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Hale "Bonddad" Stewart: 2009 Economic Year in Review: How Did We Get Here?

2009-12-19T14:11:49Z

Because we are approaching the end of the year, it is appropriate to take a look back at the economy for the last year to see how we're doing. This will be a two part series. The first is, "How Did We Get Here?" It will be a retrospective of the economic numbers for the collapse. The second part will be a "Where We Are Now" piece which will show, well, where the economy is now relative to where we were about a year ago. So, let's get started.

The fall of 2008 was marked by panic. After the fall of Lehman Brothers, there was widespread talk of a "deflationary spiral," which is:

... a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.[7] Since reductions in general price level are called deflation, a deflationary spiral is when reductions in price lead to a vicious circle, where a problem exacerbates its own cause. The Great Depression was regarded by some as a deflationary spiral. Whether deflationary spirals can actually occur is controversial.

Here is a chart of the year over year percentage change in US inflation for the last five years:

Note the "cliff diving" that occurs in mid-2008: prices literally fell off a cliff. This situation is one of the most serious that can occur in an economy; it says that people have literally stopped buying things en masse. Here is a chart of real personal consumption expenditures (PCEs) for the last five years that shows the drop:

This was the first drop in over 10 years indicating that something fundamental had changed in the US economy. Because PCEs comprise 70% of the US economy, this drop was extremely concerning. However, PCEs weren't the only thing dropping. Real exports were dropping:

As was total domestic investment:

At this point, it's important to remember the GDP equation: personal consumption expenditures plus investment plus net exports (or exports - imports) plus government spending = GDP. In other words by the end of 2008 every major element of GDP was dropping hard and fast.

In other words, by the end of 2008 -- early 2009, it was obvious the economy was at the beginning of an economic death spiral. This is exactly the same situation the country faced in 1929-1933 -- which was originally mishandled horribly.

So, that's how we started the year. In the next article we'll take a look at the economic numbers for the year to see how the economy is faring.

Lehman's $50M Bonus Package For Employees Unwinding Derivatives Contracts Approved By Bankruptcy Judge

2009-12-18T11:45:40Z

NEW YORK--A judge on Wednesday said Lehman Brothers Holdings Inc. could pay $50 million in bonuses to employees still grappling with a huge derivatives portfolio 15 months after Lehman's collapse.

TARP Has Changed Little On Wall Street: John Gapper

2009-12-17T11:39:16Z

As banks rush out of Tarp to avoid second-guessing from Congress and restrictions on executive pay, little has changed on Wall Street. Bear Stearns and Lehman Brothers are gone but the banks that remain make money in the same old way.

As the FT reported on Wednesday, banks and hedge funds have made huge profits in distressed debt trading in the past year, aided by the Federal Reserve keeping short-term interest rates low. Meanwhile, the banks that turned out to be too big to be allowed to fail are bigger than ever.

Cate Long: Red Light Swaps

2009-12-14T11:28:54Z

If you don't work on Wall Street then most financial products probably look complex and risky.

As the House of Representatives debates the Wall Street Reform and Consumer Protection Act (HR 4173) several Republican representatives, including Scott Garrett, have questioned whether derivatives helped create the financial crisis.

Well... here is what the Federal Reserve Bank of St. Louis says about the credit crisis:

Many analysts blame the financial crisis on at least three interrelated causes:

Rapid growth and subsequent collapse of U.S. house prices;

a general decline in mortgage underwriting standards, reflected in a growing proportion of home purchases financed by nonprime mortgages; and

widespread mismanagement of financial risks by firms engaged in originating, distributing, and investing in mortgages, mortgage-backed securities, and derivative financial instruments.

Mortgage delinquencies and foreclosures rose sharply after U.S. house prices peaked and began to fall in early 2007. Banks and other financial intermediaries then began to experience large losses on their holdings of nonprime residential mortgages and mortgage-backed securities.

By August 2007, these losses sparked a widespread loss of confidence in banks and other financial intermediaries, as investors suddenly became much less willing to bear credit risks. Banks tightened their lending standards, which reduced the availability of loans and increased their cost. As investors retreated to the safety of government bonds and other low-risk securities, the market yields on risky debt securities were driven up relative to yields on U.S. Treasury securities.

Investor concerns intensified during 2008 as financial losses continued to mount. The crisis reached a boiling point in September 2008 when the bankruptcy of Lehman Brothers and near-bankruptcy of American International Group (AIG) sparked panic selling in the stock market and drove the yields on risky securities sharply higher relative to those on risk-free securities.

Did derivatives cause the financial crisis? You bet... red light swaps...

Tom Gregory: China Swaps US Debt for Equity: All Problems Solved!

2009-12-13T11:56:46Z

(Reuterz, Washington D.C. )

Goldman Sachs has announced that its Treasury Dept. has completed a debt for equity swap with the People's Republic of China, effectively solving most of America's problems.

Terms of the deal give China all U.S. States, territories and possessions west of the Mississippi River -- plus Michigan -- in exchange for cancellation of the trillions of Treasury debt they currently hold.

"This solves nearly all of our problems," said a joyful President Obama. "It eliminates our foreign debt and our trade deficit; We will now only owe ourselves and sell to ourselves!"

A White House spokesperson noted that "future threats of military attack by North Korea or China have also disappeared." He continued, "Now that the U.S. is part of China, the North Koreans wouldn't dare launch any missiles, and for China to attack itself would just be silly."

Congressional leadership had initially opposed the surrender of half the country until it was pointed out they were now free to run up the national debt again and "Spend, spend, spend!"

For its role in the arrangement, Goldman Sachs compensation is estimated to be Florida.

Georges Ugeux: Does Gordon Brown Attempt to Kill the City?

2009-12-09T17:22:06Z

While fighting a regulatory battle against its European partners to defend the City against the assault of President Sarkozy and Chancellor Merkel, Prime Minister Gordon Brown is slowly but surely killing the City. He and Alistair Darling, the Chancellor of the Exchequer (the British denomination for the Minister of Finance) will go down in history as having single handedly played an incredibly negative role in this financial crisis.

This afternoon's announcement in the UK Parliament by the Chancellor in the presence of the Prime Minister of a one-off 50% special levy on any bonus above $ 40,000 is the latest inept decision of a Labor Government who completely discredited the City and killed decades of a great success for global markets.

My advice to the City: don't pay any cash bonuses above $ 40,000. Find ways to pay in shares that will allow tax-free allocations of bonuses to the bankers.

I am definitely not a defender of the excesses of the City, but since the British Government makes billions in revenues from the activities of the City, this action is akin to killing its own "golden goose."

It is at the corporate level that a "special tax" might make sense. After all, they are operating under a Government-protected environment and historically low interest rates. The current plan is just a way to attack the individuals for a system that is propagated by the financial institutions. While these individual attacks may sell very well, it is not appropriate for government leaders to take revenge for their own ineptitude.

Gordon Brown, himself a successful Minister of Finance under Tony Blair, should have been the perfect Prime Minister for Britain under this financial crisis. However, he has time and time again proved his incompetence or tried to adopt a leftist ideology. Whatever the reason, he is killing the City of London...and Wall Street, who lost the leadership recently, will definitely be able to pick the pieces of that suicidal policy and the net losers will be London, Britain and European capital markets.

During the Northern Rock crisis, he was negotiating a deal in China with none other than Richard Branson, the Virgin flamboyant chairman in the back of London negotiations that would have avoided the nationalization of Northern Rock.

It is the British Government that bears the co-responsibility with the US investment bank Lehman Brothers for the collapse of Lehman Brothers by opposing the deal that Barclays Bank had agreed with Lehman for the takeover of the entire bank. They ended up buying the US operation after a bankruptcy that has exposed the incredible mess created in the United Kingdom by that same bankruptcy that will take more years to be resolved.

President Sarkozy did not need to try to undermine the City. The British Government is doing the job all on their own.

Tom Gregory: Goldman Bans "Last Suppers"; Suspends 1st Amendment!

2009-12-01T01:03:21Z

Editor's note: the following blog post is satire.

Reuterz, New York - In swift reaction to recent calls for his resignation, Lloyd Blankfein, Chairman of the Wall St. Church-State Goldman Sachs, issued an edict banning employees from assembling in groups of twelve.

Employees received the seasonally-festive, "no parties of 12 " command via voicemail blast as part the CEO's Weekly PR Blunder Address.

"He considers any gathering resembling The Last Supper a bad omen" said a spokesperson for the financial Pontiff, noting " They don't end well."

The directive is part of a broader corporate strategy called " Don't Know; Don't Tell" in which employees are encouraged not to fraternize. "The theory is if employees do not know who each other are, they are less likely to conspire or collude", adding hastily " except in the normal course of the way Goldman Sachs does business.

Mort Zuckerman: Federal Reserve Should Retain Its Authority And Independence

2009-11-23T12:10:04Z

In the grip of our Great Recession, with more job losses to come, we have yet to fix the broken financial system that is an underlying cause of this whole mess. How can we do it? Some of the ideas being talked about in the halls of Congress are as dangerous as the reckless congressional activity that helped to precipitate the disaster in the first place.

Lehman, Bear Stearns Execs Cashed In As Their Firms Failed: Study

2009-11-23T08:05:13Z

If you thought that the executives at Lehman Brothers and Bear Stearns paid dearly in when their firms famously imploded last year, think again.

A new study by three professors at the Program for Corporate Governance at Harvard Law School reexamines the "standard narrative" of the loss of wealth suffered by top leaders at Bear and Lehman. The top five executives at Bear and Lehman were able to sell billions in stock holdings from 200-2008, the study notes, while most shareholders saw their investments in the two firms decimated.

During the same period, the study notes, "the shareholder payoffs these teams produced were indisputably poor." From the study:

Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses
and equity sales during 2000-2008. These cash flows substantially exceeded the value of
the executives' initial holdings in the beginning of the period, and the executives' net
payoffs for the period were thus decidedly positive. The divergence between how the top
executives and their shareholders fared implies that it is not possible to rule out, as
standard narratives suggest, that the executives' pay arrangements provided them with
excessive risk-taking incentives.

While it's tempting to examine the paper loses suffered by execs at Bear and Lehman (Jimmy Cayne's stock holdings fell by over $900 million, for example) the report suggests that those figures may be misleading. The authors -- Lucian Bebchuck, Alma Cohen, and Holger Spamann -- assert that the fact that Bear and Lehman leaders simply lost large sums of money in the crisis, doesn't mean they weren't tempted by skewed incentives:

There can be little doubt that the banks' executives had strong reasons to prefer
that their companies survive. Furthermore, the executives' holding so many shares at the
time of the collapse indicates that they had not foreseen in 2007 or early 2008 that such a
collapse was around the corner. The important question, however, is whether the
executives had an incentive to make decisions that created an excessive risk - though by
no means certainty - of massive losses at some (uncertain) time down the road.

In particular, excessive incentives to take risks might have been generated by
executives' ability to cash out compensation based on the firms' short-term results. To
the extent that executives did cash out large amounts of such compensation, their
decisions might have been distorted by an excessive focus on short-term results. This
problem, first highlighted several years ago in a book and accompanying articles co-
authored by one of us,22 has received much attention in the wake of the crisis from both
public officials and business leaders.

The study arrives a conclusion long-held by critics of the financial industry. In short, Wall Street pay was specifically structured to encourage short-term gains:

"...the executives were the able to obtain large amounts of bonus compensation based on high earnings in the years preceding the financial crisis, but did not have to return any of those bonuses when the earnings subsequently evaporated and turned into massive losses. Such a design of bonus compensation provides executives with incentives to seek improvements in short-term earnings figures even at the cost of maintaining an excessively high risk of large losses down the road."

Interestingly, the study suggests that Wall Street's bonus culture may not be the largest cause of the excessive risks taken by the industry. Fixing compensation isn't merely an issue of increasing stock awards and limiting bonuses; in fact, the study steers clear of suggestions that pay should be capped. Instead, the study argues that the failure of Bear and Lehman suggest that compensation clawbacks should be considered.

READ the report here:

BCS-Wages-of-Failure-Nov09 -

'Zombie Buildings': Are They The Next Economic Calamity? (VIDEO)

2009-11-20T12:16:14Z

While the overall U.S. financial system is showing signs of stability, a rapidly rising tide of troubled loans for commercial real estate threatens the survival of hundreds of the nation's small and medium-sized banks.

Financial reports this month from federal regulators and industry analysts detail a new cycle of uncertainty that they fear could cripple the economic recovery. Billions of dollars in commercial debt will have to be paid back or refinanced at a time when property values have plummeted. About $500 billion will come due in 2010 alone and an equal amount every year through at least 2012, according to the Federal Reserve.

Many banks that cater to regional and community developments were largely unscathed by the residential mortgage meltdown. But now they are facing huge numbers of possible defaults by builders who erected thousands of office towers, condominiums and shopping centers with the easy credit available five years ago. With few tenants, those developments are turning into what industry insiders call zombie buildings.

WATCH: Huffington Post Investigative Fund's video report on the commercial real estate crisis:

Commercial real estate loans generally have terms of five to seven years. Many of the loans issued at the height of the credit bubble are coming due. By mid-November, $150 billion worth of commercial properties, about 7,500 in total, were in distress, according to Real Capital Analytics Research Inc.

Next year "looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders" and the shakeout could continue for "several years," says a recent report by PriceWaterhouseCoopers and the Urban Land Institute drawn from confidential interviews with industry experts.

Stephen Blank, a principal researcher for the report, said that regional and smaller banks that made the loans are bracing for big losses that could overwhelm their resources.

"The number on the street - what we hear - is that as many as 400 banks might fail before this is over," Blank said in an interview.

As of mid-November, 123 banks had failed this year, largely split open by commercial debt. More than 400 banks now are on a problem list maintained by the Federal Deposit Insurance Corp.

Industry analysts, such as the Real Estate Roundtable trade group, point out that a sick commercial market hurts any hope for recovery. Local government revenues suffer. Construction jobs--and all sorts of ancillary jobs--disappear. Retirement funds are vulnerable.

In recent Capitol Hill testimony, Roundtable President Jeffrey D. DeBoer pointed out that "a growing number of Americans have a stake in commercial property" because of their investments in pension plans, 401(k) plans and direct investments in real estate investment trusts. He estimated that $160 billion of retirement savings are invested in commercial real estate.

In October, federal regulators issued a statement encouraging banks to work with borrowers to extend loans, rather than call them in. The federal government is also trying to entice investors to buy back bonds based on commercial mortgages through a government-run emergency fund aimed at salvaging the credit market.

Despite those efforts, the banks' problems are continuing to grow, said Michael Stevens, senior vice president for regulatory policy at the Conference of State Bank Supervisors.

"It's not the next big thing. It is the big thing," Stevens said. "We're dealing with it right now. We wouldn't be at 120 bank failures if we weren't seeing it now."

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What Did TARP Accomplish? Simon Johnson In The NYT

2009-11-19T08:05:28Z

Here is my assessment.

In late September 2008, Treasury Secretary Henry S. Paulson asked Congress for $700 billion to buy toxic assets from banks, as well as unconditional authority and freedom from judicial review. Many economists and commentators suspected that the purpose was to overpay for those assets and thereby take the problem off the banks' hands. Indeed, that is the only way that buying toxic assets would have helped anything.

'Too Big To Fail': Andrew Ross Sorkin-Lesley Stahl Interview (AUDIO)

2009-11-17T17:40:23Z

Andrew Ross Sorkin is a New York Times financial columnist, the editor of Dealbook, a popular financial blog, and most recently, the author of Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System -- And Themselves. The book, which details the fall of Lehman Brothers and the subsequent government bailouts, debuted at No. 4 on the New York Times bestseller list.

LESLEY: Andrew, let me ask you straightaway about what you learned in writing this impressive book. You interviewed virtually every major player on Wall Street and in the government crisis. How big of a mistake was it that Washington let Lehman Brothers fail?

Blake Fleetwood: The $20 Billion Gamble: The Greatest Coup in Financial History

2009-11-17T12:05:04Z

In 2007 a little known hedge fund manager pulled in a personal profit $4 billion (firm profit $20 billion), with a daring bet against a real estate boom that everybody knew was going to bust ... someday.

In 2006 John Paulson (of no relation to Treasury Secretary Henry Paulson ) bet that the sub-prime mortgage market would tank and housing prices would fall on a national scale, according to a new book The Greatest Trade Ever by Greg Zuckerman.

Paulson, a prophet of doom for homeowners, committed more than $1 billion to buy insurance on what he saw as risky mortgages. Many economists and savvy investors knew that the bubble was too good to last, but most were not willing or able to put up or keep up their bets until it did.

Since 2004 many investors bet against the real estate bubble, but if you had done so in 2004, you would have lost a lot of money, as real estate prices kept rising for the next two years. It was too early.

Paulson made his bets in late 2006 just as the sub-prime mortgage markets were starting to weaken. His timing was impeccable, as was his luck.

When the bubble burst, one of Paulson's funds rose more than 500% that year, according to Zuckerman in the Wall Street Journal. In 2008 Paulson shorted financial shares leading to the collapse of Lehman Brothers and Bear Stearns and reaped another round of enormous profits when they subsequently tumbled.

Paulson's investing lessons:

Don't Rely on Experts

Bubble Trouble

Focus on Debt Markets

Master New investments

Insurance Pays

Experience Counts

Don't Fall In Love

Luck Helps

Paulson, who is shy in the face of his recent success, has stayed out of the public eye; perhaps realizing that short sellers are among the most hated of human species. The mega-trader with a $36 billion fund should take a cue from George Soros. Although his currency trades in the 1990s were reputed to have broken the Bank of England, Soros has spent much of his career making up for his shady bounty with endeavors such as the Open Society Institute.

Meanwhile, Paulson - whose criticism of Zuckerman's laudatory book contains no specific grievances - called The Greatest Trade Ever a "tabloid-style disappointment" that contains "numerous inaccuracies and fails to capture the essence of the credit bubble."

What is Paulson betting on now? He has sold more than $300 million worth of stock in Goldman Sachs and invested in Citigroup. Citi was a great buy when it was selling for under $1, but now it is over $4. Paulson thinks it is really too big to fail.

Wonder where your money went? "John Paulson took it," wrote Peter Cohen of BloggingStocks.

Want to know what Paulson is buying this year? Gold. Betting against the dollar is his latest ploy and so far seems to be working.

To create manufacturing jobs in the U.S. the dollar has to decline, according to Martin Murenbeeld, chief economist at Dundee Wealth.

Over the last seven months the dollar is down more than 15%, a fifteen month low.

Write:jfleetwood@aol.com

Qanta Ahmed, MD: From Wall Street to Neverland: The Year America Didn't Sleep

2009-11-16T11:11:19Z

America didn’t just lose money in the Crash -- America lost a lot of sleep. The annual Sleep in America Poll published by the National Sleep Foundation focused on Health and Safety this year. The report is available on line for anyone to download. It makes for compelling reading.

From Wall Street to Neverland, Americans have been sleepless. The starkest example of the struggle with insomnia came earlier this year on June 25th, when Michael Jackson’s quest for sleep resulted in death. In these columns we have discussed some of the painful lessons derived of those Propofol Lullabies. A year or so earlier, in an anonymous New York City night, we had quietly lost the incandescent talent of Heath Ledger who had also struggled with insomnia in the weeks leading up to his death. This had followed Britney Spears' very public insomnia, preceding her hospitalization for mental illness. The lives of these celebrities is far, far removed from those of my patients, but the struggle for rest and sleep is a universal experience. And money simply can’t buy it.

One in three Americans is experiencing a sleep disorder due to economic concerns. Astonishingly, these findings have been little discussed in the professional academe or in the public sphere. This past week at the annual congress of the American College of Chest Physicians, in San Diego I discovered my colleagues were not always aware of such dramatic observations.

Since I first read the survey this spring, I began adding a single question to my interviews when I meet new patients for the first time: “ Without intruding into your financial affairs, do you believe the economy has affected your sleep?” The response has been startling. Every sector of the population relates to this question, whether the patient is a 42 year old account manager for a hedge fund describing a flare of insomnia as Lehman Brothers began its plummet over the edge, or an 87 year old grandfather concerned about his grandchildren’s future, or an overworked physician struggling to make college fees, or a single mom working in a pet store late into the night, or a 60 year old ex-service man taking on an extra shift at UPS for health insurance benefits or even a loan book manager for an international investment bank. There has been almost no patient I have interviewed who cannot relate to this observation, yet the discussion is barely beginning.

Americans are extremely concerned about the economy. They list economic fears, including the economy in general, more specific fears relating to job security and health coverage, ahead, way ahead, of concerns about the war in Iraq, the war in Afghanistan or the interminable global war on terror. Americans are anguished and hurting and its affecting their sleep.

Speaking to a physician colleague recently about this survey I was met with irritated resignation. Well, what can we do about this? We can begin by acknowledging the realities that many more individuals are experiencing insomnia in the slow motion collision that has been our economy of recent. Empathizing about this problem as a shared, national experience can be helpful and patients often sense that they are finally being heard in a climate where economic decisions are being made by faceless suits remote from reality. To quote my mentor from residency, Dr. Michael Ammazzalorso, "as physicians we are privileged to be closer to our patients than a priest is to his parishioner". These are times when we need to remember to minister to ourselves and each other. Sharing a nation’s loss and beginning to examine its many manifestations by spending time hearing about them from our patients can accomplish much.

In the endless 24/7 news cycles since the 2008 implosion of the Dow from the vertiginous altitudes of 14,000, the impact of the economy on sleep, or the impact of sleeplessness on the economy, has been a silent void. We live in a culture of not-so-wholesome Sleep Machismo and economic hardship is bringing the extremes of American lifestyles into sharp relief. Patients who are parents are contorting their schedules to accommodate work hours, long commute times, shift work, child responsibilities, homework and even higher learning. Patients who are unemployed are struggling fiscally, emotionally and without the structure of work, which has become a form of puritanical Americanism. As a nation we are known for our long work week, few vacation days and endless work hours. In contrast, the unemployed have lost their church of redemption -- workaholism, which has been, for a long time the foundation of a uniquely American ethos. Possibly only the Japanese rival us in this pursuit. Outside of a workplace, Americans often find themselves deprived of purpose, community, means and hope. The speed at which health coverage is lost following the end of a job adds to calamity and many patients attend for consultation under pressure of a rapidly uncoiling COBRA coverage.

In times like these, it is, as my colleagues have pointed out, hard to offer constructive help. In a health care system where patient encounters result in investigations and financial burden, we have to remember how to dispense practical advice. We must target behaviors in a way that results in meaningful change for our patients without submitting to the model of medicine as a diagnostic temple serving evaluation yet eternally devoid of healing. We must help and heal, even without a DRG code check box.

We begin by educating our patients about how we sleep, why we need sleep and how to sleep better. Many times a detailed interview can uncover obvious behavior to target. As a nation we are growing up without learning how to fall asleep or how to build an environment which promotes sleep at bedtime. Enter economic calamity and transient, acute insomnia quickly becomes chronic and untreated insomnia contributes to depression. Daytime performances decline, memory is impaired, attention wavers. Tempers fray, workplace litigation costs rise, health care utilization goes up. Workplace conflicts proliferate. I could go on.

The public health burden of insomnia on the United States is measured in the hundreds of billlons of dollars. While some of the costs are direct, many are indirect: covering for staff shortages due to absence, accidents triggered by sleeplessness and the impact of sleeplessness on wider society. Much of this decline is unaddressed in employee wellness programs, or in regular visits to the clinician. While as a nation we routinely cut calories, or cram exercise into demanding schedules, sleep has not even entered the conversational lexicon.

At a time of extraordinary hardship, we can ease suffering by shining the spotlight on America’s sleep habits. We need to look at our culture of Sleep Machismo which views sleep need as an expendable luxury rather than a biological necessity and the brilliant lessons extracted from Dr. Mathias Basner’s evaluation of the federally administered American Time Use Survey and his work at the Philadelphia School of Medicine. I will be devoting a specific column to his fascinating work. We need to acknowledge the socioeconomic impact of a sleepless, overworked nation in a climate of economic volatility and ignite a dialogue on protecting our most vital function of wellness: sound sleep in unsound times.

Without doubt, this is a conversation long overdue. From Wall Street to Neverland, it is time we realized: unlike Greed, Sleep is indeed Good. Americans are not only in financial debt but also rapidly spiraling sleep debt. Losing sleep is costing us money and losing money is costing us sleep.

Its time to stem the losses.

Wall Street Conspiracy Theories: Which Are The Most Plausible?

2009-11-13T15:04:54Z

So here's a field guide to the five most prevalent Wall Street conspiracy theories, with each one graded on scope, durability, crowd appeal, and plausibility and each graded on a sliding scale from 1 to 5, with 1 being "fugetaboutit" and 5 being "damn right."

Tom Gregory: Fed Releases Rare "Snapshot" on Economy

2009-11-12T00:48:12Z

(Reutrez) Washington D.C.

In a rare glimpse behind the closed-doors of The Federal Reserve, Chairman Ben Bernanke
released a snapshot of the economy they have been looking at for months.

"As you can plainly see, the economy is showing a "V" shape -- and there is activity -- see the people and the new truck?"

(more)

www.ShowbizTom.com

Tom Gregory: The Lloyd's Prayer

2009-11-11T03:25:09Z

THE LLOYD's Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth As There's No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.

Goldman.

Too Big To Fail : Joe Gregory, Former Lehman President, Swore By Malcolm Gladwell, Myers-Briggs

2009-11-06T15:50:51Z

Page 120 of Andrew Ross Sorkin's Too Big To Fail addresses the problem of bankers being too dumb to read. (Hey, you can't say Gladwell didn't warn us about Myers-Briggs.)

Goldman Sachs Alums Who've Held Top Government Positions "Long On Hubris," "Tarnished": Felix Salmon

2009-11-04T14:10:06Z

With Jon Corzine losing the governorship of New Jersey yesterday, it was yet another bad day for former heads of Goldman Sachs. It's worth running down the list, since the venerable pairing of John Weinberg and John Whitehead came to an end in 1990.

New "Too Big To Fail" Bill Gives Feds Power To Freeze Derivatives Contracts

2009-11-03T13:46:49Z

The "Too Big To Fail" legislation currently being debated by a House committee has been widely criticized as toothless. But one provision gives the federal government a powerful mechanism to prevent another implosion like the one that launched the current financial crisis.

The bill, which would give the Federal Deposit Insurance Corporation the power to take over failing firms that pose a risk to the entire financial system, gives the FDIC the authority to repudiate the firm's derivatives contracts, pay the parties less than what they're owed, or transfer the contracts to another, healthy financial firm.

Perhaps most importantly, the FDIC would have the authority to delay the parties from closing out their contracts and taking their money with them. That's part of the reason why the Lehman Brothers bankruptcy announcement caused the financial markets to crash, and it's what helped bring about the demise of the 158-year-old investment firm -- everyone wanted to get their money out before it was too late.

The FDIC already has this power when it comes to failed banks. But its authority is strictly limited to insured depositories. So the FDIC can take over a Citibank, for example, but not all the operations of a Citigroup. It's an important difference, and part of the reason why the administration and House Financial Services Committee Chairman Barney Frank are proposing to give the FDIC this expanded authority.

Here's how it works:

These days, when the FDIC takes control of a bank, it can liquidate it (receivership) or take it over in preparation for a sale (conservatorship). Receivership is the most common approach. In those cases, the FDIC will sell off a bank's assets, or it can open a temporary bank in order to minimize the disruption that would come from immediately selling off all of a bank's assets.

In derivatives contracts, a firm's failure or bankruptcy often triggers a clause that calls for the contract to be immediately closed out.

From Michael Krimminger, special advisor for policy at the FDIC, before a House committee in October:

Under both the Bankruptcy Code and bank insolvency law, the counterparties to insolvent firms can terminate and net out derivatives and sell any pledged collateral to pay off the resulting net claim. During periods of market instability -- such as during the fall of 2008 -- the exercise of these netting and collateral rights can increase systemic risks. At such times, the resulting fire sale of collateral can depress prices, freeze market liquidity as investors pull back, and create risks of collapse for many other firms.

In effect, financial firms are more prone to sudden market runs because of the cycle of increasing collateral demands before a firm fails and collateral dumping after it fails. Their counterparties have every interest to demand more collateral and sell it as quickly as possible before market prices decline. This can become a self-fulfilling prophecy -- and mimics the depositor runs of the past.

This is what happened to Lehman Brothers and another Wall Street firm no longer standing, Bear Stearns.

"Rumors about Lehman's liquidity problems, and the subsequent bankruptcy filing, triggered asset fire sales and destroyed the liquidity of a large numbers of claims held by Lehman's direct counterparties as well as of claims held by counterparties several steps removed from those having claims directly against Lehman itself," Krimminger said. "This led to an abrupt collapse of liquidity as the ability of parties throughout the market to complete settlements was placed into doubt."

While the FDIC can now stem the tide for banks, it can't for investment firms such as Goldman Sachs or Morgan Stanley. The draft of the Financial Stability Improvement Act of 2009 -- first proposed by the administration and introduced in the House Financial Services Committee last week -- would give the agency that ability.

It's not going to be easy, though. With derivatives, under both its current and proposed authority, the FDIC only has until 5 p.m. on the business day following its appointment as a receiver to dispose of the problems. The rationale behind the one-business day turnaround is that the value of derivatives is tied closely to a company's relationship with others in the market and its need for immediate and continuous access to liquidity.

According to a summary of the administration's regularly reform framework by the international law firm Gibson, Dunn & Crutcher, which represents banks and other financial firms, the FDIC would have the "power to repudiate 'burdensome' contracts and leases and is liable only for 'actual direct compensatory damages' and no damages for profits or lost opportunity or pain and suffering or punitive damages...[and it would be able to] enforce contracts despite default, termination, or acceleration clauses."

The proposal has its critics. The International Swaps and Derivatives Association, a global trade group representing the over-the-counter derivatives industry, is concerned that the bill wouldn't allow firms to immediately net-out and end their contracts.

"In general, our main concern about any wind-down authority would be to ensure that potential legislation recognizes the importance of the enforceability of close-out netting to the derivatives markets and the counterparty risk management benefits this brings," the group said in a statement.

To put the provision into context, let's imagine that AIG had been taken over by the FDIC. Rather than the troubled insurer paying Goldman Sachs $12.9 billion for its disastrous credit-default swaps (a type of derivative contract) -- a sum paid in full per the contracts -- the FDIC could have mandated a lesser payment. In the real world, however, the New York Fed chose to make AIG pay all of its debts in full. Per Jonathan Weil of Bloomberg:

AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)

It probably made sense for the counterparties to reject AIG's initial settlement offers. They had their own investors to look after. And once the government took control of AIG, it couldn't credibly threaten to force the company into bankruptcy proceedings. The premise of the government's seizure, after all, was that AIG was too big to fail.

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Geithner Testimony: New "Too Big To Fail" Legislation Won't Lead To More Bailouts

2009-10-29T11:56:24Z

WASHINGTON — An Obama administration plan to dissolve large, struggling financial firms rather than bail them out is encountering Republican resistance, Democratic doubts and only qualified support from regulators.

At a House Financial Services hearing Thursday, lawmakers from both parties worried that the proposal would give regulators and the executive branch unprecedented power.

Lehman Brothers Art Collection For Sale

2009-10-27T17:16:33Z

On November 1st, Philadelphia auction house Freeman's is holding the first of two sales of nearly 700 pieces from Lehman Brothers' private art collection.

Rep. Jackie Speier: A Reasonable Case For Regulation

2009-10-26T19:11:11Z

Before investing, you likely research the rating the financial product holds from one of the major credit rating agencies. But how would you feel if you discovered that a highly-rated bond received its grade, not because the company is strong, but because the rating agency:

assumed the government would bail the company out;

was most concerned with the "confidence sensitivity" of the market, so didn't tell investors that the company could soon collapse?

If you're like me, that would tick you off. Especially when you find out that those responsible for the shoddy analysis weren't disciplined but, instead, engaged in some "thoughtful soul-searching."

That is exactly what I was told, at a recent hearing of the House Financial Services Committee, by executives of the largest credit rating agencies - Moody's, Fitch and Standard & Poor's.

Credit-rating agencies were established in the 1920s as a safeguard for investors, who paid the agencies to evaluate bonds and provide unbiased ratings. In the 1970s, the Securities and Exchange Commission (SEC) turned the model on its head by requiring that bonds receive a rating prior to being sold. This meant corporations - not investors - were now paying the credit raters and turned the agencies' role from that of impartial consumer watchdogs into corporate marketing tools.

At a March hearing of the Oversight and Government Reform Committee, the agency executives asserted that consumers are still protected because the companies' reputations - and those of individual analysts - are on the line with each rating. So, having the opportunity to question them again, I asked Raymond McDaniel, Chairman and CEO of Moody's; Deven Sharma, President of Standard & Poor's; and Stephen Joynt, President and COO of Fitch; what repercussions befell those responsible for giving AIG and Lehman Brothers stellar ratings just days before they collapsed?

Here are some excerpts:

Me: After [AIG and Lehman failed] did you take any action against the analysts who had rated them? Did you fire them, suspend them? Did you take any action against those who had put that kind of remarkable grade on products that were junk?

McDaniel (Moody's): No, we did not fire any of the analysts involved in either AIG or Lehman.

Why?

McDaniel: An important part of our analysis was based on a review of governmental support that had been applied to Bear Stearns earlier in the year. Frankly, an important part of our analysis was that a line had been drawn under the number five firm in the market, and number four would likely be supported as well.

The same question was put to Mr. Sharma.

Sharma (Standard & Poor's): No, we did not fire anybody.

Me: No one got fired? No one got their hand slapped?

Sharma: Financial institutions are very confidence-sensitive. In Lehman's case, not only were they trying to raise capital, they were about to raise capital, and on the weekend they declared bankruptcy. And once there's a run on an institution, it's very hard to manage....

Then Mr. Joynt weighed in.

Joynt (Fitch): No, no analysts were fired. I would say that our lead analysts from those cases were disappointed, surprised, and went back and reflected on how [they reached their] conclusions. I think we've done a lot of thoughtful soul-searching...

State and local governments across the country lost billions of taxpayer dollars when their highly-rated Lehman Brothers bonds - part of safe and conservative investment strategies - became virtually worthless overnight. San Mateo County, California, lost more than $155 million to a fund that included school districts, cities and emergency services agencies. I doubt that the laid-off teachers and EMTs are overly impressed by Fitch's soul-searching.

So, who is to blame? The SEC has authority over credit rating agencies but, by all accounts, they've been asleep at the wheel. That is why, this week, the Financial Services Committee will consider legislation to restore confidence in our financial system and reassure American investors by strengthening and reforming the regulation of credit rating agencies. These reforms must:

prohibit credit rating agencies from advising the companies they are paid to rate;

require disclosure of all ratings a security receives so companies can't shop around for the highest grade;

require the SEC to review how ratings are devised;

require ratings agencies to disclose all information used in a rating, monitor its performance, and inform investors when a rating or assumption changes;

hold rating agencies liable when they knowingly or recklessly fail to reasonably investigate a rated security.

We think nothing of protecting consumers from faulty toasters or unsafe cars. Is it unreasonable to suggest that investors are entitled to information they can trust before investing their hard-earned money?

I don't think it's unreasonable at all.

How The US Blew The Trillion-Dollar Trade Of The Century

2009-10-26T01:50:38Z

When the government was forced to bail out the financial system, our friends in Washington also had the opportunity to make the trade of the century for the American taxpayer. While Uncle Sam succeeded in the former, he failed miserably in the latter.

"Too Big To Fail" Legislation Is On The Way

2009-10-25T23:36:07Z

A senior administration official said on Sunday that after extensive consultations with Treasury Department officials, Representative Barney Frank, the chairman of the House Financial Services Committee, would introduce legislation as early as this week. The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.