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    Daily Digest – March 11

    by Davos

    Wednesday, March 11, 2009, 3:40 PM

  • March 9, 2009: In Cramer We Trust (Funny! H/T Zombie210)
  • Up Day on Wall St.
  • US Recession Could Last Up to 36 Months: Roubini
  • IMF chief warns world entering ‘Great Recession’ (H/T Zombie210)
  • 53% Say It’s Likely the U.S. Will Enter a Depression Similar to 1930’s
  • Bank of America, GE Sell $16.5 Billion of FDIC Debt 
  • Citi and Federal Government in New Non-Rescue Rescue Talks
  • Bernanke Says Banks Will Remain Capitalized, but "Too Big to Fail" Needs to End
  • Famous Last Words
  • Grand Illusion – The Federal Reserve
  • Highway robbery? Texas police seize black motorists’ cash, cars (H/T Zombie210)
  • Romer Paper, "Lessons from the Great Depression for Economic Recovery in 2009"
  • More Money: Understanding Recent Changes in the Monetary Base
  • Financials: Here We Go Again Edition
  • On Optimism
  • Meredith Whitney
  • Alcohol, Drugs & Groceries
  • Got Cash?
  • Madoff to plead guilty to 11 counts: lawyer (H/T Zombie210)
  • The Inflection Is Near? (H/T Doug)
  • Uncle Jay Explains the News 


March 9, 2009: In Cramer We Trust (Funny! H/T Zombie210)

Up day on Wall St.

US Recession Could Last Up to 36 Months: Roubini

IMF chief warns world entering ‘Great Recession’ (H/T Zombie210) 

By The Associated Press

PARIS – The global economy will shrink this year as the world enters "a Great Recession," the head of the International Monetary Fund said Tuesday. 

Speaking in a taped interview with French television channel France 24, Dominique Strauss-Kahn said economic data has worsened since January, when the IMF forecast global growth in gross domestic product of 0.5 per cent this year.

"Since then the news hasn’t been good," Strauss-Kahn said. "I think that we can now say that we’ve entered a Great Recession."

Strauss-Kahn didn’t make a precise forecast for global economic decline this year.

"This recession can last a long time," Strauss-Kahn added, "unless the policies we’re expecting are put in place, in which case 2010 can be a year of return to growth."

The World Bank said Sunday that the global economy will shrink this year for the first time since the Second World War and that the global financial crisis will make it tougher for poor and developing countries to access needed financing.

53% Say It’s Likely the U.S. Will Enter a Depression Similar to 1930’s 

Tuesday, March 10, 

Most Americans (53%) now think the United States is at least somewhat likely to enter a 1930’s-like depression within the next few years.

The latest Rasmussen Reports national telephone survey found that 39% think this outcome is unlikely.
Nineteen percent (19%) say a Depression is Very Likely while 7% say it is not at all likely.

The latest results are more pessimistic than those found in early January, when 44% said a 1930’s-like depression was likely in the next few years, and 46% disagreed.

In March 2008, only 38% of adults said the country is likely to slip into a depression, while most (55%) disagreed.

The most recent survey also found that half of all adults (49%) say today’s children will not be better off than their parents. Only 26% hold the more optimistic view, while another 25% are not sure. Those results have changed little from January, when only 27% said children will be better off and 47% disagreed.

Twenty-six percent (26%) were undecided at that time.

Adults in their 30’s are the most worried, with 62% who say it is likely the nation will slip into a deep depression. Less than half (47%) of those Americans over 65 think the country will slip into a 1930’s-like depression.

Fifty-four percent (54%) of investors and 53% of non-investors say it is likely the country will slip into a serious depression. Forty-one percent (41%) of investors disagree, along with 38% of non-investors.
A third (32%) of adults with children living at home with them say today’s children will be better off than their parents, while only 22% of adults with no children at home agree.

Related Rasmussen polling found that only 45% believe anyone who wants to work can find a job, but most say it is possible for just about anyone to work their way out of poverty in America.

As the economy continues to flounder, consumer and investor confidence continue to hit record lows.
Please sign up for the Rasmussen Reports daily e-mail update (it’s free)… let us keep you up to date with the latest public opinion news.

Bank of America, GE Sell $16.5 Billion of FDIC Debt

March 9 (Bloomberg) — Bank of America Corp., the largest U.S. bank by assets, and General Electric Capital Corp. raised a combined $16.5 billion today selling bonds backed by the U.S. government as they seek to hold down borrowing costs.

Bank of America, based in Charlotte, North Carolina, sold $8.5 billion of notes in its second-largest offering under the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee program. The finance arm of General Electric Co. sold $8 billion of notes, also its second-biggest under the program.

Citi and Federal Government in New Non-Rescue Rescue Talks

The double-speak in this Wall Street Journal piece, "U.S. Weighs Further Steps for Citi," is so thick that parsing it is like wading through mud.

And I do mean to stress the attempts to obfuscate what is going on. Recall that the last retrade of Citi’s arrangement with the officialdom was initiated by the big bank, which seemed a bit annoyed that the government did not jump when it demanded attention (the result was not a new cash injection, but Citi did just fine anyhow. As Bruce Krasting explained:

Last Friday Treasury agreed to convert $25 Billion of the TARP Pref for 36% of the common of Citi. The problem is that as of the close of business on Friday 36% of Citi is only worth $3 billion. This convert looks like a $22 billion loss.

If your broker had slipped a few of these Preferreds into your account last fall and you joined the Feebs on Friday in the convert to Common your account would be down 90% in fewer than four months. Fleeced.

This time, it appears the powers that be initiated the talks with Citi. And no, of course they are not worried, they are doing mere contingency planning.

If you believe that, I have a bridge I’d like to sell you. If this really were contingency planning, the Fed and Treasury should have been on that case the day after the Bear deal was finally wrapped up. And if it was really mere contingency planning, don’t you think the Treasury would be doing the same for some of the other big banks?

The ratio of weasel wording to real content is unusually high:

Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.

Federal officials describe the discussions, which are wide-ranging and preliminary, as "contingency planning." Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.

Yves here. Even if you merely read this literally, it isn’t credible. Has anyone ever prepared for an event they don’t expect? Back to the article:

Citi executives said they haven’t detected signs of corporate clients or trading partners withdrawing their business, even though the New York company’s shares are hovering near $1 apiece — closing Monday at $1.05 on the New York Stock Exchange. Citigroup says it has a strong liquidity position and that its capital levels are among the highest in the banking industry.

Yves again. Boy, is this not reassuring. We heard the same formula from Bear and Lehman. And did you notice the failure to mention the real elephant in the room, the biggest source of vulnerability……foreign depositors? Citi has over $500 billion (relative to a balance sheet of a tad under $2 trillion) of foreign deposits. A meaningful run would swamp its capital and available liquidity. Back to the story:

Banking regulators and Treasury officials called Citigroup executives over the weekend amid rumors about the discussions, according to people familiar with the matter. They said the talks were geared toward future planning and that no new rescue was imminent.

Citigroup CEO Vikram Pandit issued a memo to employees Monday as the company’s shares hovered above $1, arguing the current price does not reflect the company’s capital position and earnings power. Read the memo.

The discussions include the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. The FDIC backs many of Citigroup’s deposits in the U.S., as well as a large amount of new debt issued by the firm.

Regulators say the planning should be seen as a normal function of government during a financial crisis. One possible future step could involve creating a "bad bank" to take distressed assets off the balance sheet of Citigroup or other troubled financial institutions. Differing approaches are still being considered. Treasury officials already are developing a public-private partnership to tackle that problem more broadly, and the two concepts could either run parallel or be merged…

Yves here. Again, the disaster planning has started when the horse has left the barn and is now in the next county. And the bad bank talk for Citi has been on since Paulson’s failed MLEC concept, circa late 2007, and is nowhere close to being operational. And even then, it was clear that the main beneficiary was to have been Citi, who had far and away the biggest structured investment vehicle exposure of any bank. To the Journal:

Also complicating matters, U.S. officials don’t have a template for winding down a company of Citigroup’s size and complexity, which Federal Reserve Chairman Ben Bernanke made clear at a Senate hearing last week.

"I’d like to challenge the Congress to give us a framework, where we can resolve a multinational complicated financial conglomerate like Citigroup, like AIG, or others, if that became necessary," Mr. Bernanke told the Senate budget committee.

Yves again. As we (and increasingly others) have said, a special bankruptcy regime for securities firms should have been the first order of business after the Bear failure. And I missed Bernanke’s cheap shot at Congress. It’s the Fed that has assigned itself the job of financial stability regulator, so the retort that Congress couldn’t do better is childish.

Hopefully we are wrong about stress at Citi, but there are reports of growing strain in the credit markets, and Citi may be vulnerable. Perhaps the authorities are finally, belatedly, addressing issues they should have tackled months ago.

Bernanke Says Banks Will Remain Capitalized, but "Too Big to Fail" Needs to End

Federal Reserve Chairman Ben Bernanke stressed the need to overhaul operating rules for "too big to fail" institutions on Tuesday.

Speaking to the Council on Foreign Relations in Washington, D.C., Bernanke said the U.S. government currently remains committed to ensuring major banks have the capital necessary to weather the recession and to meet their commitments.

"Government assistance to avoid the failures of major financial institutions has been necessary to avoid a further serious destabilization of the financial system, and our commitment to avoiding such a failure remains firm," he said.

In a question and answer session following his speech, Bernanke said he thinks bank capital has been very well used and has reduced the deleveraging process.

But going forward, Bernanke said the U.S. government needs to consider creating an authority whose main responsibility is to oversee and prevent systemic risks in the financial structure, and called on Congress to create such a regulatory body. 

The idea that some firms are "too big to fail" and will be bailed out by government reduces market discipline, he said, and creates an unlevel playing field for smaller companies.
It has also been proven to be very costly for taxpayers, he said.

Bernanke said current bankruptcy law and framework in the United States is not effective enough when it comes to large non-bank financial firms, and that the range of financial crisis situations that necessitate government intervention should be narrowed.

He said accounting methods need to be adjusted so that they "do not overly magnify the ups and downs in the financial system and the economy."

However, Bernanke said he does not support suspending mark-to-market accounting. He said while it can aggravate market swings, it is a transparent accounting method.

He also said money market mutual funds – as a key source of funding for some businesses – need tighter restrictions, "to increase the resiliency of those funds that are susceptible to runs."

Bernanke said the Fed is a good candidate for his proposed grand systemic risk overseer. "A good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems," he said. Still, he recognized this responsibility could overburden the central bank.

Overall, the downside of capitalism is that it is prone to booms and busts, Bernanke said, but noted the model helps improve living standards. The central banker also disagreed with the statement that capitalism is "self destructive."

Famous Last Words

Grand Illusion – The Federal Reserve

The whole world is in a state of complete confusion. Americans are coming to the realization that their lives have been a grand illusion. You thought your neighbor had it made. They were driving a Mercedes, spent $40,000 on a new kitchen with granite countertops and stainless steel appliances, sent their kids to private school, had a second home at the shore, and took exotic vacations all over the world. Now their house is in foreclosure and you are paying to bail them out. The anger and outrage in the country is at the highest level since the Vietnam War. The American public is being misled by government officials, politicians, and the Federal Reserve regarding the causes of this crisis and the solutions needed to solve our economic tribulations.

The average American does not know much about the Federal Reserve. The government and the Federal Reserve prefer to operate in the shadows. If the American public understood what their policies have done to their lives, they would be rioting in the streets. Henry Ford had a similar opinion:

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Most Americans believe that the Federal Reserve is part of the government. They are wrong. It is a privately held corporation owned by stockholders. The Federal Reserve System is owned by the largest banks in the United States. There are Class A, B, and C shareholders. The owner banks and their shares in the Federal Reserve are a secret. Why is this a secret? It is likely that the biggest banks in the country are the major shareholders. Does this explain why Citicorp, Bank of America and JP Morgan, despite being insolvent, are being propped up by Ben Bernanke and Timothy Geithner?

Highway robbery? Texas police seize black motorists’ cash, cars (H/T Zombie210)

More than 140 people reluctantly accepted that deal from June 2006 to June 2008, according to court records. Among them were a black grandmother from Akron, who surrendered $4,000 in cash after Tenaha police pulled her over, and an interracial couple from Houston, who gave up more than $6,000 after police threatened to seize their children and put them into foster care, the court documents show. Neither the grandmother nor the couple were charged with any crime.

Officials in Tenaha, situated along a heavily traveled highway connecting Houston with popular gambling destinations in Louisiana, say they are engaged in a battle against drug trafficking and call the search-and-seizure practice a legitimate use of the state’s asset-forfeiture law. That law permits local police agencies to keep drug money and other property used in the commission of a crime and add the proceeds to their budgets.

"We try to enforce the law here," said George Bowers, mayor of the town of 1,046 residents, where boarded-up businesses outnumber open ones and City Hall sports a broken window. "We’re not doing this to raise money. That’s all I’m going to say at this point."

Romer Paper, "Lessons from the Great Depression for Economic Recovery in 2009

In the last few months, I have found myself uttering the words "worst since the Great Depression" far too often: the worst twelve month job loss since the Great Depression; the worst financial crisis since the Great Depression; the worst rise in home foreclosures since the Great Depression. In my previous life, as an economic historian at Berkeley, one of the things I studied was the Great Depression. I thought it would be useful to reflect on that episode and what lessons it holds for policymakers today. In particular, what can we learn from the 1930s that will help us to end the worst recession since the Great Depression?

More Money: Understanding Recent Changes in the Monetary Base

If inflation resumes but the economy does not recover, policymakers will face a difficult choice.

Financials: Here We Go Again Edition

In a way, the recent deterioration in corporate credit spreads and other lending indicators shows that the Federal Reserve can only do so much. The Fed has had success with its introduction of various programs to stabilize credit markets – but the generalized anxiety investors feel about the economic landscape has not been altered, and of late, it has worsened.

Credit spreads, on the whole, have worsened of late, widening against government-issued bonds, and credit-default swap spread levels have also widened, particularly for financial issues. But it’s important to note that this recent deterioration reflects worries about the economy rather than a fear-driven flight from risky assets due to liquidity concerns, as it did in the fall.

On Optimism

Yves Smith in commenting on her reading of Nassim Taleb’s "The Black Swan":

But second, and perhaps as important, people do not want to see the world as subject to chance to the degree that Taleb says it is. This is hugely unsettling if you really do come to terms with the implications of his argument. We like to believe we have some measure of control over our lives. And research has shown that people do pretty consistently overestimate their degree of control and influence (for instance, most people will exaggerate their contribution to the success of a project, not as a matter of PR, although that may be true too, but their private assessment). Most people (ironically those deemed psychologically healthy) have an optimistic bias and generally assign too high odds of things working out well (the mildly depressed make more accurate assessments. I have often wondered which way the causality runs: do they make better assessments BECAUSE their unhappy state strips away the rose-colored filter, or are they mildly depressed because they keep giving more realistic assessments, which makes them a drag to be around, and they are depressed because they encounter social rejection?). So if you embrace Taleb, you’d have to accept the disorienting fact that the world really is a pretty untractable place, that success had more to do with luck than application (although Taleb stresses the importance of working at being lucky, that is, accepting the opportunity to meet new people and make the most of chance encounters).

Smith’s observation is absolutely true — an update on the science surrounding optimism ran in last week’s economist — though the causality is subtly different.

It has been known for a long time that optimists see the world selectively, mentally processing positive things while ignoring negative ones, and that this outlook helps determine their health and well-being. In recent years, it has also become clear that carriers of a particular version of a particular gene are at higher risk than others of depression and attempted suicide when they face traumatic events. The gene in question lies in a region of the genome that promotes the activity of a second gene, which encodes a protein called the serotonin transporter. …

It has looked increasingly likely, therefore, that genes – particularly those connected with serotonin – have a role to play in shaping a person’s outlook. So Elaine Fox and her colleagues at the University of Essex, in Britain, wondered whether genes play a part in the selective attention to positive or negative material, with consequent effects on outlook.

In a paper just published in the Proceedings of the Royal Society B they report that, sure enough, gene-related variation caused a bias in attention towards positive and negative material. Some people had two "long" versions of the promoter gene (one inherited from each parent), a combination that reduces the amount of serotonin in the junctions between nerve cells. These individuals were biased towards positive images and away from negative ones. By contrast, those who had either a long and a short version of the gene, or two short versions (and thus, presumably, more serotonin in the junctions), did not have such protective biases. In other words, the optimists really did see the world differently.

Rose-tinted spectacles may be good for one’s health, as these results fit in with wider ideas about how a tendency to look on the bright side of life is part of being resilient to stress. Those with short variants of this gene are expected to have an increased susceptibility to mood disorders following such stress. It is not all good news, though, for optimists. Because these results suggest that a person’s attitude to life is inherited, they serve as a stark warning to all buoyant optimists that trying to cheer the rest of the world up with nothing more than a smile and an effortlessly sunny disposition is doomed to failure.

That is, genetic makeup endows a disposition to selectively distort reality in order to present a falsely optimistic picture which, though fostering emotional resiliency under duress, is indeed distorted and false.

Meredith Whitney

Alcohol, Drugs & Groceries 

Got Cash?

Madoff to plead guilty to 11 counts: lawyer (H/T Zombie210)

Prosecutors said they would seek a 150-year prison term for the ex-Wall Street baron, saying they intended to throw the book at him, and would show no leniency.

"There is no plea agreement" for a reduced sentence for Madoff, one prosecutor in the case said in the court.

The Inflection Is Near? (H/T Doug – Repost)

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall – when Mother Nature and the market both said: "No more."

Uncle Jay Explains the News

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