In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
Add comment February 20th, 2010
At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.
In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?
By Simon Johnson
A Short Question For Senior Officials Of The New York Fed Baseline Scenario
Add comment October 4th, 2009
Just yesterday, for instance, the Commerce Department reported that new-home sales grew at an annualized rate of 11 percent last month, which was much better than people were expecting.
And if you look under the covers, the annualized rate actually understated the sales pace of 36,000 new dwellings that were bought last month.
Sales of previously owned homes are also improving, although, in the case of both new and used homes, prices are suffering a dramatic drop.
But whether housing is really making a comeback still carries a very big question mark.
What people are failing to realize, says Chris Whalen, who tracks the banking industry for Institutional Risk Analytics, is something that’s being called the “shadow inventory” of homes.
Put simply, these are the homes on which banks and other mortgage holders have foreclosed but which still haven’t worked their way through the courts.
Whalen says that it takes from three to four months for a house to be out of the foreclosure process and ready for sale.
In the case of New York State, he says, the length could be six months.
Experts are apparently concerned that houses are being taken away from delinquent homeowners in much larger numbers than what is now being put up for sale.
In other words, there’s a logjam of foreclosed properties that should hit the market next fall.
And when those properties do come up for sale, banks will unload them as quickly as possible and at whatever price they can get.
That’s where the question (and the question mark) comes in — if the number of houses sold in the fall increases dramatically because of this shadow inventory, is that really a good thing?
And what effect will this flood of foreclosed properties have on solvent people who might just want to move to a different residence?
Will solvent homeowners suddenly be more willing to put their homes on the market at a reduced price?
And banks will feel the shadow’s effect, too — they will finally have to admit that mortgages they are holding aren’t nearly as valuable as they are letting on.
Banks would then have to take additional writedowns.
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“Smoooch!!”
President Obama used a lot of words yesterday when he talked about the relationship between China and the US. He was kicking off an economic summit between our two countries.
But what Obama was really doing was planting a big fat rhetorical kiss on the cheek of China’s President, Hu Jintao.
President Hu seems like a sweet guy, but the niceties probably had more to do with the fact that the guy owns the US.
Our president told their president that our two countries need each other. This co-depend ence goes something like this — China has a lot of money it needs to get rid of, and we’ll gladly take it.
“If we advance those interests through co operation, our people will benefit and the world will be better off . . ,” said our president.
No tirade on human rights? No speech on free elections? How about a little lesson on how China should allow people to protest?
Nope, President Obama was the perfect gentleman and gracious host. He even called China a “great country” without even a smirk.
And why not? This is the busiest week for US debt sales in 24 years.
The US Treasury is selling more than $235 billion in various government securities, and we’d certainly like our friends, the Chinese, to buy more than their fair share even if Beijing has been a little nervous about the lack of fiscal responsibility in Washington.
*
We are coming up to the month’s end, when professional traders try their best to get stock prices higher.
The same thing happens during options expiration week — the week that contains the third Friday of the month.
Same old story, same old scam. Don’t get trapped.
Analyzing Those Great Housing Figures – John Crudele, New York Post
Add comment July 29th, 2009
With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other.
The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral. Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books.
The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.
But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.
The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.
This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.
Mr. Scott is a professor of securities and corporate law at Stanford University and a research fellow at the Hoover Institution. Mr. Taylor, an economics professor at Stanford and senior fellow at the Hoover Institution, is the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis” (Hoover Press, 2009).
Why Toxic Assets Are So Hard to Scrub – Kenneth Scott & John Taylor, WSJ
Add comment July 21st, 2009
t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.
Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.
When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph
Add comment July 9th, 2009
Last week, General Motors began the fourth largest bankruptcy proceedings in history, joining the many other large and venerable companies that have sunk to the bottom during this economic crisis. In fact, eight of the 20 largest bankruptcies have happened during the last two years of crisis. Our latest Transparency is a look at the biggest sinking ships in business history.
A collaboration between GOOD and Always With Honor.
Transparency: The 20 Largest Bankruptcies in History – Good Magazine
Add comment June 16th, 2009
ILLITERACY IN HIGH PLACES
by Paul Craig Roberts
If a person lives long enough, he can watch everyone forget everything they learned.
Everyone includes Federal Reserve Chairmen, economists, Bank of America “strategists,” and even Bloomberg.com.
Federal Reserve Chairman Ben Bernanke thinks he can hold down US long-term interest rates by purchasing mortgage bonds and US Treasuries. Sixty years ago the Federal Reserve understood that this was an impossible feat. After an acrimonious public dispute with the US Treasury, in 1951 the Federal Reserve forced an “Accord” on the government that eliminated the Fed’s obligation to monetize Treasury debt in order to hold down long term interest rates.
President Truman and Treasury Secretary John Snyder wanted to protect World War II bond purchasers by preventing any rise in interest rates, which would mean a decline in the price of the bonds.
The Fed understood that monetizing the debt to hold down interest rates meant loss of control over the money supply. The policy of suppressing interest rates could only work until the financial markets anticipated rising inflation and bid down the bond prices. If the Fed responded by buying more Treasuries, the money supply and inflation would rise faster.
Since Fed Chairman Bernanke announced his plan to purchase $1 trillion in mortgage and Treasury bonds in order to help the housing market with low interest rates, interest rates have risen. When will the Fed remember that printing money does not lower long-term interest rates?
According to Bloomberg (June 3), Bank of America strategists are recommending that investors buy Fannie Mae bonds because the rise in interest rates means the Fed will ramp up its purchases in order to prevent rising interest rates from adversely impacting the struggling housing market. When will financial gurus remember that printing money does not lower interest rates?
Treasury Secretary Geithner is another economic incompetent. He told China that he stood for a “strong dollar,” but that China should let its currency appreciate relative to the dollar, which, of course, would mean a weaker dollar. He simultaneously told China that their investments in US Treasury bonds were safe.
His Chinese university audience, being economically literate, laughed at Geithner. It apparently did not dawn on the US Treasury Secretary that if Chinese money is rising in value relative to the US dollar, the value of Chinese investments in dollar-denominated US Treasury bonds is falling.
Congressional Democrats are proving themselves to be as stupid as the Republicans. According to the Associated Press, the Democrats have reached agreement to appropriate another $100 billion to continue the wars in Iraq and Afghanistan through the end of the year. What are the Democrats thinking? The federal budget for this year is already 50% in the red. Why add another $100 billion to the red ink, which has to be monetized, thus causing inflation, higher interest rates, and a weaker dollar.
The red ink that Washington is generating is a far greater threat to Americans than any foreign “enemies.”
The hubris is extraordinary. A bankrupt government that has to send its Treasury Secretary begging to China thinks it can spend limitless amounts in a futile effort to control the culture, mores, and political system of distant Afghanistan.
Add comment June 6th, 2009
This recession is now the worst since at least 1958, which is as far back as the index of coincident indicators stretches back.
The Conference Board reported today that the index, which is intended to measure how the economy is doing on an overall basis, slipped a little in April. The decline was smaller than in previous months, and two of the four indicators edged up, which could be taken as a sign that the economy is at least getting worse at a slower pace.
As I noted last month, the index was nearing the 5.6 percent decline that it experienced in the 1973-1975 recession. Now it is down 5.7 percent.
One way to put that into perspective is that the decline so far in this recession is more than the maximum falls combined in the two previous recessions, in the early 1990s and then in 2001.
“..the decline so far in this recession is more than the maximum falls combined in the two previous receptions, in the early 1990s and then in 2001.” (Floyd Norris)
Add comment May 27th, 2009
Subprime is done. All the teaser rates are over, the interest rates have reset and the writing is on the wall.
But in the coming quarters, the scenario will play out with other exotic mortgages, Option ARM (pick-a-pay), Alt-A, etc. The homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. But, whoops, home values are way lower and the economy sucks. Plan derailed.
The subprime mortgage issue is largely past, here comes the Option ARM and Alt-A mess. (Clusterstock)
Add comment May 27th, 2009
http://jessescrossroadscafe.blogspot.com/
Bernanke’s wager is on a virtual free lunch by printing money.
“Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds “at essentially no cost”. His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct. Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences.”
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Add comment May 25th, 2009
From the NYT: http://www.nytimes.com/2009/05/20/your-money/20money.html?_r=1&hp
At first glance, the sweeping credit card legislation that passed the Senate on Tuesday looks like a huge victory for consumers. The bill, after all, contains relief from penalty fees and certain interest rate spikes.
But for people who pay off their bills each month, and milk the card rewards programs for everything they’re worth, there is some cause for concern.
For months now, the card companies have been threatening to cut rewards programs sharply to make up for revenue lost because of the new restrictions.
My guess, however, is that this talk is just so much saber-rattling.
Card companies want to make money, and big spenders help them do it, even if those cardholders do not go into debt.
First, let’s lay out the things we know will change because of the new legislation. The bill is chock-full of new rules, which will take effect at various points in the year after President Obama signs the final legislation.
¶There are new restrictions on when card companies can increase the interest rate on balances you’ve already run up. The bill says that banks generally must wait until you’re 60 days late in making the minimum payment before applying a penalty interest rate to your existing debt.
While an earlier bill in the House of Representatives suggested less strict rules, House members have agreed to adopt the Senate version and intend to vote on it on Wednesday. On Tuesday, senators voted 90-5 in favor of the measure.
¶Card companies will have to give 45 days’ notice before raising their interest rates. There’s also a notice requirement for any significant change to a card’s terms, which may keep companies from surprising customers who have been saving their loyalty points for years with huge alterations in rewards programs.
¶Banks must send out your bill no later than 21 days before the due date. They cannot send it with, say, 14 days to go, hoping that you won’t get a check to the bank in time to avoid a late fee.
¶If the card company gets your payment by 5 p.m. on the due date, it’s on time, according to the new rules. No more of this early morning deadline nonsense, which led to late fees for payments that arrived with the afternoon mail. Also, no more late fees if the due date is a Sunday or holiday and your payment doesn’t arrive until a day later.
¶Let’s say you’re paying different interest rates on the debt on a single card — one for a cash advance, another for a balance transfer and a third for new purchases. Now, when you make a payment over the minimum balance, banks will have to apply it to the highest-interest debt first. I bet you can guess how some banks used to handle this sort of situation.
¶Banks will need your permission before allowing you the “privilege” of spending more than your credit limit and paying a fat $39 fee for that privilege. The card companies should be ashamed that they needed a law to make this “opt in” requirement a reality.
¶If you’re a student, it will become harder to get a credit card. No one under 21 can have a card unless a parent, legal guardian or spouse is the primary cardholder. Students with their own income can submit proof and ask for an exception to the co-signer requirement.
The senators, in an apparent endorsement of helicopter parenting, also require written permission from the parent, guardian or spousal co-signer for any increase in a card’s credit line. You can read all the gory details through links to the Senate bill.
¶Hate gift cards? Me, too. There will be some helpful new rules regarding those absurd dormancy fees, which punish people who let the cards sit around before using them.
Under the Senate’s rule, retailers and others that issue Visa, MasterCard, American Express or Discover gift cards or certificates will have to print explicit dormancy fee information on the card. Sellers of the cards will also have to inform the buyer of the fee. That’s a smart twist, since the gift giver can then become aware of the noxious nature of the fee — and elect to give cash or some other gift.
The bill also bans expiration dates on gift cards and certificates any sooner than five years after the card’s original issue date. And the retailer or card issuer will have to print the terms of any expiration date in capital letters in at least 10-point type. Call it the fine print rule.
It will be fascinating to see which retailer or card issuer has the nerve, after having free use of your money for five years, to tell you it will lose the money altogether if you don’t use up their gift card. I dare them to try.
So will credit card companies kill reward programs or drastically scale most of them back? Of course not.
“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”
That last part is crucial. People who spend a ton generate fees galore from merchants, and that money helps the card company stay in business. So you may soon see card companies giving away more goodies or lowering annual fees for people who hit certain spending thresholds each year. American Express already does this on a number of cards.
Also, keep in mind that you may have more control over what the card companies do to you than you may think.
If you don’t like the new fees and other things that banks will soon be testing as they grapple with their new economic reality, then make some noise. Send a note to me at rlieber@nytimes.com, so I can write about the latest foolishness — or consumer-friendly twist. At the very least, all of our complaints to the higher-ups at the banks may help persuade the companies to head in another direction.
“Work your way up the chain,” said Dennis C. Moroney, research director for bank cards at TowerGroup, a MasterCard-owned financial services consultant. After all, it may cost less to appease you than it would to replace you.
Add comment May 20th, 2009
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