Quote for the Week, Jan. 30-Feb. 5, 2011

A government big enough to give you everything you want, is strong enough to take everything you have.
--Thomas Jefferson, U.S. President (1801-09)

Nenner Nails It

Charles Nenner

During a radio interview three weeks ago, cycle analyst Charles Nenner predicted that the rally in Bank of America's stock would end shortly, either when the share price hit $14.70 or around January 14. Turns out he was right on. Look at the chart below:

[click to enlarge]

That white candlestick you see at the top of the formation came on January 14, when BAC ended the trading day above 15. Since then it has been all downhill. As I write, the stock sits a buck below Nenner's target price.

If MainePERS portfolio managers had acted on Nenner's exit call, they could have saved themselves, and us, $2.5 million. I say "us" because, as guarantors of retirement pay-outs to the state's public employees, we taxpayers effectively own everything in the MainePERS portfolio. Any losses in that portfolio will have to be restored out of the General Fund to preserve future benefits.

My contention is that equity managers at MainePERS need to be more selective in their stock-picking and quicker to cut losses. BAC has underperformed for a long time and shows no signs of turning things around. Just a week ago the company reported a fourth-quarter loss of $1.2 billion, despite a release of over $1 billion in loan-loss reserves and the multi-billion-dollar sale of most of its one-third stake in BlackRock, the giant asset manager. For all of 2010, Bank of America lost $2.23 billion. Why hold such a dog?

It figures to get worse. The company's chief financial officer warned during a conference call with analysts of another $7 to $10 billion in losses to come for home loans and mortgage-backed securities sold to private investors, who want to put the toxic assets back onto Bank of America. Their beef? That BofA did not properly disclose the riskiness of said assets. The company has already settled with the GSEs on some of the slime, but there's more out there. A lot more. Maybe a quarter of a trillion dollars worth in defaulted and seriously delinquent loans.

BofA's ballpark estimate of $7-10 billion in future putbacks appears optimistic. A suit filed in the last week by several insurance companies alleges "massive mortgage fraud" by Countrywide Financial, which is now part of Bank of America. Preliminary research of a sample of 19,000 Countrywide loans found that over 90% of defaulted or delinquent loans "contained material deviations from Countrywide's underwriting guidelines." If that defect rate can be successfully extrapolated, then BofA needs to up its exposure estimate by a factor of 20.

Company officers admitted on the conference call that it may take years to sort through the mess. Which means that BAC is, at best, dead money until these issues are resolved. At worst, shareholders will get wiped out, which would set MainePERS back a penny or two. Nenner sees the stock sinking back at least to the November lows. The time to dump it, as he had predicted, was two weeks ago.

A useful hint to do just that came the day before the January 14 high, when Robert Lenzner, writing for Forbes, brought attention to an accounting convention that has allowed lenders to overstate revenues. As mortgages mature, lenders are allowed to recognize interest income whether or not borrowers actually make their payments. The phantom income representing accrued, but unpaid, interest does not come off the books until the banks actually foreclose on the distressed properties, a process that can take 16 months or--when the paper trail is sketchy--longer. Right now phantom income is accruing on $1.4 trillion in face-value mortgages industry-wide. So add looming write-offs to the list of reasons to question the earnings power of the big banks.

Quote for the Week, Jan. 23-29, 2011

A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.
--Robert Frost

'Asinine Ethanol Policy'

Price of Corn (/bushel)

Jim Quinn,
"Ever Increasing Corn Prices Are a Real Killer"

[excerpt:]

"Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3rd world countries....

The United States is the big daddy of the world food economy. It is far and away the world’s leading grain exporter, exporting more than Argentina, Australia, Canada, and Russia combined. In a globalized food economy, increased demand for corn, to fuel American vehicles, puts tremendous pressure on world food supplies. Continuing to divert more food to fuel, as is now mandated by the US federal government in its Renewable Fuel Standard, will lead to higher food prices, rising hunger among the world's poor and to social chaos across the globe. By subsidizing the production of ethanol, now to the tune of $6 billion each year, US taxpayers are subsidizing skyrocketing food bills at home and around the world."

Complete article viewable here.

Secession: The Winter of Sumner's Discontent

With all the talk these days about securing the halls of Congress so that our elected representatives may be better protected from the general public, the question remains: what if the inmates take to assaulting each other? Could happen. It has happened, most famously just prior to the Civil War, when tensions between North and South were escalating almost day by day.

Meet Charles Sumner, U.S. Senator from Massachusetts.

Here was a man who, after graduating from Harvard in 1830 at age nineteen, went home with stacks of books to study some more because he did not think that Harvard had really taught him anything useful. By age 30, Sumner had completed law school, practiced some, lectured some at Harvard Law School, published a lot, and spent three years traveling in Europe. He returned a man in search of a mission.

A staunch believer in human perfectibility, Sumner supported local initiatives to reform schools and prisons. He was also a pacifist, the kind of guy who could get up in front of a large July 4th gathering in Boston and give a lengthy speech denouncing American expansionism and militarism. "There can be no war," he asserted solemnly, "that is not dishonorable." Then he went on to criticize U.S. Army training exercises as "farcical and humiliating" and the U.S. Military Academy at West Point as a "seminary of idleness and vice"--all this with veterans and uniformed officers sitting in the front row! Way to make friends, Chas.

Acquaintances at the time described Sumner as earnest, straightforward, and humorless, "almost impervious to a joke." Sumner made no apologies for his seriousness of purpose. Anyone looking for a joke in any of his speeches, he advised, "might as well look for a joke in the book of Revelations." Hardly a ladies' man, Sumner remained a bachelor until well into his 50s. After finally getting married, he separated from his wife a year later. Sumner's best companion, clearly, was his own inner voice.

His outer voice was not bad, either. Standing well over six feet, with a sturdy frame exquisitely tailored, Sumner spoke with great effect, sometimes for hours at a time. His speeches, recited from memory, incorporated an impressive array of borrowed verses, Latin quotations, and statistics. Cut from the John Quincy Adams cloth of moral rectitude, he was more an ideologue in the Senate than a colleague, given to total conviction rather than tepid compromise. Sumner believed that you could no more be a little bit right than a little bit pregnant. Either you were or you weren't. And if you were not right, he would let you and the world know.

No political party could contain such a man, and Sumner felt in no way bound by party platforms. "The slave of principles," as he referred to himself, "I call no party master." In his first foray into statewide politics, he found himself aligned with the Whig Party. But it was not long before he peeled off with a faction of "Conscience Whigs" to protest the willingness of "Cotton Whigs" (among them Massachusetts merchants and manufacturers) to make concessions to the slave South. The nomination of Zachary Taylor for U.S. President was seen by Sumner as the result of an unholy alliance of Southwestern and Northeastern politicians, of "cotton-planters" and "cotton-spinners," of "the lords of the lash and the lords of the loom" (love that alliteration). Sumner and others, including John Quincy's son Charles Francis Adams, immediately bolted the Whig Party altogether to start their own.

The U.S. had entered a period of shifting allegiances, tremors in the political landscape warning of the national cataclysm to come. Parties came and went. Sumner was elected to the U.S. Senate in 1851 (in the Massachusetts legislature) by a coalition of Democrats and Free-Soilers, but by 1854 was gravitating toward the emerging Republican Party because of its resolve to ban the spread of slavery to the western territories. He had become one of the nation's most recognizable and, in Northern quarters, most celebrated voices against the institution of slavery.

To Southern ears, however, Sumner's voice was like nails on a chalkboard. Part of it was his holier-than-thou attitude, part the relentless invective with which he showered his opponents. On May 19, 1856, Sumner rose on the Senate floor to launch a monumental diatribe entitled "The Crime Against Kansas," the printed version of which ran well over 100 pages. He started on the 19th, but did not finish the oration until the following day; it was that long. Sumner argued passionately that the Kansas territory should be admitted as a free state, where slavery would be prohibited.

Then he got personal. Of the chief sponsors of the bill to ratify a pro-slavery constitution for Kansas, Sumner berated all three, including South Carolina's Andrew Butler, who was not even present for the debate. The elderly Butler, according to Sumner, "touches nothing which he does not disfigure--with error, sometimes of principle, sometimes of fact. He shows an incapacity of accuracy." Not only that, said Sumner, he drools--a cruel reference to Butler's stroke impairment. Another of the embattled Three, Stephen Douglas of Illinois, who was there, thought that Sumner had gone over the line. "That damn fool," he muttered during the speech, "will get himself killed by some other damn fool."

Butler's nephew, South Carolina Congressman Preston Brooks, decided that the insult called for retaliation. He entered a near-empty Senate chamber after adjournment on May 22 and found Sumner sitting at his desk, busily attending to paperwork. Brooks complained to Sumner about the libelous speech, then rapped him on the shoulders with the lighter end of his tapered walking stick. It was at that point that some kind of chemical must have been released in Brooks's brain. Beating a defenseless abolitionist felt kinda good.

Before Sumner could stand up, Brooks started raining blows onto Sumner's head, as hard as he could. What had been intended as a measured masterly whipping was turning into a full-blown assault. Sumner finally got to his feet, but only after ripping the bolted desk from the floor with his legs. With blood streaming down his face and over his eyes, Sumner staggered down the aisle, but could not escape his attacker's reach. Brooks broke his cane, but still kept whacking. When the few Senators left in the chamber came to intervene, it looked like a hockey game might break out. But calmer heads prevailed. When it was all done, the cane lay shattered in pieces on the floor, and Sumner lay unconscious.

Brooks was an instant hero in the South, as newspapers applauded his action. The Richmond Enquirer considered it "good in conception, better in execution, and best of all in consequences" and favored making it a daily ritual: "These vulgar abolitionists in the Senate... must be lashed into submission." Suggestions were made that Brooks use something heavier next time (a baseball bat, maybe?). Fragments of the now-sacred cane were fetching a nice price on eBay.

Northerners, meanwhile, were outraged. Sumner was treated almost as a martyr, and his re-election to the Senate later that year became a lead-pipe cinch. A New Yorker wryly observed that Sumner "is made by this act, senator for life." In fact, it took three years for Sumner to recover sufficiently to resume his duties, the initial injuries less burdensome than the post-traumatic stress syndrome that followed.

Sumner found upon his return to Washington in December 1859 that things had changed--and not to his greater satisfaction. The Republican Party, in a tactical shift prior to the 1860 elections, softened its rhetoric on human rights and began focusing instead on economic issues (tariffs, land grants, and railroad charters) that might attract moderate voters. Party leaders nudged Sumner to keep a low profile during the campaign season, fearful that any antislavery agitation would strengthen the standing in the South of the Democratic presidential candidate Stephen Douglas.

Sumner held his tongue and was rewarded with the election of the Republican candidate, Abraham Lincoln. During the winter of 1860-61 the nation, alas, appeared headed for rupture. Before Lincoln could even be inaugurated, seven states in the Deep South resolved to secede from the Union. Moderate Republicans in Congress worked anxiously with Democrats to fashion a compromise that might keep the Upper South from following suit. Such a compromise would allow the extension of slavery to territories south of the 36°30' parallel. Sumner would have none of it. In one of a series of letters to the Massachusetts governor, Sumner pleaded, "Pray keep Massachusetts sound and firm--FIRM--FIRM--against every word or step of concession."

Sumner had a plan for averting civil war, but all depended on the new President's listening to him.

Other posts in the series:

1: Secession Sesquicentennial: Prologue

2: The Winter of Sumner's Discontent

3: Putting the "SC" in Secession

4: Buying Time During Secession Winter

5: The Forts

6: The Adams Family

7: Secessionists Take Fort Sumter

Quote for the Week, Jan. 16-22, 2011

The Utopias of one age have been the realities of the next.

--Charles Sumner

The Fed Going Bankrupt? No Way

Yes way!

--William Ford, former president,
Federal Reserve Bank of Atlanta

And this from Richard Fisher, president,

Federal Reserve Bank of Dallas,

the very next day:

"The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we have reached our limit. I would be wary of further expanding our balance sheet."

Complete speech here.

Need more?

Charles Prosser, president

Federal Reserve Bank of Philadelphia:

"Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less. Nor should monetary policy be asked to perform credit allocation in support of particular sectors or firms. Expecting too much of monetary policy will undermine its ability to achieve the one thing that it is well-designed to do: ensuring long-term price stability."

Complete speech here.

Unintended Consequences

Some stimulus!
Prices spike, but jobs keep sliding.

"Mr. Goolsbee’s statistical analysis found that 'much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices. A 10 percent investment tax credit increases equipment prices 3.5-7.0 percent'....

The blue line [in the chart above] shows a curious spike in the prices of home building materials, peaking at the end of April 2010, almost exactly when the [First-Time Home Buyer] credit expired.

Perhaps Mr. Goolsbee’s dissertation applies here, and the rush to finish home transactions before the credit expired made home building 3 to 5 percent more expensive during that period than it would have been without the credit. In contrast, the red employment series shows no visible spike in people employed as home builders."

Casey B. Mulligan,
"Early Doubts About Whether Tax Credits Stimulate Investment"
N.Y. Times

Secession Sesquicentennial: Prologue

The worst U.S. President ever? Many historians give the nod to James Buchanan, under whose watch the sectional rivalry between slave-holding states and "free" states spun out of control. By the time his successor, Abraham Lincoln, was inaugurated in March 1861, seven states had already seceded from the Union. Buchanan's slim claim to fame was that he was able to avoid bloodshed while he occupied the White House.

Slavery, of course, was the issue that eventually split the country. It was also an issue that Buchanan thought had been settled in the early days of his administration in 1857, when the U.S. Supreme Court delivered its infamous Dred Scott decision. With five of the nine Justices coming from slave-owning families, it came as no big surprise that the Court upheld the Fugitive Slave Act, by which slave-owners (and federal marshals) were empowered to pursue runaway slaves across state lines. "Free" states were barred from providing sanctuary to slaves and, indeed, from prohibiting slavery within their own borders.

The Court's reasoning was simple enough. Since the Constitution protected the property rights of free men, and since furthermore slaves were considered property (and not citizens with rights of their own), then it followed that slave-owners could hold their property wherever. Slavery could not be abolished anywhere in the United States. Thus, the Missouri Compromise of 1820 (which, among other things, birthed Maine's statehood) was deemed unconstitutional for seeking to prohibit slavery in most of the western territories.

President Buchanan was pleased with the ruling. In fact, there is evidence that he tampered with the decision to get a two-thirds majority, a margin that he figured would end the debate for good. Now he could get on with his own agenda: further territorial expansion of the U.S. His was the Monroe Doctrine on steroids. European colonial governments in Central and South America were to be replaced by U.S. protectorates, Cuba would be purchased and annexed as a slave state, Mexico's northern states would be peeled off and annexed, and domain would be seized in Central America for a trans-isthmus waterway. "No nation will have a right to interfere or to complain," declared Buchanan in his inaugural address, "if...we shall still further extend our possession."

But the issue of slavery kept getting in the way. Author Bruce Chadwick (book jacket above) details how events in 1858 escalated tensions between North and South. Against the President's wishes, Congress refused to admit Kansas as a pro-slavery state. And candidates for the new Republican Party were ratcheting up their rhetoric, denouncing the extension of slavery. On June 16 Abraham Lincoln, campaigning for the U.S. Senate, told the Illinois Republican Convention that "a house divided against itself cannot stand. I believe this government cannot endure permanently half slave and half free." On October 25 William Henry Seward, U.S. Senator from New York, electrified a crowd in Rochester--and garnered widespread national attention--by highlighting the "irrepressible conflict" growing over slavery. "The United States," proclaimed Seward, "must and will, sooner or later, become either entirely a slave-holding nation or entirely a free labor nation." Lincoln and Seward both considered the status quo neither durable nor acceptable.

Lincoln was running against the Democratic incumbent, Stephen Douglas. Normally Douglas could have expected the support of the President, also a Democrat. In fact, Douglas had worked hard to help Buchanan get elected in 1856. But the two fell out over the Kansas debate, and Buchanan tried to undermine Douglas's campaign for re-election by fielding a third candidate. Douglas managed to hold his seat, as well as his prominent place in national politics. His intention was to run for President in 1860.

Though Lincoln was denied in Illinois, his party made huge gains in the 1858 elections, gaining a majority in the U.S. House of Representatives and narrowing the Democrats' advantage in the Senate. Buchanan mused in a private letter that the Democrats' defeat was "so great that it is almost absurd." The new Congress eventually killed Buchanan's design on Cuba and amplified the debate over slavery. With the Democratic Party now deeply split, the winner of the 1860 presidential election would likely be whomever the Republicans might nominate.

And that would almost certainly be William Henry Seward.

William Henry Seward: the early favorite to succeed Buchanan

Other posts in the series:

1: Secession Sesquicentennial: Prologue

2: The Winter of Sumner's Discontent

3: Putting the "SC" in Secession

4: Buying Time During Secession Winter

5: The Forts

6: The Adams Family

7: Secessionists Take Fort Sumter

Quote for the Week, Jan. 9-15, 2011

The love of possession is a disease with them. These people have made many rules that the rich may break but the poor may not. They take their tithes from the poor and weak to support the rich and those who rule.
--Chief Sitting Bull

TARP Bank Gets Bailed Again

BofA CEO Brian Moynihan has reason to smile. Bloomberg is reporting this morning that Bank of America has reached a settlement with government-sponsored enterprises Fannie Mae and Freddie Mac over soured home-mortage loans sold to the GSEs by Countrywide Financial Corp. (now part of BofA).

The total cost of the settlement to BofA is $2.8 billion, or less than half of the GSEs' outstanding putback demands. Fannie Mae CEO Michael Williams calls the settlement a "fair and responsible resolution." But if it is indeed fair to U.S. taxpayers, who are backstopping the GSEs, then why is Moynihan smiling? And why is BofA's stock price up over 4% in premarket trading?

Some say the deal "smells to high heaven." Congresswoman Maxine Waters calls it a "giveaway." Christopher Whalen of Institutional Risk Analytics calls it "clearly a gift" to BofA shareholders, who have been showered this season. According to Whalen, "the single digit billions BofA paid to Fannie and Freddie is less than a quarter of my firm's estimate of such losses prior to the announcement."

The wrist-slap has goosed the stock to over $14 a share. This is another chance for MainePERS to exit gracefully. Meanwhile, where are the criminal indictments for the bank officers that peddled these fraudulent loans in the first place? Where indeed?

Quote for the Week, Jan. 2-8, 2011

One way to make sure crime doesn't pay would be to let the government run it.
--Ronald Reagan, U.S. President (1981-89)

Putting the BOOM in Baby Boomers

US at War Since 1950: A New Year's Meditation

by Michael True, truthout

That's a lifetime of war. And I'm no spring chicken.

More bucks for the bang.