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Daily Digest - March 21

Saturday, March 21, 2009, 10:33 AM
  • US Congress budget office sees $1.8 trillion deficit
  • Video-o-rama: Fed employs nuclear option (Please don't miss Zimbabwe gold for bread)
  • The Big Takeover (H/T Wolf)
  • Mass Hysteria Over AIG Obscures Simple Truths: Michael Lewis (H/T CM)
  • Capitol harbors the homeless
  • US stock rally fades as investors assess Fed moves
  • Bernanke Inserts Gun In Mouth
  • Santelli (Video, last minute hints of insider trading)
  • Banks Sell Some REOs in Bulk below Market Prices
  • And You Thought 8.1% Unemployment was Frightening? (Please don't miss chart on page)
  • Merrill Writedowns: The Plot Thickens
  • Global crisis 'to strike by 2030' (H/T Turbo)
  • From Panic to Depression? (H/T Turbo)
  • Rep. Brad Sherman - Not just bonus caps but salary caps..(Video)
  • Chairman Bernanke should take note - it's all in the wrist, as the video shows (Video)
  • Largest 10 Year over Year Increases in Unemployment by Area Change vs. Unemployment Rate (Chart)
  • Tepid TALF 
  • Week # 12 - 2 Credit Unions Taken Over (18th failure this year)

Economy 

US Congress budget office sees $1.8 trln deficit 

* Sees FY09 deficit at highest ratio to GDP since 1940s 

* GDP to shrink 3 pct in 2009, grow 2.9 pct in 2010

* White House says priorities unchanged despite forecasts

* Republicans argue projections demand less spending (Adds White House, congressional reaction)

By Jeremy Pelofsky

WASHINGTON, March 20 (Reuters) - U.S. congressional budget experts on Friday offered a darker economic and budget outlook, projecting a breathtaking $1.8 trillion deficit this year, which could complicate President Barack Obama's efforts to win passage of his $3.55 trillion budget for 2010.

The Congressional Budget Office's projected deficit for the 2009 fiscal year ending on Sept. 30 would amount to 13.1 percent of expected gross domestic product -- a level not seen since World War Two. In January, the budget office had forecast a $1.2 trillion deficit for fiscal 2009.

The CBO also forecast a deeper economic downturn this year, projecting a contraction of 3 percent in 2009 before the economy begins to recover in next year.

The budget experts at CBO forecast the deficit would ease to almost $1.4 trillion in fiscal 2010 -- or 9.6 percent of forecast GDP.

Since Obama took office in January, his administration has been shoveling out billions of dollars in a bid to reverse a steep downward spiral in the U.S. economy and prop up the struggling financial system.

"Although the economy is likely to continue to deteriorate for some time," the CBO said, the government's $787 billion economic stimulus package "and very aggressive actions by the Federal Reserve and the Treasury are projected to help end the recession in the fall of 2009."

The CBO projected that following its forecast steep economic contraction this year, the economy will grow 2.9 percent next year and 4 percent in 2011.

In January, CBO had forecast the economy to shrink 2.2 percent this year before growing 1.5 percent in 2010 and 4.2 percent in 2011.

The massive deficit forecasts come after Obama submitted in February his $3.55 trillion budget plan for fiscal 2010, which includes huge new programs to address health care and curb greenhouse gas emissions.

The White House predicted Obama's budget priorities would not be affected by the forecasts of bigger deficits.

"Even with those numbers, the four key principles of the Obama budget will be met," said White House budget director Peter Orszag, referring to investments in health care, education and clean energy as well as cutting the deficit in half by the end of Obama's first term.

CBO also revised its forecast for accumulating deficits over the next decade, saying they would total $9.3 trillion from 2010 to 2019. That drew immediate fire from Republicans who have criticized Obama's budget for its massive new spending plans and tax increases on the wealthy.

"It's as if you were on an airplane and the fuel light came on ... and the pilots kept flying on as if there's fuel for another hour," said Senator Judd Gregg, the top Republican on the Senate Budget Committee. "They're taking spending up so high ... you can't close the gap. It's a spending problem."

Obama's budget outline to Congress last month included a forecast of almost $7 trillion in deficits through 2019 -- or $2.3 trillion less than CBO's projection.

Democrats cautioned that Congress and the White House could not reverse the deficits quickly and that the forecasts were subject to wide swings because of the constantly shifting economy.

"Deficits of this enormity cannot be reversed in one or two budgets," said House Budget Committee Chairman John Spratt, who noted that huge tax cuts and enormous spending under the past Bush administration would "overhang the budget for years to come."

The CBO's forecast in January of almost $1.2 trillion in red ink for fiscal 2009 and $703 billion for fiscal 2010 came before Congress passed the economic stimulus package in February.

Obama's budget projected a $1.75 trillion deficit for fiscal 2009 and $1.17 trillion for 2010. The House and Senate Budget Committees were awaiting the latest CBO estimates before they would begin to craft their budget legislation next week.

The Democratic-controlled panels will face a delicate balancing act, trying to include as many of Obama's priorities as possible but at the same time not scaring off moderate or conservative Democrats who are crucial to passing the budget.

Already a group of fiscal conservative Democrats known as the Blue Dogs have demanded capping non-defense discretionary spending at inflation and that the health-care plan be deficit neutral, among other things.

"It is critically important, now more than ever, that the Congress and the administration develop a realistic plan for putting our country back on a path to fiscal responsibility," said Representative Charlie Melancon, a Blue Dog co-chair. (Additional reporting by Richard Cowan; editing by Leslie Adler) 

Video-o-rama: Fed employs nuclear option (Please don't miss Zimbabwe gold for bread)

The Big Takeover (H/T Wolf) 

It's over - we're officially, royally $#@#$. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline - a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire. 

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history - some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we're still in denial - we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck - bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."March 20 (Bloomberg) -- Last September the U.S. government began to dole out the first of $173 billion to American International Group. A big chunk of it passed right through to banks that had bought insurance from AIG against mortgage and corporate defaults -- foreign banks such as Deutsche Bank and Societe Generale but also some domestic ones, such as Goldman Sachs and Bank of America.

Mass Hysteria Over AIG Obscures Simple Truths: Michael Lewis (H/T CM)

U.S. government officials then went to great lengths to disguise from the public exactly what they had done, and why, going so far as to declare the ultimate list of recipients of taxpayer funds off limits to the taxpayer. To its immense credit, the media -- or, rather, a handful of diligent reporters, the New York Times' Gretchen Morgenson chief among them -- prevented the public officials from getting their way.

This incredible act triggered hardly any political backlash. In effect, the U.S. taxpayer had paid off AIG's gambling debts. The end recipient of the money was not AIG, but Goldman Sachs, Deutsche Bank and the others.

Some large portion of the billions obviously wound up, in one form or another, in the pockets of their employees and shareholders. A few people on Capitol Hill moan and groan but there is popular agreement on the wisdom of this transfer of ONE HUNDRED AND SEVENTY THREE BILLION dollars from the taxpayer to the financiers.

Hara Kiri

But when AIG itself pays out $165 million in bonuses -- money it is contractually obliged to pay -- the entire political system goes insane. President Barack Obama says he's going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.

Every recriminatory bone in the political body is aroused; the one thing you can do right now in Washington without getting an argument is to rail against the ethics of AIG's bonus payment.

Apart from Andrew Ross Sorkin at the New York Times, it occurs to no one to say that a) the vast majority of the employees at AIG had as little as you or I to do with its quasi- criminal risk taking and catastrophic losses; b) that the most- valuable of those employees can easily find work at AIG's competitors; and c) that if the government insists on punishing those valuable employees they will understandably leave, and leave behind a company even less viable than it is, and less likely to give the taxpayer back his money.

And also -- oh, yes -- that if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.

Big Numbers

From this episode we can observe several general truths about the financial crisis, and the attempt to end it:

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)

2) As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn't have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn't earned the right to buy.

On the Line

But now that taxpayer money is on the line the story has changed: innocent taxpayers are now being exploited by horrible Wall Street financiers. The guy who defaulted on mortgages on his six spec houses in the Nevada desert has turned himself into the citizen enraged by the bonuses paid to the AIG employees trying to sort out the mess caused by his defaults.

3) The complexity of the issues at the heart of the crisis paralyzes the political processes' ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it.

I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue. For instance, Goldman Sachs, which received about 8 percent of the pile, or $13 billion, has claimed publicly that the money was, to them, a matter of indifference, as Goldman had hedged itself against a possible collapse of AIG -- by making bets against AIG.

Goldman's Clue

This suggests that it was clear to at least one market player, before the collapse, that AAA-rated AIG was behaving in ways that might lead to its demise -- which is to say that there was really no responsible place to lay off these bets. (So why bail out those who made them?)

It also suggests that it is a matter of indifference to Goldman Sachs whether AIG lived or died, as either way it was protected. (So why bail it out?)

Since the beginning of the crisis I've wondered why the government has found neither the will nor the way to attack the root of the problem -- the people who borrowed money to buy homes they shouldn't have bought.

Now I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn't deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.

(Michael Lewis, author of "Liar's Poker," "Moneyball" and "The Blind Side," is a columnist for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Michael Lewis at [email protected]

Capitol harbors the homeless 

Madison - At 9 a.m. in the state Capitol on a recent weekday, with the temperature outside in the single digits, about 20 people gathered in the building's marble basement. 

Some read papers, while others talked and sipped coffee, and one raucous group started dealing cards for a version of rummy.

Many homeless people find respite in the Capitol from 8 a.m. to 6 p.m., spending their days in the basement where they can find a place to rest, socialize and regroup in the round room lined with tables and chairs. Their activities range from the practical, such as washing up in nearby restrooms, to the lighthearted, such as playing hacky sack.

On the recent day, some of them were coming off a rough night.

"Me and my sister slept outside last night," said 19-year-old Sherri Seitz, who noted that a shelter six blocks away was full by the time they arrived there. "I slept on a heating grate last night."

On days that are severely cold, snowy or rainy, 30 to 50 people will take shelter in the Madison landmark, said Capitol Police Chief Charles Tubbs. As the weather warms up, the numbers diminish, he said.

"They stop and sit down, they communicate with others who are in the area at a particular time, and pass through and, of course, when the Capitol closes, they move on to shelter facilities," Tubbs said.

Rep. Cory Mason (D-Racine) thinks the state can do a better job of helping those who spend their days in the Capitol and leave to find shelter and assistance at 6 p.m., when Capitol police shoo out any stragglers.

Mason has proposed a bill that would give Dane County $50,000 over the two-year budget to find ways to better help the homeless who congregate in the Capitol.

For Mason, it would be a sign of compassion by lawmakers who pass homeless people preparing to sleep on grates as they leave the Capitol, walking to a heated parking garage a few blocks away.

"We're in this beautiful building, we come and deliberate about how best to serve the public, but it . . . bothers me (that) we turn a blind eye," Mason said.

Steven Schooler, executive director of Porchlight, which provides emergency shelter space for men and support to the homeless in Madison, said there are ample beds for men in downtown Madison.

Seitz and a 27-year-old named Andrea, who declined give her last name, both said more beds for women are needed.

Schooler said that extra funds could be better used on services to reduce the number of homeless people who need to spend most of their time in the Capitol, such as mental health services, job training and addiction treatment.

"Services combined with housing can go a long way to getting out of the cycle," he said. But "we'll be able to use it without any problem and there will still be a need."

Those who spend their days in the Capitol have their own ideas for how extra funding could be spent.

Harry Cocroft, 55, believes it would be useful to have access to more bus tickets, better transportation to assistance providers and a better system at shelters for taking telephone messages for those looking for work.

"That would help people go look for jobs, get from Point A to Point B and get something done," he said.

Homelessness on rise

Fred Mohs, a Madison attorney and downtown property owner, is concerned about the increased number of homeless in downtown Madison, who he said are drawn to the Capitol. Last year, Mohs told the First United Methodist Church he would no longer offer them free parking in a ramp he owned if the church continued to operate a homeless shelter. The church gave up the parking.

Added funding could be best used to create a better facility away from downtown that includes beds and a day room, so homeless people wouldn't have to spend their days in an "almost inhumane" windowless basement, he said.

"It should be located outside of downtown, where there are too many attractions that are a problem, too many students who don't know how to say, 'No,' to a panhandler," Mohs said.

Andrea agreed with Mohs that the Capitol basement can sometimes be a less-than-desirable spot to spend time.

"It's loud and smelly," she said.

People using the Capitol for shelter aren't allowed to wash clothes or sleep in the building. Tubbs, the Capitol police chief, said he walks through the basement at least once a day to meet with those gathered there.

It's unclear whether Mason's bill will go anywhere this session; five legislators signed on as co-sponsors. Legislative leaders are focused on passing a budget by June 30 and plugging a $5 billion budget deficit.

The American Reinvestment and Recovery Act delivered $27 million to Wisconsin for homeless prevention and assistance, some of which Mason thought might be used instead of state funds. Tony Hozeny, spokesman for the state Department of Commerce, which will administer $17 million of those funds, said the state is still waiting for distribution rules.

Separately, Madison received $817,000 from the recovery act for homeless assistance.

One 43-year-old homeless man, who declined to give his name, said the problem is much worse than many believe it is. He spent the winter in Madison but was headed back to Chicago soon, where he said he had a job lined up.

"The people who are walking the line that can fall into (homelessness) is much greater than you think it is," he said. "This is a serious, serious problem, and a patchwork isn't going to fix up a house that's on a shaky foundation."

Patrick Marley of the Journal Sentinel staff contributed to this report. 

US stock rally fades as investors assess Fed moves 

NEW YORK (AP) -- Investors doused a two-week-old stock rally Thursday as concerns emerged that the Federal Reserve's new bond-buying campaign could wind up hurting the dollar and causing inflation.
Banking and other financial shares pulled the market lower, but energy stocks got a boost from soaring crude oil prices. 

The retreat came a day after stocks surged in reaction to the Fed's aggressive plans to pump more than $1 trillion into the financial system by buying Treasury bonds and stepping up its purchases of other debt securities. The aim is to lower borrowing rates and stimulate lending.

On Thursday, investors began to digest the possible downsides of the Fed's program such as a potentially weaker dollar. That can lead to higher prices for commodities such as oil and grains, and eventually everyday products like gas and food.

Skepticism about how long it would take for the effects of the Fed's program to take hold also weighed down shares, particularly those of banks. Investors have been hungry for any signs that confidence may finally return to battered U.S. banks, and the market has had a generally dim view of the government's efforts to date to get lending moving again.

The Dow Jones industrial average fell 85.78, or 1.2 percent, to 7,400.80.

The broader Standard & Poor's 500 index fell 10.31, or 1.3 percent, to 784.04, while Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.

Declining issues narrowly outnumbered advancers on the New York Stock Exchange, where volume came to 2 billion shares.

"After the initial euphoria surrounding the surprise announcement yesterday, there's a little more analysis of this going on and its leading to some questions," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research.

Wall Street's move lower follows a buying spree that has driven stocks sharply higher since last week. Even with Thursday's slide, the Dow is still up 13 percent and the S&P 500 index is up 15.9 percent over the past eight days. The gains are impressive considering that only a few weeks ago the market was trading at levels not seen in more than a decade.

Some analysts had warned at the start of the rally that could turn out to be the type of short-lived rally that comes in bear markets, which are generally defined as a drop of at least 20 percent. The market is still about half below its peak in October 2007.

Joe Balestrino, a portfolio manager at Federated Investors Inc., said he doesn't expect the Fed's new money-injection program will be enough on its own to sustain a stock market rally.

"We're in a very weak environment," Balestrino said. "We don't see anything sustainable here."

Stephanie Giroux, chief investment strategist at retail brokerage TD Ameritrade, said she was optimistic that the Fed's latest medicine would work, but that any rebound is likely to be "slow and muted."

Some of traders' jitters Thursday came ahead of a quarterly expiration of options contracts on Friday. The sudden settling of many of those transactions can cause a surge in trading volume and more volatility in stock prices.

Energy stocks bucked the market's slide as oil surged above $50 a barrel. Oil jumped as the dollar sank against other major currencies in response to the Fed announcement. When the greenback weakens it essentially makes crude cheaper in other currencies.

Chevron Corp. gained 54 cents, or 0.8 percent, to $67.13, while Occidental Petroleum Corp. rose $2.14, or 3.8 percent, to $59.98.

Light, sweet crude rose $3.47, or 7 percent, to settle at $51.61 a barrel on the New York Mercantile Exchange.

Investors got a dose of good news Thursday from General Electric Co., which forecast a profitable first quarter and full year for its struggling finance unit. Fears that falling real estate values and unpaid credit card debt could further damage GE Capital have sent its stock price down 37.5 percent this year. GE's slipped 19 cents to $10.13.

Stocks rose early in the day Thursday after a report on jobless claims gave mixed messages about the state of the economy.

The number of initial requests for unemployment insurance last week dropped to a seasonally adjusted 646,000 from the previous week's revised figure of 658,000, which exceeded economists' estimates. But the number of people continuing to receive benefits set a new record for the eighth straight week, jumping 185,000 to a seasonally adjusted 5.47 million.

Financial stocks, which led the rally that began last week, couldn't hold their gains and dragged the market lower. Some investors were selling to lock in profits after several of those stocks doubled or tripled in a matter of weeks. 

Bernanke Inserts Gun In Mouth 

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. 

The economy is screwed, and although we have made statements for the last year that our actions would solve the problem, we've been wrong. Exponents (that is, compound interest) are a bitch and its unfortunate that you were too stupid to call us on this two years ago.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. 

Santelli (Video, last minute "hints" of insider trading)

Banks Sell Some REOs in Bulk below Market Prices 

From Zach Fox at the North County Times: HOUSING: Banks selling properties in bulk for cheap 

Lenders have become so overwhelmed by the foreclosure crisis that they are starting to unload properties in bulk to investor groups at steep discounts.

Investors then flip the properties for a profit without necessarily improving the home.

For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.

The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.

...the Temecula foreclosure was first listed for sale by Citigroup in May 2007 for $420,000, according to Multi-Regional Multiple Listing Service ...

The property was listed on the site for 19 months before selling to the investors in a bulk sale in December 2008. The lowest price it was listed for was $314,000.

"It should have been listed for less," said Craig Finlayson, a real estate agent in the area who listed the property for Citigroup. "But it would have sold for more than 139 (thousand); 139 was a giveaway price."
There is much more in the story.

I'm hearing stories frequently of banks selling REOs far below market prices, only to have local investors flip the properties.

A reader sent me some info on a property in Redwood City that is typical. The lender turned down two short sale offers at close to $649,000, and then, after foreclosing on the property, the bank listed the property at $509,000. The property sold for $493,000 all cash, even though there were other offers above the list price.

What is going on? I think the lenders are swamped, and this is OPM (other people's money). The money doesn't belong to the people making the decisions, and it is hard for them to accept a short sale, and after foreclosure, it is probably easier for them to just take a check and get the property off their desk. The result is the banks make a series of less than optimal decisions, and they leave money on the table at several points in the process.

In the story above, Citigroup left $100,000 on the table with just this one property. 

And You Thought 8.1% Unemployment was Frightening? (Please don't miss chart on page) 

While national unemployment is 8.1% and rising, the BLS reports many areas are facing a much more difficult environment: 

Overall, 157 areas posted unemployment rates above the U.S. figure of 8.5 percent, 209 areas reported rates below it, and 6 areas had the same rate.

Two manufacturing centers in Indiana recorded the largest jobless rate increases from January 2008, Elkhart-Goshen (+13.0 percentage points) and Kokomo (+8.9 points). An additional 12 areas registered over-the-year unemployment rate increases of 6.0 percentage points or more, and another 26 areas had rate increases of 5.0 to 5.9 points. Waterloo-Cedar Falls, Iowa, was the sole area without an over-the- year rate change.

Elkhart sound familiar, the Indy Star reports:

President Barack Obama fanned the town of Elkhart's hopes for relief on Feb. 9 by making it the poster child for his economic-stimulus bill. A month later, however, the city with a 19 percent jobless rate still is waiting for the promise of economic relief, Bloomberg reports today.

The problem lies in the lag between when the needs of states and municipalities are identified and how quickly decent (i.e. not completely wasteful) projects can be rolled out.

Jane Jankowski, a spokeswoman for Daniels, told Bloomberg that the state is "trying to sort through a lot of those same things to find answers to questions about how this will all be working." She said that 40 counties will be aided by the 55 highway infrastructure projects they've announced so far.

White House officials say the city needs to be patient because help is on the way. 

Merrill Writedowns: The Plot Thickens 

An interesting tidbit in the Financial Times: Bank of America was not blindsided by the Merrill writedowns (although Ken Lewis no doubt still wanted to walk from the deal). Its CAO was deeply involved in making them (boldface ours):
Bank of America was directly involved in markdowns that contributed to Merrill Lynch's $15.3bn loss in the last quarter of 2008, its final reporting period before the Wall Street bank was acquired by BofA, sources familiar with the matter say. 

Mounting losses at Merrill during December almost derailed the acquisition. Ken Lewis, BofA's chief executive, threatened to walk away from the deal unless the US government provided $20bn in extra capital. The deal closed on January 1 after federal officials pledged their support.

People familiar with the matter said BofA had dispatched Neil Cotty, its chief accounting officer, during the fourth quarter to work with Merrill's finance team. They said Mr Cotty played an active role in preparing accounts, wielding influence with Merrill executives who were set to report to him and other BofA officials after the deal closed.

With Mr Cotty's involvement in December, the people familiar with the matter said, Merrill took a fourth-quarter writedown of $1.9bn in leveraged loans and a $2.9bn reserve against an exposure to derivatives linked to asset-backed securities.

Mr Cotty also gave his blessing to a $1bn writedown of credit default swaps involving investment grade companies. The markdown of a position on the "high vol 4" index transformed a gain of $100m into a loss of $900m....

Mr Cotty said: "While BofA had access to Merrill's financial information in the fourth quarter and had input into many accounting policy and valuation issues, Merrill management was responsible for these decisions regarding the marks and other valuations."

There are two ways to look at this, neither of them pretty.

One is that Bank of America pushed for the most aggressive (meaning least favorable) writedowns on positions so that when it closed the deal, Merrill would be as clean as possible. The problem is that writedowns sufficient to do that (presuming that was BofA's plan all along) left the bank looking like it had badly overpaid. Thus the threat to walk from the deal was a bit of a ruse, since the losses were at least in part the result of over-reserving (or hedging against positions BofA could not assess).

The second is that many (most? all?) of the BofA imposed writedowns were legitimate and called for. The implication would be that Merrill for some time had been making overly optimistic marks on its dodgy positions. And it might also imply that Merrill's practices were not out of line with the industry (remember, Bank of America, unlike JP Morgan and Citigroup, is not a big player in exotic debt products). That in turn would suggest the financial reports of other big capital markets players (Goldman, Morgan Stanley, JPM, UBS) could also be more than a tad generously valued.

Of course, these possibilities are not mutually exclusive.

Informed reader comment encouraged, particularly on "high vol 4" index. 

Global crisis 'to strike by 2030' (H/T Turbo) 

Growing world population will cause a "perfect storm" of food, energy and water shortages by 2030, the UK government chief scientist has warned. 

By 2030 the demand for resources will create a crisis with dire consequences, Prof John Beddington said.
Demand for food and energy will jump 50% by 2030 and for fresh water by 30%, as the population tops 8.3 billion, he told a conference in London.

Climate change will exacerbate matters in unpredictable ways, he added.

'Complacent'

"It's a perfect storm," Prof Beddington told the Sustainable Development UK 09 conference.

'Perfect storm' poses global threat, says Professor Beddington

"There's not going to be a complete collapse, but things will start getting really worrying if we don't tackle these problems."

Prof Beddington said the looming crisis would match the current one in the banking sector.
"My main concern is what will happen internationally, there will be food and water shortages," he said.
"We're relatively fortunate in the UK; there may not be shortages here, but we can expect prices of food and energy to rise."

The United Nations Environment Programme predicts widespread water shortages across Africa, Europe and Asia by 2025.
The amount of fresh water available per head of the population is expected to decline sharply in that time.
The issue of food and energy security rose high on the political agenda last year during a spike in oil and commodity prices.

Genetically-modified

Prof Beddington said the concern now - when prices have dropped once again - was that the issues would slip back down the domestic and international agenda.

"We can't afford to be complacent. Just because the high prices have dropped doesn't mean we can relax," he said.

Improving agricultural productivity globally was one way to tackle the problem, he added.

At present, 30-40% of all crops are lost due to pest and disease before they are harvested.

Professor Beddington said: "We have to address that. We need more disease-resistant and pest-resistant plants and better practices, better harvesting procedures.

"Genetically-modified food could also be part of the solution. We need plants that are resistant to drought and salinity - a mixture of genetic modification and conventional plant breeding.

Better water storage and cleaner energy supplies are also essential, he added.

Prof Beddington is chairing a subgroup of a new Cabinet Office task force set up to tackle food security.
But he said the problem could not be tackled in isolation.

He wants policy-makers in the European Commission to receive the same high level of scientific advice as the new US president, Barack Obama.

One solution would be to create a new post of chief science adviser to the European Commission, he suggested. 

From Panic to Depression? (H/T Turbo) 

The dangers of blaming free trade, low taxes, and flexible labor markets for our current troubles. 

By Phil Kerpen
October 28, 2008 7:53 AM

Blame for today's financial panic can be assigned to a Federal Reserve that kept interest rates too low while a bubble inflated; unscrupulous lenders; people who bought homes they couldn't afford; Wall Street wizards who overleveraged and wrote derivatives they couldn't pay; and a Congress that set the policy goal of universal home ownership and recklessly grew Fannie Mae and Freddie Mac to pursue that goal.

But with so many real culprits out there, we cannot afford to blame the fake culprits of free trade, low taxes, and flexible labor markets. These are the fundamentals of a free economy. If we undermine them in response to the panic, we risk repeating the mistakes that followed another great panic and ushered in the Great Depression.

First, trade. The Smoot-Hawley tariff was Congress's first major policy blunder leading up to the Great Depression. Despite a warning from more than 1,000 prominent economists, Congress raised protective tariffs to record-high levels in June 1930. The result was that U.S. imports crashed while retaliation from abroad sunk U.S. exports. Some historians believe the political debate surrounding the Smoot-Hawley bill actually contributed to the initial stock market crash of 1929, and most believe it was a factor in turning that crash into the Great Depression.

The world economy is far more interconnected today. Trade volumes are much higher and large sectors of the U.S. economy are extremely trade-dependent. Thus, any protectionist response to the current panic would be even more disruptive.

Unfortunately, China-bashing has become a bipartisan pastime in Congress. And Sen. Barack Obama is campaigning on poison-pill labor and environmental standards that many of our trading partners can't afford. It's a sure way to sink free-trade agreements.

Obama also promises new non-tariff barriers to trade that could spark a global trade war, such as direct subsidies for companies willing to locate production in the United States. Under undivided Democratic rule it appears unlikely that there would be any progress on a new global trade agreement. And the existing World Trade Organization framework could unravel under so-called "fair trade" pressure, or even from a return to explicit protectionism.

Second, taxes. President Herbert Hoover's infamous Revenue Act of 1932 was the biggest and worst-timed tax hike in U.S. history. The bill was a bipartisan "achievement," a compromise between the Hoover administration's plan to raise income taxes and the Democratic Congress's plan to institute a national sales tax. The top marginal income-tax rate was raised from 25 to 63 percent. New excise taxes were put on everything from cars and trucks to refrigerators, chewing gum, soft drinks, and electricity. The death tax was doubled.

And the results were tragic. By raising taxes during an economic downturn, the economic pain of the 1930s was made deeper and more permanent. The higher Hoover taxes discouraged work, savings, and investment, prevented capital formation, and depressed consumer spending.

Today, even liberal congressman Barney Frank of Massachusetts has said there should be no tax hikes in the next year because of the current economic weakness. Yet Barack Obama remains committed to a program of raising the top marginal tax rate from 35 percent to 39.6 percent while also hiking capital-gains taxes, dividend taxes, and the death tax. All this will put the brakes on economic activity right when we need to hit the accelerator.

Third, labor. Economists at UCLA have determined that President Franklin Roosevelt's anti-competitive, pro-union policies prolonged the Depression seven full years. In particular, those policies led to artificially expensive products that discouraged consumer spending and artificially high wages that prevented employment from recovering.

Despite this lesson, congressional Democrats, including Obama, are today poised to give unions their greatest power boost since Roosevelt's 1935 National Labor Relations Act. The vehicle this time is the shamelessly named Employee Free Choice Act, which, among other pro-union legal changes, would abolish secret-ballot elections for union organizing.

By way of a new procedure called card check, workers will be openly pressured to sign union cards, after which, if a majority of workers sign, unions will be automatically certified. Coercive tactics by union bosses would run rampant if this policy is ever enacted. And as unions gain in power and force wages unnaturally high, mass unemployment could be the unintended result.

It's important that we avoid all these policy errors - not just for the sake of our prosperity, but for our survival. The Great Depression, after all, didn't end until the advent of World War II, the most destructive war in the history of the planet. In a world of nuclear and biological weapons and non-state terrorist organizations that breed on poverty and despair, another global economic breakdown of such extended duration would risk armed conflicts on an even greater scale.

To be sure, Washington already has stoked the flames of the financial panic. The president and the Treasury secretary did the policy equivalent of yelling fire in a crowded theater when they insisted that Congress immediately pass a bad bailout bill or face financial Armageddon. Members of Congress splintered and voted against the bill before voting for it several days later, showing a lack of conviction that did nothing to reassure markets. Even Alan Greenspan is questioning free markets today, placing our policy fundamentals in even greater jeopardy.

But after the elections, all eyes will turn to the new president and Congress in search of reassurance that the fundamentals of our free economy will be supported. That will require the shelving of any talk of trade protectionism, higher taxes, and more restrictive labor markets. The stakes couldn't be any higher.

- Phil Kerpen is policy director for Americans for Prosperity. 

Rep. Brad Sherman - Not just bonus caps but salary caps..(Video)

Chairman Bernanke should take note - it's all in the wrist, as the video shows (Video)

Largest 10 Year over Year Increases in Unemployment by Area Change vs. Unemployment Rate (Chart)

Tepid TALF

alea:

TALF = FLOP
not unexpected, but not looking too good. the collateral quality is sure to be loosened as it is truly amateur hour at the fed. 

Week # 12 - 2 Credit Unions Taken Over (18th failure this year)

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12 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - March 21

 
"Recession".

homeless-mjs-homeless-2-of-hoffman.jpg347-aria090212.slideshow_main.prod_affiliate.91.jpg

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Daily Digest - March 21

Charlie Rangel makes me want to vomit!

I have a counter-proposal:

  • 110% tax on salary, investments, and all other income
  • Applicable to every representative and sentator who voted in favor of any bailout package
  • Additional 40% surtax applies to Rangel, Frank, Pelosi and Dodd for being the true principal cause of the problem

The real problem is that <1% of America understands what is happening. Most are naieve enough to belive this stage show and think congress is looking out for their interests, when in reality congress created this mess.

It's as if they put a 55-gallon drum of $100 bills on a street corner, left it there with no security guards and not even a sign saying "please don't steal", they they express outrage when they come back the next day and the money is gone!

Erik

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - March 21

Hello Erik:

I'm putting it in the blog for Sunday but the FSN does a good piece on this in their 3rd hour, I'm almost throgh the first half and would have to say it is one of the best listens so far this year. I agree with whay you and they say. Take care

Select an Audio Format - Part 1
RealPlayer | WinAmp | Windows Media | Mp3

  • The Weimar Way
  • Resource Scarcity: Water, Food & Energy - All Related

Select an Audio Format - Part 2
RealPlayer | WinAmp | Windows Media | Mp3

  • Road to Perdition
  • Q-Calls continued

 

 

FireJack's picture
FireJack
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: Daily Digest - March 21

Here is one I got from the market ticker (started a thread about it):

U.S. Sets plan for toxic assets

The federal government will announce as soon as Monday a
three-pronged plan to rid the financial system of toxic assets, betting
that investors will be attracted to the combination of discount prices
and government assistance.

But the framework, designed to expand existing programs and create
new ones, relies heavily on participation from private-sector
investors. They've been the target of a virulent anti-Wall Street
backlash from Washington in the wake of the American International
Group Inc. bonus furor. As a result, many investors have expressed
concern about doing business with the government in this climate --
potentially casting a cloud over the program's prospects.

The administration plans to contribute between $75 billion and $100
billion in new capital to the effort, although that amount could expand
down the road.

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - March 21

Hello FireJack:

I'm posting this in the DG of the 22nd, but this really gets into what is at play here ...Take care

Geithner Should Go To Jail For Money Laundering! How did fraud and money laundering become the national economic policy of the US?  

philv's picture
philv
Status: Member (Offline)
Joined: Oct 6 2008
Posts: 13
Re: Daily Digest - March 21

Interesting developement:

At G20, Kremlin to Pitch New Currency

Maybee Davos covered it in a previous Digest and I misted it if not here it is :

http://www.themoscowtimes.com/article/600/42/375364.htm

 

FireJack's picture
FireJack
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: Daily Digest - March 21

Well damn I thought there might be a small sliver of hope there. Derringer seemed to approve but I must admit I could not understand what exactly it was or what it was intened to do. It looks like all the major papers are going to report it as a savior of the banks and is going to get the economy chugging along again.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
and just when you thought things couldn't get more curious...

The New York Times

March 20, 2009

A.I.G. Sues U.S. for Return of $306 Million in Tax Payments

By

LYNNLEY BROWNING

While the

American International Group
comes under fire from Congress over
executive bonuses, it is quietly fighting the federal government for the
return of $306 million in tax payments, some related to deals that were
conducted through offshore tax havens.


A.I.G.
sued the government last month in a bid to force it to return
the payments, which stemmed in large part from its use of aggressive tax
deals, some involving entities controlled by the company’s financial
products unit in the Cayman Islands, Ireland, the Dutch Antilles and
other offshore havens.

A.I.G. is effectively suing its majority owner, the government, which has
an 80 percent stake and has poured nearly $200 billion into the insurer
in a bid to avert its collapse and avoid troubling the global financial
markets. The company is in effect asking for even more money, in the form
of tax refunds. The suit also suggests that A.I.G. is spending taxpayer
money to pursue its case, something it is legally entitled to do. Its
initial claim was denied by the

Internal Revenue Service
last year.

The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan,
details, among other things, certain tax-related dealings of the
financial products unit, the once high-flying division that has been
singled out for its role in A.I.G.’s financial crisis last fall. Other
deals involved A.I.G. offshore entities whose function centers on

executive compensation
and include C. V. Starr & Company, a
closely held concern controlled by

Maurice R. Greenberg
, A.I.G.’s former chairman, and the Starr
International Company, a privately held enterprise incorporated in
Panama, and commonly known as SICO.

The lawsuit contends in part that the federal government owes A.I.G.
nearly $62 million in foreign tax credits related to eight foreign
entities, with names like Lumagrove, Laperouse and Foppingadreef, that
were set up or controlled by financial products, often through a unit
known as Pinestead Holdings.

United States tax law allows American companies to claim a credit for any
taxes paid to a foreign government. But the I.R.S. denied A.I.G.’s refund
claims in 2008, saying that it had improperly calculated the credits. The
I.R.S. has identified so-called foreign tax-credit generators as an area
of abuse that it is increasingly monitoring.

The remainder of A.I.G.’s claim, for $244 million, concerns net operating
loss carry-backs, capital loss carry-backs, a general refund claim and
claims for refunds of other tax-related payments that A.I.G. says it made
to the I.R.S. but are now owed back. The claim also covers $119 million
in penalties and interest that A.I.G. says it is due back from the
government.

In part, A.I.G. says it overpaid its federal income taxes after a 2004
accounting scandal that caused it to restate its financial records.
A.I.G. says in part that it is entitled to a refund of $33 million that
SICO paid in 1997 as compensation to employees, which it now says should
be characterized as a deductible expense.

A.I.G.’s lawyers in the case, at Sutherland Asbill & Brennan,
referred calls to the company. Asked about the lawsuit, Mark Herr, an
A.I.G. spokesman, said Thursday that “A.I.G. is taking this action to
ensure that it is not required to pay more than its fair share of taxes.”

vvolf's picture
vvolf
Status: Bronze Member (Offline)
Joined: Jan 3 2009
Posts: 29
Re: Daily Digest - March 21

Comandante Obama

 

"But you don't understand," the Colombian said. "We've seen this before."

"He's right, my good friend," the Cuban said. "We Latin Americans know the pattern. Believe me we do."

The American tried to shrug off the Latin Americans' warning. To his
consternation, he found that he couldn't. Peron, Fidel, now Chavez,
they insisted. The emergence of misrule, corruption and economic
stagnation in Latin American nations follows a particular sequence or
progression. Now the sequence was unfolding in the United States.

 

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Daily Digest - March 21

I found it interesting to see this headline in Bloomberg: Obama Would Reject Geithner Resignation

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVpcj9EaDjX8&refer=home

The very fact that he is having to defend his picks in this sort of way is a reflection of the lack of confidence (to say the least) that Americans feel. The latest Geithner scandal is that he was informed of the AIG bonuses on Feb. 28th and not on March 10th, as he said...

ukairportcarparks's picture
ukairportcarparks
Status: Member (Offline)
Joined: Dec 1 2010
Posts: 2
Belfast Airport parking

UK Airport Car Parks is a fast, convenient and great value way to book your airport car parking.Belfast airport parking is best place for parking.

 

Chris fryer

ukairportcarparks's picture
ukairportcarparks
Status: Member (Offline)
Joined: Dec 1 2010
Posts: 2
Belfast Airport parking

UK Airport Car Parks is a fast, convenient and great value way to book your airport car parking.Belfast airport parking is best place for parking.

 

Chris fryer

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