The Dukes of Moral Hazard: The Dangers of Quantitative Easing

 

This brilliant and terrifying column was originally published at ProPublica and is republished here under a Creative Commons license. cc

by Jesse Eisinger
ProPublica, Nov. 10, 2010, 2:40 p.m.

sinking_shipAcross the world, there are booms. Chinese Internet companies are flourishing. Energy companies are finding new sources of power. Commercial real estate is coming back.

Unfortunately, this isn’t happening in the real world, which is still crippled by sagging economies, but in the investing one.

If there’s a doggy stock, a dodgy loan or a slice of a complex credit security made to a questionable borrower — hedge funds want it now. Companies with junk bond ratings are flooding the markets with new issuance. If private equity firms bring a money-losing company saddled with debt to market, investors are eager to snap it up.

Thank the Federal Reserve. The central bank has embarked on its program of “quantitative easing,” a second round of experimental monetary policy in which the Fed buys up assets — like longer term government bonds — to bring down interest rates, which is supposed to spur lending and borrowing, thus reigniting the economy.

Nobody knows whether it will work to bring down the intractable rate of unemployment. But it has already worked in one significant way: the speculative juices of the markets are flowing.

What’s going on? As a Fed official explained it in a recent speech, one supposed benefit of the Fed policy is that it will add to “household wealth by keeping asset prices higher than they otherwise would be.”

So it’s levitation-by-decree. When the Fed moves, financial assets receive the opposite of collateral damage: universal blessing, deserved or not. Lower rates may or may not help more people find work. But there’s no doubt that the central bank has already helped the Henry Kravises and Lloyd Blankfeins of the world.

The Russell 2000 stock index, which is made up of smaller companies, has risen about 21 percent since September, when investors started to anticipate that the Fed would intervene in an aggressive fashion. A tiny Chinese Internet stock, China MediaExpress Holdings, is up more than 250 percent since mid-September. The private investors that own Harrah’s, the money-losing casino company, are bringing it public, and investors are going to gamble on it despite a crushing debt load.

Then there are something called B notes, bonds backed by commercial real estate loans. B-note holders are on the hook for the early losses if the loans go bad. They are as hot a commodity as everything else. Never mind that there’s a huge oversupply of commercial real estate in this country. Or that Wall Street just went through a disastrous episode for complex structured financial products of exactly this sort.

Without knowing a thing about finance, here’s how to tell it won’t work out well. Wall Street is the great master of the euphemism. The Street doesn’t call them junk bonds; they are “high yield.” Here, something isn’t just Triple A. It’s “Super Senior Triple A.” So when the best investment bankers can do is to dress something up with a lowly “B,” you know it’s trash.

Leverage, meanwhile, has made a glorious return. Interactive Brokers, a discount brokerage firm, has been running an advertising campaign that displays money spewing from printing presses. The firm will lend (for certain special customers)$566,000 for every $100,000. Ah, borrowing heavily for the purposes of trading in volatile markets. Maybe some Bear Stearns or Lehman Brothers bankers can explain the wisdom of this.

All of this is Finance 101. The cheaper money is to borrow, the more it makes sense to take a bigger risk with it.

But that doesn’t make it more palatable. It feels like an ominous replay of recent Federal Reserve emergency actions, which led to bigger and bigger bubbles. The Fed brokered the rescue of Long-Term Capital Management, bailing out the investment banks that had lent to the collapsing hedge fund. The Fed pumped money into the economy to save us from the Y2K computer bug. The Fed tried to rescue the economy from the bursting of the Nasdaq bubble, helping to create the housing bubble.

It’s like the exhausted “Saw” movie franchise; this isn’t just a sequel. It’s more like the third iteration of the second reboot — harder core, baser and for serious liquidity heads only.

Is this the price society has to pay for a better economy? Do we care if some hedge funders get rich as long as unemployment goes down, fewer people get thrown out of their homes and household debts are less crushing?

That would be a worthwhile tradeoff. But it’s far from clear that the Fed can get any real traction with its policies.

Over the past year, I’ve been investigating some of the more egregious conduct that occurred in the bubble years. In this column, I’ll be monitoring the financial markets to hold companies, executives and government officials accountable for their actions.

A main focus will be the spectacle of returning speculation. It’s commonplace to lament Wall Street’s lack of a historical memory. But there is something different at work. Professional investors have learned the lessons of the financial markets’ serial bubbles and learned them well.

The lesson is: When the next one comes, I’m going to get mine. I’ll just get out early this time.

You can contact Jesse Eisinger at jesse@propublica.org

Today’s non-news: Millionaires optimistic while the rest of us worry about paying the mortgage

First from the Wall Street Journal:

Millionaire Optimism Hits 3-Year High

Now, the Washington Post:

Most Americans worry about ability to pay mortgage or rent, poll finds

Well now. I feel much better informed.

palm slap

Increase in foreclosure rate could mean banks knew they were seizing properties they didn’t actually own

In the 3rd quarter of this year banks repossessed a total of 288,345 properties – by far the largest quarterly total since the meltdown began. The 4th quarter of this year is likely to have the fewest repossessions of the meltdown because of “the decision by several of the largest lenders to halt filings after it was discovered that paperwork for many loans is missing or incorrect.” The increase is a sharp spike in the total number of repossessions. The 4th quarter numbers were a 7% increase over the previous quarter and a 22% increase over the same period of 2009. According to RealtyTrac: “A record total of 102,134 bank repossessions were reported in September, the first time bank repossessions have surpassed the 100,000 mark in a single month.

So, did the banks know what was coming and try to get as many properties safely in to their possession as they could before the hammer came down? If this is not the case then why the increase?

Now I am not a real estate lawyer – to put it mildly – so I don’t know the answer to the following: Is it legal for banks to foreclose if they know that they cannot substantiate ownership? My guess is no. I hope the 50 state attorneys general now looking into this hunt around for any signs of foreknowledge by the banks. If the banks were doing something they knew to be illegal – as opposed to just making more mistakes – then it raises the question of whether or not there was a conspiracy to commit fraud. Were any of this to be true it would worsen the already dubious condition of many banks’ balance sheets.

What makes this even more interesting that it was just yesterday that analysts were cooing over the better-than-expected earnings J.P. Morgan. This was one of the reasons the press gave for explaining the very odd fact that the Dow closed at or over 11,000 for a fourth straight day. It is worth noting that the Dow has risen more than 1,300 points since July 2, presumably on the basis of all the good economic news of late. Could someone please remind what that news was? Anyone? Bueller?

As long-time readers know I view the stock market as much more of a leading psychological indicator than an economic one. I am still hoping for evidence that will convince me otherwise.

THEN AGAIN IT COULD JUST BE A COINCIDENCE: Bill McBride, who writes Calculated Risk, says: The banks are still catching up on the earlier foreclosure moratoriums – and extended periods for trial modifications.  This surge in repossessions was expected and I think unrelated to “foreclosure-gate”

 

A guide for the perplexed to the economic mess

The problem with the economy is clear, but it’s been obfuscated out of most people’s minds. So, to put it simply: Financial institutions loaned out a huge amount of money against assets that are now worth far less and whose value is still falling. Somehow, someway, the difference between these two numbers has to reconciled. Simply put, money loaned (X) – current value of assets (Y) = amount of debt to be accounted for (Z). Solve the equation and you know exactly how solvent our economy is.

This week we have found out that Y equals even less of X than previously thought – and the previously thought numbers were already pretty bad. That is because banks screwed up the paperwork so badly they are having major problems proving they do indeed have a legal right to the homes they gave mortgages on. Short form: The banks effectively gave that money away. So the debit side of their ledgers just got a whole lot redder and Z just got a whole lot larger.

Bank_Failure_700_Billion Now Z was bad before this latest fiasco was discovered. How bad? Bad enough the banks and the government have gone out of their way to make to figure out what Z is worth. My theory is they believe – perhaps reasonably – disclosing Z will cause the world’s economy to go into freefall. Unfortunately Z is not going away. So because these groups cannot change the value of X and the value of Y keeps getting smaller, they have resorted to fiddling with the – and the =.

First, the government tried to purchase mortgage debt(X) from the banks. The problem with this is that selling X would mean declaring its value, i.e. providing a real number for Y. This would mean admitting what everyone knows – that a number of banks have debts well in excess of their assets.

Because this didn’t work, the government tried to alter the equation’s minus sign by giving banks enough funds to be able to withstand solving for Y. Under this plan we get X + $100s of billion – Y = Z. Given how hesitant banks were to take toxic asset relief payments (or whatever they’re calling it now) it is reasonable to conclude that Y = way more than hundreds of billions.

But wait, you say! Many of these financial institutions have already repaid the bailout money! Yes, that is true. However keep in mind, they repaid it with money borrowed from the government. This is robbing Peter to pay Paul as imagined by M.C. Escher. Those staircases are never going to meet up but it allows both the banks and the government to say that they do while hoping that no one reads the fine print.

So being unable to either 1) increase X enough to do any good or 2) stop the actual value of Y from declining, the government tried letting financial institutions play lets pretend with the book value of Y. Recent changes in accounting rules let institutions can the value of a property at what they think it would go for in an “orderly” sale, as opposed to a forced or distressed one. Or, to quote the head of the central bank of Wonderland: “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

What all those measures did was to allow the economy to continue to operate because we all pretended the problem would somehow go away. This is an attempt to put off the day of reconciliation until some time in the far distant future when someone will have figured out a solution that won’t hurt. However, this is impossible. The solution will hurt, and it will hurt a lot.

All talk of growing our way out of the recession is absurd. It is based on the belief that we can continue to increase the size of the economy as was done earlier in this decade. Let’s make one thing clear: The last decade’s worth of growth was funded by loans against assets that were never worth those loans in the first place. Trying to go back to that means continuing to believe in the fiction that it was ever sustainable in the first place.

The healthy economy of our future won’t resemble this in anyway. We will have to accept far more modest growth and lower our expectations about always having the newest stuff. We may have to pay our farm workers enough that those jobs, and others like them, because financially appealing to American citizens. That will mean paying a lot more for food and other things.The US has to become home to manufacturing again. This will mean enacting things – like tariffs – that a lot of powerful corporations don’t want. NAFTA and other free trade agreements are going to have to change drastically.

Of course, we don’t have to do these things. Regardless of what we do, though, the economic equation will be resolved and that debt will somehow be accounted for.

But hey, the Dow’s over 11K so no worries, right?

US has record number of millionaires, poor people, irony

Two news stories from the same day:

Millionaire Population Soars — Again

According to a new survey from Phoenix Marketing International’s Affluent Market Practice, the number of American households with investible assets of $1 million or more rose 8% in the 12 months ended in June. The survey says there now are 5.55 million U.S. households with investible assets of $1 million or more.

USA’s poverty rate reaches highest level in 51 years

A total of 43.6 million people lived in poverty last year, up from 39.8 million in 2008 — the third consecutive annual increase. Extended unemployment benefits lifted 3.3 million people out of poverty, compared with 900,000 in 2008.

Why I had to stop reading Michael Lewis’ The Big Short

I’m a fan of writer Michael Lewis. Liar’s Poker, Moneyball, Sandra Bullock Wins An Oscar, are all good books. As is The Big Short, his latest. I started reading it yesterday and by bedtime I was half-way through (it’s a short book and I’m a fast reader). When I got up this morning Mrs. CollateralDamage said I was making very unhappy noises in my sleep and I’ve felt on edge all day. I read some more of the book, realized I was getting increasingly agitated and finally put it down. This book is a non-fiction horror story, and one whose end we don’t yet know.

Daily Show gets it right again. The Big Short is about four people who guessed (and bet) right about mortgage-related ponzi scheme which has led to our current economic “downturn”. What is probably upsetting me about the book is that it confirms my most cynical beliefs about the world. Several of the people in the book repeatedly ask questions of bankers, bond raters, bond salesmen and anyone else they can find in hopes that someone can prove to them that all this buying and selling of sub-prime mortgage securities isn’t just a house of cards. They want to know because they are betting that it is and want to find out if they’ve just blown their money. That, my friends, is a motivated investigator. They are either told they don’t understand how this all works (which we quickly realize means the person who should understand doesn’t) or they are met with blank stares. They try to tell regulators, they try to tell other investors, they even try telling the investment bankers who created this train wreck what is about to happen. AND NO ONE WILL LISTEN. They are Cassandra’s writ huge – except that they make a crap load of money, whereas Cassie just had to suffer.

The other terrifying thing about Big Short, is that it confirms my greatest cynical fears: That most of the people in places of power are either corrupt or fools. Now you’d think that after eight years of George W. I would already have had these fears confirmed but there’s something about Lewis stories of smug, arrogant idiots/crooks gaming the system that scared the feces out of me. It doesn’t help that I really don’t see any reason for the economy to improve. The head of our bankrupt government wants to spend more money. His opposition thinks the best way to deal with the government’s being bankrupt is to keep in place a tax cut for the richest people in the nation. The banks are pretending they’re solvent. People keep saying it’s up to consumers to spend our way out of this mess but it’s overspending that got us into the mess in the first place.  And no one but no one is talking about what happened to all the debt created by the mortgage fiasco. Wall St. and the financial press seem to think that as long as the Dow is over 10K all is right in the world – EVEN THOUGH NONE OF THE PROBLEMS THAT GOT US INTO THIS HAVE BEEN ADDRESSED. Meanwhile no one who was responsible for any of this is going to jail and the nation continues to bleed money and people in two wars everyone knows we have no business fighting.

Sorry, Mr. Lewis, I can’t take anymore. I’m going to go read something much more soothing, like World War Z or John Dies At The End. As my old drinking buddy John Milton once told me, “Stare into the abyss long enough and it starts to stare back.” Well, at least St. Peter told me I was the nicest of the damned…

 

Who could possibly have seen the banking disaster coming?

What was the theory behind the Glass-Steagall Act? Foremost, it was meant to restore a certain sobriety to American finance. In the 1920s, the banker had gone from a person of sober rectitude to a huckster who encouraged people to gamble on risky stocks and bonds. As [chief congressional counsel Ferdinand] Pecora noted, small investors identified banks with security, so that National City salesmen “came to them clothed with all the authority and prestige of the magic name ‘National City.’” It was also argued that the union of deposit and securities banking created potential conflicts of interest. Banks could take bad loans, repackage them as bonds, and fob them off on investors as National City had done with Latin American loans. They could even lend the investors money to buy the bonds. A final problem with the banks’ brokerage affiliates was that they forced the Federal Reserve System to stand behind both depositors and speculators. If a securities bank failed, the Fed might need to rescue it to protect the parent bank. In other words, the government might have to protect speculators to save depositors.

Ron Chernow, The House of Morgan, 1990, pg. 375. (Emphasis added)

 

The repeal of Glass-Steagall was passed by Congress and signed into law by President Clinton in 1999.

The arguments made to repeal the act were primarily

  1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
  2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
  3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
  4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation

Emphasis added

Lies, Damned Lies and Black Friday sales figures

firesale-savingsStories about the success of Black Friday/Cyber Monday  are as inevitable as taxes and death but nowhere near as reliable. It goes like this: "Great Black Friday sales numbers mean a big shopping season. Insert somebody’s numbers to support this and then a quote or two from an analyst." Publish, forget, and hope no one notices that they are ALWAYS — even in good economic times — WRONG. In the past these stories have been an embarrassment. Now they are colluding with retailers to overcome the facts in the hopes that somehow shear massive denial will rescue us.

This isn’t whistling past the graveyard, it’s renting a whole symphony orchestra.

Although the actual sales figures would later show a whopping 0.5% increase in sales, here’s the AP’s early report on what should be called Bogus Saturday:

The nation’s shoppers took advantage of deals on toys and TVs with some renewed vigor in stores and online on Black Friday after a year of concentrating their spending on basic necessities. Though the first numbers won’t be available until Saturday, early reports indicated bigger crowds than last year, with people buying more and even throwing in some items for themselves.

“Though the first numbers won’t be available until Saturday”? That’s shorthand for “we’re making this up.”

Stores were encouraged that shoppers appeared to be a little freer with their spending. Best Buy, Sears Holdings Corp. and Mall of America, as well as mall operators Taubman Centers and Simon Property Group, offered signs people were buying more than last year.

“Offered signs”? Whiskey Tango Foxtrot?

An average of about 1,000 people were in line for midnight openings at Toys R Us stores, CEO Gerald Storch said. After setting aside 100 Zhu Zhu Pets hamsters for each location, Toys R Us came back with several shipments of the hot toy for several of its stores Friday.

And Mr. Storch is certainly an unbiased observer with no vested interest in the outcome of this story. Fortunately Mr. Storch’s “facts” were backed up by none other than Macy’s CEO Terry J. Lundgren. Lundgren said more than 5,000 people were at Macy’s Herald Square store in New York early Friday, slightly more than last year. (WHERE DO THESE NUMBERS COME FROM? Is there someone whose job it is to count the number of people in line? )

Having passed off the above as news, the AP then goes to a person-on-the-street for further uninformed opinion.

Dondrae May, a manager at a Best Buy in Framingham, Mass., said shoppers started lining up at 4 p.m. Thursday — 13 hours before opening. He said shoppers were filling their baskets with more items than a year ago, when they were shellshocked after the financial meltdown.

Everyone repeat after me: The plural of anecdote is NOT data. The plural of anecdote is NOT data. The plural of anecdote is NOT data. The plural of anecdote is NOT data. The plural of anecdote is NOT data….

At least Bloomberg had the decency to make it clear the adjective for the sales figure was alleged, not proven.

Retailers reported “strong” shopper traffic on Black Friday as discounts on televisions, toys and computers drew budget-conscious crowds across the U.S., the National Retail Federation said.

Although Bloomberg also cites a retail CEO (Best Buy) as saying sales are better, they don’t pass off his opinion as anything but that. (BTW, Storch & Dunn’s questionable numbers are also quoted in the Bloomberg story and in the Wall Street Journal. Some PR agency is earning its commission!)

That said, Bloomberg does pass along this piece of genius seemingly without pausing to ask where these statistics come from:

“There’s a little more traffic than last year across the board, maybe 10 percent,” Bill Taubman, chief operating officer of Taubman Centers Inc., a U.S. real estate investment trust with 24 malls, said in a telephone interview yesterday.

Thank G-d for the Wall Street Journal which had the common decency to run a story poking holes in all these predictions.

Black Friday’s predictive powers are limited. Although the day after Thanksgiving was the No. 1 shopping day in terms of sales last year, when economic turmoil made it a retail free-for-all, it typically is eclipsed by the last Saturday before Christmas. Similarly, "Cyber Monday," the Monday after Thanksgiving, hasn’t been the top day for online sales since the term was created five years ago.

Why I don’t believe in this recovery

What’s the opposite of cherry picking? Prune picking? This may be an exercise in that but this “recovery” looks like smoke without mirrors. Here’s a reader of items that explain my thinking.

First, the decrease in the rate of unemployment as positive sign is pure spin and doesn’t reflect the actual situation at all.

The Spin: Sept. 17 (Bloomberg) — The number of Americans filing first-time claims for jobless benefits fell unexpectedly last week, a sign the labor market is deteriorating at a slower pace as the economy pulls out of the recession.

A: NEW YORK (CNNMoney.com) — Five states posted jobless rates above 12% in August, according to federal data released Friday. California, Nevada and Rhode Island each hit record-high rates, the Labor Department said. Michigan led the nation in unemployment, with a rate of 15.2%, while Nevada was next at 13.2% and Rhode Island was third at 12.8%. California and Oregon were tied for the fourth spot, each with unemployment at 12.2%.

B: After reviewing the various unemployment calculations maintained by the Bureau of Labor Statistics, I have come to the conclusion that the U6 calculation (Unemployed, discouraged and underemployed workers) is the most relevant, which increased 0.5 percentage points in August to a whopping 16.8 percent, representing a total of roughly 20 million people in the U.S. And remember, this is “less bad”.  I like that the U6 number includes underemployed workers, because these are people that have jobs but aren’t making as much money as they are accustomed; they have been forced into part time work. This can impact payments to ARM companies.

Second, housing starts are at a nine month high! Great, just when a huge amount of housing stock is about to be dumped on the market, aka, more foreclosures.

The Spin: Sept. 17 (Bloomberg) — Housing starts in the U.S. rose to the highest level in nine months … adding to evidence an economic recovery is taking hold.

A: WASHINGTON (Reuters) – The federal government and states are girding themselves for the next foreclosure crisis in the country’s housing downturn: payment option adjustable rate mortgages that are beginning to reset. "Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama’s administration to discuss ways to combat mortgage scams.

B: While this index (and single family starts) are well above the massively depressed levels recorded late last year and early this year, this has in all likelihood been a rebound from unsustainably weak results that was reinforced by a temporary boost to demand from the $8000 first time homebuyer tax incentive that applies to purchases that close before December 1. Gains from here on will probably be much more difficult to achieve, as poor labor market conditions, tight credit, overly leveraged household balance sheets, and still considerable inventory of new and existing homes all exert downside pressures. –Joshua Shapiro, MFR Inc.

And who is relying on all those mortgages to keep it out of bankruptcy? No, not the banks but the US government.

 The Fed’s balance sheet expanded again in the latest week, rising to $2.125 trillion from $2.072 trillion, but the increase came primarily from purchases of mortgage-backed securities, Treasurys and agency debt. Holdings of mortgage-backed securities alone jumped by nearly $60 billion, and now make up nearly a third of the overall balance sheet. The Fed started a program in March to ramp up such acquisitions in order to keep long-term interest rates low. Nearly all of the programs set up as emergency facilities to prop up the financial system posted declines. Direct-bank lending remains at its the lowest level since the collapse of Lehman Brothers, and central-bank liquidity fell again. The commercial paper and money market facilities also dropped and are at their lowest levels since inception. Companies lately have decided to take their funds out and tap investors directly as sentiment in the market improves. The only emergency facility posting gains was the TALF program aimed at spurring consumer lending.

Take note of which parts of the government are being particularly hurt:

WASHINGTON – The Federal Housing Administration said Friday its cash cushion will dip below mandated levels for the first time, but officials insist it won’t need a taxpayer rescue. The agency, a growing source of funds for first-time homebuyers, faces mounting concerns that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

WASHINGTON (Reuters) – U.S. bank regulators will meet at the end of the month to explore options, possibly including some that are not well-known, to replenish the dwindling fund that safeguards bank deposits, the chairman of the Federal Deposit Insurance Corp said on Friday.

By December 2010 the state expects its unemployment trust fund, which is being tapped $31.7 million per month, will run out. The fund, which contained $430 million at the end of 2008, could dip to $118.5 million by year’s end. … Hawaii is not alone; at least 14 other states are insolvent, and four more are on their way. (Emphasis added)

But the stock market broke 9800 yesterday, so happy days are here again.

Welcome to the boomtown
Pick a habit
We got plenty to go around
Welcome, welcome to the boomtown
All that money makes such a succulent sound
Welcome to the boomtown

David & David, Welcome to the Boomtown

The least comprehensible start of a news story – ever?

Orders placed with U.S. factories rose less than forecast in July, restrained by a decline in non-durable goods such as oil and food that masked a jump in demand for new equipment that was larger than previously estimated.

This is the journalistic version of TMI. You can’t get it all in the lede and it will only hurt if you try.

I will try to translate what I think was meant: The orders for stuff from US factories didn’t hit the July estimate because of a decline in non-durable goods like food and oil. That’s as much sense as I can get out of this and even that sense is dubious. Is it the production, demand or sales which declined? Whichever one allegedly masked a larger-than-expected increase in demand for new equipment. How do you mask a jump? Is there some stealth technology for statistics that masks an increase? Or maybe some masking agent such as is used by athletes wishing to hide steroid consumption?

If the purpose of the lede is to get me to read the rest of the story this one just got me to reach for the ibuprofen.

Despite the meltdown too many still think money = brains

bank-zombie-3 Turn a profit and you must be a genius, despite two successive bubbles that is still the essential view of too many.

Yesterday Goldman Sachs reported record earnings mostly because they are profiting from a government system they (or their former-for-now employees) helped create.

In the wake of Countrywide, Madoff, Bear Stearns, Enron, AIG, etc., etc., it would be nice to think a we had acquired even a slight sense of skepticism. But even many of our supposedly cynical reporters rushed to gush over Goldman winning a rigged game.

Here’s NPR’s Yuki Noguchi on All Things Considered: “Dick Bove is senior vice president of research at Rochdale Securities. He says Goldman suffered during the crisis. It shed 16 percent of its workforce in the last year. But what revived Goldman, Bove said, is the diversity of its business and its superior internal systems. So while some aspects of its business falter, the rest goes gangbusters.”

“Superior internal systems”? Is that a euphemism for no competition left standing? Nor is she alone in using effusive praise in the place of actual facts. Reuters quotes Michael Holland as saying:

What they have continued to do during the worst financial crisis in 25 years shows that they are the smartest guys in the room and, therefore, it doesn’t necessarily translate to the other people who are in the room.

“The smartest guys in the room.” Mr. Holland uses the old Enron catchphrase without a trace of irony. Here is a view from Australia:

The fact Goldman Sachs made as much money in the second quarter as it did for all of 2008 is undeniably good news. It shows markets are open for business, and given that many of its peers are dead or recovering the investment bank demonstrates the benefits of well judged risks.

The markets are open for business? Doesn’t the second half of that sentence beg a few questions of the first half?

No surprise that our elected officials are only too happy to jump on board the bandwagon. Richard Shelby, the top Republican on the Senate Banking Committee: "I’m not surprised. Goldman Sachs has a history of being well run and sometimes ahead of the others."

All this happy talk leads to a rise in the markets which is used as further evidence of the brilliance of Goldman, et al. It was only two and half years ago when Countrywide was considered one of the most esteemed companies in the US.

Anyone remember that?

Anyone?

Bueller?

Thankfully not everyone is falling for it. Over at the Washington Post, Binyamin Appelbaum even put some skepticism in the lead: “… as the decimation of its Wall Street rivals allowed the investment bank to romp across the financial landscape, buying low and selling high.” While Goldman has repaid its $10 billion government loan, Applebaum (and a few others) had the temerity to point out that the company “has not disclosed to what extent it continues to rely on other federal rescue programs, such as borrowing from the Federal Reserve.”

New game is a wonderfully bitter version of the economic mess

crunch-box-3D

“Crunch, The Game For Utter Bankers” is a card game for anyone with a distinctly gallows sense of humor:

[It] allows you to experience the upside of down. Placed in the role of a global banking CEO, you have to juggle the conflicting demands of your ailing bank and your flourishing bank account. … Each player starts the game with a number of Assets in their bank, a small workforce and a few Trust cards. Trust is essential to your bank’s survival. Not only will capitalism falter without it, but each Trust card hides on the reverse a potential Government Bailout.

card-rebrandThis  is the latest product from the fine warped folks at TerrorBull Games and – judging by the website — it is as bitter and cynical as their last number: War On Terror: The Board Game. (Does anyone do bitter better than the Brits? They have a cultural gift for angry commentary that I have never seen equaled: Waugh, Ralph Steadman, Francis Bacon, Martin & Kingsley Amis, Thackeray, Joe Orton – the list just goes on and wonderfully on. While the US has some fine satirists only Mencken really ranks for among the great acidivists.)

An average game sees you bribing your way out of government investigations, fending off aggressive takeovers and forcing debt onto the unsuspecting public. Meanwhile, reward your hard work by taking inappropriate bonuses and – when no one’s looking – brazenly embezzling your bank’s own funds and hiding them about your person. Crunch is unique in that to win, players are coaxed into cheating.

Fittingly, the game will hit stores on April 1, but it is NOT a prank.

Full disclosure alert:

  • I have not played the game yet.
  • I am being given a free review copy.
  • The company has wormed its way into my heart by sending a free copy of War On Terror to a friend who is currently deployed in Afghanistan.

That said, if the game is half as fun to play as the website is to read it will be great.

card-toobigtofail Although the problems inherent in, say, spending over a trillion dollars on a war, while your country’s exports diminish year-on-year, would be apparent to the average school child, somehow everyone seemed caught off guard by this. And, being simple people, we started looking around to find out who to blame. …

Unfortunately, you can’t bomb the economy into shape, so looking for culprits was largely a waste of time. Even when bank bosses finally came under fire, it all felt like a bit of a diversion. Like sitting in an upturned, burning car and taking that moment to try and work out where you went wrong, when the car itself has no breaks, no steering wheel, tyres made out of butter and wood instead of glass for windows. And it’s not even a car, it’s an angry lion on roller skates and you’ve been trying to drive it.

Not sure if this will be as much fun as some tar and feathers – but I have my hopes up.

Easy way to tell truth from spin on fixing the banks

Originally ran at BlownMortgage

There’s way more chaff than wheat in the air when it comes to understanding what’s wrong with the bank. Because of this it can be easy to get caught up in jargon and sound-bites and lose track of what the issues really are.

Two National Public Radio entities are doing a superb job at managing the noise-to-signal ratio. One is the show This American Life and the other is the blog/podcast Planet Money (the Planet’s pieces are also heard on regular NPR news shows). The two shows frequently team up and their latest look at the the big picture – entitled Bad Bank — is particularly worth listening to.

In the episode, Adam Davidson and Alex Blumberg explain in an easy-to-understand-without-being-stupid way exactly what went wrong. They also make a strong case for some very simple solutions. Not fun. Not easy. Just simple. These solutions are simple enough that it is also easy to see exactly why no one in power is yet willing to initiate them.

Alex Blumberg: If you want to understand this crisis right now, this banking crisis, you need to understand this one thing. And it’s one thing, Adam, that the mainstream media is afraid to touch.
Adam Davidson: They’re afraid because they think it’s really boring.
Alex Blumberg: Right because, what this central thing is, this thing that we need to discuss right is a bank balance sheet.
Adam Davidson: But please, do not despair, because we think we’ve come up with a way to explain this to you, and we actually think it will be pretty enjoyable. So, to begin, let’s imagine the simplest bank in the world. I would like to call it Adam’s Bank.

The pair then go on to explain the basics of mortgages and how banks work and make a profit in an amusing and interesting way. They do this by using an imaginary mortgage on an imaginary dollhouse and with the help of various experts like Columbia Business School professor David Beim.

Alex Blumberg: David Beim is saying, you don’t want to mark it to market. Mark to market, that’s another phrase you might have heard. And it applies to exactly the situation Adam is in right now. He’s got a dollhouse on his books for 100, but if he had to sell it now, he could only get 50 – that’s the market price, what he could get right now. Marking it to market means Adam would have to enter the market price – 50 dollars – or 20 dollars – or whatever it really is – into his books.
BEIM: And the bankers have all been saying ‘please don’t make me do that,’ because if you do, I’ll be declaring bankruptcy. If I show all those, the reduction from 100 all the way down to 20, you’ve just wiped out my entire capital and more, I’m going to have to go to the government and say, close me down, I’m broke. And bankers find that hard to do. and furthermore, regulators don’t want it to happen to all the banks at once. Certainly not all the big ones.
Alex Blumberg: Now obviously, in the real world, the assets that the banks have on their books are more complicated than dollhouses. But, if the banks had to sell them now, in today’s market, they’d almost certainly take a huge loss. A loss big enough to wipe out their capital and shut them down.

Also helping out is a former IMF economist named Simon Johnson and it is Johnson who lays it all out in language so clear even a politician, CEO or journalist can understand it.

JOHNSON: You know, what would the U.S. tell the IMF to do if this were any country other than the U.S.? If you covered up the name of the country, and just showed me the numbers, just show me the problems, talk to me a little about the politics in a generic way. With the financial system, you have a boom, and then the crash, what would the U.S. tell the IMF to do, I know what we would do, I know what the advice would be, and that would be, take over the banking system. Clean it up, re-privatize it as soon as you can.

Account for the bad debts, throw out the bad management, take the hit and move on. That really is the only way out of this mess. Until that happens – and it doesn’t matter if you call it nationalization or some other euphemism – nothing will change. Keep that in mind when listening to the chattering classes and it becomes quite easy to know when you are being lied to.

Bernanke consumer plan = selling sand to Saudi Arabia

My latest rant from BlownMortgage

How deaf is Ben Bernanke? With the US savings rate hitting a 14-year-high, the Fed unveils a $200B plan to “aimed at boosting the availability of credit to consumers and small businesses.” While I hope this will be of use to businesses in need of it, consumers have already made it clear they’re not interested.

As Morgan explains:

The government is trying to inject liquidity in to the ABS markets for ABS comprised of auto loans, student loans, credit card debt, home loans, etc. The idea being that investors have not bought these securities because they have been unable to secure financing to purchase them through the private sector. The government will make financing available to those investors that purchase AAA-rated ABS to try to reopen the market and make more credit available to main street USA.

I guess the theory is consumers will ignore EVERY SINGLE PIECE OF ECONOMIC INFORMATION AVAILABLE and decide to buy stuff because the credit is now available. At a moment when we are losing (conservatively) 600K jobs A MONTH, who in his or her right mind is going to buy a new car, house, or hot tub? ESPECIALLY when prices are being pulled toward terminal velocity. If consumers did this it would be so far past irrational as to call it “insane exuberance.”

Dear Ben, a lesson from Marketing 101: In order to be successful a product has to fill a need in the marketplace. Consumers don’t want debt! Not only do they not want debt, they’re not going to spend the money they already have. So there’s no way you’re going to get them to purchase stuff right now. Consumer behavior is now a lagging, not leading economic indicator. Consumers will start spending after — NOT BEFORE — the economy gets back on track.

Read more by going here …

Retailer’s top flack “intrigued” that “cheap is chic”

“What’s so intriguing these days, whether you work on Wall Street or in Wal-Mart is that it has absolutely become chic to be cheap. It’s all about price. Factors like quality, selection, store location and customer service are taking a back seat. We believe this will continue for the foreseeable future.” — Tracy Mullin, president National Retail Federation.

Ms. Mullin is now the front-runner to be named Secretary of The Obvious.