Thursday, April 23, 2009

Caught "Invisible" Red Handed

I would like to say how wonderful it was that in the comments section from last night's pot, the writer for The Automatic Earth stopped by and left a comment! It is not everyday that one of your favorite writers leaves a personal note. It seems I had mixed up the morning/evening post time lines in how I posted them, but no harm. Thanks again to Ilargi for the visit!

On another great note, I finished two big projects at work today before I leave for my week long vacation! It was a goal of mine to get those two items done before I left and it worked out.

I am not sure what kind of time I will have to post tomorrow (last minute prep for trip), but get your Friday Night Rock Blogging requests in and I am sure I will be able to have some entertainment up.

If Every Government Official Took a Long Nap We Might Have Progress
Today featured a meeting at the White House with the president and his team hosting the credit card companies. At issue is the time honored tradition of the credit card folks screwing the card holders in many creative ways. While I do not expect much to come out of this, there was some comic relief.

from Clusterstock:
via Marc Ambinder at The Atlantic;
According to a pool report, Summers nodded off at the gathering of administration and credit card company officials, "doing the head on the hand and then head falling off the hand thing," as observed by Keith Koffler, White House reporter for Roll Call.

Click the link for a Larry Summers asleep picture. Lifted from the comments section:
John said: Apr. 23, 4:21 PM
Don't knock it. if he's asleep he actually causes less damage

Hats off to John@4:21pm! What a great way to make progress, pass out Ambien to all government officials!

Interesting Currency Fact
Earlier this week I was paging through the marked pages of a book I read a while back titled "Gold: The once and future money" by Nathan Lewis. Now this is not going to be a gold post, I got tons of comments over at Seeking Alpha for the blurb I posted last night.

I had marked this section for further thought:
A staff member of the IMF estimated that as little as 10-15% of all the US Currency held outside of banks is used inside the United States. The rest is being used outside the country--by foreign central banks, in dollarized countries, by travelers, smugglers, drug cartels, tax evaders, and foreign commercial banks--as the international currency of the world. Roughly two thirds of all the dollars in the world are in the form of $100 bills, a denomination almost never seen in the United States.

I guess the dollar really is the reserve currency! That passage is interesting on many levels and I encourage discussion in the comments section.

Caught "Invisible" Red Handed
There was once a large section of the investment population that regarded charges of a "plunge protection team" or PPT at work in the markets was for tin foil hat types and conspiracy theorists. Now it is a well established fact. There were and still are plenty of market observers that think the way inflation, unemployment, and other data are calculated by the government use the very best models available and not just the models that present the best results. There are still some adherents that think we are operating in an open market with transparent rules. Today you can stop pretending.

The work done by New York Attorney General Andrew Cuomo is a watershed event. You can see all the relevant paperwork via Clusterstock.

What this boils down to is that the FED and the Treasury strong armed Bank of America into completing the deal for Merrill Lynch late last year even as the MER losses started to accelerate rapidly. Ken Lewis wanted to invoke the "Material Adverse Event Clause" (MAC) and dump MER. The FED and the Treasury threatened Mr. Lewis with being fired, along with the entire BAC board if they pulled out. Further, they explicitly demanded Mr. Lewis keep quiet about the escalating losses as not to panic an already shaky market. They in fact asked BAC to lie to shareholders and take more government cash in return.

Keep in mind that this story is moving fast. Already today Hank Paulson went on the record saying that FED head Bernanke made him tell Lewis the news. Bernanke was reached for comment and said he never said any such thing. Not a few hours later and Mr. Paulson's memory was different and he said Bernanke did not ask him to tell the BAC head what he did. As this story is still evolving, and I am off on vacation after tomorrow I will limit the specifics discussion and focus on what this all means in a macro sense.

The Treasury and the FED have been caught red handed here. They willfully and purposely forced a private company to misrepresent information and omit events that were crucially important to the company. There will be lawsuits and plenty of them. While I am always a bit critical of our quick to sue society, this time I hope the lawyers are unleashed in a big way.

The blatant attempt to manage the markets comes at a bad time for the government. An already suspicious public now will have really no reason at all to believe any "stress test" results. If BAC cannot even report MER losses that were getting worse, the "stress tests" certainly are not going to be harsh in tone.

As for the players themselves, I think Ken Lewis is the odd man out. The days revelations made me think of a part in the film "Clear and Present Danger", the Tom Clancy based spy books. Relevant scene:
Jack Ryan: I didn't sign up for this. This is someone's bulls&%t political agenda. Who authorized this? Cutter?
Ritter: Cutter couldn't tie his own shoes without permission.
Jack Ryan: If I go down you're coming with me.
Ritter: Wrong again. I have an *autographed get-out-of-jail-free card*! "The President of the United States authorizes Deputy Director of the CIA Robert Ritter to conduct 'Operation Reciprocity' including all necessary funding and support. This action is deemed important to the national security of the United States etcetera, etcetera, etcetera." You don't have one of these, do you Jack?

In the original 3 paragraph, I mean 3 page TARP proposal Hank Paulson had specific language in the document that precluded any prosecution for any actions taken by Treasury officials during "Operation TARP". At the time I wondered why such clear language was needed. Man, I am naive! So Mr. Paulson gets a free pass as I am sure this language made its way into the final TARP bill.

Ben Bernanke will get a pass because it would be very "destabilizing" for the head of the world's biggest central bank to get dumped in the midst of a crisis. that said I think Bernanke will be damaged by this and his career lifespan may be getting shorter.

That leaves Ken Lewis of BAC. Mr. Lewis had a chance to become a hero. Faced with strong arming by the government, Mr. Lewis should have called them out. Lewis should have revealed the terrible MER losses and invoked the MAC clause. What could the FED/Treasury do? If they removed Lewis it would be clear they did so only because they wanted that information kept hidden. It would have been a "systemic risk" to remove the BAC board at that time, so in effect the government had little leverage.

Mr. Lewis is going to have to answer for his actions. He has no "get out of jail free" card. He is not he FED head.

If these guys were stocks my recommendations would be:
Hank Paulson: Stock Delisted; no longer actionable
Ben Bernanke and Ken Lewis: Strong Sell
Option Play: Ultra Short Bernanke and Lewis futures contracts; no hedge needed

This story needs to grow legs and get the best exposure possible. Hopefully the blogosphere and even the mainstream media will find it compelling enough to keep the pressure on.

Have a good night.


getyourselfconnected said...

Another winner from The Automatic Earth tonight:

My post from last night is featured towards the end of the news section, very cool.

Where is everyone?

getyourselfconnected said...

Really, where is evryone? So close to my break and all have fled?

Lisa said...

I hope you have a great time on your vacation, GYSC!
Lewis couldn't possibly have been a hero, the man has no recognizable human features (read soul) and I don't believe the "can't prosecute" portion made it into the final bill. Too bad if it did, because it doesn't amount to a get out of jail free card. Paulson could still be prosecuted, and so could Bernanke. It's hard to believe, but even government officials can be jailed.
The truly unbelievable part, is how many Americans have a "you can't fight city hall" defeatist attitude. That's wimpy (at best), and I'm tired of hearing it.
The worst news today was hearing that we are all going to pay for the union members' pension and health benefits in the automaker bankruptcies. Cool.

watchtower said...

How about a trifecta of Journey by playing my 2nd favorite Journey song (with Only the Young being my personal favorite) "Girl Can't Help It"?

GawainsGhost said...

Interesting article in the new issue of BusinessWeek. Basically it says the irony of the current economic collapse is that the only way out of it is to return to the securitization model that caused it to begin with.

Hmmm. So let me see if I get this straight. A bunch of banks and Wall Street geeks came up with this securitization model, based on a computerized risk assesment of 0.15% chance of failure, and ran with it. Made a whole lot of money. For a while anyway.

Well, guess what happened. That 0.15% chance of failure turned out to be 100% predictable, and the whole thing came crashing down. Now those banks and Wall Street geeks are losing money left and right.

Thus, the government's plan is to prop up these failed banks and their investors until the same securitization model that caused the crisis can be made to work again, by fleecing the American taxpayer.

It would be laughable if it weren't so criminal.

GawainsGhost said...

Lisa said...

Good article, Gawains. Sad, but good. Guess GYSC is busy packing for his escape tonight :)

Anonymous said...

Krist Kristofferson "This Old Road"