Short on time after the usual workout so a little stroll through history instead.
Bank Panic of 1907 As is my standard procedure, I get stuck reading Wikipedia articles for serious amounts of time. That site is addictive and I need an intervention!
Tonight let's take a stroll back in history, without Delorean Assistance I am afraid, and see what caused the United States to move ahead with establishing the Central Bank that we all know and love today. All information lifted from Wiki and the pictures come from there or a Yahoo image search.
Panic of 1907 All the usual suspects were aligned for calamity. A planned short squeeze (in United Copper) went badly for the instigator Otto Heinze and this was the start of the contagion. The creep up the banking chain was fast and the first bank to go belly up was Otto's Brother's (F. Augustus Heinze) bank in Butte Montana.
The problem was in the old days reputation meant not just something, but everything. F. Augustus Heinze was involved heavily is several large banks and the word that he was involved in such a play spooked depositors and trading partners. He was forced to resign all banking interests to stave off a panic. Poor fellow, he should have been born later when losing money is not exactly a problem for Bankers anymore!
Next up, The Knickerbocker Trust Company: From Wiki:
The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence
The whole thing was falling apart when the original JP Morgan stepped in: What is great about this picture is note his left hand (on your right!). He is holding the arm of the chair but the light makes an illusion of a knife pointed outward! Scary!
You can read the whole thing for all the gory details, but safe to say things got bad. Very bad.
Not quite tanks in the street, but Wall Street was a swarm of scared traders:
Every bankers nightmare, people want their actual money and line up to wait for it:
The ending of the panic was forced by JP Morgan strong arming banks that had money to lend to those that were facing runs. Mergers were rushed through (sound familiar?) and even the President was pushed by the good old "Systemic Risk" play:
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President Theodore Roosevelt, who had made breaking up monopolies a focus of his presidency.
Frick and Gary traveled overnight by train to the White House to implore Roosevelt to set aside the principles of the Sherman Antitrust Act and allow—before the market opened—a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced James Rudolph Garfield, the Secretary of the Interior, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and Secretary of State Elihu Root began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved. Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances". When news reached New York, confidence soared. The Commercial & Financial Chronicle reported that "the relief furnished by this transaction was instant and far-reaching". The final crisis of the panic had been averted.
Now here is where things get interesting and I make my point of this exercise (there is one):
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform. In May 1908, Congress passed the Aldrich–Vreeland Act that established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. Senator Nelson Aldrich (R–RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
Wow, Congress members actually tried to learn stuff back then? Amazing.
This of course led to the formation of the US Federal Reserve Bank, which came online in 1913.
In a hearing for the Pujo Committee there was this famous exchange between JP Morgan and a Lawyer:
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from Samuel Untermyer. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking—that it is an industry built on trust—is often quoted in business articles:
Untermyer: Is not commercial credit based primarily upon money or property? Morgan: No, sir. The first thing is character. Untermyer: Before money or property? Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.
Ok so what is my point?
The FED was created to stop this kind of panic. The idea that large banks could have direct control over policy was not liked and the central bank was seen as a way to take this power away from the large banks.
Forget the FED's stated mission of stable prices and full employment, they have been total failures on that score for all time. The FED was created to prevent big banks from destroying the country.
The FED's original reason for being is also another colossal failure. The big banks still call the shots and the office of the Treasury is usually headed by a Goldman Sachs CEO. The FED is a willing partner. In 1907 people were furious the big banks could risk their savings, the FED saw a way to hold this power for themselves. Nothing has changed but the dancing partners after all this time.
A bit short on time after marking off the electrical lines to be linked to the generator. Hopefully the process will be complete tomorrow. Generac 10Kw should save me from staying at any more hotels when the power goes out.
The Difference Between the Technology Bubble and the Housing Bubble? Who Ended up the Bagholder A key theme I have harped upon for a long time is that the technology bubble went bust and hardly anyone missed a beat. Certainly no heroic efforts were attempted by the FED to help anyone. Just low rates to encourage new speculation. The housing bubble bust has been fought on all fronts. What is the difference? The big banks had unloaded their dot bomb shares on other people were as now they themselves sit on all the losses, or the losses that do not currently reside at the FED, HA!
Jesse's Cafe of course writes this up in a way that makes me jealous, so I will just point you that way with a small excerpt:
Is the FED Likely to Act if There is Another Stock Market Bubble? The 'collateral damage' caused by the dot.com and housing bubbles, all those ruined lives and families, is really not a problem and can be addressed by monetary policy (inflation) after the bubble runs its course. The problem in this last financial crisis is that the housing collapse caused a bank run, and the banks themselves were injured, instead of profiting, in the bubble collapse. Talk about an unintended consequence. Good God, not the Banks! This is a fast being remedied by the enormous subsidies granted by the Fed, and their man Timmy at the Treasury, to set the Banks back up again at the roulette tables, bringing home those eight figure paydays.
The process of filling a supertanker with oil and planning on selling it later at a higher profit sounds great as long as those "higher prices" manifest themselves. Was it not the banks like Morgan Stanley and Citigroup that were so sure "higher prices" in real estate were such a sure thing? Good to see taxpayer funds going to work on a commodity bet. I am sure this will work out well.
Well it looks like a winner but it took a bit longer!
I would say higher fuel prices may not be the shock to the economy it once was; when no one has a job there is much less driving! How's this for a bumper sticker: Unemployment: The New Green Revolution!
Bond Rates Moving Up While some writers (Calculated....) were high fiving the day after the FED MBS program ended because rates did not move up in one hour, it seems as time goes on the slow rise is gaining steam (via Market Ticker): 10 Year Bond Breakout! Most bulls see this as proof positive the economy is on fire so this remains bullish for now.
Of course you have to love the idea that the government tempted a large number of home buyers into the market at all time low rates, gave them $8-$10k towards a home purchase, and expanded FNM/FRE/FHA loans to any and all. Now, looking out maybe 1 year, higher mortgage rates will make those buyers instantly underwater! This would be funny if it was not so sad.
Metals Make the Mainstream You things are getting interesting when metal market commentary makes sites like The Huffington Post: It's Ponzimonium in the Gold Market Writer Nathan Lewis (who wrote "Gold: the Once and Future Money (2007)" which I have read) discusses the paper market and how that market vastly exceeds the physical gold market. This story is a great recap of all the crazy developments in metals over the past few weeks, including a hit and run perpetrated on a whistle blower not 2 days after his report was published.
As for the metals, my favorite, things are looking good.
Silver closed above $18 an ounce today and that is very strong. When silver was around $15 in February I was chomping at the bit to get some. I did not do any trades via the regular vehicles (SLV, miners, etc) but I could not pass up a deal on some physical to add to the Economic Disconnect holdings. Near term silver is bumping resistance at $18-19. Any break over $20 could be a big one so I will be watching this space.
Gold has not been as exciting, and my target of $900-$950 for accumulation looks to be dead at this time. Gold has been solid and the $1200 an ounce mark looms as resistance.
I did my first true BBQ attempt today on my favorite item for low and slow cooking....Beef Ribs!
I am still a newbie on the new grill and had no experience with charcoal until I bought this grill so I was a little scared I would mess this up. I think it came out pretty good!
The progression: -Rubbed Beef Back Ribs
-About done This is why they are known as "Dino Bones"
-On the plate I actually did not screw this up and the results were excellent!
The generator installation was not what I was expecting. It seems in my town the inspector that checks the gas line set up only does this on Tuesday and Thursday! The crew came and set up the generator, plumbed in the gas line, and set up the switch box. Nothing can be done now until the inspection is done on Tuesday! Oh well.
I am not going to do any thought provoking stuff tonight, you can see my take on things in the "Running Commentary" post from earlier in the day. This of course means that it is an all out entertainment post! You know you love it.
Short Story Recommendation One of my favorite books is "Time and Again" by Jack Finney. While trolling through some Wikipedia (I know, I have a serious issue with Wiki!) I came across a short story by Finney that was really amazing.
The story is called "The Love Letter" and was written in 1959. I found an online copy that you can read here. I will not spoil the plot line, but it is a little sappy! A man buys an old desk and discovers a letter in the drawer. He pens a response as a thing to pass time, but the desk may have special abilities. Check it out.
I Thought Unicorns Were Extinct? Here I thought unicorns were extinct but it seems you can get anything over the Internet: I doubt it is better than SPAM!
Read The Label You really have to read the fine print whether we are talking MBS paper or even chocolate syrup: Jeez!
Extended Rock Blogging Due to requests, keeping my word, and general music loving I offer an extended rock blogging section!
On Thursday night I posted "The Ghost of Tom Joad" heads up with Springsteen and Rage Against the Machine. This generated quite a bit of discussion over at The Automatic Earth. One viewer in particular, El Gallinazo, chimed in on the subject. Here is some interplay:
Gallinazo: As a geezer, I had heard of Rage Against the Machine but never heard their music. I never listen to the radio other than via the Internet, and that for just talking heads. I picked the top version on the youtube search and tried to view it (since no specific link was offered). Actually, I only got through about 2/3 of it. First, you cannot call it a cover as there is no musical correlation between their version and Springsteen's. They just take the lyrics. Absolutely no connection with the melody. Actually, no melody at all. Second, I found the frenetic jumping around on stage to be totally counterproductive to the feelings and mood that the lyrics espouse. Truth be told, I found the whole thing rather appalling.
I offered:
El G, I linked a live version last night. I was just starting trouble with the debate, I think both versions are excellent. I feel the frustration really comes out in the Rage version and of course I partial to metal as my default favorite. Sorry to scare you with the song!
Which brought this response:
I wouldn't say it scared me. My feelings were more that of watching a two-year-old play with its own feces.
I almost busted a rib laughing at that one! Too funny.
El G did have some request ideas and so I will post John Fahey playing "Poor Boys Long Way from Home":
Wow! That guy knows how to play. Great pick and I had never heard it before.
In case you missed this a while back, I sill have this Pete Droge song firmly planted in my head, "Two of the Lucky Ones":
That is sooooo fine!
Reader Gawains knows how to pick Black Sabbath tunes, so here is "Rock and Roll Doctor":
Old School.
Reader requests "16 Tons" from Tennessee Ernie Ford, so he gets it:
This song is featured in one of my favorite films, "Joe Versus the Volcano".
Tom of the North wanted some Alice in Chains, and a solid pick is "Rooster":
Solid choice.
How about AC/DC with "Thunderstruck" live at Donnington where legends play?:
Wow that is really good stuff!
Two more and then I will have blown out my blogger bandwidth!
I think I, I mean WE need a ladies touch! Kick it up for some Bangles with rock out version of "Hazy Shade of Winter":
Hello ladies!
Time to close the show! What to close the show with........
Well it is not quite midnight, but let's be prepared anyway with Iron Maiden and, well, "2 Minutes to Midnight" from Live After Death:
Well I am home today to watch the installation of my brand new generator. It is fed off the main natural gas line so no need for fuel. Of course now that it is going in, the power will never go out!
I am not sure how much time I will have until I have to shut off the electricity as they do the wiring, but until then I always wanted to write a real time blog post. I will start off posting what I am watching today and update it all day. A running commentary if you will. Of course this could all get cut short if the power needs to be off, but I will give it a shot.
Anyways, far short of my estimate for 11 million jobs created (kidding) but within estimates which ranged wildly (80k-350k). Markets are closed but I imagine a weekend of "jobs created, whooopppeeee!" should engineer a bull run for Monday.
9:10 Big Picture Econompic has a handy visual for the macro jobs picture: I say things are improving.....smirk.
9:25 The Good and the Bad Good run down from The Big Picture:
Negatives • Average Hourly Earnings of all employees NFP fell by 2 cents, or 0.1%. • Unemployment rate is unchanged at 9.7% (no improvement this month) • U6 Unemployment, the broadest measure, rose to 16.9% –that’s off of the December 2009 peak of 17.3, but higher than January (16.5%) and February (16.8%) of 2010. • Long-term unemployed (jobless for 27 weeks+) increased by 414,000 to 6.5 million. (bad) • 44.1 percent of unemployed persons were jobless for 27 weeks +. (Also very bad) • Involuntary part-time workers increased to 9.1 million in March. (This remains a stubborn problem area)
Positives • +162k is the best report since March, 2007. • Average workweek was up by 0.1 hour to 34.0 hours in March. • Temp help services added 40,000 jobs in March. That’s a cumulative add of 313k since September 2009. • Census added “only” 48,000 workers — far below the 100-150k consensus. This pushes their hiring out into the rest of the year. • Civilian Labor Force Participation Rate at 64.9% edged up in March • Manufacturing continued to trend up (+17,000); Mfr added 45,000 jobs in Q1. • Revisions: January 2010 data was revised upwards 40k (from-26k to +14k); February was revised up 22k (from -36k to -14k).
Good summary.
9:35 Good Read Kid Dynamite points towards a great rant by Dean Baker which is well worth a few minutes. Best part:
"The Washington Post (aka Fox on 15th Street) once again proclaimed TARP a success. The cause for the latest revelry is the fact that the government appears to be in a position to make an $8 billion gain on the stock it holds in Citigroup. Before we join the Post in breaking out the champagne, it's worth taking a bit closer look at our investments in Citigroup...."
"In effect, the government's profit is entirely due to the value of the government's guarantee. In Washington Post land, the government could make money by buying shares of a company's stock, offering to guarantee the company's debt, and then selling our shares at a gain when the market recognizes the value of the government's guarantee. Of course this strategy provides much larger gains to the other shareholders and allows the top executives to score billions in bonuses for being such shrewd managers, but in Washington Post land they don't pay attention to such things."
Classic. What a messed up situation we have.
9:45 Random Musing I was just thinking that with the terrible employment situation, housing issues, etc why is it that consumer spending is not far from highs and various other metrics show things "returning to normal"? Do we even need jobs anymore other than something to do? How does an economy work like this? Something is amiss or there are other factors at work.
10:05 Getting a Response The bets way to generate traffic and discussion? It has to be either mega hottie ladys or music!
The "Ghost of Tom Joad" debate goes on here and over at TAE. The best remake ever done? Jimi Hendrix blows Bob Dylan away with "All Along the Watchtower" by far:
Anyone really think otherwise?
Speculation Elimination I have always thought sports players should be paid at season's end based on their performance. This way you could avoid big contract guys from mailing it in.
Why can't the stock market be priced at every quarter end based on a set metric, whatever that is. Say company XXX made 2 dollars a share in Q1 and has 100 shares outstanding, the stock price would be set at $200. If they make 3 dollars a share at year end, the price is set at $300. No guess work, no games, and no casino gambling.
The two-year slide in tax collections that opened a $196 billion gap in U.S. state budgets has stopped, easing pressure on credit ratings and giving leeway to lawmakers as they craft spending plans for next year.
I already have a bad feeling when the story leads this way. Next up:
The 15 largest states by population forecast a 3.9 percent gain in tax revenue in fiscal 2011, budget documents show. The 50 states on average may increase collections by about 3.5 percent, the first time in two years the figure is expected to grow, said Mark Zandi, chief economist at Moody’s Economy.com
So faced with credit rating issues and the spector of, GASP, budget cuts, the states now FORECAST tax revenue growth? Whatever, go with it:
California took in 3.9 percent more since December than projected in January, Controller John Chiang said this month. New York got $129 million above forecasts in its budget year through February, according to a report from Comptroller Thomas DiNapoli. In New Jersey, the second-wealthiest state per capita, January sales-tax collections were 1.9 percent higher than a year earlier, the first annual increase in 19 months, forecasters said in a report last month.
“This time last year, we were sliding down a mountain,” said David Rosen, chief budget officer for the New Jersey Legislature. “I don’t think we are now; it’s stabilized.”
How's that view from the base of K2 buddy?
Yet another "awesome" report showing things getting better (?) after collapsing. We are fast approaching my target of S&P 500 1500 and DOW 14,000 with unemployment at 9% plus, no tax revenue, and waves of debt defaults. That is going to look peculiar, but pay that no mind.
Easy Button I already have this weekend's reading gem via The Automatic Earth: The Long and Short of Numbers Teaser:
Ilargi: OK, so the BLS Establishment Survey Data say that in March, nonfarm payroll employment rose by 162,000 (quite a bit less than the consensus among "experts"). Not a terribly reliable or important number, if you ask me, but of course people will milk it for what they can. What strikes me is a number in the Household Survey Data:
The number of long-term unemployed (those jobless for 27 weeks and over) increased by 414,000 over the month to 6.5 million.
That's almost 7% in one month, and that is downright scary. Of course, we've talked about this till the cows were home, fed, bathed, and left the barn again, but it still bears repeating that discussing US employment, for instance the initial jobless claims data, has become a futile exercise, if not an outright affront to the people, if the EUC (Emergency Unemployment Compensation) numbers are not included.
As always, much more in the post and you should read it. Is anyone really not checking that site every day?
What Does it Take for the FHA to Say "No Mas" to Your Firm? It looks like quite a bit to get the boot (via Housing Wire): FHA Withdraws Approval of Two Mortgage Lenders The story details some reasons:
The MRB alleges RSA misleadingly stated it was properly licensed by the Georgia Department of Banking and Finance at the time the company submitted an application to FHA for lender approval.
Additionally, the MRB alleges that RSA submitted false or misleading information regarding the criminal conviction and sanction history of its owner and executive, Ramsey Suphi Agan. Specifically, RSA claimed company officials “are neither currently, nor have ever been, debarred, sanctioned, fined, convicted, denied approval, or refused a license by any State, Federal, or local government agency.” But HUD said it suspended and debarred Agan on at least two occasions and has two felony convictions.
HUD claims 1st Alliance engaged in prohibited branch arrangements, provided false certifications, failed to implement a quality control plan, and committed a number of other violations of HUD/FHA standards.
MRB alleges 1st Alliance used independent contractors to originate 708 loans from branch offices that were not true branches of the company and then falsely certified the contractors were full-time employees of the company. The MRB also claims 1st Alliance charged consumers “unallowable, excessive or duplicative loan processing and origination fees” and also failed to list fees paid outside of closing on HUD-1 Settlement Statements.
Wow! It takes all that to get booted from FHA funding? The best summary comes from the FHA themselves:
FHA commissioner David Stevens. “If any lender can’t operate within FHA’s guidelines, they can’t do business with us.”
It is hard to live up to those stringent standards.
11:47 This is the Business We Have Chosen! I Didn't Ask "Who is a Currency Manipulator!" This stuff is so dumb I wish so much did not depend on it:
US To Defer China Currency Manipulator Decision, No Further Escalation Expected As was expected in light of recent FX moderating overtures by Beijing, China will not find out if it is or is not a currency manipulator on April 15. The NYT reports that the decision from the Treasury will be deferred until after China President Hu Jintao visit Washington. "
I am an info-mercial lover. All those products always seem so great. Of course if you ever get some of them they usually stink. I can vouch for one. I picked up an "ab-roller" thing last week and after one weeks use my stomach is messed up! It really does work.
There were so many things going on today with so many threads of discussion that this post will be bag of various goodies to share ideas and get some discussion going.
As always, Friday night request lines are open so leave one or two.
Health Care Will Not Go Away I want to stay well away from the whole Health Care discussion because of the politics that follows it. When it relates directly to things economic I think it is worth getting into.
Karl Denninger today wrote what I have have been trying to explain to anyone that would listen for some time:
The problem of course is that most pharmaceuticals and many devices have a cost structure that is more than a bit skewed. That is, the first pill may cost $1 billion - in development and testing expenses. Many drugs are "dry holes"; the company spends but the drug proves ineffective or even dangerous, and thus the money is lost. Subsequent pills may cost $2 each to manufacture - once that first billion is spent. Obviously, the drug companies must amortize that billion dollar development expense over the projected life and sales cycle for the drug. If they fail to do so they go out of business. Everyone in the world who has access to that drug gets the benefit of the development. We in The United States get to pay the entire cost, because it is only here that we do not price-control drugs and threaten manufacturers with patent breaks if they don't price "as we like it." This is responsible for most of the drug and device price inflation we have experienced - we are literally paying for the development of new treatments for more than 6.8 billion people yet there are only 330 million of us in the United States. That is, we bear twenty times our "fair share" of those development costs.
Now all up front I have worked in Biotech/Pharmaceutical research for over 12 years, so whatever bias comes from that you should know.
The reason other countries can play socialized medicine and get price controls on drugs is because the US pays through the nose for it. It is a fact. This stuff is not cheap. I cannot get into how things work, I am sorry, but let's just say experiments are expensive beyond your dreams. This cost must be recouped. Yes, it may cost a company 50 cents to make a pill, but it may have cost 10 billion in development costs to get there.
That all aside, imagine all the socialized medicine programs and what would happen if prescription drug costs went up 500% overnight? Think the Eurozone has trouble now? What would happen is those programs would collapse or price controls the world over would make innovation a thing of the past. Except in recreational drugs as people will need a diversion from having no health care.
There are few things in life where you get what you pay for. I feel drugs and drug research is one. Maybe you do not. The bottom line is that we cannot have Canada Care here because of the damage it would cause on a variety of fronts.
Of course for a preview of what is coming, look to my state of Massachusetts which is enacting price controls on our own socialized medicine program (via Mish): Health Care Price Controls Hit Massachusetts; Are Doctor Wage Controls Next? What is pure comedy about this state is the number one employer is of course the state government. Number two is the medical/pharma research field. The punch line is the ultra-lefty folks up here would vote for things which would make them unemployed. It's funny until you want to cry.
The Problem of Savings and How to Separate People from Theirs There is some kind of sickness inherent in the idea that saving money is a problem. Maybe it is just an economy that is built on no savings at all is a problem. A distinction without a difference?
An economic recovery requires that desired investment must rise relative to saving. This has happened recently as fiscal stimulus and an inventory cycle have led to a fall in ex ante saving relative to investment. But for the recovery to strengthen further, this process must continue. There has to be a further demand impulse—be it a decline in household saving rates, a rise in business investment relative to profits, a further expansion of fiscal stimulus or an improvement in the net trade balance via an increase in exports relative to imports.
From me to you Bill, bugger off.
You and the FED done enough damage forcing people to chase returns. Never fear, we do have a one outer (poker term):
In addition, the fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure. That is because a decline in the dollar would raise the value of the income earned on our foreign direct investment and foreign-currency denominated assets, relative to the income that foreigners earned on their dollar-denominated investments in the United States. All else being equal, this would boost our net investment income balance.
Makes it sound so simple indeed. Just shut up already.
FED Disclosure: As Bad as Thought and More What should have been the biggest story of the day was instead trumped by the idea that snow induced adjustments and census hiring will push the BLS jobs number to around an 11 million jobs created print on Friday. You can lead a horse to water and all that.
The Federal Reserve, for whatever reason, disclosed some of their Maiden Lane holding in the MBS arena. I think they were under the belief that this would satisfy CONgress (via mab at Illusion of Prosperity) and their staffers because those people are too dumb to know what they are looking at. Of course yours truly is that dumb, so I rely on others for the breakdown! Too bad for the FED some really dialed in folks were checking the goods.
As I recall, the Fed said they were only acquiring 'investment grade' instruments, which would be taken on its balance sheet in support of the US Dollar, in addition to the usual Treasury Debt. The recent exposures of the holdings of Maiden Lane show these to be more like junk bonds, and certainly not as represented.
Jesse also has a Robert Reich column posted and you know things are bad if Mr. Reich is singing the same song about lying and lack of transparency!
From Market Ticker: The FED Admits to Breaking the Law Mr. Denninger hammers home the explicit charter violation by the FED during the "crisis":
April 1 (Bloomberg) -- After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The problem is this: The Fed is not authorized to BUY anything other than those securities that have the full faith and credit of The United States.
In addition Ben Bernanke has repeatedly claimed that these deals would not cost anyone money. But the current value looks differently:
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
In other words, they have lost more than half of their value.
Karl asks what will be done? Let me help, nothing. Still, I love to read reality instead of fiction (unless it's Star Wars).
My quick take: -The FED has lost about 60% on their buys of the worst MBS (like Karl says, outside their charter of assets qualified to buy, but whatever) -No hedging on interest rates implies low rates for, well, ever, or that the FED never intends to sell these instruments and holds them to maturity. How does that shrink a balance sheet? What about those losses? Hello taxpayer, at least the losses it will be slow! -The FED is a corrupt mafia-like enterprise in charge of all thing economic; they do what they want when they want and they know nobody can stop them
Disgusting.
Calculated Risk Annoys Me A while ago I removed the Calculated Risk link on the blogroll and I did not really say why. Tonight I am reminded and because I am in a combative mood I thought I would expand on that.
Since CR started I both read the site every day (multiple times) and subscribed to the newsletter. The comments section had such contributors at Tanta, Nova, and some others that really added to the discussion. CR himself would add color as well. All this changed a while ago (I think you can guess about the time). CR became a big site and the comments section became a facebook for financial cohorts.
Which was fine, a great site will grow and I had no problem with that.
All that changed last year. After "The Market Bottom" and a 20% rally from the lows CR wrote a posy which included the snippet that he "went long" at the bottom. What? Any reader of CR knows he never, ever talks about positions. The site is not an investment site per se. Since that time the writing over there has been one of amplifying FED speak, highlighting crap like "rates of change" of what ever, and cheer leading good news.
I had never seen that before from CR and I was disappointed. Later on I tried to engage in a discussion on the comments section and was attacked by people so dumb I do not really participate anymore.
Until tonight.
While CR is taking a victory lap after the FED MBS program ended today regarding mortgage spreads:
The spread between mortgage rates and treasuries widened slightly, from Bloomberg: Mortgage-Bond Yields That Guide Loan Rates Rise to 3-Month High.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.05 percentage point to 4.56 percent as of 5 p.m. in New York, the highest since Dec. 28, according to data compiled by Bloomberg. ... The difference between yields on Washington-based Fannie Mae’s securities and 10-year Treasuries widened for a third day, rising about 0.01 percentage point to 0.69 percentage point, Bloomberg data show.
That spread reached 0.59 percentage point on March 10, the lowest since at least 1984, as the Fed’s purchases of agency mortgage bonds approached their scheduled conclusion. The gap averaged 1.32 percentage points from 2000 through 2009.
Oh boy, a 10 bps widening from the low! I expect the spread to widen slowly and push up mortgage rates a little (at least the spread between the Ten Year and the 30 Year fixed rate).
Wow, the day after! You are a genius! Congratulations! Before I eat my hat (I did make that bet a while ago about mortgage rates) lets give it more than 24 hours, yes? Please.
Whatever on that. What was even more annoying was the comments section. While maybe people remain from the old days, the rest is populated by snarky time wasters that will brook no divergence from the CR line. An excerpt from my attempt tonight:
EconomicDisconnect (homepage, profile) wrote on Thu, 4/1/2010 - 8:05 pm CR, Wondering what you thought of the FED MBS asset disclosure? Strong case that those things will never see sale on the open market but be held to maturity. How to shrink that balance sheet in that case? I guess we could wait for their next press release.
first reply:
daddyo (profile) wrote on Thu, 4/1/2010 - 8:13 pm They could very easily sell those on the open market in small pieces with minimal impact. Or, they just hold them. They are mortgages, so they will generally amortize and prepay away over time. A very small percent of the overall balance of a 30-year MBS is actually around for 30 years, which is why they trade over 10 year treasuries/swaps.
Ok, total bypass of anything important, but whatever. I try again:
EconomicDisconnect (homepage, profile) wrote on Thu, 4/1/2010 - 8:18 pm So now the FED balance sheet not only can buy items not allowed by their charter but can hold them for 30 years as a "temporary market assistance program"?. Sooner or later the goalposts get moved so far out that they are in the asteroid belt.
A 10bps widening on rates in one day! At that rate of change (everyones favorite parameter) that does not bode well. Lets check back in after a while and see how things look.
That comment got zero response. Not one. A bit later another player added:
1 currency now -yogi (profile) wrote on Thu, 4/1/2010 - 9:17 pm Who cares about a few basis points in mortgage rates. You're missing the bigger story, CR.
One thousand, two hundred fifty billion dollars of garbage was purchased by the Fed behind closed doors. Based on their Maiden Lane deals, this probably represents several hundred billion dollars in direct transfer of money from taxpayers to the owners of the garbage, presumably big banks..
Resign, Chairman Bernanke. End the Fed.
Not bad, along the same lines.
I offered as a caution:
EconomicDisconnect (homepage, profile) wrote (in reply to...) on Thu, 4/1/2010 - 9:23 pm "Who cares about a few basis points in mortgage rates. You're missing the bigger story, CR.
One thousand, two hundred fifty billion dollars of garbage was purchased by the Fed behind closed doors. Based on their Maiden Lane deals, this probably represents several hundred billion dollars in direct transfer of money from taxpayers to the owners of the garbage, presumably big banks.."
Don't bother yogi,it is all explained away then put on ignore. Back to pot talk.
The comments were all about legal pot.
He tries again:
1 currency now -yogi (profile) wrote on Thu, 4/1/2010 - 9:27 pm With all due respect, instead of lauding Bernanke our esteemed blogger host should be demanding accountability for the Maiden Lane disaster/theft and transparency for this MBS garbage. Otherwise, he's part of the problem.
A while later a thoughtful, but totally missing the point comment:
some investor guy (profile) wrote (in reply to...) on Thu, 4/1/2010 - 9:29 pm userbarfly wrote:
"excuse my ignorance, but what is the big deal about having the Fed reduce their balance sheet? they are the "bad bank" of last resort, no?"
Shrinking balance sheets usually means deleveraging. There are an assortment of ways to do it. 1. Let loans or bonds pay off. This is typically a slow process and can happen with no defaults, or a large number. The supply of credit will slowly drop. The amount of money people make for managing loans or MBS portfolios drops. The Fed is doing this for MBS. 2. Unwind the CDOs, TOBs, strips, bond mutual funds, and other bundles of loans, bonds, and derivatives. This is sometimes done in insolvencies. It can also be done by by solvent entities who want to run off a book of business. "Here are the underlying securities. They're yours now." I personally view this as a very underused and useful strategy for dealing with troubled institutions, and investment pools that just look like there isn't much more money to be made managing them. 3. Spin off some operations. A manufacturer might sell a subsidiary. 4. A hedge fund might liquidate most or all of its holdings and give money back to investors.
Another pie in the sky accountant type comment.
The rest is pot related and other boring stuff.
My point; CR is a great news aggregate site and a great place to lift charts, but the commentary and discussion section is a waste of time.
Reader Poll Last night I linked an Automatic Earth entry which was very good. The author, Ilargi, included a video of Bruce Springsteen performing "The Ghost of Tom Joad" from 1995:
A great song and a stellar performance.
It put me in mind of the Rage Against The Machine version of the same tune. I commented:
The version of "Tom Joad" by "Rage Against the Machine" is quite a bit more btiing and powerful in my opinion. Great intro, as always.
The author responds:
"The version of "Tom Joad" by "Rage Against the Machine" is quite a bit more btiing and powerful in my opinion."
Heavy guitars can easily sound hollow.
This Ilargi's way of dumping on anything and everything I ever say in the comments section over there! Here I thought the blogs were a hive mind of like thought! Wow that one stung!
New poll! Above is Bruce. Below is the Rage Against the Machine (live):
Vote in the new poll as to which tune is more powerful. You know my vote. Unlike others, I will still engage you if you disagree!
Added: A great BBQ site I have been following is "No Excuses BBQ" and enjoy a hilarious "what is BBQ??" twitter thread here: http://noexcusesbbq.com/archives/3194 or http://tinyurl.com/yjpmndx Too funny.
Way short on time tonight, the bags were being hit aggressively, so I will just link to all the stuff that jumped out at me today which is better than anything I was going to write anyway.
Throttle Linkage Is Not Stuck In the old day there was an actual metal rod that went through the firewall of cars and opened up the carburetor for gas intake. That evolved to levers with wires doing the work and no many cars just use a computer. Here is some non-stuck linkage!
Expect to see much more of this kind of thing going forward. A lot more.
Honesty From Across the Pond In this country we get treated to such things as: -The banking system is perfectly sound -The vigorous "Stress Tests" proved banks were rock stars -Capitalism is our system of markets
Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse.
“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”
The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.
“The information that has emerged from the banks in the course of the NAMA process is truly shocking,” Lenihan said.
I can only imagine that the bank information was shocking because the Finance Minister never worked at Goldman Sachs, like all of our top level players have.
I am 100% sure that costing taxpayers dearly for a long time and shocking banking practices are unique to the Irish Banking system only. They are the outlier, nothing like what we have here in the United States.
