Keeping track of the TARP

TARP COP: Get tough on banks

The top cop tracking the $700 billion bailout program said Monday that he's concerned federal officials are ignoring his proposals for preventing tax dollars from being wasted or pilfered.

Neil Barofsky, the special inspector general overseeing the Troubled Asset Relief Program, released a 260-page report detailing a long list of concerns about government efforts to prop up hundreds of banks, Wall Street firms and auto companies.

The report criticizes the Treasury Department the most for its unwillingness to adopt some of his recommendations.

Barofsky cites two examples: He wants Treasury to force bailout recipients to keep track of how exactly they are spending TARP funds. He also wants officials to erect a "firewall" to prevent private investment managers -- the kind hired to manage and invest taxpayer dollars -- from taking advantage of insider knowledge.

I guess it is too much to ask Treasury to:

a) ask TARP recipients to keep track of where the money is going
b) discourage insider trading

"This administration promised an 'unprecedented level' of accountability and oversight, but as this report reveals, they are falling far short of that promise," Issa said. "In fact, the Treasury Department is actively obstructing transparency. The American people deserve to know how their tax dollars are being spent -- especially considering they are the ones who are footing the bill."

The brazen, unapologetic manner in which the self-anointed aristocrats of our nation are selling the rest of us down the river is literally breathtaking. We are quickly becoming a Banana Republic, and few seem to care.

It's like deja vu all over again

It's great to see that Wall St. has gotten over the Great Hiccup of 2008 and it's back to business as usual:

Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Two years after the credit markets began to seize up, costing the world’s biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so- called structured finance securities and turning them into new debt investments with top credit ratings. While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

It seems as though dogs are not the only ones that lack a short term memory.

It also reminds me of an old saying, "no matter how good the recipe is, you'll never make chicken salad out of chicken shit."

What not to name a company

Surely there are many examples in the business world of a company living to regret the name of a product or a joint venture. The first one that comes to mind was when Chevy rolled out the Nova in Mexico back in the 70's without considering that in Spanish, "no va" means "no go."

Today we learn that Russia's Gazprom and Nigerian Gas are teaming up in a joint venture that should provide a boost to Nigeria's state revenue.

The name of this new company will be NiGaz Energy Company, Ltd.

Testing the waters

One of my current concerns as I voiced in a previous post is that the Obama administration may try to take over the Federal Reserve by using the strong arm of a Democratic Congress. Looks like they may be testing the waters:

Bloomberg article: Fed Said to Retreat From Seeking Power to Sell Its Own Bills

At the House Budget hearing, a lawmaker brought up the idea of making Fed district-bank presidents subject to Senate confirmation. Currently the presidents are nominated by the banks’ boards of directors and approved by the U.S.-appointed Fed governors in Washington.

Representative Marcy Kaptur, an Ohio Democrat, asked Bernanke during the hearing whether he supported the idea. “No,” the chairman replied.

“The last thing the Fed wants is for its independence of monetary policy to be challenged,” said David M. Jones, president of DMJ Advisors LLC in Denver and a former Fed economist. “It’s very unlikely this debt thing would be pursued.”

It's official: Congress and the SEC are insane

Insanity has been defined as the repetition of the same task with the expectation of a different result. If that's the case, then the SEC and Congress offer a text book example:

US Lawmakers Push Short-Selling Changes Following Report

A bipartisan group of U.S. senators said the SEC needs to consider new restrictions to help quell naked short selling, including a possible requirement that short sellers borrow shares before they try and sell a stock short. Naked short selling occurs when a trader sells shares that are not actually in their possession, potentially creating downward pressure on the price of shares.

"Unless the SEC can develop an appropriate alternative, a strict pre-borrow requirement may be the only way to adequately protect shareholders' rights," Sen. Charles Grassley, R-Iowa said in a joint release with Sen. Carl Leving, D- Mich., and Sen. Arlen Specter, D-Penn.

Last time I checked, it was already a requirement to get a borrow before you shorted a stock. The problem has been and remains enforcement.

One thing is certain. We'll need a vast new bureaucracy to enforce this groundbreaking new legislation.

In other news, my dog's breath smells like dog food.

Observing the weathervane

This quote summarizes this week’s sentiment rather succinctly: "There will likely be a growing steady recognition that in trying to prevent a Depression, the transfer of risk has been shifted from the private sector to the public purses and this may create a longer, more drawn out problem."

• Geithner admits overnight that the US credit rating is in jeopardy in light of our heavy issuance
• PIMCO's Bill Gross said the U.S. will eventually lose its AAA rating
  
• Moody's did say Thursday it is comfortable with the triple-A sovereign rating on the United States, but it is not guaranteed forever
• Goldman Sachs said the hike in oil prices this week was due to real oil market fundamentals and not just hedging against a weak dollar and equity market rallies. "The oil market was shocked by disruptions in Nigeria, refinery problems in the U.S. and a strong gasoline market," Goldman said in a research note. (Not sure why they think they have any credibility. Last year when oil was at $140/bbl they were calling for $200/bbl by year end. Their prop desk was probably getting short on the call, but I digress...--Ed)
• US Treasury was getting hit hard at the end of the day yesterday as the market was getting ready for big new supply coming next week - $101B of fresh Treasuries to be auctioned
• WAPO reported that the Obama administration is preparing to send GM into bankruptcy as early as the end of next week under a plan that would give the auto maker tens of billions of dollars more in public financing
• Mastercard will lose more than half of a $59B portfolio of debit-card users after JPMorgan Chase & Co. decided to shift more business to Visa
  
• The FDIC seized BKUNA, the 34th bank failure of the year, with $12.8B in assets, $8.6B in deposits and 85 branches
• AIG announced that Chairman and CEO Edward Liddy will step down and also proposed a 1-for-20 reverse stock split

I think that at some point in the not too distant future the Obama Administration, with the help of Congress, will attempt to take over the Fed. I bet the majority of Americans will see nothing wrong with that, at least the ones who have no idea (and don't care to have one) what the Federal Reserve system is and why it was created in the first place.

The elephant in the room

Bruce Bartlett at Forbes does a good job of quantifying exactly what it would take to fully fund all of our upcoming Social Security and Medicare liabilities.

The 81% Tax Increase

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."

The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.

Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government's ability to pay benefits that have been promised. In a very technical sense, it would lose the ability to pay benefits in excess of current tax revenues once the trust fund is exhausted. But long before that date Congress would simply change the law to explicitly allow general revenues to be used to pay Social Security benefits, something it could easily do in a day.

Social Security's actuaries make such a calculation on page 64. It says that Social Security's unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. In effect, the capital stock of the nation would have to be $17.5 trillion larger than it is right now. Alternatively, the payroll tax rate would have to rise by 4%.

To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. So if we were to fund its deficit with general revenues, income taxes would have to rise by 1.3% of GDP immediately and forever. With the personal income tax raising about 10% of GDP in coming years, according to the Congressional Budget Office, this means that every taxpayer would have to pay 13% more just to make sure that all Social Security benefits currently promised will be paid.

That's just the social security portion--the baby elephant. Let's have a look at the real elephant--Medicare:

As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. Thus every taxpayer would face a 28% increase in their income taxes if general revenues were used to pay future Medicare part A benefits that have been promised over and above revenues from the Medicare tax.

But this is just the beginning of Medicare's problems, because it also has two other programs: part B, which covers doctor's visits, and part D, which pays for prescription drugs.

The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever (p. 127).

To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.

I see three solutions to this problem as it exists today:

A) cut benefits
B) massive tax increase
C) hyperinflation

We're in this mess precisely because government refuses to make hard choices and instead just kicks the can further down the road, so the chances of A) happening are slim to none and slim just walked out the door. Imagine the mass of baby-boomers rolling their walkers up to Capitol Hill after beating their canes into clubs the minute some unfortunate congressional rube dared to suggest a cut in benefits.

Surely B) will be tried, but an 81% tax increase would result in some very unpleasant blow back from anybody still left in this country who produces anything of value. Since Congress has already allowed our monetary base to double from $900bil to $2 tril since last October, C) seems the likely choice. I reckon it won't be long before investors in US government debt begin to demand a risk premium. There's already anecdotal evidence that recent treasury auctions have not gone as smoothly as planned. At that point, "backed by the full faith and credit of the United States" will have about as much meaning as "the check's in the mail."

There are ways to combat hyperinflation, and I may be hyperventilating with hyperbole, but since our government has a proven track record of taking the easiest route possible, what's to stop them from doing it yet again?

Ask me no questions, I'll tell you no lies

Greenmail: Money paid by a company (or allied company or individual) to acquire its own shares of stock from a shareholder who is threatening to take control of, or unwanted influence over, the company. The term is a neologism combining the terms greenback and blackmail, invented by journalists and commentators who saw the practices of corporate raiders as a form of blackmail. The target company is financially held hostage, and is legally forced to pay the greenmailer to go away.

Jonathon Weil makes some interesting observations about a recent unsolicited payment from Goldman Sachs to the Commonwealth of Massachusetts:

Goldman Sachs Pays Greenmail to make Snoops Go Away


May 14 (Bloomberg) -- Thanks to the commonwealth of Massachusetts, crusading attorneys general throughout the land now have a road map for extracting multimillion-dollar checks from Wall Street banks such as Goldman Sachs Group Inc.: Don’t accuse them of anything at all.

The big news from Goldman and Massachusetts Attorney General Martha Coakley this week was a $60 million settlement, under which the investment bank resolved her office’s investigation into its packaging of mortgage securities backed by subprime home loans. Per the usual custom in such accords, Goldman didn’t admit any wrongdoing.

The odd part is that Coakley’s office didn’t accuse Goldman of any wrongdoing, either. It filed no lawsuit. And it made no allegations that Goldman had violated any statutes or rules.

Why did Goldman pay if Coakley’s investigators couldn’t identify any infractions to allege? That’s a mystery. The only statement I could squeeze out of Goldman was a one-liner from a P.R. man, Michael DuVally. “Goldman Sachs is pleased to have resolved this matter,” he said. I’ll bet it is.

Odd behavior from an investment bank--sorry, holding company-- not exactly known for spending money frivolously.

When I first read through the settlement agreement, which contained no findings of fact, I couldn’t help but wonder if this might be one of those instances where a prospective plaintiff agrees to take a payoff in exchange for keeping silent about any damaging information it knows.

You Have to Wonder

Coakley said it was a fair question. She assured me, though, that this wasn’t the case. “There was no smoking gun here,” Coakley said. She said Goldman’s $60 million offer was everything her office could have hoped for, especially given its limited budget and jurisdiction over the bank’s activities. Even if the state had filed claims against Goldman, “we would not be able to achieve a better result,” Coakley said.

That may be true. It’s also conceivable that Goldman had no legal liability, and decided to pay the equivalent of a parking ticket just so it could get the investigation over with and stop racking up bills for outside lawyers.

Yet there’s the inescapable feeling that we have no idea what really happened here. Those 714 borrowers may be getting compensation. What much of the public is looking for, though, are answers about how some of the nation’s most powerful Wall Street banks helped drive us into our present economic mess.

We didn’t get any this time. Perhaps that’s one reason Goldman is so pleased with this investigation’s resolution.

Trickle up poverty

Ed Yardeni once again nails it:

The politicians in Washington, DC have an advantage over many of us: They don’t work for a living. So they have plenty of free time to figure out ways to take money away from those of us who do. Working stiffs like us don’t have much time to stop them. We need a national Tea Party to check and balance the Kleptocrat Party running amuck on both sides of the aisle of our nation’s capitol. On April 15, there were tea parties in several cities around the nation to protest ballooning federal deficits and rising taxes. Most of the demonstrations were held during lunch time when people could get away for an hour from work!

The authors of our Constitution intended that it would protect the liberties of the individual and limit the power of the government. They intentionally designed a political system of checks and balances so that it would more often than not result in gridlock. Both the Democrats and the Republicans, and all the special interest groups that support them, have been chipping away at this system for decades. Rather than fight one another to a draw, they’ve come up with lots of compromises, and have compromised the checks and balances system. They couldn’t have done so if their spending were constrained by a balanced budget amendment. Nevertheless, until this year, there was some sense of fiscal limits, if not discipline left in Washington. This is no longer the case.

The current Administration has proposed, and Congress is likely to enact, a dramatic expansion of social welfare spending over the next 10 years. At the same time, more and more Americans are getting excused from paying any taxes if their incomes are low enough. Many may effectively benefit from a negative income tax. That leaves fewer and fewer Americans to pick up the government’s tab. These remaining taxpayers may be relatively well off, but there aren’t enough of them to pay the government’s bills. So the federal government is scrambling to find new taxes, though such taxes won’t come close to filling the gap between federal spending and revenues. Let’s review some recent developments focusing on the government’s trivial pursuit of additional nickel-and-dime revenues:

(1) The Office of Management and Budget now estimates that the deficit will be $1.84tn this fiscal year, a 5% increase over the Administration's estimate released in February.

(2) Over the next 10 years, the federal deficit is projected to total nearly $10tn. The Administration proposes to cut taxes by $736bn for middle-income families and $99bn for small businesses during the same period.

(3) Over the next 10 years, the Administration hopes to raise $210bn by closing tax loopholes for multinational corporations. This is likely to put US corporations at a competitive disadvantage since most other countries don't require their companies to pay taxes on foreign earnings.

(4) Over the next 10 years, $58bn in additional tax revenue will come from changing the way assets in estates are valued ($24.2bn), from modifying rules for some life insurance company products and contracts ($12.8bn), and from changing the way income is treated for some dealers of equity options and commodities ($2.6bn).

(5) Treasury officials also recently outlined plans to eliminate $36bn in tax breaks for oil companies for activities such as exploration and drilling and to reinstate excise taxes used to help clean up federal Superfund environmental sites. The excise taxes expired in 1996 and would generate about $16.7bn over 10 years.

(6) On April 20, President Obama convened his Cabinet for the first time, and ordered its members to identify a combined $100mn in budget cuts over the next 90 days. That’s millions, not billions.

The long-term problem is that the federal government continues to expand nondiscretionary spending on more social welfare programs. These are open-ended commitments that are politically difficult to cut. They also create an unhealthy codependence as more Americans depend on the government, and politicians expect that the beneficiaries of government spending will keep them in office. In personal income, government social benefits were equivalent to 31% of wages and salaries in March. That’s a record high. During the 1960s, it was around 10%. By the 1980s, it was around 20%. The gap between these benefits and employee and employer payroll taxes to pay for them widened from nearly zero at the start of 2001 to a record $514.5bn in March of this year.

This morning, Bloomberg reports that the Social Security trust fund will run out of assets in 2037, four years sooner than previously forecast. Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago. The current Administration claims that their reforms of the health care industry will lower growth in health-care costs even as they push to make sure that all Americans have access to “affordable” health care. In a statement yesterday, Treasury Secretary Tim Geithner promised that after pulling off this miracle, the President will “build a bipartisan consensus to ensure the long-term solvency of Social Security.” David Axelrod, a senior White House adviser, said that Obama is “committed to a serious effort to confront that issue.” Good luck with that. Then again, it took a conservative president to recognize China. Maybe a liberal one can finally reform Social Security by imposing means testing. That should be popular with all the populists that support this Administration’s social welfare policies.

(H/T Yardeni Research)

The noose tightens

“You never want a serious crisis to go to waste — and what I mean by that is an opportunity to do things that you didn’t think you could do before.”--Rahm Emanuel

Today, governments around the world are taking power back from free markets, particularly financial markets, under the pretext that they have failed. In fact, the markets were hobbled by a combination of anti-market regulations and the lack of enforcement of regulations that leveled the competitive playing fields. In the US, the power grab is spreading to banking, autos, energy, and health care. Here is a brief chronology of recent developments around the world in this epic power struggle:

(1) It started with TARP, which was proposed by Hank Paulson and Ben Bernanke and enacted by Congress on October 3, 2008. This politicized the financial rescue program in the US. It gave the government the power to dictate how recipients must manage their companies. On October 13, Paulson forced nine major banks to take some of the TARP money even though most of them didn’t need it or want it.

(2) In December, Ken Lewis, the CEO of Bank of America, had buyer’s remorse after having agreed to purchase Merrill Lynch in mid-September. Mr. Lewis contends that Paulson and Bernanke also advised him not to share his second thoughts with BofA shareholders who were about to approve the deal.

(3) On February 26, the Obama administration unveiled its budget, which includes significant increases in spending on social welfare, especially health care. The resulting deficits are projected to total more than $9tn over the next 10 years.

(4) On March 30, 2009, the White House fired Rick Wagoner, the head of General Motors. The Obama administration is orchestrating the restructuring of the auto industry. President Obama declared that the US government stands behind GM's warranties.

(5) The government is pushing legislation aimed at bringing down credit card fees.

(6) The Obama administration is pushing to have student loans made by the government rather than private lenders.

(7) Democrats in Congress are moving to make the Obama administration’s health care proposals filibuster proof by pushing the proposed legislation as part of the budget reconciliation process.

(8) In Russia, the government is in effect nationalizing the industries that were once controlled by the oligarchs, who borrowed too much and must now be rescued by their comrades in the Kremlin.

(9) In China, the government is pumping large sums of money into infrastructure projects aimed at stimulating economic growth to offset the shuttering of thousands of manufacturers as a result of the plunge in exports.

(10) Governments are raising taxes, especially on high income earners. The Bush tax cuts will be allowed to expire at the end of 2010. States from New York to California are raising income tax rates and user fees. Prime Minister Gordon Brown’s government laid out plans on Wednesday for more than $1tn in deficit spending over the next five years, a scale of public debt that critics say is without precedent in Britain. In addition, his government now plans to hike the top marginal income tax rate from 40% to 50%, rather than to 45%.

(h/t Ed Yardeni Research)

Congress and NASCAR

Here's a great idea. Every member of Congress should wear a one piece uniform emblazoned with the icons of their corporate sponsors:

Some people wear their hearts on their sleeve. Members of Congress should wear their sponsors on their chest.

This isn’t an original idea. About a month ago, a friend forwarded me a post that was making its way around the blogosphere at the speed of light:

“Members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.”

Great idea. Just imagine what that would look like.

Senator Chris Dodd, Democrat of Connecticut and ethically challenged head honcho at the Senate Banking Committee, files into a congressional hearing room, wields his gavel and calls the committee to order. The dress code is business casual: collared shirts, no jacket required.

Dodd is sporting a pink Lacoste shirt, with his “endorsements” emblazoned across his chest in large, black letters (the corporate logos go on the back):

  Citigroup Inc.                $428,294
United Technologies           $380,550
Bear Stearns                  $347,350
American International Group  $281,038
Deloitte & Touche             $270,220

And that’s just a list of Dodd’Top 5 lifetime contributors, according to the Center for Responsive Politics.

The list goes on: Goldman Sachs, Morgan Stanley, JPMorgan Chase, Merrill Lynch and Lehman Brothers.

From a company's standpoint, investing in a politician delivers a far higher return on investment than any other investment vehicle out there:

The companies that have been awarded taxpayers' money from Congress's bailout bill spent $77 million on lobbying and $37 million on federal campaign contributions, The Center for Responsive Politics finds. The return on investment: 258,449%.

Where does a regular guy like me find a ROI like that?

The New Republic has an article today that does a good job of naming a few of the more egregious hypocrites alongside their doublespeak who are currently serving in the 111th Congress.

There's that saying...

Oh you know the one, something about pictures and what they're worth in words...

Budget deficit: past, present and future (source: Wapo)



This one has words and pictures. That doubles its value!

The Dodd Amendment

I do believe that the Obama administration and his congressional enablers finally have a plan in place to remove the last vestiges of faith in the federal government any of us may still harbor exempt their campaign contributors from having to take unsavory responsibility for their bad business decisions:

While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. The provision, now called “the Dodd Amendment” by the Obama Administration provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” -- which exempts the very AIG bonuses Dodd and others are now seeking to tax.

He was for the bonuses before he was against them. John Kerry would appreciate that. Also, it's pretty rich that they want to "tax" these bonuses. As the tax laws already stand the federal government will get about 35% of the gross amount. And depending on what state the recipients live in, they'll be lucky to see 55% of the gross amount after the local governments are through.

Dodd’s original amendment did not include that exemption, and the Connecticut Senator denied inserting the provision.

"Idunnoitwasn'tme!" Classic 3rd grade denial.

“I can't point a finger at someone who was responsible for putting those dates in,” Dodd told FOX. “I can tell you this much, when my language left the senate, it did not include it. When it came back, it did.”

Of course he can't point a finger. If he did there would be three pointing back at at him. I bet even Senator Dodd can understand that 3>1.

This explains a lot (click to enlarge):




The WSJ has an editorial today that gets to the heart of the matter:

The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

The best insurance policy AIG ever invested in was political donations to the left side of the aisle.

UPDATE 3/19/09: Dodd admits Role in AIG Controversy

Why does this guy still have a job?

AIG's earmarks

The latest outrage washing across the political landscape is over AIG's decision to honor a commitment to pay out $165 million in bonuses to certain employees. Obama has said that he will "pursue every single legal avenue to block" the payout.

At issue are retention bonuses for employees of AIG's financial-products division, whose credit default swaps brought AIG to the brink of collapse. The government controls AIG through an 80% equity stake and as a major lender and doesn't have legal authority to freeze payments on its own. The U.S. has committed $173.3 billion to AIG, including $70 billion from Treasury's rescue fund.

I see no difference between this and the earmark-laden bills that regularly get passed through Congress with nary a peep. Now that AIG is a de facto government owned entity, the bonus payments--just like earmarks--are a form of patronage. We already know how Obama feels about the AIG earmarks, and he has repeatedly said he is against all earmarks, though it seems that some earmarks are worse than others. Namely the ones that originate in Congress are OK, but the ones that originate in the private sector are not. Seems he's just blowing hot air of out his yapper.

Lest you think that the banks who have taken TARP money are going to sit still and let the government dictate a new, equal and just pay structure, think again. Reminds me of a beggar with a stick.

For the record, I am against all earmarks and all bailouts. Does anybody think that AIG would be paying bonuses if they'd been allowed to go bankrupt?

The mortgage plan is revealed

U.S. Sets Rules for Mortgage Modifications, 2% Mortgages

March 4 (Bloomberg) -- The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates to as low as 2 percent.

2 percent? sign me up! Sadly, I do not think I'll qualify, as I am current in my mortgage payments and have chosen to not live beyond my means. However I am troubled by all of this government intervention in the mortgage market. Though I don't think that's the kind of "troubled mortgage" candidate they're looking for.

The voluntary initiative, announced on Feb. 18, would require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

Here's a really stupid, naive question: how does one document the ultimate financial hardship--losing one's job--by providing pay stubs and tax returns?

I hope mentioning the fact that Fannie and Freddie will be relied upon to refinance these loans is not meant to inspire confidence.

“This is not going to save every person’s home,” presidential Press Secretary Robert Gibbs said during a briefing. The plan offers help “for those who have played by the rules.”

Mr Gibbs, I played by the rules. Can you please be more specific?

President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own.

It would be encouraging to see that the GOP has lately re-discovered that one of their founding principles used to be opposition to Big Government if it weren't so unabashedly pathetic.

Lenders likely won’t be able to offer the loan modifications for a few weeks as they update their technology to process the applications, a mortgage-industry official said on a conference call today with Obama administration officials.

Not surprising since they've laid off virtually all of their employees.

Obama is seeking to curb a jump in foreclosures that, along with a drop in consumer credit, is lowering property values, dragging down the economy and keeping prospective homebuyers away. The housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.

“This plan will help make home ownership more affordable for 9 million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans,” Treasury Secretary Timothy Geithner said in a statement.

Please somebody--anybody--show me where it is written that housing prices are only allowed to go up. I'm sure it's written right under the rule that states certain banks and insurance companies are "too big to fail".

For a loan modification, lenders would have to reduce the mortgage payments to no more than 38 percent of the borrower’s income. Then, the Treasury would share the cost for lenders to cut that debt-to-income ratio to 31 percent, the government said.

The modifications would allow a lender to drop the interest rate to as little as 2 percent to achieve the ratio, and if necessary, extend the term or amortization of the loan to as long as 40 years. If more effort is needed, lenders can forbear the principal and in some cases forgive, or reduce, portions of the principal altogether, the documents show.

Sounds like an excellent incentive to work as little as possible.

The proposal, Garrett said, may violate requirements that homeowners put up at least 20 percent of the appraised value of a home or carry mortgage insurance.

“Due to falling home values, many of the potential applicants for Treasury’s foreclosure mitigation refinancing plan will now find themselves” below that level, Garrett said. “There is no specific language under this title that provides the regulator of these two entities any discretion for when or how to apply this requirement.”

The problem with making stuff up as you go is that you often run afoul of the rule of law--not that that matters too much to our current administration. They're acting "for our own good" so there's nothing to worry about. Paging unintended consequences...


At least some vacant houses in Florida are being put to good use:

Kids Party in Foreclosed Homes, Leave Wake of Vandalism

As one astute commenter at the bottom of the article put it, ""These kids DO own these houses and will be paying for them for generations...!"

Geithner to fight himself; Obama channels Jim Cramer

Everytime I see Treasury Sec Geithner's mug on TV, this is how I envision him:


Geithner: Obama to fight international tax dodgers

WASHINGTON (AP) - President Barack Obama's Treasury secretary says the administration will unveil a series of rules and measures in the coming months to limit the ability of international companies to avoid U.S. taxes.

Treasury Secretary Timothy Geithner told the House Ways and Means Committee on Tuesday that Obama will propose legislation to limit U.S. companies' ability to shelter foreign earnings from taxation in the U.S. He also said the administration will try to limit wealthy Americans' ability to use tax havens to avoid taxation.

He did not immediately provide details.

Separately, Obama had this to say about the stock market:

"What you're now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal"

I'm no CFA, but even I know there is no such thing as a profit and earnings ratio, let alone multiple "profit and earnings ratios" . I know that the very useful price to earnings (P/E) ratio exists, but a profit to earnings ratio? No such thing. Perhaps it was just a gaffe, and he really meant P/E ratio. I would give him the benefit of the doubt if I thought that he actually knew anything about finance or wealth creation. But as a self described community organizer and a lawyer to boot, I will assume he is as well-versed in finance as the rest of his cohort. By that I mean he only knows how to take wealth from those who create it and give it to those who do not.

By the way, WTF is the President of the United States of America doing making a market timimg call in the first place?

U.S. Bailout, Stimulus Pledges Total $11.6 Trillion

All information culled from Bloomberg:

The following table details how the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg.

Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks.

The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac, the country’s two largest mortgage-finance companies.

--- Amounts (Billions)---
	Limit	Current
=================================	===============	===========
Total	$11,623.63	$3,800.18
---------------------------------	---------------	-----------
Federal Reserve Total	$7,565.63	$1,478.88
Primary Credit Discount	$110.74	$65.14
Secondary Credit	$0.19	$0.00
Primary dealer and others	$147.00	$25.27
ABCP Liquidity	$152.11	$12.72
AIG Credit	$60.00	$37.36
Net Portfolio CP Funding	$1,800.00	$248.67
Maiden Lane (Bear Stearns)	$29.50	$28.82
Maiden Lane II (AIG)	$22.50	$18.82
Maiden Lane III (AIG)	$30.00	$24.34
Term Securities Lending	$250.00	$115.28
Term Auction Facility	$900.00	$447.56
Securities lending overnight	$10.00	$5.59
Public-Private Investment Fund	$1,000.00	$0.00
Term Asset-Backed Loan Facility	$1,000.00	$0.00
Currency Swaps/Other Assets	$606.00	$417.86
MMIFF	$540.00	$0.00
GSE Debt Purchases	$600.00	$33.58
Citigroup Bailout Fed Portion	$220.40	$0.00
Bank of America Bailout	$87.20	$0.00
---------------------------------	---------------	-----------
FDIC Total	$1,551.50	$400.30
FDIC Liquidity Guarantees	$1,400.00	$261.30
GE	$139.00	$139.00
Citigroup Bailout FDIC	$10.00	$0.00
Bank of America Bailout FDIC	$2.50	$0.00
---------------------------------	---------------	-----------
Treasury Total	$2,206.50	$1,621.00
TARP	$700.00	$387.00
Tax Break for Banks	$29.00	$29.00
Stimulus Package	$168.00	$168.00
Stimulus II	$787.00	$787.00
Treasury Exchange Stabilization	$50.00	$50.00
Student Loan Purchases	$60.00	$0.00
Citigroup Bailout	$5.00	$0.00
Bank of America Bailout	$7.50	$0.00
Support for Fannie/Freddie	$400.00	$200.00
---------------------------------	---------------	-----------
HUD Total	$300.00	$300.00
Hope for Homeowners FHA	$300.00	$300.00

No comment is neccesary.

MBA, CFA, BFD

"MBA, CFA, BFD."

I once had a boss that used that phrase anytime some greenhorn equity salesman would try to impress him with their spit-shined education credentials. I always got a kick out of that, especially since he was a CFA chartholder himself, and several of my colleagues had either an MBA, a CFA or both. He was a cynical man with a chip on his shoulder who was also fond of referring to this elite crowd as "the lucky sperm club." His roots were quite different than what he assumed were the roots of those he denigrated. He worked his way through a state school while supporting a young wife and special needs daughter as a tire salesman before launching a career in investment bank equity research which lead to his eventual early retirement as a rich, successful portfolio manager. I think it was his snide way of saying what Mark Twain once said: "I never let my schooling get in the way of my education." He had an excellent nose for bovine excrement, and was particularly suspicious of the brand that Ivy league MBA-types were fond of peddling.

There's an opinion column on Bloomberg today titled, "Harvard Narcissists With MBAs Killed Wall Street."

Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers.

When Wall Street was run by people randomly selected from the population, it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.

If you walked into any major Wall Street firm a year ago and randomly selected an employee, chances are that person would either be from an Ivy League school like Harvard University, or have an MBA, or both.

While there may be a handful of multi-talented people working on Wall St. for reasons other than the money they earn, the vast majority are attracted to Wall St. for one reason: the pay scale. The rationale being that if one is going to be a working stiff, one may as well be a working stiff at the top of the pay scale. The problem from the employer's point of view is that the pay scale becomes a self-reinforcing juggernaut rather quickly. The best and brightest are attracted to Wall St. for the money, so Wall St. firms get into a bidding war to attract the best and brightest. Elite universities then use that salary data to persuade the next crop of the best and brightest to attend their program, which further concentrates the size of the pool in which the best and brightest swim. Pretty soon all you have to choose from is the most elite pool that exists--the Ivy league and a handful of other institutions of the same caliber. The dangers of the resulting groupthink are rarely discussed, though today they are as apparent as a Skid Row hooker in a nunnery, and need no further elaboration.

What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest.

This narcissism has a real career impact. Psychologists at Ohio State University studied the behavior of 153 MBA students, who were put in groups of four and asked to orchestrate a large financial transaction on behalf of an imaginary company. The psychologists observed that the students who had the strongest narcissistic traits were most likely to emerge as leaders.

According to Amy Brunell, the lead author, the results of the study had large implications for real-world settings, because “narcissistic leaders tend to have volatile and risky decision- making performance and can be ineffective and potentially destructive leaders.”

There is no shortage of narcissism on display in the upper echelons of Wall St. firms. Less overt but even more destructive is the narcissism displayed in the upper echelons of government officialdom. I say more destructive because government seldom makes any pretensions of fiscal constraint. Why should they? Afterall, it is not their own money they are borrowing and spending. Though it must be noted that TARP 1.0 has done a pretty thorough job of making private sector banking just as unaccountable as the public sector.

All of this may sound familiar to anybody who has read Herman Hesse's 1946 Nobel prize winning novel, The Glass Bead Game. In it, a member of the futuristic ivory tower elite--long having been insulated from the realities of life--decides to cast his privileged status aside for a life of rubbing elbows with the commoners. Tragedy befalls the protagonist when he drowns during what would be considered a routine swim across a lake by anybody who had not grown up insulated in the ivory tower. The moral of the story is that no matter how smart you think you are, nobody is above the laws of nature.

Another word that comes to mind when trying to describe the predicament Wall St. finds itself in is incest. When you choose the bulk of your work force from a single gene pool--no matter how gifted that gene pool may seem to be--the weakest traits inevitably surface and manifest themselves in such a way that makes the destruction of the host a real possibility. Ask the Ptolemaic Dynasty how incest worked out for them.

It is done

It looks like both houses of Congress have agreed to the 1,000+ page, $787,000,000,000 "stimulus" package that is going to save our country from the abyss.

Before you accuse our elected officials of vigorously scratching the itch to spend our children's money, remember, it could have been worse:

The nonpartisan Congressional Budget Office said the stimulus package will cost $787 billion, rather than $789 billion lawmakers estimated earlier this week.

That is what passes as fiscal responsibility on Capitol Hill.

And this, from San Francisco's favorite carpetbagging daughter:

“The jobs the American people care about most -- their own -- will be dramatically safer the day that President Obama signs this plan into law,” said House Speaker Nancy Pelosi, a California Democrat.

I know I feel much safer about my job after reading that. Please, somebody find me one sound-byte that falls out of her yapper that isn't plum-crazy talk.

This is interesting:

Lawmakers dropped provisions barring funds from going to museums, arts centers and theaters. A ban on money to casinos, golf courses, zoos and swimming pools was retained.

I like museums, arts centers and theaters as much as the next guy, which is why when I use them, I pay the price of admission which I assume is structured to cover the costs of doing business. Why they should get free money from the government; while casinos, golf courses, zoos and swimming pools(??) are all forced to survive in the capitalist--sorry--socialist wilderness on their own is beyond me. Well if this results in a reduction of the $25 price of admission to the shiny new California Academy of Sciences I suppose I will be forced to reconsider my stance on the entire "stimulus" bill.

Lawmakers deleted provisions requiring businesses receiving stimulus funding to use E-Verify, a government program used to ensure workers are in the country legally.

By all means, we must not upset the largest potential block of new democratic voters, at least not until after the 2010 census. If Obama successfully wrestles control of the census count away from the Dept. of Commerce and into the White House--which is illegal if the US Constitution is your guiding principle anyhow--illegal aliens will be a permanent fixture of the democratic machine.

Most senators had left the chamber’s floor hours before the final tally was announced. The vote was held open for five hours until Senator Sherrod Brown, an Ohio Democrat, returned from his home state to cast the deciding vote for the bill. Brown had been in Ohio following the death of his mother earlier this week.

Rest In Peace Mrs. Brown; government has yet to invent a way to tax you in the afterlife. And if you thought curious, inquiring congressional minds may want to stick around and read what they just signed , you'd be wrong:

“It is over a thousand pages,” said Representative Tom Price, a Georgia Republican. “It is physically impossible for any member to have read this bill.”

I've been reading the abridged version of the History of the Decline and Fall of the Roman Empire for almost 3 years now. It comes in a little under 1,000 pages. It is taking me a long time to read because it is a lot to digest, and nobody is paying me to read it. Maybe I should just thumb through it and tell people I read it instead. At least I wouldn't let contemplating any of the details hold me back from taking a first-class trip to Europe.

On a more positive note, what we need are more economists like Michelle talking no-nonsense economics with Obama supporters, capturing it on video and broadcasting it on YouTube.


(h/t texas rainmaker via instapundit for the image at the top of the page. Probably photoshopped or a prank, but it does capture the spirit of the Obama rapture rather well.)

The United States of Insolvency

This chart caught my eye over the weekend (from the Economist):

The biggest force behind the bond-market shock is the onslaught of new issuance as the government seeks to finance the gaping budget deficit, Fed liquidity programmes, mortgage purchases and bank bail-outs. Yields moved still higher this week partly on the Treasury’s announcement that it would borrow a whopping $493 billion this quarter. Wrightson ICAP, a research firm, predicts the Treasury will issue $1.8 trillion this year, which combined with $1.5 trillion last year, would exceed all the net borrowing of the prior 27 years combined.

Where are all the hyperventilating voices that expressed outrage when Dick Cheney said, "...deficits don't matter" almost 5 years ago?