Commentaries

from Rolfe Winkler:

Evening Links 12-23

(Reader note 1: posting will be light through the weekend....taking a few days off)

(Reader note 2: Just saw Avatar, the IMAX 3D version. I highly recommend it.)

Food stamps altering how retailers do business (Maestri/Baertlein, Reuters) "At 11 p.m. on the last day of the month, shoppers flock to the nearest Walmart. They load their carts with food and household items and wait for the midnight hour. That's when food stamp credits are loaded on their electronic benefits transfer cards."

The Protocol Society (Brooks, NYT) "When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology."

Treasury to seek easing of bailout fund rules (Somerville, Reuters)

One cheer for Barney Frank (WSJ editorial) WSJ editorials tend not to be very useful, but I thought the last line of this one was notable: "Perhaps the House and Senate should simply ... start over with a new mission for [financial] regulatory reform: break up the too big to fail racket." More evidence that all sides of the political spectrum agree on this. I wonder how they would propose we do it.

New home sales decrease sharply in November (Calculated Risk) Yesterday's existing home sales report had everyone exited, but new home sales are far more important for economic growth, and those are still terrible. Bill has dubbed this "the distressing gap."

from Rolfe Winkler:

Lunchtime Links 12-22

Furlough alert 1--Yahoo imposes week long shut down (Vascellaro, WSJ)

Furlough alert 2 --City of Chicago to shut down Xmas Eve to save cash (CBS2)

TARP deadbeat list grows to 55 (Applebaum, WaPo) Up from 33 banks + AIG last quarter.

Mega-savant Kim Peek dies (Collins, Deseret News) Peek was the inspiration for "Rain Man." What a fascinating brain: "Scientists [recently] learned that Kim could hold a book within eight inches of his face and read the left page with his left eye, the right with his right eye at the same time. He devoured books that way." Much more in the article.

GDP revision suprisingly large (Evans, Real Time Econ) Q3 GDP growth was originally reported at 3.5%. The first revision put it at 2.8%. The second, released today, says it was really 2.2%.

Serious delinquencies rise for prime mortgages (Dixon, Reuters) The delinquency rate is far lower than for subprime and Alt A, but prime mortgages are much larger and there are many more of them. So total dollar volume of prime delinquencies is much larger than for subprime/Alt A.

More on existing home sales (CalculatedRisk) CR offers a number of contrarian thoughts regarding today's surprising existing home sales report.

from Rolfe Winkler:

Lunchtime Links 12-8

(Reader note: still working on the bugs....please click "continue reading" to see all the links)

Banks, U.S. spar over TARP repayment (David Enrich) This is the kind of thing that gives me a better feeling about Tim Geithner and Ben Bernanke. They are hammering banks to raise equity capital to get out of TARP. They have leverage and are using it productively, forcing bank shareholders to eat losses via dilution so that balance sheets are more stable. Great! Stick to your guns guys!

Questioning the unemployment rate (Kaminska, Alphaville) Dennis Gartman doesn't buy the good news in the jobs report.

FASB wants accounting standards "decoupled" from bank capital rules (Norris, NYT) Can you blame 'em? Seems to me Bob Herz just wants to be left alone. If regulators want to give banks more slack, fine.

Consumer credit contracts again (Federal Reserve) Though the contraction seems to be moderating. Just the latest improvement in the second derivative. I'm a fan of this trend. As consumers get out of debt, they rebuild their savings.

NY Fed President Dudley says monetary policy can limit leverage (CalculatedRisk) CR hightlights some key sections of Bill Dudley's most recent speech. On the one hand it's good to see him talk about the Fed's ability to prevent credit bubbles by limiting leverage. On the other, he repeats that rates will stay low for an extended period. So the Fed is doing what it does best, inflating the next bubble. This time 'round they say they understand why that's a problem. Yet they seem unwilling to do anything about it.

Obama to announce new jobs program (Zeleny, NYT) Including a cash for caulkers program....

from Rolfe Winkler:

Evening Links 12-7

Update from this morning: Neel Kashkari joins PIMCO (Ishmael, Alphaville)

TARP cost estimate falls $200 billion (Somerville, Reuters) Even after this latest reduction, the administration still estimates TARP will cost $141 billion. We may be getting more back than we though, but we're not making money. Remember, the Fed still has north of $1.0 trillion or mortgage-backed securities on its balance sheet, the value of which is not clear.

Moody's links option ARM performance with subprime (Golobay, HousingWire) Option ARMs were generally considered "prime" loans based on the credit scores of borrowers. We learned last year, however, that credit scores are less indicative of default rates than negative equity. Negatively amortizing option ARMs, which allow borrowers to make a minimum payment that doesn't even cover interest, have seen their loan balances explode. With prices down, they're so far underwater it makes little sense to pay their mortgage...

Euros become currency of choice for drug cartels (Syal/Townsend, Guardian) Not an indication of the euro's strength versus the dollar, however.  €500 notes are smaller than $100 bills and therefore easier to smuggle.

Does Dubai really owe $150 billion? (Arabianbusiness.com) The consensus estimate is that Dubai owes closer to $85 billion...

Global banking economist warned of coming crisis (Spiegel) Keep your eye on the Bank for International Settlements. They've been predicting that low interest rates encourage investors to chase risk imprudently...

Colton Harris-Moore, the barefoot bandit, outfoxes sheriffs (Times UK) "Police say 18-year-old Colton Harris-Moore, whose escapades are turning him into a folk legend, is a one-man crime wave, responsible for 50 burglaries as well as stealing light aircraft, which he taught himself to fly from video games, and several speedboats. He lives in the woods, shuns shoes and catches his own food. His only technological aid is a pair of thermal-imaging goggles to hunt at night and his weakness is pizzas, which he asks to be delivered at the edge of the woods."

from Rolfe Winkler:

TARP may pay down debt

From Deborah Solomon and Jonathan Weisman at WSJ:

The administration wants to keep some of the unspent [TARP] funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program -- the amount it expects to lose -- to as little as $200 billion from $341 billion estimated in August.

The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation's mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

Borrowing money over here to pay down debt over there doesn't sound to me like real "debt reduction." Sounds more like giving back an appropriation to avoid debt expansion.

It would better to retire the program entirely while letting outstanding loans run off.

But the administration does seem to be getting a bit more serious about making cuts:

The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President's Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the "tax and spend" label that has bedeviled Democrats, according to administration and congressional officials.

Forget the freeze Rahm. Go for the 5% cut.

A death panel for Citi

It’s way too soon for the federal government to contemplate reducing its considerable equity stake in Citigroup.

If anything, now’s the time for the feds to finally get tough with the troubled giant and establish a firm deadline for forcing Citi to shrink itself.

What better way to mark the anniversary of Lehman Brothers’ chaotic collapse and the birth of bailout nation than with a presidential directive giving Citi one year to reduce its $1.8 trillion balance sheet by half?

Harsh? Yes, but that’s the point. To restore the principle of moral hazard, the managers of giant banks need to know that there must be some consequences for their reckless actions.

Any “too big to fail” bank that gets bailed out shouldn’t be able to simply walk away to live another day as if nothing has happened.

Now don’t get me wrong. The bailout of the banking system was necessary to prevent a global financial meltdown. Propping up Citi with a $45 billion cash infusion and a federal guarantee on $300 billion in toxic assets prevented an out-of-control collapse of the mammoth bank that would have made Lehman’s bankruptcy look like a case in small-claims court.

But Wall Street historian Charles Geisst says Citi “hasn’t paid much of a price” for its many misdeeds — including SIVs, CDOs and subprime mortgages, not to mention reckless credit card and auto loans. And I suspect a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.

from Rolfe Winkler:

Geithner: Some rescue programs will end, others won’t

Tim Geithner testified before the Congressional Oversight Panel for TARP this afternoon. A few interesting comments with respect to Treasury's bailout initiatives:

On PPIP (Public Private Investor Program):

The Treasury will continue ... its plans to buy small-business loans and to remove toxic assets from bank balance sheets through the Public-Private Investment Program, a Treasury official told reporters earlier today on condition of anonymity. The first PPIP funds are expected to begin operating later this month or in October, the official said.

This is bad news. PPIP was a terrible idea to begin with. It provides cheap, non-recourse government financing to encourage investors to buy toxic assets from the banks. This takes banks off the hook and puts taxpayers on it.

Other, unused programs will be allowed to expire, including a program guaranteeing money-market mutual funds and the Capital Assistance Program, which was established earlier this year to provide extra money to banks that needed it and couldn’t access private markets.

"Unused" doesn't seem a fair modifier to me. No, there weren't any money market funds that broke the buck and required a taxpayer bailout, but the industry as a whole has benefited tremendously from the Treasury guarantee they've been able to market to investors.

On TARP:

from Rolfe Winkler:

Bailout “profit” is taxpayers’ loss

Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.

That's a nice chunk of change, but taxpayers shouldn't be fooled into thinking this -- or any other bailout -- is a good deal.

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

"As big banks repay bailout, U.S. sees profit" read the headline in the New York Times on Monday. The story was parroted on evening newscasts.

The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.

So when those recipients pay back TARP -- at a decent profit for taxpayers -- bailouts all of a sudden don't seem so bad.

But the bailout was much larger than TARP. There is FDIC's debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve's emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don't know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.

Recycle the TARP

The U.S. insurance fund for bank deposits is running out of money. At the same time, some of the big institutions that received federal bailouts last fall have repaid more than $70 billion to the Treasury Department, and more checks to the government may be in the mail soon.

Right hand, meet left hand.

Indeed, one way of dealing with this looming crisis at the Federal Deposit Insurance Corp would be to take all that repaid bailout money and simply inject it into the bank insurance fund. Such a move would instantly bolster the deposit insurance fund, which at the end of June had just $10.4 billion in the kitty.

Transferring the repaid bailout money to the insurance fund would permit bank regulators to move more aggressively in shutting down some of the 416 troubled lenders with $300 billion in assets on the agency’s watch list.

And the sooner the FDIC can dispose of the worst banks, the faster the nation’s financial system will be on the path to a real recovery.

Using money repaid to the Troubled Asset Relief Program would also save President Obama from the embarrassment of having to go to Congress to ask for another bailout if the FDIC exhausts a $100 billion line of credit from Treasury.

It’s far easier for Obama to get Congress to approve the reallocation of bailout money that’s already been appropriated than asking for a new round of government welfare for the nation’s banks.

Aegon raises money to repay the taxpayer

LONDON, Aug 13 (Reuters) – As stock markets rally, a chief executive’s thoughts turn to getting the government off the shareholder register.

The strongest U.S. banks have already shrugged off the TARP, with its tiresome restrictions on executive pay. In Britain, Lloyds Banking Group has toyed with a jumbo capital raising as a way off the hook of the British government’s fiendishly complex asset protection scheme.

In the Netherlands too, the financial sector is looking to shrug off the bonds of state assistance. Dutch insurer Aegon is the latest with a plan to pay back government loans.

However, wriggling out altogether won’t be easy. The Dutch government has structured its rescue operation so that recipients have to pay a hefty tax to get out altogether.

The Dutch state lent Aegon 3 billion euros last October during the worst part of the crisis. When Aegon repays the money it has to pay a 50 percent surcharge, turning 3 billion into 4.5 billion euros. The surcharge doesn’t change whether Aegon keeps the money for one year or 20. And there is no final redemption date on the loan.

This may seem an odd structure as it seems actively to discourage recipients from repaying the money early. But there is some method in The Hague’s madness. Finance is a strategic sector for the Dutch government. It wanted to ensure that financial firms requiring assistance took it for long enough genuinely to repair their balance sheets.

Why is Aegon so keen to repay this perpetual zero coupon capital, one might ask? Well, it is only zero coupon so long as Aegon doesn’t pay its shareholders a dividend. If it does the loan bears interest at 8.5 percent.