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    Daily Digest – May 6

    by Davos

    Wednesday, May 6, 2009, 3:26 PM

  • 401(k)s Hit by Withdrawal Freezes (H/T Suzie G and CM)
  • Ben Bernanke to Ron Paul: “I will resist any attempt to dictate monetary policy.” (Video)
  • Reality Brought to You via Truth Tellers…
  • WSJ: About 10 of 19 Banks will need Capital
  • Richardson and Roubini Call for Bank Resolution, Diss Stress Tests
  • Goldman connection at NY Fed “doesn’t pass the smell test” (Video)
  • The Truth
  • From Michael Covel’s Site: Bright Future, Superfund Gold (PDF)
  • Chart: U.S. domestic light truck sales
  • Auto Sales (Chart, April)
  • You Know the Answer
  • Flu Pandemics, Financial Pandemics, and the Macroeconomy
  • Perception: Bernanke: Economy should grow again later in 2009
  • Reality: Michiganians mine bodies for cash to make ends meet
  • A(H1N1) Map 

Economy

401(k)s Hit by Withdrawal Freezes (H/T Suzie G and CM)

Some investors in 401(k) retirement funds who are moving to grab their money are finding they can’t.

Even with recent gains in stocks such as Monday’s, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can’t withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.

When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn’t withdraw $40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.

That fund, which invests directly in office buildings and other properties, had stopped allowing most investors to make withdrawals last fall as many of its holdings became hard to sell.

Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience. All he wants, he said, is his money.

"I hate to be whiny, but it is my money," Mr. Dursky said.

The withdrawal restrictions are limiting investment options for plan participants and employers at a key time in the markets. The timing is inconvenient for the number of workers like Mr. Dursky who are laid off and find their savings inaccessible.

Though 401(k) plans revolutionized the retirement-savings landscape by putting investment decisions in the hands of individuals, the restrictions show that plan participants aren’t always in the driver’s seat.

Individual investors mightn’t even be aware of some behind-the-scenes maneuvers causing liquidity problems in their retirement plans. Many funds offered in 401(k) plans lend their portfolio holdings to other investors, receiving in exchange collateral that they invest in normally safe, liquid holdings.

(More)

Ben Bernanke to Ron Paul: “I will resist any attempt to dictate monetary policy.” (Video)

[video:http://www.youtube.com/watch?v=nf1FN91dwmA&feature=player_embedded]

Reality Brought to You via Truth Tellers… 

Let’s start with David Tice, former manager of the Prudent Bear Fund. Sorry to the sunshine crowd, but David has been correct and is correct in what he says here, especially his comments about debt and the government’s debt bubble Ponzi dynamics.

WSJ: About 10 of 19 Banks will need Capital

From the WSJ: More Banks Will Need Capital

The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital …

One big risk worrying industry officials is that the market will view banks on the list as insolvent when the official results are announced Thursday, even though Fed officials have repeatedly said that’s not the case.

An initial stress test identified Wells Fargo as among the banks needing a bigger buffer … It is unclear whether Wells would be forced to raise fresh capital or if regulators would accept the bank’s argument that it can earn its way through the losses in future years. Wells expects more clarity Tuesday.
Wells Fargo will probably suffer enormous losses from Wachovia’s Option ARM portfolio (originally from Golden West) and from their own HELOC portfolio. The estimated losses will apparently be broken out into the 12 categories listed in the Fed’s White Paper, and that should show substantial losses for Wells Fargo in these categories.

Citi, BofA, Wells … the constant leaks are pretty amazing …

Richardson and Roubini Call for Bank Resolution, Diss Stress Tests

History repeats itself, the first time as tragedy, the second time as farce. But when it’s your farce, sometimes it’s hard to appreciate the humor.

We’ve railed about the stress tests since they were announced, but the chicanery, starting with the March 10 Citi and Bank of America pronouncements that they had had a decent couple of months, have lead to a big rally in bank shares. Of course, before we get too excited, it’s important to remember that Citi is still trading at a bit over $3 and Bank of America at just over $10.

Nevertheless, the insistence of the cheerleading is looking strained, particularly when pretty much every professional investor we know is skeptical of the rally, even those who had the foresight to buy into it early. And even an equity broker (generally of the bullish persuasion) commented on earnings season: "One third had earnings that beat expectations, one third were short, and one third were delusional."

I’ve also noticed more than a few headlines, particularly on Bloomberg, that take any snippet of the positive and play it up. For instance, one a few days ago called a morning when stocks opened down and then moved into weakly positive territory as ‘stocks gain" which was technically accurate, but when the averages again fell into losses, it was "stocks fluctuate." Please. Similarly, tonight Bloomberg tells us, "Chrysler Bankruptcy May Not Dent Economy as Cutbacks Were Set". The point of the story is that (assuming the bankruptcy goes according to plan, an open question) the plant cutbacks and furloughs had already been planned as part of the restructuring. But that means that much damage was inevitable, regardless. Saying "Bankruptcy May Not Dent" is not the same as "Bankruptcy May Do No Incremental Damage," which is what the story really says. I plan to keep closer tabs on this and readers are encouraged to e-mail sightings of misleading headlines.

Back to the matter at hand. Matthew Richardson and Nouriel Roubini, in "We Can’t Subsidize the Banks Forever," provides a welcome bit of reality to the unwarranted optimism about banks. Having companies look viable as the result of massive, and seeming open ended subsidies does not say much about how they’d be faring ex life support. And even worse are the distortions. We’ve seen that large scale banking with score based credit paradigms has fared badly. Yet these companies are being subsidized to the detriment of smaller regional and local players who are closer to their communities and can incorporate local knowledge into their credit decisions. But no, just as old style computer jockeys had trouble accepting that big iron might be inferior to PC and distributed processing, so to the powers that be seem unduly fond of very large banks when the superiority of that model is in question.

(More)

Goldman connection at NY Fed “doesn’t pass the smell test” (Video)

The Truth

This caught my eye today:
“It takes two to speak truth, one to speak and another to hear.”
-Henry David Thoreau, American Essayist, Poet and Philosopher, 1817-1862

From Michael Covel’s Site: Bright Future, Superfund Gold (PDF)

Chart: U.S. domestic light truck sales

Auto Sales (Chart, April)

You Know the Answer

This is something of a rhetorical question, of course, but does the following excerpt from a 1989 research paper by Miguel A. Kiguel, "Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation" —

Large budget deficits financed by money creation are widely believed to be the primary force sustaining prolonged high inflation processes. The relationship appears to be closer for hyperinflationary episodes, which are usually associated with the presence of massive budget deficits. Hyperinflation, understood in this paper as a process of accelerating inflation, in fact occurs because governments have unsustainably large budget deficits.(1)

A correction of the fiscal imbalance has been crucial for stopping hyperinflation. This factor is well documented in the works of Yeager (1981), Sargent (1982), and Webb (1986) on the hyperinflation episodes in the central European countries during the 1920s and by Sachs (1987) on the more recent Bolivian episode. Substantial reductions in the budget deficit, monetary reform, and a fixed exchange rate were crucial for the successful stabilization policies in those countries. Indeed, fiscal restraint, which in most cases meant outright elimination of the budget deficit, was probably the most important of these policy measures.

— sound like something we should be thinking about when we read the following New York Times article, "Worries Rise on the Size of U.S. Debt"?

The nation’s debt clock is ticking faster than ever — and Wall Street is getting worried.

Flu Pandemics, Financial Pandemics, and the Macroeconomy

Flu Pandemics, Financial Pandemics, and the Macroeconomy

Two from the WSJ. First, Barro and Ursua discuss the macroeconomic threat posed by flu pandemics:

Pandemics and Depressions, by Robert J. Barro and Jose F. Ursua, Commentary, WSJ: Here we are, struggling to find a way out of the worst financial crisis since the 1930s, when along comes the possibility of a global influenza epidemic. Though the first concern about the new strain of A/H1N1 virus involves health, we also have to worry that a full-blown flu pandemic would intensify the world’s economic problems.

Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions — defined as declines in a country’s real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21. …

Next, Richardson and Roubini on the state of the banking system:

We Can’t Subsidize the Banks Forever, by Mathew Richardson and Nouriel Roubini, Commentary, WSJ: The results of the government’s stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators’ conclusions. …

Perception: Bernanke: Economy should grow again later in 2009

Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the economy should pull out of a recession and start growing again later this year.

Reality: Michiganians mine bodies for cash to make ends meet

As Michigan’s economy continues to suffer, people are offering themselves up as medical guinea pigs for a quick buck to make ends meet. Some are selling plasma, others their hair for hundreds on the Internet, while others take the more extreme road by wanting to sell their eggs or participate in medical studies in exchange for payment and free medical exams.

 A(H1N1) Map

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