Friday, March 19, 2010

Weekly Wrap

[click to enlarge]

Take a quick look
at these two graphs from CalculatedRiskBlog. Above, we see that the Mortgage Bankers Association's Purchase Index, updated every Wednesday, shows that mortgage applications for new homes have slipped to a twelve-year low, despite the soon-to-expire First Time Homebuyer's Tax Credit. Below, notice that initial unemployment claims, updated every Thursday, are stubbornly sticky at 450+ K. Look back to the double-dip recession of 1980-82 and ask yourself whether we should be girding ourselves for a similar chart pattern this time around:

Testifying on Capitol Hill Wednesday, the dean of two-handed economists used both hands to fend off congressional critics. Fed Chair Ben Bernanke delicately dodged questions about shady accounting at Lehman Brothers in the months leading up to the financial-sector meltdown in September 2008. The questions were sparked by last week's revelation that Lehman, prior to its bankruptcy, had used an accounting gimmick known as Repo 105 to overstate the health of its balance sheet. Recall that Lehman was raising capital like crazy during the winter and spring of 2008. Falling for the Repo 105 lipstick, investors in those secondaries eventually got gaffed.

Where were the regulators? Treasury Secretary Timothy Geithner, then heading up the New York Federal Reserve Bank, has used the DNR Defense--"do not recall." Likewise, Bernanke insisted on Wednesday that the accounting tricks were "hidden," even as two Fed officials were on the premises at the time, protecting the Fed's interests in discount-window loans to Lehman. They were there to Follow the Money, but did not follow far enough.

Now today comes the news that Merrill Lynch ratted to both the SEC and the Fed two years ago about Lehman's "aggressive" accounting. Caught, like Lehman, in the vise of the growing credit crunch, Merrill found itself at a competitive disadvantage to a firm cooking its books. Advised then of the tilted playing field, the Fed now claims no knowledge. Huh? As Tyler Durden at ZeroHedge tartly observes, the Fed is simply a tool of the industry and should not be part of any regulatory solution to the current financial crisis:

And this is the Fed that lame duck and financially supremely challenged Chris Dodd wants to put in charge of regulating everything in this country? If that really ends up happening, we are so #&$*ed... but not before Goldman funnels all of Americas' money into its Middle-Class Irredeemable Negative Interest Rate All-market Fund SIV.

How much confidence should we have in Big Ben?

THIS much.


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