The 70% discount on Goldman’s $500m gift (Ransom, SmartMoney) Really great work from Diana Ransom. Goldman will get a tax writeoff for much of its “gift.” Other parts of it are actually loans the company expects will be repaid with interest. BTW, people know that Warren Buffett isn’t actually contributing any money, right? He’s just lending his time. Hmmm. What’s he going to do? Get on the phone with a Denny’s franchisee to talk about the stock market?

Congresswoman passes leverage amendment (Grim, HuffPo) It’s hard to keep track of the House Financial Services Committee these days. The amendment would apparently limit leverage to 12x. I’m trying to get my hands on a copy to determine how it defines leverage. And in any case, all of this may be a dead issue. The Congressional Black Caucus canceled a vote on the package Thursday arguing that not enough is being done about unemployment. Ugh. There are lots of problems with the financial reform package, but now it’s looking like we may not get anything signed into law before 2011.

Millions may have to repay part of stimulus tax credit (Puzzanghera/Hsu, LA Times)

Tim Geithner, mad as hell and not going to take it anymore (Tech Ticker) This quote from Geithner, in response to criticism from a Republican congressman, is just another reason he has to go: “What I can’t take responsibility for is the legacy of the crises you’ve bequeathed this country.” But Geithner bears as much responsibility for the banking crisis as anyone. Recall that he was chief of the NY Fed before he joined the administration. In that role he was supposed to regulate banks. Clearly he wasn’t a very tough regulator if, when the CEO spot at Citigroup opened up two years ago, Geithner was Sandy Weill’s first choice.

The Louisiana Purchase redux (Milbank, WaPo)

Unburied bodies tell the tale of Detroit (Reid, Times Online)

Baby elephant sneezes…

Britain may finally be emerging from recession, but many analysts warn that it is a false dawn. In fact, they argue, the economy here is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s.

I still don’t understand why we refer to Japan’s “lost decade,” singular. The country is now moving into its third consecutive lost decade.The Nikkei is still at 1984 levels.

But back to the UK: the NYT piece quotes the latest research from Variant Perception (no link). I got it in my inbox earlier this week and it’s a fascinating (though not pleasant) read. Notably, they talk about the outside possibility of a “sudden stop” event. As mentioned in this space before, a “sudden stop” is what happens to emerging economies when they lose access to capital markets. Confidence is lost in the government’s ability to pay back debt and everyone races to get out of the system. See Argentina.

The problem is acute for indebted emerging markets because they don’t borrow in a currency they can print. So, the argument goes, you can’t have a sudden stop in Britain, or the US, because we print the currency in which our debt is payable.

I’ll let the VP guys take it from here:

The UK’s fiscal situation is in its most precarious state for 30 years. The Bank of England has responded by cutting rates to historic lows. This has merely bought time. Debt in the household sector remains at its highs, and enormous relief has been provided to many overleveraged mortgage holders who hold tracker deals [i.e. teaser-rate mortgages]. They have been able to ride out the recession so far without defaulting. As their trackers expire and they reset to higher rates they will face acute problems.

Usually a government can quickly return to fiscal vitality after a cyclical upturn. The UK will find this difficult. Structural problems such as a heavy reliance on the business and finance sectors and a consumer that will eventually have to deleverage will provide strong headwinds to any sharp turnaround in revenues.

To pay for the shortfall in income, the UK government has stepped up bond issuance to generational highs. This is not sustainable and taxes will eventually have to rise. However, there is a belief that raising taxes will increase revenue. We believe the opposite is true, and the state will have to borrow more than is projected, for longer than is hoped.

The Bank of England has embarked upon a quantitative easing program to support the gilt market. The sheer size of the initiative raises the question of whether it will be able to reverse it in a stable and orderly manner. Any trip-ups in its unwind would raise yields considerably.

The structural problems in the domestic economy, and difficulties in other economies across the globe, will impede the prospects for sustainable growth in the UK. Debt will continue to grow, and the creditworthiness of the country will continue to weaken. Investors will be more and more reluctant to meet the borrowing needs of the UK.

If the situation continues to deteriorate there is a non-negligible possibility the UK could face a ‘sudden stop’ in capital inflows. A debt crisis would precipitate a currency crisis. This would not be especially unusual for the UK: during the postwar period, there has been one on average every 15 years. These have happened like clockwork.

The possibility of this course of events unfolding is small, but not negligible. If a new government is formed next year, perhaps they will be able to enact the policies that will reduce the deficit and restore confidence in the financers of the UK deficit. We believe, though, that to say the UK will not have a debt crisis is complacent and pays no heed to the past.

If Britain is laid low by a sudden stop event, if the BOE finds itself the only buyer of British government debt, the argument in favor of deficit spending whenever there’s an “output gap” will, in my view, suffer a fatal blow.

Also worth calling out, the VP guys note that household debt is still growing quickly in the UK:

In order to return to health the UK, more than most countries, needs to deleverage. However, this process still seems to be in its early stages. UK consumers have so far not materially improved their balance sheets since the onset of the crisis. This is concerning: before the crisis, UK consumers were some of the most indebted in the world, and so have more urgency than most to reduce their indebtedness via deleveraging or default.

But …. household debt to GDP in the UK continues to rise. This is partly a denominator effect, as nominal GDP has fallen in the recession. However, even on a QoQ basis, household debt has barely contracted.

The US consumer, by comparison, is showing much clearer signs of reducing leverage. Over the last 2 years (to Q209), US household debt to GDP has risen by 0.7%-pts, while in the UK the same metric has risen by 4.4%-pts, more than 6 times as much.

#124

• Failed bank: Commerce Bank of SW FL, Fort Myers FL
• Acquiring bank: Central Bank, Stillwater MN
• Vitals: at 8/28, assets of $79.7m, deposits of $76.7m
• DIF damage: $23.6m

Central has been busy. They also acquired the assets of Riverview Community Bank and Jennings State Bank in October, as well as Mainstreet Bank in August.

One wonders where news and approval ratings will be when Bernanke’s confirmation comes up for a vote….

I went on record with my Bernanke angst the day said he’d nominate Bernanke for a second term. At that time I qualified my opinion by saying that if Larry Summers was the other option, then I’d settle for BB. But I get the sense that Larry isn’t that popular now either, that Washington wants a clean break from Bernanke/Summers/Geithner.

So take a shot on a new Fed chair Mr. President. One who’s not afraid to challenge the banks, and run the occasional Fed fire drill.

(Click chart to enlarge in new window)

• -8.6% Mar to Apr
• -7.6% May
• -1.0% June
• -5.1% July
• -3.0% Aug
• -3.9% Sept

Since the peak in October 2007, CRE prices are down 43%.

Residential real estate has been coming back lately, according to the Case-Shiller index. The composite 20 index rose 1.2% in August, after rising 1.7% the month before and 1.4% the month before that.  Again these are month over month changes. The index is still down 11% compared to last year.

There’s a lot of skepticism that this indicates we’ve reached the bottom. Real estate agents will no doubt tell you they have. I doubt many are aware that the GSEs now guarantee a super-majority of all mortgages and that the Fed is printing money to put most of those on its balance sheet. Also ask what they think will happen when the homebuyer tax credit finally goes away next year. Without government support, the housing market wold be a ways down from where we are right now.

As always, keep in mind that the chart above comes with a BIG caveat. The Case-Shiller index is more robust than the Moody’s CRE index. The former is based on millions of transactions. In September, there were a total of 363 commercial transactions, valued at $5.1 billion. Of those, 76 totaling $1.1 billion were repeat sales used in calculating the index.

(Click chart to enlarge in new window)

The market for CRE is as cold as ever. Will the Superdome be included in November’s data?

Fed makes capital foremost concern (Torres/McKee, Bloomberg) With the Fed/Treasury actively engaged in reflating the asset bubble (see next link), it’s good to know they’re paying attention to capital levels…

With FHA Help, easy loans in expensive areas (Streitfeld, NYT) Anecdotally this is quite scary. Remember a year ago when the size of “conforming” mortgage loans was raised over $700k? That means FHA is backing much larger home purchases (I’d forgotten this when I linked to that article on Toll calling FHA the new subprime). The scary quote (ht CR) comes from some technology guys who went in on a $900k property having been busted just a year ago: “We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Can the postal service be saved? (Montopoli, CBS)

Asia considers capital controls to stem bubble dangers (Adam, Bloomberg) Low rates in the developed world are putting emerging markets in a dangerous position. With no returns available at home, hot money is again flowing East (and South, to Brazil).

SocGen’s worst-case debt scenario (Murphy, Alphaville) Good sleuthing from Paul. He has a link to the report that Ambrose Evans Pritchard wrote up. Ambrose embellished a bit. Also the report is over a month old. Still, pessimism porn at its finest.

Texas accidentally bans straight marriage (Spak, Newser) HT Felix.

Satan, the great motivator (Fitzgerald, Boston Globe) “A pair of Harvard researchers recently examined 40 years of data from dozens of countries, trying to sort out the economic impact of religious beliefs or practices. They found that religion has a measurable effect on developing economies - and the most powerful influence relates to how strongly people believe in hell.”

College students arrested for not paying tip (Mucha, Philly Inquirer)

Commuter cat star of bus route (BBC)

Nunchuck (imgur)

As always, there are numerous holes in his argument that he chooses to ignore.

1. The chart he uses is the most charitable view of America’s public debt burden. It’s simply public debt outstanding. This ignores money the government owes itself to fund future benefits. More importantly, it ignores unfunded liabilities. Paul puts debt to GDP at 60%. In reality, public debt is closer to 500%. And that’s using 2005 figures.

2. Krugman ignores private debt (household, business, financial) which still stands at a suffocating 300% of GDP according to the latest flow of funds report. If households are drowning in private debt, they can’t exactly afford tax increases to pay off more public debt. This is a key argument against those who say that we can borrow more because we have in the past, specifically during the ’40s when we were fighting WW2. Yes, public debt was much higher then. But private debt had been virtually wiped out by the Depression. So the total public + private debt burden was far lower than it is today.

(Click chart to enlarge in new window)

Again, the chart above excludes unfunded liabilities. Including them would put the total debt burden closer to 800% of GDP. Truly an astonishing figure.

What bothers me most is how Krugman caricatures the fiscally conservative as Scrooges unconcerned with high unemployment. To the contrary, we see that the root of the employment problem facing the country is debt itself. That’s why we find ourselves in this financial crisis.

Digging ourselves a deeper hole means worse unemployment down the road.

But PK needn’t take my word for it. He made the argument himself quite cogently back in 2003.

FHA-backed lending is a train wreck says Toll (Gittelsohn, Bloomberg) Maybe a reader can correct me, but I’m guessing Toll Brothers, because it’s a higher-end builder, doesn’t rely much on FHA-backed lending to move its inventory. Still, it’s interesting that a homebuilder would criticize the government for providing too loose credit. Homebuilders wouldn’t have much of a business without it.

Jobless benefits to end for 1 million in January (Eckholm, NYT)

Audit the Fed effort under threat in House (Grim, HuffPo)

Cash for caulkers (Leonhardt, NYT)

Costco no longer carrying Coke products (AP)

California faces new $21 billion budget hole (Goldmacher, LA Times) CA lawmakers have more tough decisions to make…

On the shoreline (Boston Globe) The latest from the Globe’s Big Picture blog.

Students unhappy with big tuition hike at UCLA. Education is expensive and CA’s public university students have benefited from state subsidies for years. With CA’s budget in tatters, the free ride is over…

Ever want to own a domed football stadium?

The question was a plausible one Monday when it was announced that the Pontiac Silverdome — once home to the NFL’s Detroit Lions — was sold for $583,000, or about 1 percent of the $55.7 million it took to build in 1975.

The Silverdome, an 80,300-seat stadium located in Pontiac, Mich., is the latest example of how comprehensively the recession has socked southeastern Michigan.

Mass layoffs and automotive plant closures have wreaked havoc on the local economy. Budget deficits are deep, foreclosures are widespread, and the population shrinking – from about 2 million people in the 1960s to about 900,000 today.

The article doesn’t mention if the buyer assumed any debt as part of the purchase. And apparently the sale is on hold.

The real cost to the buyer isn’t this initial layout, most likely it’s the cost of converting the property into something that is revenue generating — they’ve envisioned a soccer stadium — not to mention the continuing cost of maintenance.

Gold is surging because investors see that the Federal Reserve — more concerned with deflation and unemployment than sound money — may be trapped in a never-ending cycle of monetary accommodation.

Ben Bernanke says he won’t monetize debt, but he already has. His Fed has bought $300 billion of Treasuries and is on pace to buy $1.45 trillion of government-backed mortgage debt all of which is being salted away indefinitely on the Fed’s balance sheet.

Why indefinitely? Because the Fed has no intention of unwinding its balance sheet so long as the economy is stressed. Witness comments this week from Bernanke, Fed Vice Chairman Don Kohn and San Francisco Fed President Janet Yellen all suggesting that the Fed’s “extended period” of low interest rates can be measured in years, not months. Today St. Louis Fed President James Bullard said rates aren’t going up till 2012.

So long as deficit spending continues, if the Fed wants to avoid deflation, it will be forced to monetize more debt.

[Elsewhere, capital controls are being erected in emerging economies like Brazil, Taiwan, and possibly Indonesia in order to keep speculative waters at bay. As Hong Kong's chief executive remarked last week, a dollar carry trade spawned by low rates threatens to inflate dangerous asset bubbles in emerging markets the same way low Japanese rates did in the '90s.]

Exploding debt throughout the developed world means other central banks face similar pressure.

(Click chart to enlarge in new window, reprinted with permission)

So confidence in paper currencies is waning.

Some people say it is absurd to buy gold; the metal has no intrinsic value. That may be. But is it any less absurd to hold paper? The best that can be said for paper is that if you lend or invest it, tomorrow someone will give you more paper in return. This is fine so long as its purchasing power is maintained. But it isn’t. A 2009 dollar is worth a 1914 nickel.

Eventually the value of all the paper you’ve accumulated goes to zero. The trick is to turn that paper into tangible assets with tangible value.

Gold may be volatile, but at least it maintains its real value:

(click chart to enlarge in new window, reprinted with permission)

Grice contends that the price of gold could reach $6,300 an ounce. He explains: “The U.S. owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap — at current prices, the USD is only 15 percent gold-backed.”

Absurd you say? It happened 30 years ago. President Nixon ended the Bretton Woods global monetary system and his compliant Fed Chairman Arthur Burns let inflation run wild. So by 1980 gold spiked to a level at which the dollar was “overbacked” according to Grice.

Did gold overshoot in 1980? Sure, but only because Paul Volcker was willing to hammer the economy to re-establish the Fed’s credibility. Today’s Fed has been very clear that it isn’t willing to put up with a recession of any kind in the service of sound money.

All of that said, investors should be careful. Grice’s chart shows that, over the long run, gold is likely to do no better than protect your purchasing power. An ounce of gold today buys a good men’s suit; in 100 years, it is likely to buy the same.

So gold won’t make you rich. But it may protect you from becoming poor.

The slide on Bernanke around the 12 minute mark is very interesting.

His strategy hasn’t worked and Ally’s anti-competitive behavior is hurting other banks. The new chief executive, Michael Carpenter, needs to restructure GMAC so that it is no longer dependent on a government lifeline.

GMAC has already received $12.5 billion of TARP money and recently asked for as much as $5.6 billion more. In addition, the FDIC has guaranteed $7.4 billion of debt.

Ally has also received another $7 billion in federally subsidized loans in the form of advances from the Federal Home Loan Bank of Pittsburgh. As a government-sponsored enterprise, the FHLB has access to cheap capital. It passes the savings on to member banks like Ally.

At the same time, Ally is marketing deposit accounts with interest rates among the highest in the nation. Insulated from risk, depositors couldn’t care less about Ally’s health. They’ve poured money into the bank over the past year, raising GMAC’s total deposits 57 percent, to $28.8 billion.

This doesn’t sit well with other banks that don’t benefit from so much government largess and can’t afford to pay the same rates. Last May, the American Bankers Association complained to the FDIC, which put the screws to Ally. The bank reduced its rates, but only a little. According to the Wall Street Journal, Ally now pays 2.1 times the national average for a one-year CD, down from 2.3 in May.

Ally’s financial condition, meanwhile, continues to deteriorate. Chris Whalen of Institutional Risk Analytics gives Ally an “F” grade, pointing to charge-offs that doubled in the third quarter.

Whalen also notes the growth of Ally’s securities portfolio. It is becoming less of a conventional lender and more of a bond hedge fund, he says. So why is the government is supporting it?

Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.

Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.

But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.

“No way” says Whitney.

She adds: “I don’t know what’s going on in the market right now ‘cuz it makes no sense to me.” The fundamentals aren’t there.

(ht Alexis N.)

New York’s governor could not have spoken more plainly than he did last week before a joint session of the State Legislature. “Quite frankly, we are running out of money,” he said, as he asked members to help cut the budget. The plea has so far gone unanswered, even though, with each week, the fiscal problems get worse….

Gov. David Paterson has had a few awkward moments recently, but the fact that he’s taking a hard stand on balancing the state’s budget shows real leadership. If he sticks to his guns, he will have earned my vote next year.

Unfortunately, the Democrats running the State Senate seem to think things are not as bad as the governor makes out, and have advanced a plan that is politically palatable but also ludicrous. They would drain rainy-day funds and any other untapped pool of savings to pay the bills until March of next year.

That’s like cleaning out your 401(k) to pay the rent. And it leaves open the question of how the state would really manage once the savings were spent. Senators also want to refinance and extend loans on the tobacco settlement money, a scheme that does two things well — it helps the bond merchants of Wall Street and it forces future taxpayers to pay for today’s expenses.

It is time for the Legislature to face facts. New York spends twice the national average on Medicaid at $2,283 per person. That is the highest average in the country, with Rhode Island a distant second at $1,659. Mr. Paterson wants to scale back the health care budget by $471 million. That seems the least the state should do. Education is even more costly. The national average per student is $9,138; New York spends $14,884. Mr. Paterson’s plan to cut education costs by about 3 percent, or $686 million, is clearly in line with what’s necessary.

Budget issues have to be dealt with decisively. The sooner the better. As the foregoing paragraph emphasizes, the problem here in NY isn’t too-low taxes, it’s too-high spending.

This is equally true at the national level. Many have convinced themselves that the federal government’s ability to borrow money in a currency that it can print removes budget “constraints.” Mechanically, this may be true. But if we follow their prescription — borrowing and printing so long as there’s “an output gap” — latent inflation stored up in dollar-denominated assets overseas could go kinetic rather quickly.

Bankruptcy rise slows with thaw in lending (Spector/Haywood, WSJ) Great article. The writers emphasize how the supposed “thaw” in lending markets is largely a head fake, that junky companies are being allowed to paper over their problems because the Fed is forcing investors to chase risk.

Unemployment rates by county (americanobserver, ht MW) Seeing maps like this, one understands why Krugman and other liberals are calling for another stimulus jobs bill. The trouble is, the reason we have so much unemployment today is because of all the debt we’re trying to work off from yesterday. Adding more debt doesn’t solve this problem.

After a summer of mixed messages, Roubini is back! (Wiesenthal, BusinessInsider)

GM says it will start paying back taxpayers (Isidore, CNN Money) Taxpayers shouldn’t expect to get much back. The $1 billion payment GM says it will make in December would be about 2% of what we put in…

The Great Wallop (Ferguson/Schularick, NYT) Talking Chimerica.

Chinese bank regulator says low rates inflating asset bubble (Zengerle/Choonsik, Reuters) The Fed maintains there’s no pressure on inflation. Trouble is, they don’t measure inflation the right way. They’re looking at things like the cost of goods and labor in the U.S. They’re ignoring the inflated price of assets, for instance junk debt (see again second link). Greenspan also ignored asset bubbles, choosing instead to focus on the unemployment rate and goods prices. How well did that work out?

DIY glasses for the world’s poor? (Addley, Guardian)

Crocodile attacked and killed by angry hippos (Telegraph) And see below…

Buffett admits: Burlington not cheap (Frye, Bloomberg) Buffett was so eager to deploy his cash that he was willing to overpay for Burlington. What I think may be going on in his head: in a world likely to experience many more bubbles and busts, lots of paper wealth will be wiped out. Not a bad idea to turn cash into tangible assets.

After spending binge, administration says it will focus on deficits (Allen/Vandehei, Politico) Not sure if I believe this. The Senate is already planning a third stimulus dressed up as a “jobs” bill.

Treasury confident Congress will increase debt ceiling (Christie, Bloomberg)

Deeds, not words, on the US dollar (David Merkel) Well said.

The last of the Bluefin Tuna? (Estabrook, Atlantic)

VIDEO: Balloon boy parents plead guilty (Reuters)

How pumpkin pie is really made (imgur)

For geometry lovers…. (best after the 5:00 mark)

After these transactions, IBERIABANK will have increased its balance sheet nearly 67% since June.

It’s worth nothing that IBERIA received $90m worth of TARP money, though it exited the program in May.

There are cases in the past when other banks have taken multiple failures, expanding significantly, only to fail themselves later on. One example I recall (though am having trouble Googling the evidence) is Talman Federal in IL.

Is IBERIA too weak to be be growing so quickly? Perhaps not. The bank’s Texas ratio is around 24%, well below the dangerous 100% threshold. If readers have thoughts, please chime in with a comment.

#121

• Failed bank: Century Bank, Sarasota FL
• Acquiring bank: IBERIABANK, Lafayette LA
• Vitals: at 10/31, assets of $728m, deposits of $631m
• DIF damage: $344m

#122

• Failed bank: Orion Bank, Naples FL
• Acquiring bank: IBERIABANK, Lafayette LA
• Vitals: at 10/31, assets of $2.7b, deposits of $2.1b
• DIF damage: $615m

#123

• Failed bank: Pacific Coast National Bank, San Clemente CA
• Acquiring bank: Sunwest Bank, Tustin CA
• Vitals: at 8/31, assets of $134.4m, deposits of $130.9
• DIF damage: $27.4m

Fed may cause next globabl crisis says Hong Kong leader (Anstey/Dwyer, Bloomberg) Interesting theory: Japan’s low interest rates through the ’90s inflated the tiger bubble that ended in the 1997 Asian contagion. Now the Fed’s ZIRP is inflating new bubbles throughout Asia. The explosion of bank credit in China isn’t helping…

Did the nation overdose on debt (Pragmatic Capitalist) An interesting and detailed paper from Wells Fargo Securities. Click “full screen” and then the printer icon to print out a copy.

Treasurys mixed after 30-year bond sale (Yousuf, CNN Money) Yesterday’s auction didn’t go well. This isn’t yet a trend, but if it becomes one, my bet is it will add to pressure on the dollar (down) and interest rates (up).

Hedge funds can’t mess up worse than Bob Rubin (Reilly, Bloomberg) The Dodd bill would allow shareholders to nominate directors.

No more too big to fail (Jamie Dimon, WaPo) This op-ed, by the CEO of JP Morgan Chase, is disingenuous in the extreme. In his second sentence he says that his firm should be allowed to fail if some unforeseen event pushes them over the edge. Of course they would have failed last year had the government not stepped in. Still, he goes on to argue that not only do we “need” large financial firms — to support multilateral trade — they should be allowed to grow even larger. Bill Black speaks of executives using a corporate entity as a weapon. Dimon knows his bank’s sheer size makes it unthinkable that the government would ever let it fail. He speaks piously of allowing bank failure, but will make sure his bank remains too large, powerful and interconnected for that to be considered an option.

Still haven’t put all your money in gold? You will when you see this chart! (imgur, Reddit) Clever response to my chart of the day…

Trade gap widens by an unexpectedly large amount (Palmer, Reuters) The falling dollar seems no match for Fed-induced demand.

New rules would restrict overdraft fees on debit cards (Labaton, NYT)

Did Texas kill an innocent man? (Economist)

Trippy Mandelbrot (wikipedia)

French-Irish diplomacy (imgur) I have no idea if this is authentic. But it’s pretty funny. (Click on the image to enlarge)

PSA: Just in case you’re held hostage at gunpoint….

FED CAN’T RAISE RATES UNTIL AFTER 2011

The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are $2.7 trillion of debt coming due through 2011 and another $1.5 trillion of leveraged loans….In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.

I’ve argued in this space many times that the Fed is trapped. Our monetary system, which is fueled by credit expansion, simply doesn’t work in reverse. To avoid deflation, credit must always be expanding in the aggregate. If the private sector won’t borrow, the public sector must….and vice versa. If they de-lever in tandem, we get deflation.

We’re told to be panicked by the prospect of deflation and yet the solution we’ve been given — unprecedented public credit expansion + inflation of new asset bubble — leaves us worse off than when we started.

Alan Greenspan’s 1% interest rates inflated a disastrous credit bubble. We think 0% rates and quantitative easing will lead to a different result?

According to its recent 10-Q, Citi had $38 billion of deferred tax assets as of Sept. 30, more than a third of the bank’s tangible common equity of $107 billion.

Backing that out, Citi’s TCE ratio — the inverse of leverage — is reduced from 5.7 percent to 3.7 percent. And when Citi adopts new accounting rules for off-balance-sheet assets, the ratio will be reduced further to 2.8 percent.

Bank regulators should be concerned. To fortify their balance sheets so they can withstand systemic events without government support, banks need genuine capital available to absorb losses.

Deferred tax assets, or DTAs, don’t fit that bill. Imagine an individual in bankruptcy court asking to pay off his credit card debt with tax-loss carryforwards.

So long as Citi generates profit, its DTAs have value. But earnings could evaporate quickly if the Fed decides it has to prick the new asset price bubble being inflated by near-zero rates, or if an unanticipated systemic event puts stress on Citi’s balance sheet.

There may be another problem with Citi’s ability to realize the value of its DTAs. According to Barclays analyst Jason Goldberg, future transactions in the company’s stock could be considered an “ownership change” that would require some DTAs to be written off. That would be a direct hit to tangible common equity.

Citi’s pile of DTAs may be the largest, both absolutely and as a percentage of TCE, but JPMorgan Chase, Bank of America and Wells Fargo each have their own.

Some regulators are taking action. As Robert Barba reported in the American Banker, the California Department of Financial Institutions last week took the unusual step of instructing Hanmi Financial Corp. to raise common equity as part of an enforcement action.

It’s a promising portent. Bank regulators have a lot of power to force Citi and the other big banks to raise real capital. They should use it while markets are receptive.

Have we reached peak gold? (Evans Pritchard, ht frog) Exploration budgets are up, but results have been poor. On the flip side, William Buiter is not a fan of gold. He makes some good points, though Jesse disagrees.

FDIC helps securitization market (Shrivastava, Dow Jones) Interesting,

The dollar is the most crowded long in history (Johnson, Alphaville) A very good point. I like to think of all the paper we’ve shipped overseas as “latent” inflation.

FHA’s cash reserves down sharply (Streitfeld, NYT) It’s capital reserves have dwindled to 0.53% from 3% a year ago. Given the high quantity and poor quality of loans FHA has been making of late — little down, low doc — it’s a good bet they’ll need a bailout.

The looming problem of corporate debt (Marketplace, ht Clusterstock)

Unsolicited principal reduction offer from B of A (CalculatedRisk)

Miracle whip vs. Colbert (imgur) Click to enlarge.

Awesome wheelbarrow race move (Youtube)

Carrie Prejean walks off Larry King (Youtube) Why can’t Larry be this tough with all his guests?

Dog greets owner coming back from war

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.

On healthcare:

“What may they feel about an elderly person who doesn’t have a whole lot of productive years left?….In order to save government money, government health care has to be rationed… [so] than this elderly person that perhaps could be seen as costing taxpayers to pay for a non-productive life? Do you think our elderly will be first in line for limited health care? And what about the child who perhaps isn’t deemed normal or perfect per someone’s subjective measure of their use or questionable purpose in the eyes of a panel of bureaucrats making our health care decisions for us,”

Also this:

“It is so bogus that society is sending a message right now and has been for probably the last 40 years that a woman isn’t strong enough or smart enough to be able to pursue an education, a career and her rights and still let her baby live.”

And the pièce de résistance:

Noting that there had been a lot of “change” of late, Palin recalled a recent conversation with a friend about how the phrase “In God We Trust” had been moved to the edge of the new coins.

“Who calls a shot like that?” she demanded. “Who makes a decision like that?”

She added: “It’s a disturbing trend.”

Unsaid but implied was that the new Democratic White House was behind such a move to secularize the nation’s currency.

But the new coins – concerns over which apparently stemmed from an email chain letter widely circulated among conservatives – were commissioned by the Republican-led Congress in 2005 and approved by President Bush.

(Click chart to enlarge in new window)

Thanks to Nick Laird of Sharelynx for the data.