got all the responses that you could imagine, from, 'Boy, you're really crazy,' to thinking that that was really funny, to other people thinking that that was right on, 'You're standing up for yourself, for people against the bank that's doing this.' The only thing I didn't get was a negative response."

Coleman was released from jail the second weekend of April, two years of monthly parole visits in front of him. He said he's not going to use a bank anymore and that he'll cash any checks from future employment.

Now sedated with anti-anxiety medication, he talks calmly about what happened and is adamant that he made a terrible mistake. He knows now that when a bailed-out bank takes your last dime -- in Coleman's case, money deposited by the government to soften the blow of that "brutal recession" Obama mentioned -- threatening to steal it back is not OK.

Coleman's mom, who asked her name not be used in a story, is glad to have him back. When he was first arrested, she cried, saying she felt too ashamed to go outside. But she also resents the indignity of the situation.

"Our society is so screwed up at this point in time that your head spins. I never thought in 73 years I would ever see things so screwed up. Our government can't get things straight. We as people can't get things straight," she said.

"Perhaps it's that we know too much. Maybe it's because when I was younger we didn't know too much through the media, but when I hear of all of the corruption I really do wonder what kind of people are really running our government. On both sides -- it's just general -- they are so corrupt in so many ways. How do young people teach their children not to lie and not to be deceitful when our own government is deceitful in so many ways? I just find that I can't really do anything about it so I'll just be an ostrich for the rest of my life."

They’ve Got It: Fixes for the Financial System
by Sewell Chan and Binyamin Appelbaum

Congress is consumed by the proposed legislation to overhaul the financial system, with lawmakers clashing over the best ways to regulate derivatives, protect consumers and end taxpayer-supported bailouts.

Most proposals in the Senate bill supported by President Obama amount to variations on the current system of regulation.

But some scholars in finance, law and economics — perhaps less inhibited by practical considerations — see an opportunity to revolutionize the financial system. In books, papers and presentations, they have proposed an avalanche of ideas, some more outlandish than others. Here are a half-dozen; judge the merits for yourself.

End the Dollar’s Supremacy

The housing bubble was inflated with vast sums borrowed from the rest of the world. Joseph E. Stiglitz, a Nobel-winning economist at Columbia, says the United States should surrender some of its borrowing power by trying to end the use of the dollar as the primary international reserve currency.

The United States basically borrows money by printing dollars and selling them, in the form of Treasury securities, to China and other governments that hold those dollars in their financial reserves. The United States then uses the borrowed money to buy foreign goods. This system, Mr. Stiglitz says, has, in effect, made the United States the world’s largest recipient of foreign aid.

The inflow of foreign money also tends to create asset bubbles, such as the spike in housing prices, making the American economy much more vulnerable to disruption and crisis. If other nations no longer needed dollars, the United States would not be able to borrow money as easily. “Knowing that it would be more difficult to borrow might curb America’s profligacy,” Mr. Stiglitz writes in “Freefall: America, Free Markets and the Sinking of the World Economy” (W. W. Norton, 2010).

Give Bankruptcy a Chance

When Lehman Brothers went to bankruptcy court in September 2008 after the government refused to rescue it, credit markets froze. The authorities quickly caved in and bailed out a bunch of other companies.

Lehman’s disorderly collapse, conventional wisdom says, showed that bankruptcy courts could not handle huge financial failures, because they were too slow, lacked the expertise and were not designed to consider the intricate linkages that hold financial companies together.

The bills in Congress seek to design a federal “resolution authority” — a way to arrange the orderly liquidation of giant financial companies — modeled after the process the Federal Deposit Insurance Corporation uses to take over failed banks.

But Thomas H. Jackson, former president of the University of Rochester, says the panic was not caused by bankruptcy proceedings, but by letting Lehman fail in the first place. Under current law, parts of Lehman went through bankruptcy, while other subsidiaries could not.

Among other changes, he calls for amending bankruptcy laws to cover companies — retail banks, stock and commodity brokers and insurance companies — so that large, complex institutions could be fully dealt with in court. And regulators would be able to pull the trigger.

“There’s a lot to be said for a judicial process rather than a government agency process,” says Mr. Jackson, author of an essay in “Ending Government Bailouts as We Know Them” (Hoover Institution, 2009). The legal system is more predictable and transparent and better established.

Bonds Can Regulate Banks, Too

Many economists say that creditors, who determine how much banks can borrow and on what terms, are often better equipped than regulators to provide the market discipline that can keep banks from taking on too much risk.

Unlike stockholders, bondholders have little to gain when banks take on risk in the hope of reward. What they want is a steady stream of income and the repayment of their loan. Corporate bonds tend to be held by institutions like mutual funds, hedge funds and insurance companies that have the time and resources to monitor their debtors.

Robert C. Pozen, chairman of MFS Investment Management and author of “Too Big to Save? How to Fix the U.S. Financial System” (Wiley, 2010), wants to require banks to issue an existing kind of bond known as long-term subordinated debt. “Subordinated debt is bought by very sophisticated investors who insist on conditions like capital requirements and covenants to make sure that banks don’t take on too much risk,” he says.

Since their investment is not guaranteed and their time horizon is long term, such creditors have interests closely aligned with those of government regulators, says Mr. Pozen, who is also a lecturer at Harvard Business School.

In a 2000 report, the Fed studied requiring banks to hold subordinated debt, but the idea went nowhere. Banks don’t like it because such debt generally charges higher interest than other kinds of corporate bonds.

Compound Interest 101


A person borrows $100 at an annual interest rate of 20 percent. How long does it take that debt to double? About four years. What share of American adults can figure that out? About one in three, says Annamaria Lusardi, an economist at Dartmouth College.

Ms. Lusardi wants to add financial literacy to high school curriculums. A crisis sparked in part by the decisions of millions of Americans to take mortgage loans they could not afford has underscored her conviction that “lack of financial knowledge is alarmingly widespread.”

Only three states — Missouri, Tennessee and Utah — now require a course devoted to personal finance, according to the JumpStart Coalition for Personal Financial Literacy, a nonprofit group. Another 18 states incorporate some lessons into other courses.

“Financial literacy is an essential piece of knowledge that every student should have,” Ms. Lusardi wrote recently on her blog. “Just as reading and writing became skills that enabled people to succeed in modern economies, today it is impossible to succeed without being able to ‘read and write’ financially.”

Take the Money Out of Banks


Laurence J. Kotlikoff, a liberal economist at Boston University, wants to dismantle the banking system.

Instead of checking accounts, people would place money in all-cash mutual funds. Savings accounts would be replaced by short-term funds that make conservative investments. And people could also place money in more adventurous funds that made mortgage loans, or extended lines of credit or played the market in derivatives.

It is a system designed to reduce risk taking by preventing banks from gambling with other people’s money.

Depositors now relinquish control when they place money in a bank. The institution decides how to use the money and it keeps the profits — or suffers any losses. Most banks also borrow large sums of money from investors to increase their lending and profits.

Under Mr. Kotlikoff’s model, called “limited purpose banking,” banks would manage families of mutual funds. No more borrowing. No more gambling. Except for office space, computers and furniture, banks could not hold any assets.

“Banks would simply function as middlemen,” Mr. Kotlikoff writes in “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague With Limited Purpose Banking” (Wiley, 2010). “Hence, banks would never be in a position to fail because of ill-advised financial bets.”

Race to the Scene of a Disaster


When an airplane crashes, investigators from the National Transportation Safety Board race to the scene to determine what happened to avoid future disasters. There is no comparable federal agency to look into financial catastrophes. After the 2008 market crash, more than a year passed before an inquiry commission, established by Congress, held its first hearing.

Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology, wants the government to create a safety board for the financial industry. Unlike the current commission, this agency would be insulated from political pressure, staffed by professionals and able to criticize the government as well as businesses.

“It is unrealistic to expect that market crashes, manias, panics, collapses and fraud will ever be completely eliminated from our capital markets,” Mr. Lo said at a House hearing in October. “But we should avoid compounding our mistakes by failing to learn from them.


Stoneleigh said...

I am back from New York State and I wanted to thank all the wonderful people who let me stay with them and made my trip so memorable. You make me feel that what I am doing is worthwhile. I hope I can help to turn virtual communities into real ones.

I will be arriving in Austin, Texas, on Sunday May 9th and staying until May 12th. If people would like to get together while I'm there, that may be possible. The talk I am going for is at 7pm on the evening of May 11th.

Erin Winthrope said...

@ Stoneleigh or Ilargi,

I posted this comment last week while you were lecturing. I didn't get many responses, but I was wondering if you would be willing to address some of the questions that I raised. Since the Greek debt crisis seems to be reaching quite a crescendo this week, it seems even more appropriate.....

I propose a practical thought

Since the debt crisis that's currently rocking Greece will eventually reach the shores of the UK, the USA and Canada, it seems useful to ponder what one would do with one's liquid assets if one were a Greek citizen right now. More specifically, would you:

1) Withdrawal some extra cash from the local bank (since there's been abundant anecdotal evidence of capital flight from the Greek banking system). What percentage of your assets would you leave in the banking system at this stage in a crisis?

2) Would you shift any existing bank deposits from a Greek bank to an international bank like HSBC that accepts retail bank deposits in Greece? I've read that Greek branches of HSBC have been overwhelmed with requests for new deposit accounts as Greek depositors have begun shifting their deposits from Greek banks to international banks.

3) Would you attempt to open a bank account outside the country and move your deposits there? If so, what percentage of your assets would you move?

4) Would you sell your short term government debt (since it seems a debt restructuring -- haircut -- is now inevitable.)

5) Would you buy some precious metals or US dollars in small quantities to hedge against the possibility that Greece will exit from the Euro and a return to a significantly devalued Drachma. (This would be a replay of the move that smart Argentinian investors made in 2001 when they converted their peso's to dollars before the fixed dollar-peso peg was lifted and the peso crashed.)

6) Stock up on extra emergency supplies of food/water/batteries/water filters etc. to prepare for the possibility that austerity protests could boil over into greater levels of disorder and civil strife.

Since all of us will one day face the stress that the Greeks are currently experiencing, it seems useful to engage in these sorts of thought experiments well in advance of the actual crisis. Once the crisis strikes, it will probably be difficult to think calmly and clearly.

Stoneleigh said...

Ed Gorey,

Great questions :)

1) Withdraw some extra cash from the local bank (since there's been abundant anecdotal evidence of capital flight from the Greek banking system). What percentage of your assets would you leave in the banking system at this stage in a crisis?

Personally I wouldn't leave any assets in the banking system at this point. The situation is looking more an more Angentine all the time.

2) Would you shift any existing bank deposits from a Greek bank to an international bank like HSBC that accepts retail bank deposits in Greece? I've read that Greek branches of HSBC have been overwhelmed with requests for new deposit accounts as Greek depositors have begun shifting their deposits from Greek banks to international banks.

I'm not convinced that would be much safer. If a bank run begins, the panic could affect all banks, as panic is an unthinking psychological phenomenon.

3) Would you attempt to open a bank account outside the country and move your deposits there? If so, what percentage of your assets would you move?

If you have a lot of money that would be better, but only for a while, and that styrategy would create a risk of being separated from your money if the crisis spreads, as such crises almost inevitably do. Greece is by no means the only country i very deep trouble. It's just that the speculators tend to pick on one at a time - picking on the weakest first like any predator.

4) Would you sell your short term government debt (since it seems a debt restructuring -- haircut -- is now inevitable.)

In Greece the risks associated with short term government debt are certainly much higher than is currently the case for countries more at the centre.

In any country government debt is a relatively short term option for riding out a great deleveraging, with a view to buying hard assets within 2-5 yeaars once assets prices have come down far enough for people to afford them. It is not a long term solution to capital preservation. At some point the risk will become unacceptable in any country, but it appears Greece has got there first.

What Argentina did is to convert short term bonds into long term and then default on them later. Greece may follow suit. Buyer beware!

Stoneleigh said...

(Part II)

5) Would you buy some precious metals or US dollars in small quantities to hedge against the possibility that Greece will exit from the Euro and a return to a significantly devalued Drachma. (This would be a replay of the move that smart Argentinian investors made in 2001 when they converted their peso's to dollars before the fixed dollar-peso peg was lifted and the peso crashed.)

If you have significant resources to protect and are comfortable with taking currency risk (which you always do when you speculate on changes in relative currency value), then my view is very much that the US dollar will rise and the euro will fall. You may want to hold US dollars.

That would be a relatively short term option though (2-5 years), as cash is in general. Cash is king in a deflation, as we have always said, but in the long term all fiat currencies fail, and you would need to be in hard goods before that.

If you choose to speculate in US currency and are not American, one risk you face down the line is that currency can be reissued, as the Russians did. In Russia they were trying to smoke out money under the bed in a country where there had been chronic mistrust of banks, and therefore a lot of 'stray wealth' to target. In the US that is not the case, as people have been very trusting and complacent for a very long time, plus they generally have no savings anyway because they depend on credit for a rainy day. There would be relatively little to find under American beds.

If the US reissued currency it would probably be to remove the value from the enormous quanitity of physical US currency held abroad. Foreigners would be unable to convert to the new currency and their holdings would cease to be legal tender.

In Greece I think the balance of risk would suggest holding physical euros in combination with a certain amount of precious metal, given that Greece's continued participation in the euro is questionable down the line.

You might want to hold euros issued by a different European country, although if Greece were forced out of the euro, you would end up taking currency risk and would need to move into holding at least some of the resulting 'neo-drachmas'. If Greece gives its bond holders a haircut though, as is inevitable at some point, it could find itself isolate from the international debt financing model.

If the discipline of the bond market is lifted for them, a 'neo-drachma' could be subject to rapid inflation via actual printing. Greeks would therefore need to get into hard goods sooner than others.

6) Stock up on extra emergency supplies of food/water/batteries/water filters etc. to prepare for the possibility that austerity protests could boil over into greater levels of disorder and civil strife.

Absolutely! The risk of spreading unrest is very high.

Greenpa said...

"2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. "

Ok, now. Is it likely this guy snuck into that position under Obama's radar?

Sure, it's possible. Not, however, too likely. Is it possible Obama (the swine) schemed to put him there? It is.

I have been CEO for 4 corporations at once, including 2 national non-profits (one I founded is now in the top 10% of conservation organizations)- and I'm still CEO of 2 C corps.

I have brought people like this onto the board several times- while personally staying in the background. Nobody connected me with their becoming a Director.

Then they totally nailed some asses which desperately needed nailing- and hey- I had nothing to do with it.

I assure you this is standard practice among CEOs.

One of them is still on a board, and the current Directors keep asking me- "why in the hell did this guy get put here? He's an abrasive bastard!" Yep, he sure is; and very effective.

Plausible deniability, you know. Who, me?

Just keep the possibility in the back of your mind.

soundOfSilence said...

Stoneleigh said: Personally I wouldn't leave any assets in the banking system at this point. The situation is looking more an more Angentine all the time.

Would you consider credit unions as part and parcel part of the banking system? About a year ago we pulled the savings out of the TBTF and moved it to a credit union. We don’t have whole lot... not even enough to pull it all out and pay off the mortgage (not that I haven’t thought long and hard about putting what there is on the mortgage… but the absence of any sort of safety net seems unwise).

jal said...

Greenpa said...
"Just keep the possibility in the back of your mind."


Why didn't someone tell me that they were playing with aces up their sleeves.
Maybe there is another aces up their sleeves.

Senate Agriculture Committee, chaired by Arkansas Democrat Blanche Lincoln.
"Derivative Reform"

Greenpa said...

"Do the above stories bother you?"


"They should."

I disagree.

"If Americans are going to file for bankruptcy or walk away from their mortgages they should at least start showing some signs that they have learned something. "

On the contrary, they show clearly that the people mentioned have indeed learned something- quite important.

To wit: the big banks and the "rich" have been doing this forever. Ripping everyone off, and giving themselves bonuses- any time they could get away with it. "Just business, you know."

One way they've done this, consistently, is change the terms of their agreements- at any whim. "Sorry, we've decided, based on nothing whatever, that you're now a lousy risk, and actually need the money we lent you, so we're changing your interest rate to 33%. Have a nice day, and we just love having your business. Let us know how we can be of further assistance."

People have now discovered that they CAN get away with it- because so many people have been forced into real defaults, that neither the lenders nor the legal system can keep up with it- at all.

The rich guys do it? Isn't the American Dream - to get rich?

All they're doing is- following the examples of the big guys. Learning fast.

Rumor said...

The last Rattle generated a lot of discussion of what should be done by the government, and Ilargi continued that theme with this Rattle. There were some challengers in regard to how much President Obama can actually pursue from his office (that is, on the assumption that Congress is uncooperative, to which I anyway say, look how FDR cajoled and herded an uncooperative Congress), but Ilargi is not the only one making the case that Obama can in fact do quite a lot starting only with his administrative authority.

At Cathartic Rants there are a few ideas:

Do something. Fuck, it doesn't even have to be legislative, all you have to do to "fix" the problem of endless corporate greed and fraud is start enforcing EXISTING laws. Where are the criminal investigations against rampant mortgage fraud? You can't just fucking scold banks, and then not hold them accountable. Laws are only meaningful if you actually enforce them. Reinstate leverage limits if you're worried about "excess leverage". Start bringing criminal indictments against ALL the fraudulent lending. Reinstate mark-to-market accounting and get banks to remove all their bullshit off-balance sheet assets.

More substantially and thoughtfully, Numerian at the Agonist has a thorough set of recommendations (I strongly recommend reading the whole article):

This is the last important lesson of the banking crisis. You cannot prevent future problems if you do nothing to reform the Federal Reserve, and if you do not dismantle the culture of greed that is the modus operandi of the powerful and the connected. The sense of exceptionalism and entitlement is so strong among the elite that eliminating this culture will be very difficult.

Tristram said...

Don't worry, everything is OK:

"From the Mall to the Docks, Signs of Rebound"

Positive feedback loops everywhere you look.

RobertM said...

re: I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the "lower classes" have at least a decent life.

This is something I've been saying for years and it is oh-so-very true. Obviously these people have never been to a third world country. Without a middle class, without whom these CEOs would not exist, our country would not be in any way, shape or form like it is today. The further the middle class sinks, the bigger the target on their backs become. I expect in the next wave down, there will be people who, at the end of their ropes, seek to take as many bankers as they can with them. These CEOs really need to re-read some history books on what happens to people of their ilk.

Gravity said...

You look but don't see; the things that dwell behind.

RobertM said...

Let me add this to my previous point. What the CEOs fail to understand is that economies are built from the bottom up (another reason why the dottering-old-fool Reagan and his trickle down (pee-on-the-poor) economic theory is such a joke). Without people to consume and pay for all the services and goods we built on economy on, there is no middle class and without the middle class there are no rich people to 'invest' with companies like Goldman.

Erin Winthrope said...

Thank you for the response Stoneleigh! I have some Greek friends, and perhaps this information could be useful to them.

Stoneleigh said...

I have an unusual and highly presumptuous request for donations to make. This has nothing to do with money and everything to do with saving lives. I mention it with one particular life in mind - my younger sister.

Her cancer (lymphoma) returned despite aggressive chemotherapy. She is terribly ill and her only chance is now a bone marrow transplant. My brothers and I have been tested and sadly none of us is a match. She is now dependent on finding a match with someone on the international bone marrow registry. I have no idea what the odds are of finding a compatible individual.

Anyone between 18 and 50 can choose to be on the registry, which means offering potentially life-saving help to a random stranger (one cannot volunteer to help only one specific person). As I understand it, most transplants can be done non-invasively.

There are many people in need of this treatment, and there can be few things more satisfying than saving a life - any life. I am on the registry, although I cannot help my sister.

Here are the links for the registry in different countries:

Other Countries

bluebird said...

Stoneleigh - I am so sorry to hear about your sister. I am on the bone marrow registry for several years, but I don't know how they go about finding a match with over 8 million registry members. If permissible by the registry, I could email you with my donor profile number to see if I could be tested. Note that I am older than 50s, so I may be too old now. Hugs.

Anonymous said...

Hi Stoneleigh

I'll join the UK donor list.

I hope there's a match out there for your sister!

See you on tour I hope!

James, Coventry, UK

RobertM said...

I'm in my mid 50s....sorry I can't help. Best wishes to your sister.

g-minor said...


I checked the US Registry website and the cut off age is 60 rather than 50. While that still leaves me out, it might admit some other willing donors.


Stoneleigh said...

Thank you very much for your kind responses.

Hopefully something will work. Lymphoma can be unpredictable. Sometimes people manage to defy the odds even without sophisticated treatments. My friend's mother was told her case was terminal and she's now been cancer-free for ten years.

With luck we will find a donor, and if not we will still hope.

Bigelow said...

Sanctions on Iran's gasoline imports? That's war talk.

China Renders Iran Sanctions Toothless

Bigelow said...

“You know, I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss.” –The Matrix

Is there any other way to explain that the esteemed economic analysis company Trim Tabs, widely tracked by institutions and hedge funds, recommended a 100% long position in the U.S. stock market yesterday (up from 50%)?

Anonymous said...


So sorry to hear about your little sister. I hope she recovers. Yes, never lose hope.

Would she consider using alternative/holistic medicine -- herbs (Essiac tea, for example), a detoxification regime, etc.?

Best wishes!

Anonymous said...

"The Imminent Crash of Oil Supply: Be Afraid"

Mike said...

For Joe Bageant fans: The Middle Class Game Is Up: We're Heading to a Slave Labor Planet

scandia said...

@ahimsa...I came across the countercurrent article yesterday and haven't been able to sleep! Certainly , if accurate, changes the time line...

btraven said...

I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the "lower classes" have at least a decent life.

I'm not sure about this. From my vantage point the US has bifurcated: On one side is Main Street and on the other side is the Financial sector and Government (the banksters and their accomplices). I don't see that the banksters need to recognize anything about Main Street. The banksters hold the cards and can continue to drain money from both the real and phantom economies or get more "funny money" from the Fed/Treasury complex. In addition, their sights aren't limited to the U.S.

I really don't see any form of contrition or epiphanies playing a role here. A turn-around of government (massive efforts, heavily punitive of the banksters, and reinstatement of Glass-Steagall or something even tougher ), class war to drive away those not representing the best interests of Main Street, or creation of truly separate local real economies (using a new form of money or exchange, separate from the greenback) are the only things I can currently imagine that will make any kind of real change.

ric2 said...

Stoneleigh and Ilargi -

I was wondering if you guys have had a chance to read the FEASTA Tipping Point paper (pdf) posted on The Oil Drum a couple of weeks ago.

If you have, what are your thoughts? I think I remember someone posting about this here fairly recently, so I apologize if you guys have already commented on this.

Ilargi said...


Leafing though it, a see a very long rehash of age old points that, for instance, Stoneleigh and I have been making even way pre-TAE and ongoing, combined with fundamental misunderstandings of what comes next, and the human and societal dynamics in play.

You won't change the way the human mind works, and therefore also not the way the minds of the masses, societies, do.

And here I was resolved to not comment on anything coming from people who have the term "The economics of sustainability" in their organization's name.

Words like "green" and sustainable" are used these days only by those who wish to profit from them and those who don't know what they mean. FEASTA adds a poor knowledge of economics to the mix.

But I'm suer they all mean well, and yes, Stoneleigh has a far more "nuanced" opinion on them.


Anonymous said...


Yeah, scary stuff that's probably accurate. Michael Ruppert has said that the oil industry cooks its books as much as Enron did!

ric2 said...

Ilargi -

The "sustainable" in their organization's name is misleading. They are predicting full systemic collapse of global civilization within 2 years max.

Yes, they do indeed echo much of what you guys have been saying for years. They focus more on energy and less on finance/markets/herding behavior, and do so through lenses of thermodynamics and systems theory.

From the intro:

"This will evolve as a systemic crisis; as the integrated infrastructure of our civilisation breaks down. It will give rise to a multi front predicament that will swamp governments ability to manage. It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. The report argues that a managed de-growth is impossible.

We are at the cusp of rapid and severely disruptive changes. From now on the risk of entering a collapse must be considered significant and rising. The challenge is not about how we introduce energy infrastructure to maintain the viability of the systems we depend upon, rather it is how we deal with the consequences of not having the energy and other resources to maintain those same systems. Appeals towards localism, transition initiatives, organic food and renewable energy production, however laudable and necessary, are totally out of scale to what is approaching.

There is no solution, though there are some paths that are better and wiser than others. This is a societal issue, there is no other to blame, but the responsibility belongs to us all. What we require is rapid emergency planning coupled with a plan for longer-term adaptation."

Ilargi said...

New post up.

Blankfein, Pecora and the blinding limelight