Archive for January 11th, 2010
America Slides Deeper Into Depression as Wall Street Revels
January 11th, 2010 | 
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America Slides Deeper Into Depression as Wall Street Revels
December was the worst month for US unemployment since the Great Recession began.
The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.
The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.
Judges are finding ways to block evictions. One magistrate in Minnesota halted a case calling the creditor “harsh, repugnant, shocking and repulsive”. We are not far from a de facto moratorium in some areas.
This is how it ended between 1932 and 1934, when half the US states declared moratoria or “Farm Holidays”. Such flexibility innoculated America’s democracy against the appeal of Red Unions and Coughlin Fascists. The home siezures are occurring despite frantic efforts by the Obama administration to delay the process.
This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of “option ARM” contracts due to reset violently upwards this year and next.
US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. “If the 2008 and 2009 loans go bad, then we’re back where we were before – in a nightmare.”
David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.
Fed hawks are playing with fire by talking up about exit strategies, not for the first time. This is what they did in June 2008. We know what happened three months later. For the record, manufacturing capacity use at 67.2pc, and “auto-buying intentions” are the lowest ever.
The Fed’s own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.
Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.
This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73.
How anybody can see imminent inflation in the dying embers of core PCE, just 0.1pc in November, is beyond me.
Mr Rosenberg is asked by clients why Wall Street does not seem to agree with his grim analysis.
His answer is that this is the same Mr Market that bought stocks in October 1987 when they were 25pc overvalued on Shiller “10-year normalized earnings basis” – exactly as they are today – and bought them at even more overvalued prices in 2007, long after the property crash had begun, Bear Stearns funds had imploded, and credit had its August heart attack. The stock market has become a lagging indicator. Tear up the textbooks.
Government Lies = Lawsuit?
Posted by Karl Denninger
Now here’s an interesting idea….
BRUSSELS, Jan 12 (Reuters) – The European Commission is likely to launch infringement proceedings against Greece for failing to provide reliable statistics on its budget deficit and debt, an EU source with knowledge of the proceedings said on Tuesday.
What, governments lie about economic statistics? 
Gee, what have I (and others) been talking about for a few years now? Or maybe a few decades?
Let’s see…. we don’t count anything that might show inflation in the inflation statistics, we back $5 trillion+ of Fannie and Freddie debt with the Treasury but don’t count that as debt on the balance sheet, and we have some $70 trillion of unfunded liabilities (on a discounted perpetual cash flow model) in Medicare and Social Security but don’t count that either!
Oh, and we count debt in GDP, making the (false) claim that our economy (on balance) is benefiting from the use of debt to pull forward demand and finance consumption (or worse, ponzi-style speculation), even though if you go to the bank and take out a $20,000 loan you’re not one penny richer than you were five minutes earlier.
The EU has scant room to complain about this. There’s not one nation under their umbrella that holds their government liabilities (that is, the social promises they’ve made) nor the backstops they’ve taken for their banking institutions on balance sheet either!
If any private company CEO or auditor pulled this sort of nonsense they’d wind up in prison.
I find the concept of complaining about accounting “irregularities” particularly odious when it comes from somewhere like the EU, while they’re doing the same thing at the same time, exactly as the US and every other major government has and does.
Before one raises such a complaint there should be a requirement that they restate their own balance sheets on a GAAP basis. Were we to do this, of course, bond buyers would recoil in horror at how the disappearing paint had worn off the elephant that has been standing in the room the whole time.
After all, if you look at the United States alone with its bloated social spending promises you’d find that we have about $100 trillion of liabilities and yet the total tax base on which the government can assess for revenue is about $14 trillion annually (GDP.) If you assume that the government could, at best, siphon off perhaps 15% of that without completely collapsing final consumer demand (remember that some 30% of GDP IS government spending, so you have to be careful here!) you find that they’re trying to finance $100 trillion in debt with $2 trillion in revenue. Hmmm… how’s that going to work out again exactly?
Yeah.
Posted in Corruption, Debt, Economic Crisis, Economy, Financial System, GDP, Tax Revenue | 
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Dylan Ratigan: Geithner Must Go
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Federal Reserve earned $45 billion in 2009
Federal Reserve earned $45 billion in 2009
Washington Post Staff Writer
Wall Street firms aren’t the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government.
The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.
The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy — though there remains a risk of significant losses in the future if the Fed sells some of its investments or loses money on its stakes in bailed-out firms.
This turn of events comes as the banks that benefited from the Fed’s actions are under the microscope. Starting at the end of the week, major banks are expected to announce significant earnings and employee bonuses. Anger in Washington is at such a high boil that the Obama administration will probably propose a fee on financial firms to recoup the cost of their bailout, officials confirmed Monday.
As it happens, the Fed’s earnings for the year will dwarf those of the large banks, easily topping the expected profits of Bank of America, Goldman Sachs and J.P. Morgan Chase combined.
Much of the higher earnings came about because of the Fed’s aggressive program of buying bonds, aiming to push interest rates down across the economy and thus stimulate growth. By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier. The interest income on those investments was a major source of Fed profits — though that income comes with risks, as the central bank could lose money if it later sells those securities to reduce the money supply.
The Fed also made money on its emergency loans to banks and other firms and on special programs to prop up lending, such as one that supports credit cards, auto loans, and other consumer and business lending. Those programs impose interest and fees on participants, with the aim of ensuring that the Fed does not lose money.
And while the central bank in its most recent financial report had recorded a $3.8 billion decline in the value of loans it made in bailing out the investment bank Bear Stearns and the insurer American International Group, the Fed also logged $4.7 billion in interest payments from those loans. Further losses — or gains — on the two bailouts are possible as time goes by. The Fed also charges fees for operating the plumbing of the financial system, such as clearing checks and electronic payments between banks.
From its revenue, the Fed deducts operating expenses, such as employee salaries, then returns to the Treasury almost all of the earnings that remain. The largest previous refund to the Treasury was $34.6 billion, in 2007.
“This shows that central banking is a great business to be in, especially in a crisis,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute and a former Fed official. “You buy assets that have a nice yield, and your cost of funds is very low. The difference is profit.”
The Fed plans to release its estimate of 2009 earnings Tuesday. The Post’s calculation is based on combining data through September from the Fed’s monthly balance sheet report with more recent data from the Treasury’s daily budget statement.
Fed officials do not make policy with an eye toward maximizing profits. They are charged by law with managing the nation’s money supply to keep employment high and prices stable, and earnings fluctuate depending on a wide range of factors as they pursue that goal. In the crisis, the central bank’s policy has been to create money and use it to buy a wide variety of assets, which in turn pay interest.
In effect, the unprecedented range of actions taken to address the crisis has made the Fed’s balance sheet more like that of a private bank. A firm such as Bank of America takes money from depositors, whom it pays little or nothing in interest, and lends it out at significantly higher rates. The Fed, similarly, takes money that banks keep on deposit, at a rate of 0.25 percent, and lends it to the U.S. government by buying Treasury securities and, lately, to home buyers and other private borrowers though more exotic investments.
While that resulted in higher earnings in 2009, it exposes the Fed to more risks down the road. “They’ve moved up the risk-return curve, as they have more long-term assets and more things that involve credit risk,” said Diane Swonk, chief economist at Mesirow Financial.
If the price of Treasury bonds or mortgage-related securities issued by Fannie Mae and Freddie Mac were to fall in the years ahead, and Fed leaders decided they need to drain money from the financial system by selling off some of their portfolio, the central bank would lose money. “If they do enough asset sales and rates go high enough, that could eat into future profits pretty substantially,” said Michael Feroli, an economist at J.P. Morgan Chase.
Even as the Fed comes to resemble private banks in terms of its balance sheet and its earnings power, there remains one big difference. The CEO of the Federal Reserve, Chairman Ben S. Bernanke, received a modest cost-of-living raise for 2010, despite the record earnings: He now makes $199,700, with no bonus at all.
Federal Reserve Seeks to Protect U.S. Bailout Secrets
Federal Reserve Seeks to Protect U.S. Bailout Secrets
By David Glovin and Thom Weidlich
Jan. 11 (Bloomberg) — The Federal Reserve asked a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history.
The U.S. Court of Appeals in Manhattan will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.
“This case is about the identity of the borrower,” said Matthew Collette, a lawyer for the government, in oral arguments today. “This is the equivalent of saying ‘I want all the loan applications that were submitted.’”
Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.
‘Right to Know’
“The question is at what point does the government get so involved in the life of the institution that the public has a right to know?” said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit.
The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit.
New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg, sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression.
‘Almost Two Years’
“Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Thomas Golden, an attorney for the company with Willkie Farr & Gallagher LLP, wrote in court filings. He said the Fed may be trying “to draw out the proceedings long enough so that the information Bloomberg seeks is no longer of interest.”
The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.
The lawsuit, brought under the U.S. Freedom of Information Act, or FOIA, came as President Barack Obama criticized the previous administration’s handling of the $700 billion Troubled Asset Relief Program passed by Congress in October 2008. Obama has said funds were spent by the administration of former President George W. Bush with little accountability or transparency.
Press and Public
FOIA requires federal agencies to make government documents available to the press and public.
In her Aug. 24 ruling, U.S. District Judge Loretta Preska in New York said loan records are covered by FOIA and rejected the Fed’s claim that their disclosure might harm banks and shareholders. An exception to the statute that protects trade secrets and privileged or confidential financial data didn’t apply because there’s no proof banks would suffer, she said.
The central bank “speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed,” Preska, the chief judge of the Manhattan federal court, said in her 47-page ruling. “Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden” of proof.
In its appeal, the Board of Governors of the Federal Reserve System argued that disclosure of “highly sensitive” documents, including 231 pages of daily lending reports, threatens to stigmatize lenders and cause them “severe and irreparable competitive injury.”
‘Confidentiality is Essential’
“Confidentiality is essential to the success of the board’s statutory mission to maintain the health of the nation’s financial system and conduct monetary policy,” Assistant U.S. Attorney General Tony West and Fed lawyer Richard Ashton wrote in a legal brief to the appeals court.
“The board’s ability to administer lending programs crucial to maintaining national financial and economic stability will be severely undermined” if lenders won’t come to the regional Federal Reserve Banks “for their funding needs, particularly in time of economic crisis,” they said.
Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets, Davis said. Laws governing such disclosures may be due for a change, he said, following the far-reaching U.S. bailout.
“If you are in need of a bailout and turn to the federal government and say, ‘help,’ with that comes some requirements in terms of transparency,” Davis said.
Joined in Bid
The Fed is joined in its bid to overturn Preska’s order by the Clearing House Association LLC, an industry-owned group in New York that processes payments between banks. The group assailed the judge’s decision for what it said were legal errors, such as applying the wrong standard in weighing the exception to FOIA.
The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., US Bancorp and Wells Fargo & Co.
Preska allowed the association to join the case so that it could directly participate in the appeal. More than a dozen other groups or companies filed amicus, or friend-of-the-court, briefs, including the American Society of News Editors and individual news organizations.
The judge postponed the application of her ruling to allow the appeals court to consider the case.
Also today, the same appeals court was to hear arguments in a lawsuit brought by News Corp. unit Fox News Network seeking similar documents. U.S. District Judge Alvin Hellerstein in New York sided with the Fed in that case and refused to order the agency to release the documents.
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).
To contact the reporters on this story: Thom Weidlich in the U.S. Court of Appeals for the Second Circuit in Manhattan at tweidlich@bloomberg.net and; David Glovin in U.S. District Court for the Southern District of New York at dglovin@bloomberg.net.
Blatant Data Error At The Federal Reserve
Blatant Data Error At The Federal Reserve
Submitted by Tyler Durden
A vigilant reader, who combed through the backup of today’s Consumer Credit G.19 statement points out a flagrant and obvious error in the Fed’s data. While luckily the data impact is not major (at most $4 billion, which in our day and age is a pithy 50% of Goldman’s FICC trading desk bonus), the implication that the Fed does not check its work in something as critical as one of the core data series (or at least it used to be until a few machines took over the market, to whom, as today indicated, a record credit contraction somehow ended up being a positive event) is very, very troubling.
The original, Fed-hosted excel file with the backing data of the actual G.19 statement can be found here. We welcome all readers to compare cells AC 804 through AC 809, which is the data for “Consumer Revolving Credit Owned by Nonfinancial Business, Not Seasonally Adjusted” for the months June through November of 2009, and to compare it with data in cells AC 792 through AC 797, which is comparable data for the months June through November of 2008. These are identical and very much wrong! So, dear Fed auditors, while you obviously are very highly overpaid for your error-proofing work, can you please tell us what the real Consumer Credit number for November is?
It is one thing for the broader population to speculate in what ways the Fed is screwing over the thinking public by allegedly ramping up the market day in and day out. It is something totally different to make such careless errors in critical economic releases and insult our intelligence. Should we not trust any data that comes out of the Fed in this case? Or should Americans spend gobs of time to triple check any and all Fed data, as apparently Bernanke’s syndicate is unable to do so on its own. When the Fed was so very much against auditing, we thought it was merely to hide the fact that there is no value whatsoever to the collateral it accepts from banks for discount window and PDCF lendings; little did we realize that Bernanke is simply ashamed of independent auditors uncovering such rookie mistakes (which, however, amount to just a little more monetary damage than a first year banking analyst forgetting to carry the decimal comma).
The first reader to point out any additional such discrepancy either in this excel file, or in any other excel document, will win Zero Hedge decals (which we truly hope will not be subsequently used to deface the entrance of the Marriner Eccles building).
