Lots to think about this week-end.
Jesse at the Cafe Americain digs out a speech by Ron Paul whom other than being one of the more sensible politicians thus enjoying the usual degree of ostracism as someone that tells it like it is usually does, appears to be concerned that “revolutionary change” is heading our way.
Over at the Market Ticker, Karl Denninger digs out a Wall Street Journal opinion piece by one Holman Jenkins Jr who takes a sarcastic and condescending swipe at those of us that see things for what they are and are intent on raising awareness.
As I began to distill excerpts from the WSJ piece, I soon realized that there was too much glaring bull shit being passed off as rational logic that I decided to break down the article in its significant paragraphs and comment on each. My comments are prefixed with “GR”.
“If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller’s Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—”nearly two and a half times the previous annual peak in 2000.”
GR – So then, everything seems all right. Crisis averted, economy saved and all is well.
“Profitability,” adds the state of New York, “has soared because revenues rose while the costs of doing business—particularly interest costs—declined” (in other words, thank you Federal Reserve).
GR – This is a reference to the fact that the money that has been given to the banks is sitting in reserves on which the Federal Reserve is paying interest to the banks. Thus the Federal Reserve is paying interest to banks on money that has been given to them free of charge by the Federal Reserve. This, I might add, whilst banks are raising interest rates on loans to the public and where interest rates on credit card balances are now in the range of 30% if you are banking with some of the more prominent financial institutions.
[…] …but compensation isn’t paid out of profits, it’s paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money….
GR – True; bonuses are paid out of revenue. Here’s the thing. The revenue banks enjoyed in the past two years has been achieved by illegal means. Essentially, subsequent US administrations have decreed that banks may disregard Mark-to-Market accounting rules. In so doing, government allows banks to maintain their investment rating thus eliciting more institutional funds thus goosing revenues. Of course, this begs the question why, if banks are in such rude health, allow them to disregard one of the linchpins of the entire accounting construct? Furthermore, both the government and the monetary authorities are still refusing to look into High Frequency Trading that artificially inflates trading volume in a security thus giving the appearance of liquidity and interest thus eliciting even more institutional funds (your pensions and insurance funds for example). But, more disturbing still, is what sort of “smarts” are banks availing themselves of when the game is rigged in their favor by none other than the government and, I might add, the one government that has exclusive control of the world reserve currency?
[…] But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion.
GR – Author attempts to diminish the importance of the sum in relation to the capitalization of the company. But think about it in a different manner. Without government collusion, the banks could not have enjoyed even such “meager” earnings.
“Much of the nation’s paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.”
GR – Here I’ve lost the author. Not sure what he means by “the Federal Government briefly fumbled”. However, that Americans overbet on housing is plainly false by any measure you care to look at. Revolving credit and mortgage origination have been declining for the past two years.
“Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition.”
GR – If that were the case, mark to market rules would have been suspended for everyone and not just for a chosen few. Either that or there would be no need to suspend mark to market rules for anyone at all. At the very least, now that banks are so healthy again, then mark to market should be reinstated. Whichever way you turn it, this is still bull shit.
“But didn’t taxpayers bail out the financial system, so don’t taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren’t doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).”
GR – The author conveniently omits the fact that it was not the taxpayers decision to give funds away. Neither was it a decision of congress. It was the decision of unelected officials like Hank Paulson then and Tim Geithner now whom were accorded extraordinary executive powers to act as they see fit. And act they did, hence the profits claimed by their alternatively employers/sponsors. With regards to the income tax the Fed may stand to collect, those sums must be viewed in the context of the worth of the assets the Fed originally purchased with public money. However, we will not know what the assets that were purchased with our money are worth till mark-to-market rules are reinstated. And let me tell you, early indications are not good. Just remember that the most successful Ponzi schemes are predicated on paying out “profits” to a handful of patsies. The trick is in not allowing the patsies to see how those profits were earned because when you realize that they are paid out of revenue then you also realize that revenue may not be organic and, as is very clearly the case for the banks at this time, is dependent on eliciting more funds from new investors. This is exactly how Madoff operated. Text book Ponzi. And the fact that the Federal Reserve should be fighting tooth and nail a legitimate request for transparency (one of Obama’s campaign promises I might add) by none other than the courts of law of the land, inspire confidence it does not.
“Taxpayers effectively acquired these assets on a bet that taxpayers’ own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn’t intervene. That bet has proved a good one so far (as bets often do when you control the outcome).”
GR – Once again. Author omits to take into account mark to market rules. Till mark to market is reinstated for all or lifted for all, we won’t know what the worth of the assets we were saddled with are worth.
Now, in guise of a heads-up in terms of looking for indications of what invested public money may be worth now or in the future, I warmly recommend you read this post by Jesse’s. No need to read the whole thing if you have no time. Just look at the graphs.