Photo essay

Scenes from the housing meltdown - a gallery by Anthony Suau

Cleveland, Ohio, March 25, 2008 -- Detective Robert Kole of the Cuyahoga County Sheriff's Department cautiously approaches an abandoned house. He must search it, room by room, at gunpoint to ensure that the house is clear of weapons and squatters or inhabitants. It can be a dangerous and, at times, depressing, job. In this home, the decomposing body of a dog, tied to a leash and left to starve to death, was discovered in the kitchen.

Photo

Seen on the intersection of Clove Road and Victory Blvd, Staten Island, NY

From an essay last year on what a depression might look like in today's times...

By looking at what we know about how society and commerce would slow down, and how people respond, it's possible to envision what we might face. Unlike the 1930s, when food and clothing were far more expensive, today we spend much of our money on healthcare, child care, and education, and we'd see uncomfortable changes in those parts of our lives. The lines wouldn't be outside soup kitchens but at emergency rooms, and rather than itinerant farmers we could see waves of laid-off office workers leaving homes to foreclosure and heading for areas of the country where there's more work - or just a relative with a free room over the garage. Already hollowed-out manufacturing cities could be all but deserted, and suburban neighborhoods left checkerboarded, with abandoned houses next to overcrowded ones.
And above all, a depression circa 2009 might be a less visible and more isolating experience. With the diminishing price of televisions and the proliferation of channels, it's getting easier and easier to kill time alone, and free time is one thing a 21st-century depression would create in abundance. Instead of dusty farm families, the icon of a modern-day depression might be something as subtle as the flickering glow of millions of televisions glimpsed through living room windows, as the nation's unemployed sit at home filling their days with the cheapest form of distraction available.

The A. I. G. Sinkhole

Joe Nocera of the Times on AIG - the company which got a further $30 billion yesterday in addition to the $150 billion already committed by the United States taxpayer so far.

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful. I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Investment Banker in an organic compound

After sharks in formaldehyde, it is indeed fitting that 'artist' Damien Hirst has decided to put an investment banker in this embalming fluid... It sold for an investment bank type sum too (nearly $4 billion). For some reason I don't believe that, but that is what the internets say...
Among the other creatures that fall into the same league that he could throw into formaldehyde and make his zillions include hyenas and vultures.
The banker happens to be from Merrill - not too sure why this company was the 'chosen' one. After closely studying the price for which this was sold for, I think Sec. Paulson might consider recruiting Mr Hirst into the investment bank bailout team. He seems to have the ability to easily muster ungodly amounts of cash by artfully distorting ninth grade science experiments/exhibits... We need the money - you know...

UPDATE: The Hirst investment banker thing looks like a spoof - like I said above, I did not believe the price, though formaldehyde might be a good medium to put most of the bankers in...

Mavericky behavior alert!

The Federal Reserve Board announced today the creation of the Commercial Paper Funding Facility (CPFF), to help provide money to large corporations and companies. Fed officials didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase. The program will continue to run till April 30, 2009.

A bottomless cash withdrawal mechanism, I betcha'.

The Federal Reserve said yesterday that it would start to pay interest on bank deposits for the first time and double its auctions of cash to banks to as much as $900 billion by year-end.

These two moves are over and above the $700,000,000,000.00 bailout.

Say it ain't so, but 1 million Joe six-pack Americans lost homes over the last two years and another million will lose their homes over the next 12 months. I am yet to see a single coordinated initiative on their behalf.

Meanwhile, life goes on as usual for the million dollar bonus CEO's as is evident from this report:

Less than a week after the federal government offered an $85 billion bailout to insurance giant AIG, the company held a week-long retreat for its executives at the luxury St. Regis Resort in Monarch Beach, Calif., running up a tab of $440,000. The executives spent $200,000 for rooms, $150,000 for meals and $23,000 for the spa.

Bailout angst on Wall Street continues - pictures

Stepping outside for lunch, one is greeted nowadays by signs that seem to exude a labor union type dispute in a factory setting. It was funny to see Main Street collide with robotic pin striped suits strutting around Wall Street...

An intrepid man and woman team from dirtymoney.com managed to climb up a couple of flagpoles behind the iconic bull in Lower Manhattan and plant an American flag with the words FORECLOSED? emblazoned on it. They seem to have climbed the narrow poles using makeshift harnesses and cords. Impressive and dangerous, I must say. The scene below them was fairly chaotic with at least a hundred police officers and emergency workers looking to find some way to coax them down the poles.

It was an interesting scene - a busload of fairly clueless Oriental tourists somehow descended from nowhere and added to the general pandemonium.

Finally, the guy gets off the pole after about a half hour. He was greeted by the waiting arms of the officers who were fairly helpless in dissuading him earlier...

He was promptly read his rights and handcuffed and whisked away. His lady compatriot had scaled down earlier and faced a similar fate.

Meanwhile at a building overlooking the Stock Exchange, an enterprising group of young women decided to don these masks and placards around their necks with the words 'Greed Kills'.

I thought the most interesting part of the afternoon was this old individual casually resting against a trash can with his flute enjoying his dulcet production while the girls were protesting with their death masks above him. He seemed to be out of the whole system - in his own world..

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…

On the $700,000,000,000.00 ‘Honk for Hank’ campaign

I am sure the following is old news:

Hank Paulson, the US treasury secretary on Saturday raised the price tag on its emergency plan to revive the U.S. financial system, asking Congress for authority to spend up to $700 billion to relieve crippled financial institutions of their mortgage-based assets, a sum that would exceed the cost of the Iraq war so far.

What is NOT making the mainstream news rounds is the following plans hatched by Wall Street to benefit from the largesse:

- Blackstone Group, may be interested in pursuing an asset-management assignment from the government.
- Pimco, which manages about $830 billion in assets, would like to be an asset manager for the government.
- BlackRock, a big New York asset management firm, was also involved in negotiations with the government
- Bank of New York Mellon and JPMorgan Chase were also campaigning for a spot.
- While an earlier plan said that only US headquartered firms could sell assets to the government under the program, a later version said sellers could include any financial institution (foreign banks).

So, lets get this right - first these firms use high risk financial instruments to bleed people out of their homes, make their money while the bubble is still strong, then, as the bubble pops, they plan to get the government to take over these risky holdings for pennies on the dollar and as the government guarantees these toxic instruments other Wall Street firms come up and catwalk their way to be money and fund managers for these instruments charging the government additional monies. Reminds me of carrion birds feeding on leftover carcasses after the lions have fed themselves.

At this point, when just about everyone is clear that Wall Street firms and its leaders were overpaid, under scrutinized and overvalued, why would anyone with a sane mind give them even more - especially in the management of these assets that the taxpayer is planning on buying and on top of that - have them charge the taxpayer to manage the assets?

Is this not the time for the government to create a public agency or a corporation that is empowered to drive a hard bargain and acquire these toxic assets for the lowest possible price to protect taxpayers against potential future losses, manage these assets until the taxpayer sees a return on the $700,000,000,000.00 investment and then ultimately sell these assets when they become profitable on the open market thus giving back some of the valuable taxpayer money back where it belongs : TO THE TAXPAYER!? Why should the people who are financing this largesse be NOT allowed to have a share of this ownership?

Any plan is suspect when the leaders of the party who propose the plan itself may not have anything positive to say about it. I am yet to read a single piece of economic analysis that talks about the benefits of this $700,000,000,000.00 socialist rescue effort other than the fact that it will bail out big Wall Street firms (oh, and add to that foreign banks too - after intense lobbying this weekend, they managed to get themselves on the gravy train).

Even William Kristol, a regular commentator on the Fox News Channel and staunch conservative who is normally a champion right wing intellectual mouthpiece cannot muster a single word in support of this plan: He even endorses a novel idea in the realm of executive compensation structures:

It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States. - This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Michelle Malkin, another right wing conservative blogger had the following to say:

And this is a Republican White House presiding over the Mother of All Bailouts. Every step along the way since stimuluspalooza began last summer, we’ve heard that every bailout step was just a one-off. Each step was supposed to calm the markets. Each new government intervention and allocation of taxpayer dollars was supposed to achieve “stability.” Each new package of goodies rewarding irresponsible behavior and bad financial decisions was supposed to prevent new ones. None did. And now, here we are. This is your Bush legacy — not Pelosi’s, not Reid’s, not Obama’s: A ginormous bailout of every last, failing, panicked financial institution’s illiquid assets that may reach into the trillions — TRILLIONS – when all is said and done.

Paul Krugman, a Princeton economics professor calls it 'cash for trash'. He is right.

If the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place. That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets.

It is especially frightening when Mr. Paulson is demanding what amounts to absolute unfettered authority over the overseeing, administration and the means to manage this $700,000,000,000.00 payout: He demands immunity from review “by any court of law or any administrative agency”. When public officers ask for enormous powers of this kind and ask for blanket protection from any screw-up – one should instinctively be cautious.

This was the same man who said the following with respect to the sub-prime mortgage crisis a couple of years back: “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained”

Nobody is clamoring for killing the bailout – it will fry the financial world at this late juncture, all one asks for is accountability to the people, ownership by the people and regulation for the people.

Aaron Johnson, 'Star Crossed', Acrylic polymer and pigment on polyester flag, 93 x 128 inches. Photo from a recent visit to Aaron Johnson's show at the Stefan Stux Gallery (runs from 4 Sept - 18 Oct, 08). Reverse-painted acrylic polymer peel paintings on polyester American flags.

On flipping flopped companies

Looks like the Fed is flipping and flopping a lot like the McCain campaign in its policy pronouncements. “Being for something before being against the same”.

When the financial markets were melting down on Monday with Lehman going under and jobs lost all around, McCain coolly comes up and tells us that the economy is strong. Later he backtracks and says that he was talking about the American people and not the health of the economy actually. Likewise, the Fed initially said that they will not bail out AIG before actually deciding to bail them out late evening yesterday. Yes, it called for an injection of $85 billion of taxpayer money this time. Of course, this is on top of the bail out of Bear, Fannie and Freddie.

The latest bailout might be labeled as the ‘mother of all bailouts’ since it was not just the company (AIG) that was bailed out, but all those toxic assets from companies that AIG had insured. In essence, AIG's clients still got to chew on their toxic mortgage meatballs while the taxpayers stepped in to foot the bill. Of course, many will advance the argument that AIG was 'too big to fail'. Even if one agrees with this theory (yes, this too big to fail thing is fast becoming a theory as more and more banks are signing on the bailout bucket list), the bailout should have come with regulatory conditions that will prevent this mess from happening again. Of course, none of that happened. Taxpayer money was pledged to straighten a large Wall Street firm with minimal guarantees ensuring the survival of the firm, ensuring the people at the top get their regular bonuses and also ensuring that nary a legislation or regulation is passed that would have prevented a meltdown like this from happening in the future. Well, this is free market at its best.

Two things were clear after the latest bailout: The first being that the Fed is absolutely clueless and has just about zero control over the rapidly deteriorating situation in the financial markets. The other being that we have just further slowed down what was essentially an already very slow moving financial train wreck. What is that expression of Chinese torture – death by a thousand cuts – is what we will be subject to….

Executive paycheck watch - II

As the investors keeps getting hammered with more bad news (AIG falling under after ratings cut last night, Goldman announced a couple of minutes back that their profits were down 70%, the first time since the company went public, Merrill to see large layoffs, thousands of Lehman workers out on the street), here is a bit of news that looks to the bright side of things...

From here: Merrill Lynch & Co. Chief Executive Officer John Thain and trading-division head Thomas Montag may reap payouts totaling more than $47 million if they leave or are given lesser roles after Bank of America Corp. buys the firm.

The ultimate irony with the whole payout was that John Thain was hired into Merrill nine months back explicitly to turn the ailing company around. Instead, he turns tables and sells the company lock stock to Bank of America (of course, he had no other option after the debacle at Lehman). Yes, greed is good.

The executive paychecks for CEOs who were responsible for sending Fannie Mae and Freddie Mac into the ground covered here previously.

As we rouge pig lips...

Just this morning on the train to work, I read…

- 156 year old Lehman Brothers is fighting for its life on Wall Street – fallout from the ‘markets know best’ culture that spawned the sub-prime mortgage fiasco

- One of the poorest nations, Haiti (whose citizens use clay mud cakes to soften their hunger pangs) has been battered beyond belief by Hurricane Ike – fallout from global climate change

- Special Operations forces are now unilaterally striking targets in Pakistan without much regard to what the government of that country thinks or says – fallout from the so called ‘war on terror’.

- Oil companies in Texas bedded with an Interior Department agency that collects taxes on oil drilling using sex and drugs as carrots. Investigators called it a ‘culture of ethical failure’ – fallout from the ‘drill, baby drill’ chant popularized by you know who

- Venezuela’s president plans to pilot Soviet made TU-160 ‘Blackjack’ bombers in a show of joint military force with the Russians just south east of our coastal borders – fallout from an ill conceived backing of the Georgian war

- The worlds most isolated and unpredictable regime’s ‘Dear Leader’, Mr. Kim Jong-il suffered a stroke – raising fears of an ugly succession battle in a country armed with nuclear missiles – fallout from the world deciding to isolate the regime as rogue and classifying it as ‘axis of evil’.

And here we are – debating pigs and lipstick… My take is that the only good thing that go well with pigs is dollops of barbecue sauce. When are we going to get to some real issues?