Watching the media frenzy around JPMorgan, one is reminded how much of life is an illusion, a running cognitive deficit we all share and contribute to in our own way. Politicians such as Senator Carl Levin (D-MI) solemnly proclaim the need for more regulation. But never once does this deficit spending liberal from America’s rust […]
There are certain professions in which the collective genius of the American people dominates the field: semiconductor design, fast food product differentiation, fire-control systems for air-to-air combat, and con artistry. That these are not, at the moment, sufficient to earn a current account surplus, is a problem being worked on, not least by the service exporters in the latter occupation.
John Dizard Financial Times March 1, 2009
Last week, we learned from Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that Washington lacks the guts to fix the problems eating away at the US financial system, at least so far. So large are the derivative-fueled losses and so majestic the collective incompetence of the Congress, regulators and the Sell Side dealers on Wall Street in enabling these losses, that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP.
Once upon a time you dressed so fine You threw the bums a dime in your prime, didn’t you? People’d call, say, “Beware doll, you’re bound to fall” You thought they were all kiddin’ you You used to laugh about Everybody that was hangin’ out Now you don’t talk so loud Now you don’t seem so proud
How does it feel How does it feel To be without a home Like a complete unknown Like a rolling stone?
Bob Dylan “Like a Rolling Stone” (1965)
As we were preparing our remarks for the session today at American Enterprise Institute on credit default swaps, “Everything You Wanted to Know about Credit Default Swaps,” our thoughts turned to the interview we did last year with Martin Mayer (‘The Vigorish of OTC: Interview with Martin Mayer’, June 12, 2008′)
On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business todayÃÂ as branches of U.S. Bank.
“NOTHING the Government does will work until they get rid of these nightmares. Letting credit default swaps (“CDS”) redefine insolvency as failure to post collateral means systemically critical counterparties such as Lehman Brothers or Bear are certain to fail once they wobble and, even worse, that there will be NOTHING LEFT for traditional creditors (including commercial paper) when they do. This has seized up the money markets, which no longer function without government assistance. This means the Government picks winners and losers, encourages investors NOT to underwrite and incents those “chosen” to sit on the money they can raise and keep credit velocity at zero. As long as CDS exist in bilateral form there is structural uncertainty in what it means to have a balance sheet. For everybody. CDS should be DOA.”
A reader of The IRA
“Political economy is not a science, it’s a clinical art, like medicine.” Eliot Janeway
As this issue of The IRA goes to press, we hear that the Obama camp is considering our friend and former Fed Chairman Paul Volcker as Treasury Secretary. The idea is to have Volcker lead the toxic waste cleanup for a year, so it is suggested, to be followed by New York Fed chief Tim Geithner.
Our advice to Chairman Volcker is to turn down this dubious honor. Paul Volcker has enormous credibility and judgment, but he does not have enough experience with and understanding of these financial markets to be effective, at least in our view.
The past several months have been a blur of activity. On the eve of Veteran’s Day, when Americans remember those who have served and have died to protect our freedom and our way of life, let’s take stock of where we are.
In this issue of The IRA, we turn to two veteran observers of the Fed and the US political process to get some perspective on the financial crisis and the policy makers who have arguably caused much of the present economic difficulty.
Roger M. Kubarych is Chief US Economist of UniCredit Global Research, part of UniCredit Markets and Investment Banking. He joined HVB Americas Inc., now part of UniCredit Group, in July 2001 with responsibility for advising management and clients on economic, financial market, and policy developments with significant implications for banking and investment decisions. He is also the Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at the Council on Foreign Relations. He has published two books: Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (2001) and Foreign Exchange Markets in the United States (1980).
Just for fun, we added one-year and 30-day stock price volatility calculations to the metrics displayed on some of our public website pages. Click here to see the demo profile for Ford Motor Co (NYSE:F) from The IRA Corporate Monitor. The one-year and one-month volatility metrics, along with the other benchmarks in The IRA Corporate Monitor, are calculated dynamically based on data provided by Morningstar.
Watching the New York equity markets again flirt with meltdown, a possibility made more urgent and exciting thanks to global media surveillance, we wonder how much the creative destruction on Wall Street is actually hitting Main Street. So far, it seems, the answer is not much.
In fact, the greater the distance from a global financial center and the attending media fire hose, the less the relative importance or perhaps, better — the perceived importance — of the rescue and the wants and needs of Wall Street generally. This is particularly true for American communities which have experienced significant hardship, like the good people of Southern Louisiana.
“As the first step in promoting the government’s new voluntary bank capital injection plan, Secretary Paulson summoned the CEOs of the nation’s largest banks to Washington and “made them an offer they couldn’t refuse.” He told them that as part of the government’s “voluntary” capital program, he was going to “invest” $125 billion of the government’s money in preferred stock that they would issue. In return for this capital injection, these institutions would also grant the government warrants, and executives would at least nominally subject themselves to limits on executive compensation. It was also “suggested” that they deploy the capital to make new loans, even though many would improve their financial position measurably by redeeming other higher-cost debt, including preferred stock previously issued. Finally, although the preferred stock was to be nonvoting, as would any common equity that the government might acquire through warrants, the “terms of the injection and suggestions” sure had the smell of exercising a controlling influence.”
Bob Eisenbeis Cumberland Advisers
Last week, the global financial system took a deep breath and began to react positively to the heaping quantities of fresh capital that politicians in the US and EU are shoveling at the latest problem created by the subprime mortgage bust, namely bank solvency. So far, so good, at least for now.
We regret to say that the Q3 2008 earnings reports from US banks will do little to dissuade markets that more crisis remains ahead. In front of us still are several quarters of old fashioned realized losses in the form of possibly record levels of bank loan charge-offs, so don’t hold your breath waiting for US commercial banks to start growing lending exposure anytime soon.