Posts Tagged ‘personal consumer expenditure’

GMAC… again… Tax payer now majority stake holder

December 31, 2009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agcYWuOIJVRg

Excerpts:

The infusion will bolster lending at GMAC as it absorbs $3.8 billion in new pretax charges and decides what to do with its loss-plagued home mortgage unit, according to statements from the agency and the company yesterday. The aid comes on top of about $13.5 billion previously earmarked for GMAC, which regulators have said is crucial to the U.S. auto industry. […] The U.S. stake will rise to 56.3 percent from 35.4 percent. The U.S. also controls General Motors, GMAC’s former parent, whose stake shrinks to 6.7 percent.

The following are quotes that should likely elicit a “what the fuck!” from you if you understand the irony:

GMAC was the only company of 19 that underwent stress tests that wasn’t able to raise capital in the private sector, Williams said. Still, the Treasury said the aid was less than originally planned because restructurings at GM and Chrysler caused less disruption at GMAC than regulators expected. Tim Price, a partner at Cerberus, didn’t return a call for comment. […] There will be individual asset sales in the near future but whether some larger concept evolves is a matter of time,” Carpenter said. “We think ResCap and the mortgage business is stable and that we don’t have to do anything crazy. We have no urgency.

So aid was less than originally planned? A cynic would say that GMAC is not done asking for capital as they have just done. As far as having no urgency to do something “crazy” is concerned: of course you have no urgency, the government is shoveling public funds your way.

Here is the moral of the story.

Billionaire investors, astute funds managers, competent hedge fund managers and lowly retail investors are all saying they are not interested in buying GMAC stock. They look at the company, they don’t like what they see and they don’t buy the company stock.

So, apparently, Obama thinks that his administration is smarter than all the more competent investors in the market place and decrees that your money will be given to GMAC whether you like it or not.

The government is now majority owner in GMAC as it is majority owner in GM which was the original owner of GMAC and all this with your money. The money you and me and everyone else thought would be employed in infrastructure improvement, education or financial reform is now being given to a failing finance company that was created in order to sustain GM but that turned out to be one of the largest lenders to the real estate bubble and that is today creaking under the weight of its failed bets.

Obama thinks GMAC will turn out ok and against taxpayers’ wishes is giving them just under $4Billion Dollars on top of the $13Billion that had already been given a few months ago.

Can we yet call this corporatism? Can we call it Fascism?

War is dialed in latest by 2015 but, likely, by 2013

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The elephant in the room…

December 20, 2009

Remember that the US$ is the world’s reserve currency and that we are running a floating exchange fiat monetary system.

Hat tip to Karl Denninger for the chart: http://www.market-ticker.org/archives/1752-There-Is-No-Way-Out-Of-This-Box…..html

https://i0.wp.com/www.market-ticker.org/uploads/Dec2009/credit-all.png

Deflation at work…

November 17, 2009

http://detnews.com/article/20091117/METRO/911170327/1409/METRO/Silverdome-sale-price-disappoints

Nearly 35 years after taxpayers spent $55.7 million building the Pontiac Silverdome and a year after a $20 million sale fell through, city officials have sold the arena once called the most desirable property in Oakland County. […]  The price: $583,000. […] We had hoped it would have brought more, but now the city can be freed of its upkeep and get it back on the tax rolls,

This is what deflation does. It reduces nominal wealth thus it reduces overall revenue streams and so it reduces tax revenue. As nominal wealth declines, entities can no longer expand outstanding debt due to diminished collateral. As revenue declines, entities can no longer expand debt and/or service existing debt and must lay off workers. As tax revenue falls, local governments have to lay off and curtail public spending.

Allowing banks to disregard mark-to-market accounting rules aims to avoid just this type of situation in the hope to buy time.

But inflation has a limit. If that were not the case, then you would expect some degree of direct correlation between inflation and GDP progression. But that is not the case. Since 1980 government and household debt expanded by 1200% to $26Trillion but GDP only expanded by 100% to $14Trillion. Thus inflation conforms to the law of diminishing returns.

From the inception of the modern Dollar in 1913 inflation proved to be a barrier almost immediately in 1929. Subsequently, by declaring convertibility to gold but not allowing anyone to check the quantities of the metal in storage, the USA were free to pretty much print whatever amount of money they wanted. Till the late 60s when the situation was fairly similar to where we are today.

By the early 70s it was decided to abrogate the monetary agreement that had been in force since WWII in favor of floating exchange rates meaning that now Europe too was on a fiat monetary system. Thus inflation could now be pushed into the new vacuum of the European markets. Then came globalization effectively allowing us to push inflation into the last remaining markets and the Euro that allowed us to inject a further dose of inflation in Euroland. Thus till very recently, inflation could come to the rescue of governments by decreasing nominal debt outstanding.

There are no more markets of any consequence that we can bring in on the inflationary gig. Thus my contention that we’ve reached the end of the inflationary cycle.

Industrial capacity and debt obligations are at historic highs. Interest rates, savings and capacity utilisation are at historic lows.

Why would gargantuan spending by governments to add even more industrial and commercial capacity solve anything?

Incidentally. Gargantuan government spending guarantees prolonged deflation because increased taxes will erode spending, hiring and investment. Therefore, if anything, spending of this magnitude only serves to delay the eventual recovery.

So, buying time may be a viable strategy if and when inflation has room to run. I think inflation can no longer be expanded at this point and that a gradual contraction in prices, wages and asset values is with us for some years to come.

The trouble is that the existence of government if predicated on inflation. No inflation = the bankruptcy of government.

Can a Western government declare bankruptcy?

 

 

Even more proof the secular inflationary cycle has ended…

November 1, 2009

Via the team at Zero Hedge

http://www.zerohedge.com/article/guest-post-dear-prudence-wont-you-come-out-play

Read the entire post and look at the graphs. This is just more proof that traditional monetary policy has lost traction and that government is “pushing on” the proverbial “string”.

Important excerpts:

It should be no surprise to anyone that household debt outstanding fell again in 2Q (the latest Fed Flow of Funds data), making this now three quarters in a row of household net debt contraction.  The important character fingerprint in the 2Q period being that debt contraction at the household level accelerated. […] Household sector credit contraction is a first in post War history (emphasis added).

[…]

If households are paying debt down, then something has to be given up for that balance sheet reconciliation decision.  And the give up is consumption.  Although you may not realize this, and this is clearly one of the key reasons why the long tenured Street truism suggests no one bet against the US consumer, personal consumption in nominal dollars has actually increased during each and every recession of the last six decades (at least).  Each and every recession until the present, that is. […]  Lastly, we believe it’s also important perspective to remember that in our current circumstances, households have been treated to some of the lowest interest rates of a lifetime and consumer product price weakness has been pronounced.  Yet still zip in terms of consumption gains 19 months into official recession territory.

 

All I can say, is that you should be accumulating gold and silver bullion.

 

Backdoor taxes hit Americans with public financing in the dark

October 26, 2009

This article highlights information that is much too important to show excerpts for. I warmly suggest you read the whole thing because it will give you an idea of the scope, breadth and depth of this debacle. I will reproduce the full text of the article and intersperse my comments in brackets prefixed by “GR” in Italics.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aBarSkIcch2k

Oct. 26 (Bloomberg) — Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

“I thought they were money markets that were just paying more,” Calvanese said in an interview. “Nobody ever used the term ‘CDO,’ and I am not sure I would have known what that was anyway.” (GR: This, I remind you, from a “Treasurer”; a County Treasurer to boot. These are the type of people that are in charge of public funds)

Such financial mistakes, often enabled by public officials’ lack of disclosure and accountability for almost 90 percent of government financings in the $2.8 trillion municipal bond market, are costing U.S. taxpayers as much as $6 billion a year, according to data compiled by Bloomberg in more than a dozen states.

The money lost to taxpayers — when the worst recession since the Great Depression is forcing local governments to cut university funding, delay paying bills and raise taxes — is enough to buy health care for everybody in Minneapolis; Orlando, Florida; and Grand Rapids, Michigan, according to figures from the U.S. Census Bureau and the U.S. Department of Health and Human Services.

Florida county commissioners sent deals to their favorite banks in an arrangement that led to criminal convictions. Pennsylvania school board members lost $4 million on an interest-rate swap agreement they didn’t understand in the unregulated $300 billion market for municipal derivatives.

Trouble With Swaps

Local agencies in Indianapolis, Philadelphia, Miami and Oakland, California, spent $331 million to end interest-rate swaps with banks including JPMorgan Chase & Co. of New York and Charlotte, North Carolina-based Bank of America Corp. during the past 18 months. The swaps, agreements to exchange periodic interest payments with banks or insurers, were intended to save borrowing costs. Payments increased instead.

New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds the state redeemed more than a year ago, Bloomberg News reported Friday.

The interest-rate swap agreement, which the state entered in 2003 under former Governor James E. McGreevey, remained in place even after the state Transportation Trust Fund Authority replaced $345 million in auction-rate bonds that had fluctuating yields with fixed-rate securities last year.

Harvard Pays

Now, the 3.6 percent the trust fund is paying on the swap has pushed the cost on the original debt to 7.8 percent, the most the authority has paid since it was formed in 1985, according to records on its Web site. Canceling the swap before 2011 would require the state to pay an estimated $37.6 million fee, according to state records.

Even Harvard University, whose endowment of $26 billion makes it the world’s richest academic institution, fell for Wall Street’s financing in the dark: The Cambridge, Massachusetts- based university paid $497.6 million to investment banks during the year ended June 30 to cancel $1.1 billion of swaps. (GR: This from Harvard… that sacrosanct temple of knowledge)

The public needs more transparency in municipal debt transactions, said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program. Proposed reforms, such as an oversight agency for consumer finance, could help spur improvements, she said in an interview this month.

‘Worldview Change’

“We need a worldview change about transparency, and that includes municipal finance,” said Warren, a professor of bankruptcy law at Harvard Law School.

The public paid extra costs for borrowing with tax-exempt bonds because local governments resist providing investors the same level of disclosure as corporate borrowers, which file quarterly reports.

Municipalities typically file financial statements only once a year. Detroit, the largest U.S. city with a less-than- investment-grade credit rating, released its annual report for fiscal 2007 in March, more than 18 months later.

State and local governments that share more financial information than the minimum required pay yields as much as 0.20 percentage points lower than others, said Lisa Fairchild, professor and chairman of the finance department at Baltimore’s Loyola University Maryland, who produced a 1998 study on disclosure.

Applied across the tax-exempt bond market, that’s $5.6 billion a year, enough to buy more than 12,000 $465,608 pumper- tender fire trucks. That’s more than one truck for every county in the U.S. The rest could form a parade 50 miles (80 kilometers) long.

Build America Bonds

State and local governments that sold $43.8 billion of taxable Build America Bonds this year will pay $385 million a year more in interest than similarly rated corporate borrowers, based on data compiled by Bloomberg.

The bonds, for which the federal government subsidizes 35 percent of interest costs, pay an average yield that’s 0.8 percentage points more, relative to benchmark rates, than yields for corporate securities with the same credit ratings, the data show.

As a result, it costs New Jersey road authorities, Georgia sewer districts and other agencies more to borrow, even though they, unlike corporations, can raise fees or taxes to make up for deficits. Corporations are at least 90 times more likely to default than local governments, according to Moody’s Investors Service.

Discounted to their present value, those additional payments by municipal borrowers add up to $6.1 billion over the life of the debt.

‘It’s Horrendous’

“I think it’s horrendous, but it’s very hard to get anybody to pay much attention to it,” said Stanley Langbein, a law professor at the University of Miami and a former tax counsel at the U.S. Treasury in Washington.

Underwriters — banks or securities firms that guarantee the purchase of debt issuers’ bonds — have an interest in keeping prices low, and yields high, because it means higher returns for them and the first investors, Langbein said.

Many Build America bonds traded at higher prices immediately after agencies sold them, a sign that taxpayers lost, he said.

The Government Finance Officers Association, a professional group based in Chicago, warns municipalities of “competing objectives” in their relationships with underwriters. Many don’t heed that warning, said Christopher “Kit” Taylor, who was the top regulator of the municipal bond market from 1978 to 2007.

‘Stockholm Syndrome’

“They’re suffering from Stockholm syndrome,” he said, referring to the psychological phenomenon in which hostages begin to identify with and grow sympathetic to their captors. “They are being held hostage by their investment bank.”

Public officials shunned competitive bids for more than 85 percent of the $308.9 billion in new tax-exempt bond sales in the first nine months of this year, according to data compiled by Bloomberg. That’s up from 17 percent in 1970 and 68 percent in 1982, according to the Government Accountability Office.

Most borrowing costs that state and local taxpayers incur are set in private negotiations. Finance professionals say no- bid sales allow them to market debt to particular investors, helping issuers find demand when credit markets are tight.

The method boosts interest rates by as much as 0.06 percentage point, according to several academic studies reviewed by the GAO.

Excess Fees

Palm Beach County, Florida, paid $880,000 in excess bank fees and as much as $1.3 million a year in unnecessary interest because its commissioners sold bonds without bids, according to a county report in April.

Each commissioner nominated his or her favorite bank and work was parceled out on a rotating basis, the report showed. That allowed former commissioner Mary McCarty to steer more than $600 million in debt issues to banks that employed her husband, Kevin McCarty, according to federal charges that led to guilty pleas from both this year.

After the McCartys were charged, the county adopted a policy stating a preference for competitive bond sales. When bonds are sold by negotiation, a financing committee will circulate a request for proposals, evaluate them and then recommend an underwriter to commissioners, said Liz Bloeser, Palm Beach’s budget director.

No Bids

Beaver County, Pennsylvania, commissioners haven’t taken bids for bond underwriters since 1986, county records show. After relying on the same firm for more than two decades, they paid as much as $2.8 million more than they had to on a bond sale in January, based on trading records from the Municipal Securities Rulemaking Board, which oversees the tax-exempt bond market.

Using the same underwriter repeatedly for negotiated sales increases borrowing costs each time, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. The study found that if an issuer had used the same bank twice before, its borrowing cost on $100 million of 10- year bonds increased by more than $1 million over the life of the debt.

Other financial mistakes can be difficult to quantify. Taylor, who studied government finances for 30 years as the executive director of the MSRB, said as many as five out of 10 local governments “aren’t getting the best deal by a long shot” on their investments.

Overpaid for Securities

Apache County, Arizona, overpaid its broker almost $500,000 for U.S. government securities, county records show. A price check would have caught the problem. The county has no record that it ever did one.

Many local officials are unprepared for Wall Street’s sales pitches, said Mary Christine Jackman, Maryland’s director of investments in Annapolis.

“When you combine people who are less sophisticated with people who can sell as those on Wall Street usually can, you end up with a very big problem,” she said. Jackman tries to offer basic training and advice to small municipalities, she said.

There are more than 89,000 cities, counties, school districts and other municipal authorities in the U.S., according to data from the Census Bureau. Each year, about 5,000 people attend training sponsored by the Government Finance Officers Association, which has 18,000 members, said Jeff Esser, the group’s executive director.

‘Doing Nothing’

The GFOA has never tried to make a comprehensive tally of its members’ educational attainment or professional backgrounds, he said. He added that during his 30 years with the organization, he has seen “a significant increase” in members’ education, training and professionalism.

Supervisors in Mohave County, Arizona, took issue with the professionalism of its treasurer, Lee Fabrizio, during an investigation last year in which employees reported that he played a lot of golf and was rarely in the office.

“It’s nice to get this paycheck for doing nothing,” Fabrizio told employees once, according to the July 2008 report by the county manager.

Fabrizio, who received a $56,500 annual salary, said he doesn’t remember making that statement and was in the office every day. He said he played nine holes of golf a day for two hours at lunchtime.

An employee’s grievance sparked the investigation and ultimately a state audit, which reported Aug. 28 that the treasurer bought corporate bonds with no evidence of competitive bidding, didn’t vet brokers’ backgrounds and continued to value a $5 million Lehman Brothers Holdings Inc. bond at full cost even after the firm’s Sept. 15, 2008, bankruptcy.

Not an Expert

The Lehman bond was purchased in late 2007, when the treasurer put $50 million, about 25 percent of the county portfolio, into 11 corporate bonds, 10 of them in financial firms including Lehman and Bear Stearns Cos.

“Even if it was a bad investment, I wouldn’t have known the difference; I’m not an investment expert,” Fabrizio said, adding that he relied on his hired deputy for those decisions. The deputy e-mailed competing brokers and had them fill out questionnaires, he said.

The county never sanctioned him, and he was voted out of office last year.

The Lehman loss cost the 7,000-student district in Kingman, Arizona, the county seat, almost $1 million, according to Wanda Hubbard, the schools’ finance director. The real losers are taxpayers, who will be levied more as a result, she said. The owner of a $250,000 house in the district may pay $25 extra this year, Hubbard estimated.

‘Back-Door Tax’

“It was kind of a back-door tax increase,” she said.

Officials are up against increasingly sophisticated financial products, including interest-rate swaps and so-called swaptions. A swaption grants the owner the option to force a particular party into a swap.

The Butler Area School District in western Pennsylvania paid JPMorgan $5.2 million last year to cancel such a pact. The payment was about seven times more than the district had received under the contract. Statewide, 55 Pennsylvania school districts have paid counterparties to exit interest-rate swaps since 2003, according to state records.

Some officials now say they didn’t understand the deals.

“The financial guys would come in with a lot of stuff that nobody at the district understood,” Penelope Kingman, a former member of the Butler school board who voted against the deal, told Bloomberg News last year. “Local governments are entering into these without fully understanding what they are doing.”

Market Has Grown

While such contracts aren’t traded on regulated exchanges, the market for municipal derivatives has grown to as much as $300 billion annually, the MSRB says. Derivatives are a category of contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

One type of derivative, the interest-rate swap, helped put Jefferson County, Alabama, on the brink of bankruptcy.

The county refinanced $3 billion of sewer debt in no-bid deals earlier this decade, issuing variable-rate bonds that were hedged with swaps. The plan backfired last year as the global credit crisis took hold. Interest payments due on the bonds more than tripled to 10 percent, while the swap income decreased.

Last week, the former president of the county commission, Larry P. Langford, went on trial in federal court in Tuscaloosa. Langford, now the mayor of Birmingham, pleaded not guilty in December to charges including bribery, conspiracy and filing false income tax returns.

‘Political Witch Hunt’

Prosecutors say he took cash, clothes and Rolex watches from a banker who received $7.1 million in fees on debt sales in 2003 and 2004. Langford has called the case “a political witch hunt.”

The Justice Department and the Securities and Exchange Commission are investigating whether Wall Street banks conspired with some brokers to rig bids and fix prices for municipal derivatives. The probe centers on interest-rate swaps and on investments that cities, states and schools buy with bond proceeds, according to subpoenas received by agencies in Alabama, Illinois, Pennsylvania and New Mexico.

While many municipalities turn to professional consultants for guidance on derivatives, the MSRB reported in April that 73 percent of financial advisers who participated in the municipal bond market in 2008 weren’t subject to the board’s rules because they weren’t registered securities dealers.

Legislation Considered

Congress is considering legislation to regulate the financial advisers. Still, there are other gaps.

Federal law exempts the municipal market from rules regarding disclosure and enforcement that apply to companies. And transactions between broker-dealers and municipalities are rarely scrutinized by the self-regulatory agencies that banks and securities firms use to police themselves, including the Financial Industry Regulatory Authority, said Taylor, the former MSRB chief.

Finra and other regulators presume that institutional clients are sophisticated enough to look after themselves, he said.

“Typically, what happens is, nobody looks,” he said. “Finra doesn’t look, the firm doesn’t look, the city council doesn’t look and the populace, the taxpaying populace, has no idea any of this is going on.” (GR: This is a typical case of people doing something just because everyone else is doing it regardless of whether they understand what they are doing or not)

Nancy Condon, a spokeswoman for Finra, declined to comment. The Strategic Programs Group of the authority’s enforcement department in May sent letters to dealers seeking information about interest-rate swaps, structured notes and other products they may have sold.

Enforcement Questions

Taylor questioned why the information-gathering hasn’t led to anything further.

“Finra wants the world to think it is doing something for investors and the good of the markets without actually bringing any enforcement actions or adopting any rulemaking,” he said.

In Orange County, the home of both Disneyland and the largest municipal bankruptcy in U.S. history, officials echoed the mistakes of 15 years ago by investing in another Wall Street innovation.

Robert Citron, who was county treasurer leading up to the 1994 bankruptcy, bought structured notes that paid off when short-term interest rates were lower than medium-term rates, and increased his gamble with funds from issuing new debt. The county lost $1.6 billion when interest rates rose.

Cost of Insolvency

Payments from the resulting insolvency still cost more than $80 million annually, about 1.5 percent of the county’s proposed fiscal 2010 budget.

County supervisors responded by creating an oversight committee to monitor the treasurer and banning investments in derivatives and the use of leverage to amplify returns.

Under John Moorlach, the accountant who exposed the bad bets and succeeded Citron as treasurer, the county later invested in structured investment vehicles, or SIVs. Banks set up the pools of loans to shift risk from their own balance sheets. They borrowed money at short-term rates to finance longer-term investments such as British credit-card receivables or home mortgages.

Moorlach said he got into SIVs, which often yielded more than the county’s other investments, after a ratings officer from Fitch Ratings told him that such exotic instruments were becoming more mainstream. (GR: The ratings agencies have been shown to be partial and bought for since many years. And yet, no government authority bothered to dismantle any of them. Quite the contrary, they sponsored and rewarded rating agencies for volume of business)

By 2007, one year after Moorlach won election to the county’s board of supervisors and was succeeded as treasurer by Chriss Street, the investments in SIVs totaled more than $800 million. They made up 14 percent of a county investment pool that manages money for the county, schools and local agencies.

‘Weren’t Paying Attention’

The county sold one SIV at $6.4 million below par last year and so far has recovered about $30 million of the $80 million it invested in Whistlejacket Capital LLC, created by London-based bank Standard Chartered Plc. Whistlejacket, which listed Citigroup Inc. debt and U.K. home loans among its assets, went into receivership last year.

“Despite the oversight, despite the audits, they weren’t paying attention — and should have been,” said Terry Fleskes, a member of an independent panel that chastised the treasurer and county auditor in June for allowing more investments in complex financial products. Fleskes is a former controller at a unit of San Diego-based Sempra Energy.

“The lessons of the past have been forgotten,” the Orange County Grand Jury said in its report. The group, which doesn’t have the authority to compel changes, serves as a kind of ombudsman to examine county policies.

‘Best Stuff Around’

The structured vehicles were difficult to evaluate, Moorlach said. He relied on rating companies, which “were treating it like it was the best stuff around.”

“I think the rating agencies have a lot of explaining to do because of the overreliance by hardworking municipal treasurers,” he said. (GR: Rating agencies can be blamed for what were clearly partial and paid-for opinions on the safety of various investment instruments. However, this fact does not detract from the fact that a Treasurer should know what he is getting himself into. This is what fiduciary duty is all about. One thing is a bank clerk peddling investments to an individual consumer whom may not necessarily know better and would fully rely on the rating agency’s advice. An entirely different thing is when a “treasurer” too relies blindly on the agency advice especially considering that even a cursory look at their prospectus would highlight potential conflicts of interest.)

A Fitch spokesman, Kevin Duignan, declined to comment. (GR: No kidding! I wonder why.)

“It’s easy to point the finger at others,” said Bart Hildreth, dean of the Andrew Young School of Policy Studies at Georgia State University in Atlanta and a former finance director of Akron, Ohio. “The rating agency didn’t authorize the allocation of the money.”

Orange County auditor David Sundstrom said the amount at risk in SIVs was nothing like the leveraged wagers made by Citron.

“The controls compared to pre-bankruptcy are incredibly strong,” he said.

Out of SIVs

The county has exited all of its SIV investments except Whistlejacket, in which it has notes in a restructured successor that’s being liquidated. Taking into account interest earned, the county hasn’t lost on the SIVs, said Deputy Treasurer Keith Rodenhuis. Interest totaled $58.6 million, with $50.2 million in capital still outstanding in the Whistlejacket successor. County officials expect to get that money back in time, he said.

While Moorlach said Orange County did what it could, sending an analyst to London to investigate one SIV and examining financial reports, the investments may have been a mistake.

“If something’s taking up so much of your time, maybe it ain’t worth it,” he said in his Santa Ana, California, office, overlooking a courtyard where volunteers from local churches serve hot dinners and distribute essentials like socks and toilet paper to a 40-deep line of needy people.

King County, Washington, the home of Seattle, has recovered less than half of $207 million that it put into four failed SIVs. It sued rating companies in federal court this month, saying it was misled by their assessments.

No Clue

“There’s a basic rule of finance: Don’t get into anything you don’t understand,” said Michael Granof, an accounting professor at the University of Texas in Austin. “Many municipalities had no clue as to what they were buying.”

Apache County, Arizona, an area the size of Maryland where 70,000 people live among vast mesas dotted with shrubs, stuck to safe investments, such as U.S. Treasury securities and federal agency bonds. It just didn’t know how to value them.

County treasurer Katherine Arviso, a school administrator on the Navajo reservation for 40 years until she won election in 2004, said she arrived to find investment records packed away in boxes.

“I had to put the whole office back together,” she said.

Then came an August 2005 letter from Piper Jaffray Cos.’sBradley Winges, the head of sales and trading for the Minneapolis-based firm’s public finance group. He wrote that the firm had reviewed trades in the county’s account and found unacceptable commissions. The firm credited $247,060.79 to the county’s account.

Eventual Refund

Piper Jaffray eventually refunded $472,060.79, according to a settlement obtained by Bloomberg News under the state public records act. That’s more than double the $194,870 that the county, one of the poorest in the U.S., spent on immunization, teen pregnancy prevention and home health care last year. Apache County’s per capita income was $8,986 in the 2000 U.S. Census, less than half the U.S. figure, $21,587.

Three days after sending the letter, the firm fired broker Eric Ely, according to Finra records. Ely didn’t return telephone messages or respond to an e-mail seeking comment for this story.

From Oct. 20, 2003, to June 29, 2005, Ely executed 103 trades for Apache County, buying and selling bonds, according to a subsequent investigation conducted by Edward “Buzz” France, a former deputy county attorney.

Estimated Commissions

In a presentation to county supervisors, France estimated that Piper Jaffray earned commissions of just over $1 million on $158.6 million in principal, an average rate of 0.638 percent. Investment bankers told France the commissions should have been no more than 0.3 percent.

“Our clients’ interests come first,” Piper Jaffray said in a statement. “Four years ago, we discovered a situation in which we believed one employee had run counter to this guiding principle, and we proactively and quickly worked to rectify any client impact, and terminated the employee.”

There was no need for so many trades if the goal was steady, reliable returns, said Charles Anderson, the former manager of field operations for the tax-exempt bond division of the Internal Revenue Service.

A reasonable commission for the $158 million of securities that Apache County purchased would have been $50,000 to $100,000, said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets Corp. in New York, one of 18 firms that trade directly with the Federal Reserve.

Not Unusual

Basic financial mistakes trip up many local governments, said Kevin Camberg, a partner with Fester & Chapman P.C., a Phoenix accounting firm that has checked the books of Apache County and others in Arizona for the state auditor.

“It’s not as unusual as it should be,” he said.

France, the county investigator, never determined how Piper Jaffray was chosen to handle Apache County’s investment fund. The treasurer at the time, Betty Montoya, declined to comment on the selection process for this story.

Had the county checked Ely’s licensing history with Finra, which oversees almost 4,800 brokerage firms, it would have found previous allegations of infractions. Since 2002, investors have been able to access BrokerCheck reports of disciplinary histories online, said Condon, the Finra spokeswoman.

Ely paid $80,000 toward a $260,000 settlement of a customer’s 1989 complaint of “unauthorized and unsuitable transactions,” according to Finra records. Ely worked for Merrill Lynch & Co. from 1983 to 1990, the records show.

Settlement in Wyoming

In 2002, Piper Jaffray reached a $42,500 settlement of a customer’s allegations that Ely had purchased and sold securities contrary to Wyoming state law or local investment policy, the records show.

Ely, now affiliated with Public Asset Management Group in Greenwood Village, Colorado, and First Financial Equity Corp. in Scottsdale, Arizona, continued seeking business with small local governments. The broker gave a speech called Investment Management Alternatives for the School at a meeting of the Montana Association of School Business Officials in June 2008.

“He said he was interested in all the smaller players,” said Dustin Zuffelato, who attended as business manager of the 2,400-student Columbia Falls School District Six in Flathead County, Montana.

Zuffelato recommended that his school board consider investing about $8 million with Ely. The board declined, citing the logistical hurdles of switching investments from a pool managed by the county treasurer, he said. Zuffelato said he didn’t check for complaints against the broker first.

Investing 101

In June, the broker appeared again at the Montana schools conference, this time teaching a class called Investing 101.

In Springfield, Calvanese, the former city treasurer, said brokers told him he was investing in money-market funds.

City officials could have learned that they were really buying securities that bundle various issuers’ bonds or loans, or both, if they had insisted on seeing disclosure documents about the securities. Calvanese said in an interview that he rarely looked at such documents, which outline risks.

Calvanese was fired after the CDO investment came to light. He has filed suit challenging his dismissal.

Springfield officials and the Massachusetts attorney general argued that the city was misled by its brokers from Merrill Lynch, who sold it financial instruments that violated a state restriction on public investments. Calvanese said the brokers assured him the transaction complied with state law.

Merrill Lynch, now owned by Bank of America, returned the $14 million the city had invested, and agreed to pay an additional $300,000 in July.

A $75,000 portion of that money was set aside for educating municipal officials on investment management.

To contact the reporters on this story: Peter Robison in Seattle at robison@bloomberg.net; Pat Wechsler in New York at pwechsler@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net

GR: The moral of the story is that for as long as things are going in one direction, nobody can be bothered to go and look at the detail. Those that do are considered party poopers and those that opt out of what everyone else is doing are routinely blamed for substandard performance and may even lose their jobs. On the other hand when public finances are being squandered and pillaged at the highest echelons of government, how can lower ranking administrations officials be blamed for doing what their bosses are doing? Acting on principle and moral standing will very easily make your life impossible during the blow off phase of the inflationary dynamic.

The next World War

October 19, 2009

This is not a catchy title aimed at getting your attention. This is what our governments are planning if not by choice then by necessity.

(NB) Some of you have complained that the first iteration of this post was too disjointed. I am now altering it to highlight some of the relationships that have been discussed in previous posts in an attempt to connect the dots for those that have not followed my posts previously.

Mike Shedlock puts out a great summary of the illegal shenanigans our governments are tolerating and or colluding in and outlines the basis for what should be public outrage but is not… yet. Mike Shedlock does not go as far as predicting a global conflict. I do. Here’s why:

The defining characteristic of fiat money is inflation. One of the characteristics of inflation is that it brings forward and compresses in time the demand and production cycles.

Thus towards the end of the inflationary dynamic, you have excessive industrial capacity thus low pricing power.

Keep that in mind.

The only reason the West will engineer a war is because the coffers are empty. I know that alarmists have been jumping up and down for decades claiming that the coffers are empty. But they have been and still are empty. The difference is that for as long as a government is able to generate inflation, then you can borrow and spend thus maintaining the appearance of solvency (think of the pension trust fund that has been spent for example). However, inflation has a mathematical limit. Essentially, when interest rates are approaching zero and your entire issue of government securities goes towards servicing the debt, you no longer can borrow.

Printing money is a solution IF the money circulates. But if it doesn’t, then all you are doing is destroying the currency.

http://research.stlouisfed.org/fred2/series/MULT

Keep that in mind too.

Now!

One of the more insidious characteristics of deflationary recessions is that as unemployment rises, social costs go through the roof. However, government tax revenue drops dramatically (because of forced liquidation of which more later).

So, governments have to cut back on social expenditure just at the time that unemployment is rising.The other characteristic of deflation is that it forces a liquidation of assets thereby decreasing nominal earnings and the nominal value of balance sheets. The direct result is that all pyramid schemes and illegal finance arrangements are blown out of the water.

Therefore, we will have rising unemployment and a reduction of social expenditure at a time when many politicians and select members of the business elite will be implicated in scandal after scandal; and trust me, we are not done finding out about illegal or criminal practices. I know this because as the beneficial effect of inflation pumping wanes, government has a vested interest in aiding, abetting and colluding in criminal action (Fannie Mae… Goldman Sachs).

http://globaleconomicanalysis.blogspot.com/2009/10/where-hell-is-outrage.html

http://market-ticker.org/archives/1514-Tying-It-Together-Massive,-Pernicious-Fraud.html

The unemployed, the retired and the students will not take well to the new juncture and civil disorder will follow in short order.Civil disorder means that governments will fall.Politicians in the West are not about to relinquish power and they are certainly not about to admit that they are no better than your garden variety Mugabe.

Before enough unemployed will be roaming the streets looking for some politician to lynch, we’ll have us a world war.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6QpSf.s4NaA

It’s been done before for exactly the same reasons. There is absolutely no reason why it should not be done again.

We don’t need resources. We need to destroy plenty of infrastructure so that we may restart the inflation dynamic. No inflation = government default

Forward this post to anyone and everyone on your mailing list. You are the only ones that can prevent the next world war by forcing accountability and legal consequences on our politicians.

– ADDENDUM MARCH 11TH, 2012 –

As I go over posts written over the past few years, I realize that till very recently I have made use of the words “inflation” and “deflation” in erroneous thus ambiguous ways.

Inflation of course, is the expansion of the monetary base and credit. Deflation is the contrary.

Till very recently, whenever I mentioned “inflation” I meant the expansion of the monetary base and credit. So that is correct. However, whenever I mentioned “deflation” I meant the nominal decrease in asset prices thus in balance sheet.

You will forgive me as I am new at this writing stuff.

Below is the link to as well as the entire text of Mike Shedlock’s post

http://globaleconomicanalysis.blogspot.com/2009/10/where-hell-is-outrage.html

Where The Hell Is The Outrage?

The number of articles and opinions on Goldman Sachs earnings, bonuses, and influence pedaling over the past several days is quite stunning.

Many have pointed out the problems; few have expressed outrage over what is happening in general, not just at Goldman Sachs. Let’s take a look.

My take is at the end.

Letting The Dice Roll

Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.

Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.

Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.

With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?

Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.

To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.

Geithner’s Appointment Book

The New York Times is taking A Look Inside Geithner’s Appointment Book

As Treasury secretary in the aftermath of last fall’s Wall Street meltdown, Timothy F. Geithner needs to keep in touch with the nation’s top bankers. But it seems that he connects with some financial chiefs much more often than others.

An analysis of Mr. Geithner’s calendars, which the Associated Press obtained through the Freedom of Information Act, shows that Mr. Geithner had contact with top executives at Citigroup, Goldman Sachs and JPMorgan Chase more than 80 times during his first seven months at Treasury — while the heads of Bank of America and Morgan Stanley appeared on his calendars a total of just six times.

The Associated Press describes one spring evening when Mr. Geithner had a series of particularly high-powered calls:

After one hectic week in May in which the nation faced the looming bankruptcy of General Motors and the prospect that the government would take over the automaker, Mr. Geithner wrapped up his night with a series of phone calls.

First he called Lloyd Blankfein, the chairman and C.E.O. at Goldman. Then he called Jamie Dimon, the boss at JPMorgan. Obama called next, and as soon as they hung up, Mr. Geithner was back on the phone with Mr. Dimon.

Gee what might those calls have been about? Derivative bets on GM by any chance?

How Goldman Sachs Leveraged $70 Billion In Government Money

Jesse’s Café Américain is reporting How Goldman Sachs Leveraged $70 Billion In Government Money.

Guess which two Wall Street banks were acting as informal agents of the government in order to support the bond and stock markets and reinflate them?

Two big banks that are showing record trading profits, and a small group of enablers and assistants.

Exchange Stabilization Fund – wise, its a near layup when the US fronts you the money and then works with you to take the markets higher. Especially when it is on thin volumes based on ‘news’ which you help to create and control via frequent calls to young Tim who is your coordinator, in addition to all your other well-placed backchannel sources. You get a heads up, you use the futures to prop the markets. You need some good news, some can be arranged. Just like the good old days when Timmy was riding herd on the NY Fed desk.

All for the good of the country. And if you happen to make a billion per month in trading profits, well, that is the price of freedom for a job well done.

Max Keiser On Fraud

Robert Parsons: Is this froth and no substance or is there something to this?

Max Keiser: The word is not froth the word is fraud. JPMorgan, Goldman Sachs, Citigroup, are all engaged in accounting fraud. They are not realizing losses on trillions of dollars worth of bad debts on their books, giving themselves big bonuses this year, deferring losses to next year ….”

Part One

Part Two

The Goldman Tithe

Joe Peyronnin at The Huffington Post is writing Tithe Goldman Tithe

So Goldman Sachs is now concerned its company has a perception problem? They are even going to undertake a huge public relations offensive to turn things around? Well they sure have plenty of money to throw at this problem.

For sure, Goldman Sachs bankers work hard at creating value for their customers and shareholders. And their success should be rewarded. But a report that the firm had set aside about $20 billion for employee bonuses has caused a backlash. Critics say that Goldman Sachs is just back to its old money making ways.

Sadly Goldman Sachs doesn’t really care what Main Street thinks. Rather they are concerned what Congress or the U.S. Government might do.

The projected 2009 Goldman Sachs bonus pool will be around $20 billion, a near record amount. Therefore the average pay out per employee could be more than the $661,490 given in 2007. Memo to Goldman Sachs: most Americans don’t make that much in a lifetime of working.

This year Goldman Sachs should tithe. Take 10% right off the top of the bonus pool, or $2 billion, and donate it to rebuilding New Orleans and the Gulf Coast of Mississippi and Alabama. Tap into their own brainpower to develop a plan to target the money on specific worthwhile projects so it does not get diverted to corrupt contractors and politicians. For starters, money could be used to rebuild the 9th ward of New Orleans, and devastated sections of Biloxi and Bay St. Louis, Mississippi.

Subsequently, Goldman Sachs should donate 10% of their bonus pool each year to a particular cause, helping injured and needy US military veterans, underwriting national after school programs designed to keep kids off the streets and out of trouble, curing diseases and the list goes on.

The US taxpayers supported the financial community when its collapse was imminent. Now it is time for financial institutions to help their country in its time of need.

Goldman’s Public Relations Bind

The New York Times says Bonuses Put Goldman in Public Relations Bind

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Goldman executives are perplexed by the resentment directed at their bank and contend the criticism is unjustified. But they find themselves in the uncomfortable position of defending Goldman’s blowout profits and the outsize paydays that are the hallmark of its success.

For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.

Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.

Goldman executives know they have a public opinion problem, and they are trying to figure out what to do about it — as long as it does not involve actually cutting pay.

Another Goldman Executive Named To Key Government Post

Glenn Greewald writing for Salon notes Another Goldman executive named to key government post as its profits skyrocket.

Apparently, the U.S. government didn’t have enough Goldman Sachs executives in key financial and regulatory positions so Goldman Exec Named First COO of SEC Enforcement.
In October of last year, a Goldman Sachs Vice President, Neel Kashkari, was named by former Goldman CEO and then-Treasury Secretary Hank Pauslon to oversee the$700 billion TARP bailout. In January of this year, Tim Geithner hired a former Goldman Sachs lobbyist, Mark Patterson, to be his top aide and Chief of Staff. In March, President Obama nominated Goldman Sachs executive Gary Gensler to head the Commodity Futures Trading Commission, which regulates futures markets, even though (or “because”) Gensler confessed to lax regulation during the Clinton administration over the very derivative instruments that caused the financial crisis. In April, Goldman hired as its top lobbyist Michael Paese, the top aide to Rep. Barney Frank on the House Financial Services Committee which Frank chairs.

According to ABC News in October, 2008, Goldman “spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989” and their “bankers have been the country’s top political campaign contributors this year.” “They are almost in a class by themselves,” said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG — which resulted in massive federal government monies to Goldman — was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman.

That the administration continues, so brazenly, to place Goldman Sachs executives in the very government positions with the greatest power over the financial industry illustrates how little effort is devoted to hiding what is really taking place.

Adam Storch COO of the SEC

The Business Insider has posted an image and qualifications of Adam Storch, 29-Year-Old Goldman Guy Who Is Now COO Of The SEC

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Storch graduated from SUNY Buffalo. During college he did a stint as a summer intern at Neuberger Berman and worked at Deloitte & Touche for two years after graduating.

Storch then went to NYU’s Stern School of Business. This lead to a job at Goldman, where he worked for the last five years.

Derivatives Bill’s Loophole May Exempt Most Firms

Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.

“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”

The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.

The Rich Have Stolen the Economy

Paul Craig Roberts, writing for CounterPunch says From Offshoring Jobs to Bailing Out Bankers The Rich Have Stolen the Economy.

Bloomberg reports that Treasury Secretary Timothy Geithner’s closest aides earned millions of dollars a year working for Goldman Sachs, Citigroup and other Wall Street firms. Bloomberg adds that none of these aides faced Senate confirmation. Yet, they are overseeing the handout of hundreds of billions of dollars of taxpayer funds to their former employers.

The gifts of billions of dollars of taxpayers’ money provided the banks with an abundance of low cost capital that has boosted the banks’ profits, while the taxpayers who provided the capital are increasingly unemployed and homeless.

Except for the banksters and the offshoring CEOs, there is no source of consumer demand to drive the US economy.

The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.

Tenacious Goldman

Here is one more article, from July, courtesy of New York Magazine: Tenacious G

On the weekend of September 12, 2008, as the financial system shuddered and appeared to be on the verge of lurching to a halt, two Goldman Sachs men, former CEO Hank Paulson and current CEO Lloyd Blankfein, huddled with other banking heads at the Federal Reserve Bank of New York to consider how to stave off disaster. Bear Stearns was dead. Merrill Lynch, run by another former Goldman man, John Thain, was in desperate need of a savior. And now Lehman Brothers was on the brink. As secretary of the Treasury, Paulson asked the banks to come up with a private-funding solution for Lehman before it imploded from lack of cash. But all the banks had been scrambling for cash reserves or strategic mergers to buffer against a rapid freeze in lending. No one was able, or willing, to help. And Paulson, a free-market purist, had made one thing clear up front: The government would not bail out the firm. Lehman Brothers, a longtime Goldman rival, prepared to declare bankruptcy, ending its 158-year run on Wall Street.

By Sunday night, Paulson realized he had an even bigger problem: the insurance giant AIG. AIG had sold billions in credit-default swaps to several major banks, what amounted to unregulated insurance on risky subprime-mortgage investments, the very ones that were bringing down the economy.

Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG—one in which Goldman Sachs and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles.

At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior. By contrast, JPMorgan CEO Jamie Dimon did not attend.

The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake.

Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”

Somehow not recognizing (or perhaps not caring about) the brewing backlash, Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system. The company was earning its nickname: “Government Sachs.”

Both Rogers and Paulson (who’s publishing a book this fall that will presumably attempt to justify his decisions and save his damaged legacy) have argued that the AIG decision was about saving the system as a whole, not Goldman in particular.

Similarly, they say, when it came to AIG, the firm was “prudent” in hedging its bets, buying credit-default swaps from Bank of America, JPMorgan, Société Générale and other banks in case AIG failed to pay the money it owed Goldman—in effect, hedging its hedge against the mortgage market. Goldman Sachs had no “material exposure” to AIG, they argue. One senior executive goes so far as to suggest the firm might even have benefited from AIG’s demise. “We might have done very well,” he says, “but I wouldn’t be so presumptuous as to say that. Who knows?”

Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?

Lost in the haze of Goldman’s recent record profits is the fact that the firm nearly went under even after the AIG bailout last fall. As the market continued to plunge and Goldman’s stock price nose-dived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.

Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.

Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”

Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.

Goldman claims that there is a Chinese Wall between the advisory business and the trading business. “There are rules and laws regarding information sharing, and we scrupulously follow them,” says a company spokesman.

But two former clients told me they had observed firsthand how Goldman traded against their interests to improve its own bottom line—one who didn’t like it, the other accepting it with a shrug and saying, admiringly, that Goldman’s ability to convince the world that it is a “client-oriented” business was its most masterful PR coup.

Goldman’s profiting from this ethical gray area was exemplified by the real-estate market and the subprime-mortgage collapse: Goldman Sachs sold subprime-mortgage investments to its clients for years, but then in 2006 began trading against subprime on its own balance sheet without informing its clients, a hedge that ultimately let it profit when the real-estate market cratered. For some, this was a prescient call; for others, a glaring conflict of interest and inherently dishonest, since the firm let its clients take the fall.

Earlier this month, Goldman had an ex-employee arrested for allegedly stealing computer codes that could be used, as the prosecutor noted, “to manipulate markets in unfair ways.” Some hedge-fund traders and financial bloggers have speculated that Goldman itself could have been using the codes for the same purpose.

Now attention is turning to Goldman’s dominance of trading on the New York Stock Exchange—as the exchange’s biggest high-speed program trader as well as a provider of liquidity to other traders—and whether that ubiquity has afforded the firm undue advantage. If Goldman’s database knows nearly every trade that is about to be made, sophisticated computer codes could, theoretically, instantly execute fail-safe trades on Goldman’s behalf milliseconds beforehand. This, some are insisting, is where the company is manipulating the markets and making hundreds of millions of dollars a day.

The New York Magazine article is 8 pages long and well worth a read in entirety.

My Take

As long as the playing field is level, corporations are entitled to make what they can and do with the profits what they want, and that includes granting whatever bonuses a corporation wants.

Let’s see how level the playing field was and still is.

AIG

Goldman Sachs makes the case that it was hedged so it deserved not to lose anything. However, as the New York magazine points out, the odds are high that those hedges were worthless because of the sheer amount of leverage and counterparty risk. Yet, Goldman received $13 billion, the entire balance of its claim on AIG while “Banks like Merrill Lynch that bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar.

Every financial institution involved should return every cent of that money because they all would have failed without government (taxpayer) handouts.

GM

It is incredibly peculiar that in “one hectic week in May in which the nation faced the looming bankruptcy of General Motors and the prospect that the government would take over the automaker, Mr. Geithner wrapped up his night with a series of phone calls” to JPMorgan and Goldman Sachs.

I suspect those calls were in regards to concerns over the derivative books of JPMorgan and Goldman Sachs. It is no secret that more credit default swaps were bet on GM than there were underlying bonds.

Of course, the realm of possibilities says those calls may have been to arrange last-minute details for a group fly fishing trip to Paulson’s private island off the coat of Georgia. However, the realm of probabilities is much narrower.

Is it too much to ask the precise nature of those calls? I suppose it is.

The SEC Appointment

Is Storch really the most qualified candidate? Will a Goldman appointee overlook or squelch investigation into the practices at Goldman in favor of investigating Aunt Martha or some firms that Goldman just might want to step on?

Regardless, It sure does not hurt when you have someone at the SEC who will turn a blind eye to anything Goldman might have done wrong or is still doing wrong or alleged to be doing wrong.

There are a lot of allegations against Goldman about front running trades, naked shorting, high-speed program trading, and the sheer volume of program trading at Goldman Sachs. What are the odds any of this gets investigated, or that if is investigated any wrong-doing will be found?

Derivatives Legislation

Think any derivatives legislation will be passed that is not specifically beneficial to Goldman Sachs and JPMorgan? Think again.

Influence Pedaling

All hail “Government Sachs” the king of kings and master of the universe of influence pedaling. Salon.Com details position after position of ex-Goldman Sachs employees in positions of influence.

Yes, there is some public anger about Goldman Sachs. Sadly, much of it is misdirected towards the bonuses. The real outrage should be over the favoritism, influence pedaling, and business as usual environment in which Goldman Sachs can do what it wants, when it wants, while in a position to know in advance (and potentially trade off that knowledge) of what the government is about to do.

Where’s The Outrage?

I don’t know about you, but I am outraged.

I am outraged and not just about Goldman Sachs, but about a process that allows, even encourages political pandering, by time and time again rewarding leveraged riverboat gamblers and failed institutions and at taxpayer expense.

I am outraged that real people are suffering massively while the influence peddlers have stolen the country for their own personal benefit.

I am outraged at a political system that is totally unresponsive to the American people.

I am outraged by campaign contribution and lobbying processes that allows corporations to buy votes with donations.

I am outraged how legislators ignored the wishes of the people who clearly did not want these bailouts in the first place.

I am outraged that very little of this is in mainstream media. Why is this stuff not on the frontpage of every newspaper in the country or at least in the editorial pages?

I am outraged that the average US citizen is not aware of any of this, instead depending on CNBC, or “The View” for their interpretation of the world.

I am outraged how special interest groups have exercised their power to monopolize the economy for the benefit of themselves, US citizens be damned.

I am outraged that all these bailout programs are doing nothing to alleviate the massive consumer debt problems. Every program, virtually every program was designed to bailout lending institutions, not consumers.

I am outraged at fees charged by banks receiving bailouts.

I am outraged over government pension plans and government pay scales massively out of line with the private sector.

I am outraged that Congress and this administration thinks the solution to massive budget deficits are still higher budget deficits in excess of a trillion dollars.

I am outraged about indictments. Paulson Admitted Coercion to force a shotgun wedding between Bank of America and Merrill Lynch yet no indictments were handed out. Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

I am outraged that US citizens are not concerned enough and not educated enough to demand change.

I am outraged that the two party system has failed. Neither party has delivered meaningful change on budgets, on taxes, on social security, on deficit spending, on the size of government, on military spending, or fighting needless wars.

I am outraged that the Obama Administration promised changed and did not deliver. “Yes We Can” was a lie. The reality is “It’s Business As Usual, Only Worse, With Higher Deficits”.

I am outraged there is not enough outrage over this.

Where the hell is the outrage?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

A change in sentiment?

October 17, 2009

It would appear that the main stream media is in the process of becoming somewhat more critical of government action and may be willing to take a stand against what are flagrant and obvious illegal if not criminal practices.

Here is a clip by MSNBC’s Dylan Ratigan whom along with a number of other commentators I cannot recall ever questioning the actions of our “leaders” and monetary “authorities”.

I don’t know what is causing the change in sentiment in the main stream press and, for the time being, I reserve judgment.

The information provided in the video clip is factual if greatly watered down. I suspect the watering down is necessary to make it intelligible to the greatest number of people. For example, it is true Goldman Sachs have taken public money and have made a killing by acquiring assets at distressed prices at the height of the financial panic. What is not explained is how Goldman Sachs should know which assets to acquire. That, is a much more complex concept that relates to far more criminal behavior than taking public money and retaining all the profits. If you browse any of the blog sources you find on my blog such as Karl Denninger or the team at Zero Hedge or search for High Frequency Trading on my blog (HFT) you will realize that criminal behavior runs deep and involves government collusion. HFT is not the only illegal action undertaken by GS or the government. There are dozen of other instances of criminal collusion and contravention to the letter of the law. Things like the suspension of mark-to-market rules for example. How about taking over Fannie Mae and Freddy Mac two clearly private enterprises that have never been government sponsored entities? Or the riding roughshod over GM bondholders but unilaterally and arbitrarily sparing bank bondholders. How about the information black-out imposed by government on who got TARP money and how much?

The list of acts of fiduciary negligence and criminal activity is fairly long and was heralded by numerous red flags along the way.

However, what seems to escape most people is what might have caused this latest crisis. Indeed, is there one overarching action or decision or dynamic that can be highlighted and pointed at that would explain what is happening today?

If you’ve read any of my posts, I think there is.

In my opinion, this is nothing but the logical conclusion of the dynamic brought about by our monetary system. That is, what is happening today is nothing but the direct and logical consequence of the use of an unchecked fiat monetary system.

Incidentally, I wish everyone to realize that although we live in societies that are presumably steeped in economic and personal freedom, no government anywhere in the “free” West has ever asked ratification for their unilateral and arbitrary choice of monetary system.  Even worse, in our presumed economically free capitalist societies, government retains the power to set interest rates.

Once the government of a democratic society awards itself the right to impose the monetary system and manipulate interest rates, the one logical and inescapable outcome is the gradual erosion of the purchasing power of the unit of currency i.e. inflation.

Inflation is a dynamic that is both exponential in nature and, therefore, limited mathematically. Being exponential, inflation has a number of preordained and inevitable effects on society and the economy. One of the inescapable ramifications of inflation is that by artificially, pervasively and aggressively inducing inflation into a monetary system, government induces a rise in price level hence a rise in GDP. However, as GDP progression becomes ever more dependent on generating more inflation, the intrinsic wealth structure of society is progressively impaired. As the dynamic progresses, financial value runs away from intrinsic value at ever greater speed until the only way to induce more inflation requires ever greater degrees of government collusion in carrying out actions that eventually become criminal. This causes government to become an ever greater actor in the economy and eventually the existence of the political structure becomes dependent on generating ever more inflation.

But since expanding government can only subsist if it is financed by increasing tax revenue, then the generation of ever greater inflation becomes a goal unto itself.

The problem is that the logical conclusion of a fiat monetary system is known and inevitable. It has happened before. We know how it ends. Government intervention can at best stretch out the time line but cannot avoid the conclusion. In the process, government becomes a progressively larger actor in the economy. But as government is a non profit construct, its existence is predicated on increasing tax revenue thus progressively sapping the life blood of the economy.

The point at which the economy no longer generates enough revenue to service debt, that is the point at which financial value spurred on by leverage and gimmickry (i.e. hedonic adjustments, CPI manipulation, absurd leverage of 80 t0 1 )  is the most distant from intrinsic value. At that point, due to the yawning gap between what assets are worth on the market and the amount of debt that needs to be extinguished, returning to equilibrium causes social and economic devastation in the form of rising unemployment and a reduction of social services expenditure (road maintenance, mail delivery, social medicine, teacher salaries, civil servant salaries, food stamps… pensions… ).

Historically, similar junctures have resulted in world wars. We can only hope that this time will be different. But hope, as you know, is not a sound strategy.

http://www.msnbc.msn.com/id/31510813/ns/msnbc_tv-morning_meeting/#33346455

(look for “Ratigan: Goldman Sachs magic trick”)

Houses at $7000 (seven thousand Dollars)

October 16, 2009

The cost of a house can never drop below construction cost right?

Right?

http://finance.yahoo.com/news/At-foreclosure-auctions-rb-853906128.html?x=0&.v=1

We’re having a difficult day,” said Tom Atkins of Zetabid, the company holding the auction. “There was a $1,000 property that no one bid on. You’d think a slum lord at the very least would buy it and put a (federal housing assistance voucher) renter in there for $600 a month.”

Deflation – employment, wages, tax revenue

October 15, 2009

Few are ready for a bout of deflation. Even fewer understand the consequences of a deflationary recession which at this point is probable will turn into a depression.

In an unchecked fiat monetary system, inflation progressively becomes the ultimate and only goal. Towards the end of the inflationary dynamic, credit creation expands exponentially till inflation overwhelms the GDP number. The natural result is that financial value progressively runs away from intrinsic value at an accelerating rate. However, when the underlying economy no longer generates sufficient revenue to service the debt, then asset liquidation is the only solution.

Asset liquidation causes a decrease in nominal wealth, thus in earnings. Decreasing earnings have a double effect: they are responsible for lower tax revenue for the state and they cause layoffs. In turn, layoffs put more pressure on the state in two ways: first because unemployed people pay less taxes but need more state services and second because unemployed people consume less thus generating less revenue for the private sector and, yet again, less revenue for the state and more layoffs.

http://www.nytimes.com/2009/10/14/business/economy/14income.html?_r=2&hpw

In recent decades, layoffs were the standard procedure for shrinking labor costs. Reducing the wages of those who remained on the job was considered demoralizing and risky: the best workers would jump to another employer. But now pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression.

http://www.summitdaily.com/article/20091013/NEWS/910139995/1055/RSS01

Colorado voters approved an adjustable minimum wage in 2006. Supporters of that amendment said they did not intend for wages to fall, but the provision allowing it to fall was crucial to its passage. They have pointed out employers of the estimated 50,000 to 70,000 Coloradans making minimum wage are free to leave wages flat.

http://www.baltimoresun.com/news/maryland/baltimore-city/bal-md.ci.pension14oct14,0,7605979.story

An unusual pension benefit for police and firefighters could cost Baltimore $164.9 million next year, nearly double what the city is now paying and a figure that the city’s finance director says taxpayers cannot afford. […] Pension costs for the roughly 5,800 retired police and firefighters are soaring at a time of deep budget problems. The city recently forced employees to take five unpaid furlough days, laid off workers and halted capital projects to chop $60 million from its current budget. Declines in projected tax revenues and cuts from the state prompted cuts. Another round of budget reductions is expected early next year.

For all intents and purposes, most people alive today, particularly in the West, have lived in an inflationary environment that has caused a steady rise in the cost of living. Few can contemplate an environment of falling wages and reduction of public services let alone the discontinuation of some public services that we have come to take for granted.

When the streets of Western capitals will be teeming with unemployed, homeless and angry citizens, a world war will be the only way our politicians will be able to maintain a grip on power. It has happened before. There is absolutely no reason why it should not happen again this time around. Deflationary busts are stealthy, insidious even if all too predictable.

Got bullion?

Curtailing public spending – a precursor to war

October 11, 2009

http://news.yahoo.com/s/nm/20091009/pl_nm/us_usa_state_budgets

Excerpt:

Lower tax revenues could lead to higher taxes or another sharp reduction in services if receipts do not show signs of improvement before year-end, as every state but Vermont is required by law to balance their budgets.

That could mean fewer teachers, early prisoner releases and fewer highway repairs as residents battle soaring unemployment. ”

The article repeatedly alludes to “signs of recovery” but from where I am standing, that is just wishful thinking. I will give you that the stock market has bounced higher and farther than most people expected. However, other than the fact that there is little short term relation between the stock market and the economy, similar bounces are not unprecedented in times of deep recessions. What matters is that industrial capacity utilization is still too low, unemployment is still rising and the money multiplier is still stuck below 1 despite the gargantuan financial effort put out by the financial authorities of the world. Finally, credit is still contracting at a fast clip:

http://www.marketwatch.com/story/banks-cutting-back-on-loans-to-businesses-2009-10-09