Twenty Years Ago Today...

...Checkpoint Charlie was opened, Nov. 9, 1989.
So began the dismantling of the 28-year-old Berlin Wall.

Boston Globe Photo Gallery

James Carroll: "the greatest date of our lifetimes"

Rising From the Napalm

...where the green shoots are real.

The Mad Hedge Fund Trader gives a lesson in demographics:

http://madhedgefundtrader.com/November_6__2009.html

Pick-a-Stat

Gone: another 190,000 jobs. So says this morning's press release from the Bureau of Labor Statistics. This number--the one that gets all the headlines--is from the "establishment" survey (CES), and it is plenty bad. Worse, though, is the "population" survey (CPS) number, which comes in three times higher at -589K. BLS tries to reconcile the two figures with the so-called "adjusted household survey." That one falls somewhere in between: -402K.

Does any of these numbers spell "recovery?" I didn't think so.

And now (thanks to Jake at EconomPic) for the number that has governors across the land reaching for their medication: hours worked per week per capita, now at 19.3. This means more dependents in a shrinking economy less able to support them.

TARP Money Goes Up in Smoke

Congress thought it had a better idea. A year ago it allocated $700 billion to a new Troubled Assets Relief Program to prevent a run on some of the nation's biggest banks. The Treasury Department used a good chunk of the $700B to buy preferred shares in those banks (think Bank of America and Citigroup), as well as in insurers (AIG) and other lenders (CIT). Taxpayers were sweet-talked into believing that these were "investments." TARP, it was said, would actually become a profit center for the federal government, with quarterly dividends generating an annual return of 5%. Not bad with real interest rates below zero.

Trouble is, many of the investments are turning sour. Yesterday, while most of the nation was diverted by NFL action, CIT announced that it is seeking bankruptcy protection. The resulting reorganization, once approved by the courts, will mean a 30-percent haircut for bondholders and a virtual wipeout for stockholders. Not only do we taxpayers lose our direct "investment" in CIT of $2.33B (as reported by Bloomberg), but as partial owners of Bank of America we lose another $2.25B in the debt swap. Meanwhile, 33 banks missed their TARP payments in August, up from the 15 who missed their May payments. Think we'll ever see any of that money?

TARP is scheduled to expire at the end of next month, which, as the Wall Street Journal pointed out last week, would be none too soon. Treasury treats TARP as a revolving fund, which means that as money is returned, it gets redirected back out again. It will keep getting "invested" in ever riskier enterprises until it doesn't come back. Congress can lock up the remaining money by doing nothing. But given its propensity to subsidize losers like Cash for Clunkers and Cash for Bunkers, nothing dollarable (as John Muir used to say) is safe.

Bringing the Boys Home--In Boxes

[Reuters]

"Going back to Alexander the Great, no one has ever had success
fighting the locals in Afghanistan."

--David Verdi, Vice President of NBC News

quattrocelli plays Rumford

Muskie Auditorium, October 26, 2009

play Chitarri on StreamPad below

[more selections at quattrocelli's MySpace player here]

Bon Appetit

wheat futures heading up

From the Mad Hedge Fund Trader:

"During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot."

Oh, and have a nice day.

The Punch Bowl Gets Taken Away

Home sales in the U.S. have been artificially supported by the First-Time Buyer's Credit, which is due to expire at the end of next month. Because of the time necessary to process new mortgage applications, the window has already effectively closed. Look (above) at what happened to mortgage apps last week. According to survey data released this morning by the Mortgage Bankers Association (MBA), its Market Composite Index, a measure of mortgage loan application volume, decreased 13.7 percent on a seasonally adjusted basis from one week earlier. Without the adjustment for the Columbus Day holiday, the index actually decreased 22.4 percent. Oops.

[update, one week later:]

Realtors, lenders, and builders will undoubtedly point to the latest kink in the data series as proof that the Buyer's Credit should be extended. The $8,000 credit essentially covers the down payment for a cash-strapped purchaser. But Rex Nutting at MarketWatch argues that the subsidy is wasteful. Of the million-plus claims that have been filed so far, as many as two-thirds have been for transactions that would have taken place anyway, with or without the credit. Subtract those out, and the real cost to the government of each additional sale under this program is $43,000. "The last thing we need in this country," says Nutting, "is more houses, or a temporary floor under prices or more government incentives to buy a home without putting any of your own money at risk."

Actually, Rex, the very last thing we need in this country is more fraud. It is bad enough that banks are ripping off taxpayers; now taxpayers are ripping off each other. The $43K figure mentioned above does not capture the costs of weeding out fraudulent claims, which (as reported by the Wall Street Journal here) could be one of every ten. In testimony to Congress, the Treasury Inspector General for Tax Administration recommends that the Internal Revenue Service demand more thorough documentation before granting the credits. No credits before closing, no credits for second homes, no credits for 4-year-olds.

A handout meant to grow green shoots creates red tape instead. I know, hard to believe.

Junior At Eleven Weeks

Worthley Pond, 10-17-09

[compare to one month earlier]

Shrinkage at G.E.

General Electric is a blue-chip "tell" for the U.S. economy as a whole. A more diversified company than 20th-century stalwart General Motors ("what's good for GM is good for the country"), GE has five major divisions, including Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance, and Consumer & Industrial. In 2007 the company pulled in revenues of $173 billion and netted $22.5 billion in profits. If GE is working, so is the U.S.

We now know from GE's third-quarter earnings, posted this morning, that good cheer alone will not turn the economy around. Remember, this was the quarter when GDP growth was supposed to turn positive, officially ending the recession. If that happens, it will be because of increased government spending, not because of recovery in the private sector. Q3 revenues at GE of $37.8 billion were down 20% from a year earlier and 3% from Q2.

The biggest drag came from G.E. Capital Services, the company's lending arm, accounting for one-third of total revenues. In 2007 GECS generated more than half of the company's profits, or roughly $3 billion each quarter. Those days are gone, as CEO Jeffrey Immelt revealed plans to shrink the balance sheet at GECS by 25%. [Memo to President Obama: contracting balance sheets in corporate America spell S-T-A-G-N-A-T-I-O-N.] Last quarter, GECS managed to break even only with the help of a $1 billion tax credit.

This bad news for the U.S. financial sector was compounded by Bank of America's announcement, also this morning, of a $2.2 billion loss in Q3 (after preferred dividends, some to Uncle Sam). (A page from BofA's financial summary documenting the relentless growth in nonperforming assets may be viewed here.) Citigroup yesterday announced a loss of $3.3 billion, despite underfunding its loan-loss reserve. Nonperforming loans are surging there, too.

The financial crisis is not over.

Bloomberg TV interviews Harvard prof Niall Ferguson here.

MBA Index Rolling Over?

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 25, 2009. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.8 percent on a seasonally adjusted basis from one week earlier.

The twin peaks in the graph above are your "green shoots." Since early summer we have been mired in a lending brownfield, which may turn to quicksand with the expiration of the Federal First-Time Buyer's Tax Credit at the end of November. Recovery, anyone?

Echo Bust?

[click to enlarge -- relayed by Mike Mish Shedlock]

Here Come De Judge

Legislators won't do it. Neither will regulators. So how do we proceed with pest control on Wall Street? I'm talking about the investment bankers who have spent the past two decades padding their compensation by peddling risky derivatives to zombie investors. Their financial "engineering" (too good a word, as it implies that they actually made something useful) resulted in a dangerous shortening of time horizons, a dysfunctional allocation of resources, massive job destruction, a generational delay in economic innovation, and a crushing tax burden amortized in perpetuity. Other than that, good job, guys.

Throughout 2008 I held up Merrill Lynch as the arch symbol of this over-the-counter culture. When 2008 expired, so did Merrill Lynch, at least as a stand-alone company. But the culture lives on. By all rights Merrill would have--and should have--failed, just as Lehman Brothers did a year ago. But Bank of America, prodded by an oligarchy anxious to keep the game going, decided to take Merrill over.

The merger almost fell apart when, upon more careful examination, Merrill's assets proved too toxic even for an acquirer the size of BofA. Then came a comical sequence wherein the Three Stooges--Treasury Secretary Henry Paulson, Fed Chair Ben Bernanke, and BofA CEO Ken Lewis--slapped each other silly with threats and counter-threats. Ken-Doll thought about pulling out of the deal before the shareholder vote in December. Take this, said Hammerin' Hank, handing him an envelope stuffed with $25 billion in TARP dough. Not enough, said Lewis. Then we'll up the ante, said Paulson, throwing in another $20 billion in taxpayers' money and a guarantee to cover as much as $118 billion in Merrill assets. Still not enough, repeated Lewis. Look, you good-for-nuttin' empty suit, said Helicopter Ben, just take the money and keep your trap shut, or we'll fire you AND your entire board.

O.K., O.K., that's enough, concluded Lewis. BofA shareholders approved the deal, blissfully unaware that Merrill was ringing up billions in losses and paying billions in executive bonuses. Since then the Securities and Exchange Commission, embarrassed into action by New York's Attorney General, has accused BofA executives of withholding material information from shareholders. Convinced that its work was complete, the SEC then agreed to a settlement whereby BofA would pay the government a fine of $33 million while admitting no wrongdoing.

Here come de judge! (Remember that refrain popularized by comedian Flip Wilson forty years ago?) Last week U.S. District Judge Jed Rakoff threw out the settlement, finding it ridiculous that the victims of the alleged wrongdoing--the shareholders who own the company--would ultimately pay the fine (the judge's dissatisfaction is documented here). Instead, he ordered the case to trial. The SEC, having already blown the Bernie Madoff affair, has no choice but to proceed. It must prove the misconduct and identify the perpetrators, who presumably would then be subject to punishment. Yesterday the SEC pledged to "vigorously pursue" the case against Bank of America.

Pending the trial, Lewis continues to make out like a bandit, thanks to the largesse of the federal government. The various bailout programs enacted by Congress (TARP, TALF, TLGP, etc.) have boosted the stock prices of all the major banks. Lewis has seen his 4.7 million shares of BofA stock more than quintuple in value since March. So confident is he of his firm's recovery that he has arranged to cancel the $118 billion asset guarantee provided by the feds for the Merrill mess. Generous to a fault, Uncle Sam is accepting an exit fee of $425 million, or less than a tenth of the real value of the insurance as originally negotiated.

It will be interesting to see if the discovery process which Judge Rakoff demands finally assigns accountability for the ongoing financial calamity that threatens any meaningful economic recovery.

[update, 09-30-09:]
Lewis announced today that he will retire from Bank of America at the end of the year. He will leave with $135 million in pension benefits, stock, and other compensation. So what if Social Security goes bust!

Young Loon Now a Tween

Loon offspring at seven weeks, Worthley Pond, 09-20-09

Turn-around Ahead?

[click for a larger view]

The S&P 500 stock index oscillates around its 200-day moving average, regularly reverting to the mean. The S&P is now trading at 20 percent above the 200-day MA, typically a level which triggers a turn back down. Fasten your seat belts.

Banks Are Ill-Prepared for the Coming Tsunami

Up, Up, and Away? That's what the stock market seems to be saying, but the line above is pointing in the other direction. ALLL stands for "Allowances for Loan and Lease Losses," and the graph indicates that only 20% of all bank assets reside in banks with sufficient allowances set aside to cover their nonperforming loans. In other words, as more and more loans become delinquent, banks are under-reserving for possible defaults. Instead, they are puffing up their current earnings in hopes of appeasing regulators and attracting investors (and, of course, paying their top executives).

A new wave of defaults will arrive in 2010 as option ARMs (adjustable-rate mortgages) do what they were designed to do: explode. These are teaser loans that start borrowers off at absurdly low monthly payments for the first few years. The payments might be interest-only (leaving the principal untouched) or even less (allowing the balance owed to increase). Then, once the introductory period expires, the payments on principal begin. That's when the rubber finally meets the road.

These products were perfect for speculators flipping properties in an overheated market. Borrowers could sell for a profit before the loans re-set. But option ARMs will prove deadly to homeowners who have suddenly lost their jobs and, thus, the income to cover the higher payments due after the re-set. The U.S. economy has shed jobs for twenty months in a row (a total of 6.9 million) and is expected to continue doing so at least until the middle of 2010. The mortgages, alas, allow no grace periods for unemployed borrowers. [Hours after I posted this, FDIC Chair Sheila Bair revealed in a statement that "the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months." The initiative applies to banks that have acquired failed FDIC-insured banks and would offer relief to "unemployed and underemployed" borrowers.]

Almost $100 billion in option ARMs will reset between now and the end of 2010. Mounting foreclosures are inevitable, and hundreds of banks will be forced to close. Surviving banks will be hit by the feds with a double whammy: "special assessments" to help indemnify insured deposits as well as stricter capital-reserve requirements to backstop defaults. Turning a profit will be a tall order (as described here). Lending to entrepreneurial start-ups--and creating jobs--will be out of the question.

But bank CEOs don't mind. They already have theirs.

Photo Retrospective: Ted Kennedy

[click for slide show]

Also, the Boston Globe has a video timeline here.

Where Exactly Is All That TARP money?

Not here. As far as savings go, Americans have gotten religion. We now owe less money collectively than we did a year ago, as the graph above shows. Not only do we want to get out from under; lending institutions are forcing us to submit to tighter discipline. They are making money less freely available now to protect themselves from risky borrowers.

But this is bad news for an economy built on expanding consumer debt. The reduced demand for goods and services has resulted in massive layoffs during the past nineteen months, feeding a vicious cycle of lost incomes and delinquent loans. Policy makers in Washington last fall tried to stanch the bleeding with the infamous TARP, a program designed to force $700 billion through the nation's banks into the hands of tapped-out consumers. It was a frantic attempt to keep the debt addiction going.

A funny thing happened on the way to recovery:

[THERE it is...]

Instead of recycling the money as intended, the banks are sitting on it. Notice (above) how excess bank reserves have soared since September's meltdown in the credit markets. Once burned, banks are now twice shy about building their balance sheets on the backs of distressed consumers. Instead, they are hunkering down until the storm passes.

TARP was supposed to mitigate the pain. It has not done that, nor has it helped to spread the pain evenly. It has selected and protected a privileged group of survivors, a class that, more than made whole, is actually profiting from the crisis. During the Obama relief rally, banks have made money by underwriting each other's stock offerings and trading each other's stock. They have not made it by making new consumer loans or modifying existing ones.

They said that taking TARP money was the patriotic thing to do. They lied.

Population Grows, Workforce Doesn't

For the first time since World War II, the U.S. Gross Domestic Product has shrunk for four straight quarters (and five of the last six). Another post-WW2 first: we are completing a ten-year period with no net new jobs (see chart above). Wages and salaries, which drive recoveries in spending (not to mention tax collections), fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960. In other words, we have more dependents than ever before in a shrinking economy less able to support them.

Today brings the "good" news from the Bureau of Labor Statistics that "only" 247,000 jobs were lost in July. Numbed by monthly losses twice as large earlier this year, we are coaxed by the media to accept that a quarter-million new pink slips somehow bespeak an imminent recovery. I again remind you that the BLS data are "adjusted," and perhaps this month adjusted more than usual in order to pump up consumer and investor psychology (see Chris Martenson's take here). For now we have an Economy of Hope, but not yet one of results.

[update, September 4: Sure enough, the BLS has revised the July number to 276,000 jobs lost, a number nearly 12% uglier than the preliminary estimate. The final "official" number will not be known for another month.]

Lake Umbagog Slide Show

Begin here
(courtesy Boston Globe)