Happy Financial Fools day

That's right, rather than today be called April Fools day, it might be more appropriate if the day is labeled Financial Fools day. At least that is what the Treasury Secretary hopes that we all are: 'financial fools'. Economics Nobel winner Joseph Stiglitz's analysis of the bad asset bailout plan unveiled late last week by the Obama administration calls it a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

From here: Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership! Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan. If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even the Wall Street Journal, long a voluptuous cheerleader for capitalism does not like what it sees in this plan.

We have no idea if Treasury is playing favorites, but it certainly doesn't look good. All the more so given that some of these big players may have consulted informally with the Obama Administration as it was writing the plan. Not to mention that the big asset management companies that are most likely to land plum fund-management jobs are also the ones that have been most vocally praising the Treasury plan.

Recent photographs from a visit to see Barnaby Whitfield's pastel works in an exhibition titled 'Ah For A Man to Arise in Me / That the Man I Am May Cease to Be' currently on view at the Stefan Stux Gallery, Chelsea. More information here.

The great monthly flip flopping ritual

Former Goldman Sachs CEO and current Treasury Secretary Henry 'FlipFlop' Paulson is caught in a curious case of shape shifting. We are now able to soundly predict with a large degree of confidence the frequency with which the Treasury Secretary performs the flips and flops on the bailout package. Yes, the predictable recurrence pattern on plans to use bailout funds now happens monthly. See below.

In September: The $700,000,000,000.00 bailout bill was called TARP (or Troubled Assets Relief Program). It was sold to lawmakers as a mechanism to buy off troubled and toxic securitized assets off banks and lending institutions and thus ease the credit crisis sparked by the mortgage meltdown.

In October: Buying troubled assets was cast by the wayside and the Treasury decided to flip and put out a plan to buy equity stakes in American banks of their choice. Hank's alma mater Goldman Sachs saw a cash injection of $10 billion. Morgan Stanley got another $10 billion. Is it a matter of coincidence that both of them announced bonus pools of 7 billion dollars. No, I would not dare suggest that they used taxpayer money to pay their bonuses.

In November: Treasury flopped and now announces that they have decided that buying up equity stakes in banks are not working (or maybe worked just well enough for those banks to declare bonuses). The wizards yesterday announced that they are planning on using the remaining bailout funds to help companies that issue credit cards, make student loans and finance car purchases.

In December: Plans to unveil disbursement of as yet unknown cash injections to as yet unknown set of companies as Christmas gifts. Consumer retail stores, bodegas and kiosks might need to behave properly in line as they queue up to get a part of the largesse.

Curiously missing from the whole bailout equation was help for troubled and distressed homeowners.

United States Senator from the state of NJ Robert Menendez summed it up best:

In the month of August, over 9,800 homes entered foreclosure every day, if this statistic was that there were over 9,800 Wall Street executives that lost their jobs every day in August, we would have ended this a long time ago.

Sad but true...

Profiles in profligacy: The Bailout Lobbyist

We have talked abut the bailout multiple times here, here and here. It is undoubtedly the greatest giveaway of taxpayer money since one can't remember when, but in an interesting piece in the Times today, I noticed profiles of a couple of lobbyists who are making sure that the constituents they represent get a fair share of this socialist largess doled out by the Treasury.

A Hispanic business group is representing plumbing and home-heating specialists. This group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.
The National Marine Manufacturers Association is asking whether boat financing companies might be eligible for aid to ensure that dealers have access to credit to stock their showrooms with boats.

While the plumbing lobbyist is making sure that the Joes it represents obtain a fair bite of the bailout chunk, it is painfully clear that almost none of the aforementioned bailout money has explicitly been allocated for distressed homeowner mortgage protection.

On the other hand, if the boat based lobbyist group actually succeeded in convincing the Sec. Paulson, then it will be a historic time when we start using taxpayer money to help boat dealers stock up their showrooms with new boats at a time when consumer confidence is at a historic low!

More than lobbying for boat dealers, it looks like someone needs to lobby to repair the money rushing out of gaping holes in the rickety Treasury Department steamer.

On what we could learn from the Chinese regarding bailouts

Today was yet another great day for bailouts. Firstly, there was yet another bailout of the beleaguered insurance giant AIG, then there was news that the Treasury Department on the sly decided to give American banks a tax windfall of $140 billion and thirdly, there was news of a half a trillion dollar Chinese bailout. OK, now why am I mixing the Chinese bailout with similar measures taking place here? Well, it is indeed interesting to see how these monies are being put to use. To get a quick idea on the differences between the plans hatched by the Treasury as opposed to the Chinese in bailing out, it is instructive to see the details. Or, maybe it is even time to learn from the Chinese.

On what the Chinese would do with their bailout:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

On the sly tax windfall to US banks:

Late September, the Treasury Department issued a five-sentence notice that attracted almost no public attention. Administration officials had just given American banks a windfall of as much as $140 billion. The change to Section 382 of the tax code came after a two-decade effort by the Republican administration to eliminate or overhaul the law. Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

On bailing out AIG again and yet again:

The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the new revision announced today, the Federal Reserve said it would reduce that credit line to $60 billion. When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.

So just to get this clear:

• China spends its bailout money on actual projects like infrastructure additions that benefit its citizens and in turn keep the economy humming and productive.
• In the United States, the Treasury decides to award tax write-offs to banks that shelter their profits from taxation by acquiring shell companies whose real value indicates losses on their books, but then manage to offset imaginary losses with actual capital gains to avoid any payment of taxes.

Comment on Obama considering Summers for Treasury

The Times is agog with the news that Mr. Lawrence Summers is in the short list to be the next Treasury Secretary. It is commendable that President elect Obama is looking to allay jittery markets and appoint someone as quickly as possible at the Treasury who can project an image of stability, values and infuse continuity at the Treasury.

The only problem is that Mr. Lawrence Summers is not that man.

From his speech to the National Bureau of Economic Research:

Women often don’t want to work the hours needed to get to the top and that girls are socialized toward nursing while boys are socialized toward building bridges. In the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are, in fact, lesser factors involving socialization and continuing iscrimination.

In other words, this man was telling us that women were intrinsically inferior to men when it came to math and sciences.

That he was the President of Harvard University when he made that comment was another thing... Now he is being considered by President elect Obama to be the Treasury Secretary. No way. Now how. Not ever.

Obama can do better than that. Geithner is the right individual for this job.

What the repackaged bailout really means...

Yesterday, Mr. Paulson in his infinite wisdom decided that we are going to scrap the original plan to buy distressed, toxic assets from banks and instead decided to invest about 250 billion directly into some select banks and financial institutions. The plan is to take an equity stake in the banks thus guaranteeing the taxpayer that we will see some kind of a return on the investment. In case none of these banks fail, the taxpayer will see a return on the investment. What was conspicuously absent in the plan was any form of regulatory framework, compensation ceilings or change in management teams.

If I were to explain in laymans terms what this kabuki play of a handout from the Treasury's perspective, this is what it might look like:

"Banks, here is an investment of taxpayer money that Secretary Paulson would like to make in your company. You were singled out just because of the fact that I know some of the CEO’s personally, you are a 'leading financial institution' and if I may use euphemistic phrases, ‘you are too big to fail’. You may take this money and do what you like. If you profit from our investment, the taxpayer gets a part of the profits. If you go under, I will just count this as a bad investment gone awry. Either way, you are free to do exactly what you did for the last 10 years leading up to the bubble and you are free to carry on doing the same thing - we really do not care. What this really means to the bottom line is that way you will be able to continue your high risk bets in overleveraged financial instruments that has become your de-facto business model, your stupendous compensation packages that the CEO's and the board have gotten used to and you get to keep your current management board that got us into this mess. Go ahead, let the good times roll!!"

This looks increasingly like a very wealthy investor indulging in high stakes investments in large blue chip companies.

OK, all this sounds very, very interesting, but what about that homeowner who is being foreclosed?

Oh, that individual. Hmm… Well, they need to fend for themselves. Hey, this is the free market.

The quadrillion dollar derivative market and how one woman tried unsuccessfully to regulate it

The Times had a great article about how a lady chairing the Commodity Futures Trading Commission (CFTC) ten years ago was thwarted by the all knowing Mr. Greenspan in her attempts at bringing greater regulatory authority over options, swaps and futures (derivative instruments). These are the very instruments that led to our current global financial meltdown. The value of these instruments have ballooned from about $100 trillion six years ago to $0.5 quadrillion dollars (yes, quadrillion – I did not make it up). When people say that the bailout amounts ($700 billion) proposed is just a drop in the bucket, they are absolutely right...

In 1997, the CFTC, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley Born, invited comments about how best to oversee certain derivatives. Born was concerned that unfettered, opaque trading could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it," she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Born's views incited fierce opposition from Greenspan and Robert Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

"Greenspan told Brooksley that she essentially didn't know what she was doing and she'd cause a financial crisis," said Michael Greenberger, who was a senior director at the commission. "Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street."

This summer, the Bank for International Settlements, estimated that the face value of derivatives floating around the world is $1.14 quadrillion. That is $1,140,000,000,000,000.00. The breakup was distributed between $548 trillion in listed derivatives or traded on organized exchanges and $596 trillion under over-the-counter derivatives that were basically unregulated and unmonitored.

Maybe Mr. Greenspan should have listened to that little lady warning him then in 1997. Maybe, but hey, she would not play tennis with the guys nor have lunch with the guys... How can such a lady give credible advice? It also does not help that Greenspan was an avid follower of that libertarian cheerleader Ms. Ayn Rand.

Meanwhile, the National Debt Clock in midtown Manhattan has run out of digits to record the growing debt.

What is good for the goose is good for the...

New Yorker's Andy Borowitz has an interesting take on why he is "too big to fail" and makes his case for a bailout.

This is the first time I have ever asked for a bailout from the Federal Reserve. I know what you’re thinking. Why do I deserve your largesse, and I do mean largesse, since I’m asking for five million big ones? The answer is simple. Like many of our nation’s financial institutions, I am simply too big to fail.

Folkert de Jong's sculptural tableau. The Shooting...At Watou; 1st July 2006 on display at the James Cohan Gallery (between Sept 6 - Oct 4th 2008)

Boondoggle dissection

A draft version of the bill authorizing Secretary Paulson to use $700,000,000,000.00 as he pretty much pleases is posted here. A quick, non-economist, layman's readthrough does not seem augur well for the following reasons:

1. How did we arrive at the $700,000,000,000.00 number? Very Unclear.
2. The planned Oversight Board is very very weak and staffed by insiders.
3. To call the section on Executive Compensation 'opaque' would amount to flattery.
4. No clarity on the price that the people would pay to acquire toxic assets.

1. It is customary in planning and budgetary practices to breakdown large dollar numbers into smaller chunks which help demystify and clarify the individual components and constituents which ultimately add upto create the total amount. This is typically done either in the main text or appendices: The only reference to $700 billion I could find was the following sentence:

The authority of the Secretary to purchase troubled assets under this Act shall be limited to $700,000,000,000 outstanding at any one time, by aggregating the purchase prices of all troubled assets held and any expenditures.

No breakup, nothing... Hopefully, a breakup of how the 700 number is clarified in the final version of the bill.

2. Everyone has been clamoring for a strong oversight board - if not to make sure that Secretary Paulson does not go on a trip to Las Vegas with the booty, at least to make sure that the billions are not used in partisan, Street friendly ways. Well, from the looks of it, the oversight board is weak and not independent at all. Judging from the fact that most of the players who indirectly wrote / co-wrote this are on the oversight board - cat guarding the henhouse...

The Emergency Oversight Board shall be comprised of the following:
- Chairman of the Board of Governors of the Federal Reserve System
- The Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation
- Chairperson of the Securities and Exchange Commission
- Two members who are not government employees, having appropriate financial expertise

The first three individuals mentioned were government employees tasked with making sure that we did not fall into this mess in the first place and they failed. Now we put them on an oversight board to bail out companies responsible for bringing the economy to its knees...

Hopefully, we see a little more independent oversight teeth added to the final version.

3. The other item deemed important was the need to put checks and balances on executive compensation such that all entities seeking to sell assets through the bailout under the Act meet some kind of punitive standards. One of the ideas advanced was to limit compensation for the CEOs of such entities to be lower than the United States President... Well, the bill is as vague as it can get in this subject...

The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include
- limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive;
- a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate and
- such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.

Pretty much means - the CEOs keep on making what they currently get - the bill will couch it in a language so broad and unclear, you CEOs need not have to worry one bit...

Hopefully, we will see clearer punitive measures added to the final version.

4. As far as the prices that they plan on purchasing the assets at – the bill is very, very vague – Are they planning on purchasing the assets at market price (par) or substantially above market price (both of which has its own advantages and disadvantages in a macro economic aspect)…

This definitely needs a lot of work and is not something that the lawmakers should rush and sign…

Wish list

Heard that they are having hearings on bailouts and free handouts over in DC. While the lawmakers are at it, can they throw in a couple of trillions for the following wish list?

• Nationalized healthcare for all residents with options for foreigners to avail of healthcare benefits for a nominal fee.
• Free food and clothing for all US residents with drop box provided at street corners to discard leftover clothing and food.
• Free checking accounts with a guaranteed minimum of $100 at all times for all residents.
• Nationalize the airways with maximum ticket prices not to exceed $100 (with plans for extension of the $100 ceiling to international routes).
• Guaranteed free education, housing, healthcare and any other benefits one can think of for residents under 15 and guaranteed social security benefits for all residents above the age of 15.
• Citizenship for just about anybody who steps foot into the country (even if the individual is in transit). Of course, immediate retroactive citizenships for just about any illegal alien at this point in time is indisputable.
• Authorize and bear costs of building custom designed homes to house just about anybody who feels like they are not satisfied with the one they have already.
• All mortgage down payments capped at 1% of the total value of the house with the remaining payments paid monthly by the home-owners future grandchildren.
• Mandatory one month ‘all expenses paid for’ vacation at a location of the individual’s choice for all US residents above the age of 30.

Some more ideas are in the works, but as soon as they get started with the list above, we could add more…

Olivier Blanckart, 'MoMA Don't Preach', 2008, adhesive tapes, cardboard, kraft paper, trampoline, ink jet print, Life sized. From a recent visit to P.P.O.W Gallery (exhibition runs from Sept 4 to Oct 4, 08')

Bailout frenzy continues..

The news is that the Bail baby, Bail! team composed of the Federal Reserve and the Treasury are planning on coming up with the god of all bailouts. They plan still being worked out relies on the now familiar tactic of buying up large portions of toxic debt held by the banks using taxpayer money. This is good on several fronts. This way the companies that got to play and profit with exotic financial instruments are saved, the CEO's still get to take home their million dollar bonuses, very little regulation gets passed in the spirit of 'market knows best, stupid' and mainly ensuring that the common individual and taxpayer keeps getting screwed again and again.



John Updike, "Superman"


I drive my car to supermarket
The way I take is superhigh
A superlot is where I park it
And Super Suds are what I buy.
Supersalesmen sell me tonic
Super-Tone O, for relief.
The planes I ride are supersonic.
In trains I like the Super Chief.
Supercilious men and women
Call me superficial, me!
Who so superbly learned to swim in
Supercolossality.
Superphosphate-fed foods feed me
Superservice keeps me new.
Who would dare to supercede me
Super-super-superwho?


---From the New Yorker, November 12, 1955, p. 56

Oh, I forgot to mention the cost: The ranking Republican on the Banking Committee, Sen. Richard Shelby, said the U.S. has "been lurching from one crisis to another" and predicted the new bailout plan would cost at least a trillion dollars.

I wonder if Richard Shelby did one of those Dr. Evil type little finger in the corner of mouth routine as he reeled off these numbers...

Insult to injury

I had lamented here earlier that we were not doing enough to regulate investment banks while opening up the 33 billion dollar a day money spigot for them with easy lending terms and little or no regulatory framework. Well, the Treasury Secretary Henry M. Paulson Jr. yesterday laid out a plan to overhaul the regulatory apparatus that oversees our nation’s financial system.

New York Times calls it 'dead on arrival'. I humbly agree.

Instead of greater regulation, the plan seems to buttress deregulation: One of the changes that Wall Street wants had wanted for years was for regulators to shift from being the rules police to looser “principles” based interpretations people - always a recipe for disaster - and it seems that this latest move by the Secretary seems to do just that. More details here.

The best reaction that I had read to the plan came from a statement issued by the Consumer Federation of America. The last sentence is telling and damning.

“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system’"

“This plan had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets."

Placido Costanzi (1702 - 1759), ‘Justice and Temperance triumphant over Vice’, oil on canvas, 24” X 29” (Photo from a Christie’s auction book)