Afternoon Links 3-17

Mar 17, 2010 18:54 UTC

Google flips the bird at China ( Do a search on for “tianamen.” Those aren’t the image results you’d see if Google still cared about mollifying Chinese authorities.

Three large Puerto Rican banks being shopped by FDIC (Rieker, WSJ) Bank failure preview…

FOMC statement, redacted (Merkel) David analyzes what the Fed said yesterday. Among other things, it confirmed that it’s quantitative easing plans — i.e. printing electronic money to buy MBS — will end on schedule this month. Expect it to come back. Why? See next link…

Japan increases quantitative easing to fight deflation (Tabuchi, NYT) As it enters its third consecutive lost decade, Japan is still fighting the deflationary forces of its own burst real estate bubble. Remember, credit is money. When the economy generates lower levels of credit, it reduces the money supply. That’s deflation. The levels of debt we’ve reached are so high, there’s nowhere for credit to go but down over time. That means we’ll be fighting deflation for years ourselves, here and in much of Europe….especially the UK.

44 of 172 Detroit schools slated to close in June (AP)

Squatter stimulus, no mortgage payments for three years and counting (Calculated Risk) This is the homeowner equivalent of what I mentioned on Sunday regarding private equity and for-profit education. Putting lots of debt onto an asset in order to finance a cash withdrawal. Homeowners did it too, though few probably came out as far ahead as this person…

China, Germany committing world to deflation (Wolf, FT…ht Yves) Does anyone else have as much trouble as I do loading web pages from

Repo 105, “like, whatever” (Felix)

China in midst of “greatest bubble in history,” Rickards says (Hu, Bloomberg) In related news, the World Bank urged China to cool its economy.

Winter Paralympics (Big Picture blog)

Such a lovely place

Mar 17, 2010 13:33 UTC

Cross-posted from today’s NYT.

Wall Street’s closest link to the lyrics of “Hotel California” had been the indulgent pink champagne. But Senators Christopher Dodd and Bob Corker are bringing a more modern slant. A provision Corker added to Dodd’s plan to overhaul financial regulation stipulates that even if Goldman Sachs and Morgan Stanley, or other banks that received funds from the Troubled Asset Relief Program, check out as bank holding companies — they can never leave the Federal Reserve’s embrace.

The two firms signed the Fed registry at the height of the financial crisis in September 2008. The last surviving independent investment banks were granted bank holding company charters to gain access to emergency credit from the central bank. Two months later, the status enabled them to sell government guaranteed debt through the Federal Deposit Insurance Corp. Goldman announced it would be the first to use the scheme the day its shares hit a low of $47.41. Were it not for that program, Goldman was a goner.

All these carrots came with a theoretical stick: oversight by the tougher Fed instead of the more lax Securities and Exchange Commission. But with survival no longer in question, whispers started circulating that one or both banks might want to slip out the back door without paying the price — by dropping their charters in a game of regulatory arbitrage.

The temptation must be as inviting as the warm smell of colitas. Deposits are a complete after-thought for Goldman, and still remain a minor component of Morgan Stanley’s business despite plans to add Smith Barney deposits to its brokerage and closer ties to a Japanese commercial bank. Such funds can’t be used to finance investment banking activities, which remain a hallmark of both Wall Street denizens. What’s more, Goldman is losing money by parking its small pool of deposits at the Fed.

It’s true neither firm has said or suggested it wants out from under the Fed’s thumb. But as the bankruptcy examiner for Lehman Brothers starkly reminded, Wall Street has a way of shrewdly finding regulatory loopholes. The senators are smart to stab this beast with their steely knives.

Winding down

Mar 16, 2010 22:59 UTC

Regulators need to approach the notion of resolution with resolve. To avoid the next financial mega-collapse, like Lehman or American International Group, Senator Chris Dodd’s new bill for reforming U.S. financial regulation gives watchdogs powers to liquidate all big financial firms, not just banks. This resolution authority should be useful – if regulators aren’t tempted to keep firms afloat instead.

Few disagree with the idea that regulators need power to wind down big financial players, even if they aren’t banks. This was never more clear than in September 2008. Whereas the collapse of Lehman and AIG brought the specter of financial Armageddon, a failing Washington Mutual was seized by the Federal Deposit Insurance Corp and its assets handed off to JPMorgan with relative ease.

The difference was that WaMu was a bank and FDIC had the regulatory muscle to impose an orderly resolution, forcing shareholders and creditors to take losses so as to right-size the balance sheet. Regulators had no such powers when it came to Lehman or AIG.

The Dodd bill would give FDIC those powers. Among other things, it would also require systemically-risky financial firms to submit “funeral plans” — known as “living wills” in the UK — to serve as a roadmap in the event they needed to be shut down.

So far, so good. But Dodd’s plans still aren’t ideal. A proposed $50 billion bailout fund, albeit financed up-front by a levy on financial firms themselves, could create a morally hazardous expectation of bailouts. And skeptics won’t like the fact that the bill contemplates FDIC borrowing from Treasury, even if only for “working capital” purposes.

Where the institution in question is a bank, Dodd’s proposals also allow the FDIC to guarantee debt to avoid a creditor run. The guarantee program enacted during the recent crisis was justified as an emergency measure to prevent wider financial calamity. But if made permanently available, even in the limited circumstances envisioned, there could be a temptation to use it. Seizing the next gigantic failure before it’s too late will take significant courage; regulators shouldn’t have excuses to put the decision off.



One of the best things they did when creating the FDIC back in ’33 was to make it independent of government funding. This gave the FDIC incentive to break up failing banks early, before the regulated entity made more risky bets and destroyed value further (fine, the incentive was always fuzzy, but it was clearer during the early years than it is today). Once it’s clear the FDIC is backstopped the ability of the insurer to maximize estate value declines as it too becomes subject to moral hazard. Allowing the FDIC to borrow from Treasury is a bad idea. In fact, if you want a stable system, deposit insurance really has to be provided by an isolated institution that won’t be bailed out. Dodd is not solving the problem. He is playing a shell game. Congress has to commit to financial institution failure and dealing with the consequences independent of the failed entity, i.e. fiscal stimulus. If it can’t fail, it should be public and should not be for-profit. Until that happens the system will transfer wealth from the general public to financiers.


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Lunchtime Links 3-16

Mar 16, 2010 15:41 UTC

Corporate debt coming due may squeeze credit (Schwartz, NYT) This is a big reason why quantitative easing — when it ends this month — won’t be gone for long. To avoid debt deflation, the Fed will be forced to absorb much more debt onto its balance sheet.

The recovery cannot be sustained (Alphaville) Elsewhere in this report from SocGen’s Albert Edwards, he points to a version of our favorite chart on leverage to explain why we’ve many years of economic stagnation ahead of us.

The Harvard thesis that inspired Michael Lewis’s book (Lattman, WSJ) There’s a link to the thesis in the article. Long, but worth a read.

NPR sells $160 million of debt as yields sink (Saraiva/McGrail, Bloomberg) Yes, that’s National Public Radio. You know debt markets are back open when fixed income investors will buy bonds backed by pledge drives!

At Lehman, watchdogs saw it all (Sorkin, Dealbook) I’m skeptical a new regulatory apparatus will do much good to corral the worst excesses of the banking system. After all, it still relies on regulators to do their jobs. As Sorkin points out, they were over Lehman’s shoulder even as it was using Repo 105 to manipulate its books. They won’t do their job any better next time as Larry Summers himself argued at an Economist conference a few months ago. In any case, there’s too much political pressure to do nothing. Talking to regulators in Washington today, one notes that they’re more concerned about lending than they are about regulating banks. But proper regulation generally means less credit…

Summary of the Dodd financial reform bill ( For the really ambitious, there’s also the bill itself

Bank chief accused of TARP fraud (Wei/Bray, WSJ) And lots of other kinds of fraud to boot!

Hello America, My name is Rielle Hunter (DePaulo, GQ)

C-Span puts full video archive on web (Stelter, NYT)

Florida vampire to run for president (CBS) Watch out Barack.

Thieving baboons wipe out South African vineyards (AFP)

Lewis on his book on 60 Minutes

Mar 15, 2010 19:24 UTC

As Felix points out, Michael Lewis has done well in his new book “The Big Short” to describe how the subprime crisis was aided and abetted at the highest levels of finance. And in profiling some of the traders that made money in the process, he puts a human face on the short side of the trade. But Lewis pulls one crucial punch, in my view, undermining the value of the book.

First the good. Lewis breaks news by naming the guy behind the losses that nearly brought down Morgan Stanley. A bond trader named Howie Hubler, who escaped with a rich exit package despite nearly bankrupting his employer, thought it wise to short low-rated tranches of CDOs against higher-rated tranches. He didn’t realize the CDOs were entirely worthless, including the AAA tranches, because they were simply repackaged subprime detritus. A pile of garbage repackaged as AAA-rated garbage is still, well, garbage.

What Lewis doesn’t do as well is make the connection for readers that his protagonists, i.e. the guys who spotted the subprime crisis early and shorted it via CDS, actually harmed society. Felix puts it well in his review:

What these men did was not “socially useless,” to quote the chairman of the UK’s Financial Services Authority, Lord Turner. It was worse than that: it was actively harmful, since they provided the fuel which kept the subprime mortgage furnace burning even when the country was running out of new junk mortgages to write. In most financial markets, bearish bets act as a dampener; in this one, they were a necessary part of the subprime-mortgage machine, and a Deutsche Bank mortgage trader named Greg Lippmann ended up making billions of dollars for his employer — not to mention a $50 million bonus for himself — by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking.

Smart readers can make the connection, but Lewis fails to criticize them directly as, ultimately, they provided the source material for his book.

One of these guys, Michael Burry is featured in the 60 Minutes piece on Lewis’s book last night. He seems a nice enough guy, but he’s surely a smart enough guy to know that in making his killing betting on CDS, he was helping to destabilize the financial system. As Lewis describes in detail, the shorts provided the liquidity necessary to keep the market going.

I’ve read the book and, overall, it is very good. Lewis is a great writer capable of making abstruse material accessible to a broad audience. But he should have gone farther. He should have criticized his subjects for perpetuating a market that they knew (or should have known) was harming the economy.

Here’s Part 1 of 60 Minutes’ piece:

Watch CBS News Videos Online

And Part 2:

Watch CBS News Videos Online


What? I don’t understand what your proposal means.

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Evening Links 3-14

Mar 15, 2010 00:48 UTC

Private equity’s Trojan Horse of debt (Morgenson, NYT) Great piece from Gretchen. Another example of private equity — in this case TPG and Apax Partners — taking cash out of a corporate balance sheet by loading it with debt. See also the case of Thomas H. Lee Partners and Simmons.

Must ReadIn hard times, lured into trade school and debt (Goodman, NYT) This is an issue close to my heart and, actually, it’s the same story as above. The only difference is that instead of finding corporate balance sheets to use as an ATM, for-profit education looks for vulnerable people trying to improve their lot in life. Find a warm body eligible for taxpayer-guaranteed federal loans and it matters little the quality of education you provide….you’ve already taken the cash out, cash the government provides. This article is loaded with colorful details, but Goodman saves the best for last. The government requires that only 10% of tuition money come from students themselves or private sources. On this portion, the companies set aside “roughly half” (!) to cover bad debt. But “they’re making so much money off their federal student loans and grants that they can afford to write off their own loans…”

Promises, promises (David Merkel) When all others fail, the last balance sheets that can be used to take cash out are governments’.

Lehman examiner punted on valuation (Partnoy, NC) Lehman examiner Anton Valukas is getting lots of credit for his very thorough report. Even so, at nearly 2300 pages, the report only glosses the surface in some respects. Lehman’s operations were so complex they’re impossible to properly catalog. No doubt the same is true of all the large investment banks: C, GS, MS, JPM, even BAC. We think 1) that these behemoths can be properly regulated? And 2) that when they get into trouble new “resolution authority” will enable them to be shuttered without causing financial contagion?

Science fails to face the shortcomings of statistics (Siegfried, Science News) “…if you believe what you read in the scientific literature, you shouldn’t believe what you read in the scientific literature.”

We bought a toxic asset, you can watch it die (NPR, ht Reje)

Say goodbye to unlimited wireless data plans (Gizmodo)

Black Cobra (Swedish) gang steals selection of small cakes (

I’m with CoCo artist: My life has totally changed (TMZ)

I want one of these in my office…



Maybe a month ago BusinessWeek had a full length feature on the problems with gov’t reimbursements in tuiton re: gov’t employees/military service people.

It was a good read.

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Bank failure Friday

Mar 12, 2010 22:21 UTC

Valley National got a package deal — they picked up LibertyPointe last night and got another tonight. Plus, don’t look now, but NYC is suffering a veritable wave of bank closures. Two in two days. These are the first in the Big Apple since 1999.


—Failed Bank: Park Avenue Bank, NY NY
—Regulator: New York State Banking Department
—Acquiring bank: Valley National Bank, Wayne NJ
—Vitals: at 12/31, assets of $520.1 million, deposits of $494.5 million
—Estimated DIF damage: $50.7 million


—Failed Bank: Old Southern Bank, Orlando FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: Centennial Bank, Conway AR
—Vitals: at 12/31, assets of $315.6 million, deposits of $319.7 million
—Estimated DIF damage: $94.6 million


—Failed Bank: Statewide Bank, Covington LA
—Regulator: Louisiana Office of Financial Institutions
—Acquiring bank: Home Bank, Lafayette LA
—Vitals: at 12/31, assets of $243.2 million, deposits of $208.8 million
—Estimated DIF damage: $38.1 million

Fragile riches

Mar 12, 2010 22:17 UTC

This week was a positive one for paper wealth. Forbes reported on Wednesday that the average net worth of the world’s billionaires jumped 17 percent to $3.5 billion apiece. More mundane quarterly data from the U.S. Federal Reserve on Thursday showed that American households’ collective wealth rose 5.4 percent in 2009. Trouble is, governments everywhere are propping up markets and asset values, and recent increases in wealth could easily evaporate.

The newly accumulated wealth is more than usually vulnerable for at least two reasons. First, monetary policymakers the world over have lavished easy money on their financial sectors to limit the effects of the recent credit crunch and recession. That has helped markets and investment portfolios to recover. But inflationary pressures or bond market jitters sparked by massive government borrowing — or both — will before long force interest rates up, removing the monetary punch bowl and potentially sending some markets into reverse.

Click here to enlarge in new window.

Total Debt, Q4

Second, despite talk of deleveraging and data showing household borrowing declining, the U.S. economy in particular is still burdened by a near-record amount of debt. As calculated by economist Steve Keen of the University of Western Sydney, the total government, personal and corporate debt load in the United States stood at 388 percent of U.S. GDP at the end of 2009. That’s just off the record high seen last year, but still well above the previous peak just north of 3 times GDP reached during the Great Depression.

Leverage amplifies gains and losses — and with further deleveraging needed and interest rates having nowhere to go but up, there’s more stacking up on the loss side of the scale. The newly richer may be feeling good about their wallets right now, but it may not last.

Bank failure Thursday

Mar 12, 2010 00:40 UTC

Generally you don’t see midweek failures unless everyone’s taking Friday off.

From AP:

The bank catered largely to the Orthodox Jewish community in Manhattan and Brooklyn….The bank was closed by New York state’s banking regulators and the FDIC appointed as receiver on Thursday, rather than on Friday as is customary for bank shutdowns because of the Jewish Sabbath falling at sundown Friday into Saturday.


—Failed bank: LibertyPointe Bank, NY NY
—Regulator: New York State Banking Department
—Acquiring bank: Valley National Bank, Wayne NJ
—Vitals: at 12/31, assets of $209.7 million, deposits of $209.5 million
—Estimated DIF damage: $24.8 million

The last Thursday closures were on July 2nd, 2008, when seven were shuttered. July 3rd everyone had off, including FDIC.

Before that BankUnitedwas closed on  May, 21. And before BKUNA was WaMu, which was seized Sept 25, 2008.


Correction, the extraordinary *size* of the CDS market is proof of its leverage and evidence that Felix’s statement was false.

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2,200 page train wreck

Mar 12, 2010 00:24 UTC

The just-released examiner’s report of the Lehman collapse reads like the financial crisis equivalent of the 9/11 Commission Report.

WSJ has hosted the 2,200 page document in 9 parts on Scribd.

Right up top it shows how, to inflate the “net leverage” figure on which ratings agencies were focused, Lehman actively manipulated its balance sheet.

Lehman did not disclose…that it had been using an accounting device (known within Lehman as “Repo 105”) to manage its balance sheet – by temporarily removing approximately $50 billion of assets from the balance sheet at the end of the first and second quarters of 2008.

In an ordinary repo, Lehman raised cash by selling assets with a simultaneous obligation to repurchase them the next day or several days later; such transactions were accounted for as financings, and the assets remained on Lehman’s balance sheet.

In a Repo 105 transaction, Lehman did exactly the same thing, but because the assets were 105% or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet. With Repo 105 transactions, Lehman’s reported net leverage was 12.1 at the end of the second quarter of 2008; but if Lehman had used ordinary repos, net leverage would have to have been reported at 13.9.

Lehman employees themselves referred to the maneuver as an “accounting gimmick” according to the report.

Here’s a simpler way to look at it:


The report also says they misled the market about their available liquidity, much of which was, er, illiquid.

There is much, MUCH more.

Lunchtime Links 3-11

Mar 11, 2010 19:47 UTC

Financial reform: Dead? (Wutkowski/Younglai, Reuters) Talks broke down over the consumer financial protection agency it appears. On the one hand it’s a shame reform can’t get through Congress, on the other hand what was under discussion was so watered down it deserve to be called “reform.” Regulators will be disappointed not to get resolution authority, on which they’d pinned their hopes of ending the “Too Big to Fail” paradigm.

Slim tops Gates, Buffett (Forbes) The world has a new richest man, according to Forbes. At 25, Facebook’s Mark Zuckerberg is the youngest on the list. He’s listed as worth $4 billion. Who needs a revenue model!

CFA Institute kicks out member for porn (Levin, Dealbreaker…ht Dan Wilchins) This isn’t written very clearly. The nut of the story appears to be that CFAI was unhappy that a charterholder became a pornographer while advertising the fact that he was a CFA. Seems to me they’d do more to protect the value of the CFA brand by going after charterholders violating their fiduciary responsibilities to clients. That’s an interesting question, actually. Surely there are plenty of CFAs that engaged in unethical behavior during the crisis. Has CFAI revoked any charters, for instance, for marketing auction rate securities as cash equivalents?

Tiger hires Bush flack Ari Fleischer to facilitate comeback (Cannizzaro, NY Post)

New strike paralyzes Greece (Kitsantonis, NYT)

How NOT to select photos for a news story (Guardian)

Smile! (imgur) Click the image to enlarge.

Lunchtime Links 3-10

Mar 10, 2010 18:09 UTC

Obama foreclosure prevention plan lagging, new data shows (Nasiripour, HuffPo) More great work from Shahien….it appears someone on the Congressional Oversight Panel shared a letter written to them by Geithner in which the Treasury Secretary outlines the latest HAMP data. It doesn’t look good and just provides more evidence that only mods that reduce principal will work over time. As noted yesterday, it’s a very expensive proposition….see next link.

Second-lien writedowns (Konzcal) For the uninitiated, a second-lien loan on a house is one that’s junior to the first lien. For instance you take out a first mortgage to cover 80% of the cost of a new home (first lien) and supplement it with a second mortgage for the remaining 20% (second lien). The second lien is second because it is junior in terms of repayment. If the house’s value falls 20%, then the second lien is…theoretically…totally wiped out before the first lien loses a cent. The scary data is how deep underwater some homeowners with two mortgages are. Loans like option ARMs that allowed a minimum payment with unpaid interest added to the mortgage principal show that some now have mortgage debt equal to 169% of the current value of the home. In other words their mortgage is 69% larger than their home’s value.

PDF – Gensler speech on OTC derivative regulation reform (CFTC) One of our favorite regulators yesterday spoke out about the need for tighter derivatives regulation.

Must Read from 1977How inflation swindles the equity investor (Warren Buffett, ht Nick Gogerty) I’ve argued in this space against the conventional wisdom that inflation is good for stocks. Even if earnings are rising, the multiple at which they are capitalized compresses dramatically. Buffett offers much more on the topic. A long piece, but very good.

Can California declare bankruptcy? (Beam, Slate) The answer is no according to Beam, since there’s no part of the bankruptcy code that covers states. He says banks could theoretically end up in some kind of federally-sponsored receivership. Interesting thoughts to kick off a discussion.

Team Obama propoganda push reaches fever pitch (NakedCapitalism) Yves writes disapprovingly of recent articles profiling Tim Geithner, who says his bailouts worked to save the financial system. Sure, the bailouts prevented a steep decline in the short-run, but at the cost of a steeper decline later. The one place Geithner deserves credit is the stress test. He did force banks to raise more capital. He didn’t, however, force them to raise enough. Not when you look at the second-liens on their books!

China property price jump, highlighting bubble risk (Wong, Bloomberg)

Academy award winning movie trailer (YouTube) Hilarious.

Alpert on housing (ht Ed Harrison)….last bit is Dan

Lunchtime Links 3-9

Mar 9, 2010 15:17 UTC

Treasury getting more comfortable with principal write-downs, sort of (Nasiripour, HuffPo) Principal writedowns are the only sure-fire way to slow foreclosures, but that means hitting banks’ capital big time. Consider, for instance, that three-quarters of the ~$1 trillion of second-lien mortgages in the U.S. are on commercial bank balance sheets. Writing down principal to some level that again gives folks equity in their home would wipe out a meaningful share of these second-liens. Many banks may not have the capital to withstand that. And if folks think principal writedowns will become official policy, suddenly many will just stop paying their mortgage. These are big reasons this is so controversial inside the administration. Nasiripour has done a great job outing that controversy…

Must Read – Finance: An exposed position (FT)

Strategic defaults on homes on the rise (Said, SF Chronicle….ht PK)

Dumping “dirt bonds” (Hart, Bloomberg) No sense waiting for a housing rebound that may not come till “the early 2030s.”

PDF – The Buffett short thesis (Raj Rajagopal) A Cornell MBA student forwards this presentation of his short thesis on Berkshire Hathaway. Good piece, though it lacks a catalyst. Buffett seems to be in very good health and is as active on the media circuit as ever. For me the short thesis is wrapped up in the fact that Buffett has totally flipped his investing style, focusing on capital intensive, lower-return businesses. I hope to have more on this later this week.

Brazil slaps trade sanctions on U.S. over cotton dispute (BBC)

China says committed to U.S. debt, wary on gold (Chiang/Wheatley, Reuters)

Video – MIT Prof on personalized solar energy (Vimeo, ht Reddit) Can a new process to split hydrogen and oxygen solve the world’s energy needs?

To kill or not to kill Shamu (Esterl, WSJ) Actually, euthanasia appears to be out of the question, even after SeaWorld’s biggest Orca was involved in perhaps his third death. Killer whales are very big business….

Betty White to do SNL (CNN) Prayers…answered.

Baby hippo…



A solution to the housing crisis? It’s so easy, it’s trivial.

Quantitative easing to the people! Money financed tax cuts all around, with government checks to everyone else who can fog a mirror.

Not in an out-of-hand, mind you, but just enough to give underwater homeowners and underwater governments a little boost. Also, with sticky wages, lots of folks are being paid at boom levels even after deflation has taken place.

Without that, we face an almost certain Japan-like scenario. There was massive inflation in the mid 2000s, if you include houses, which the CPI does not. Now we’ve had deflation (that also doesn’t show up in CPI) which leaves behind mountains of stranded debt.

Consumers don’t want to be levered anymore. They have had enough of that. They want to get out of debt and then live debt free, with the money in their bank accounts. There isn’t enough base money in the world for that to happen and rather than create more base money, the fed keeps trying to lever.

I suppose this will be clear to policymakers soon enough. Or if they already know, it means they are completely in the thrall of banks.

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Quote of the Day

Mar 8, 2010 17:28 UTC

From reader CB:

Rolfe, as you likely know there is no cost of living increase in Social Security payments this year for the logical reason that there has been no increase in the cost of living.

Nevertheless, I just received this from AARP (their boldface):

We’re already months into 2010, and seniors still haven’t seen any relief because of the lack of a cost-of-living adjustment to their Social Security. For the first time in 35 years, the regular payment update they’ve depended on did not occur.

Congress must act quickly. Will you help us flood their offices with letters, demanding that lawmakers make relief a priority?

My point – nobody will give an inch at a time when everyone needs to. Seniors as a group are better off than any other age group and are now enjoying the huge Medicare part D entitlement.

The larger point here is that, at a certain point, the young simply can’t transfer more income to the old. Though many observers don’t worry much about the unfunded liabilities for Medicare and Social Security — “they’re far out on the time horizon and are just promises that can be legislated away” — seniors are a remarkably powerful voting bloc that won’t easily be convinced to accept lower/delayed benefits…

Go for it Gary

Mar 6, 2010 15:00 UTC

Gary Gensler — regulator and, yes, Goldman alum — has distinguished himself in Washington. As CFTC Chairman, he’s fought to impose stricter rules on OTC derivatives and recently proposed rules that would cut the leverage currency traders are allowed to deploy from 100:1 to 10:1. Lest we all forget how dangerous leverage can be when traders misuse it, there’s LTCM to serve as exhibit A. In a clear sign that Gensler is fighting the good fight, traders are screaming about the proposed rule. Fantastic.

From Carolyn Cui and Sarah Lynch at WSJ: Foes take on leverage curbs from CFTC

An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.

The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.

Under current rules, a customer putting up a security deposit of $1,000 in cash will be able to trade a notional amount of $100,000, a common contract size for currencies such as the dollar and the Japanese yen. The new rule would cap that amount at $10,000.

The rules also would require dealers to abide by new capital and disclosure requirements.

If the rules come into force, investors would be required to either put more capital in their accounts or pare their positions.

Unfortunately, what I’d like to start calling “the politics of easy credit” may get in the way of this sensible new rule:

“If our leverage rules are 10-to-1 and leverage rules elsewhere are 100-to-1, the business is going to move elsewhere,” House Agriculture committee member Jim Marshall (D., Ga.) said.

Thanks Congressman Marshall, for protecting American entrants in the race to the bottom.

As I argued yesterday, on the one hand we want tougher financial reforms, but reforms are related in the sense that they’re all designed to reduce the availability of credit. Call it what you want: leverage, credit, debt finance. Americans love the stuff because it magnifies rewards. The less you put down for an investment — whether you’re a bank, mortgagee or currency trader — the more juice that comes back to you if a trade goes right.

If the trade goes wrong you risk outright collapse, but bet big enough such that your failure is “systemically risky” and you can count on a bailout.

The article notes that the “huge risk-reward potential makes the [forex trading] market a hotbed for scams. From Dec. ’00 to Sept. ’09, more than 26k customers received $476m in restitution in 114 forex fraud cases pursued by CFTC.”

Over 106 months, 114 frauds. Yeah, we’re with Gensler on this one.