Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Archive for April, 2009

Blood Transfusions Can Get Messy

Posted by Larry Doyle on April 30th, 2009 3:00 PM |

Friends of mine have asked me to explain some of the dynamics involved in the government rescuing of our banking system, equity markets, and economy as a whole. Allow me to share with you the following analogy I gave them.

A patient in distress enters surgery and badly needs a blood transfusion. The blood in our economy is transferred via massive increases in deficit spending funded from borrowing in the government bond market. The same sort of operations are occurring in every major country and region literally around the world. The overall blood donor supply is not limitless. In withdrawing the blood from the government bond market, other patients (consumers, corporations) have found blood to be in very short supply and they have suffered as a result. 

We all know that blood can regenerate. Are the “green shoots” in our economy a result of “blood doping,” in which the patient regenerates his own blood even in the midst of the transfusion? Blood doping is a very dangerous procedure. When should the patient become a blood donor rather than a blood recipient?

Are our surgeons talented enough to know when and how to precisely withdraw the blood? Does the patient run the risk of another much more serious condition from excessive blood flow? No doubt.

Who on our staff is practiced in the art of withdrawing blood?  Paul Volcker was chair of the Fed in the early 1980s when inflation ran rampant. He increased the heart rate monitor known as the Fed Funds rate to near 20% in order to choke off the inflation monster. 

Without referencing a specific target Fed Funds rate, Volcker remarked yesterday that an overheated patient this go round may also require similar treatment.


Reconciliation May Create Irreconcilable Differences

Posted by Larry Doyle on April 30th, 2009 11:00 AM |

Will the Democratic Congress supported by the Obama administration use a process known as “reconciliation” to pass health care legislation? Reconciliation allows for passing legislation by a simple majority in the Senate instead of the standard 60 vote margin. In so doing, Obama and the Democrats will likely pass this legislation without real debate.

The process has never been used to pass new legislation of the magnitude of health care reform. By all measures, the reconciliation process was never intended to be used in this manner. Obama and the Democratic leadership maintain that the Bush administration used reconciliation to pass tax legislation. The Republicans respond by claiming that in those cases reconciliation was used to renew existing legislation and not of the magnitude or importance of health care reform.

Are Obama and the Democrats forgoing any form of debate on this issue and jeopardizing any sort of honest bipartisan politics moving forward? I believe so.

The UPI provides further color on this topic, Dems to Use Reconcilation For Healthcare.

Is there any doubt that Obama is hellbent on passing this legislation regardless of future risks to political procedures. Will this healthcare legislation be written in the same manner as the Economic Stimulus bill jammed through Congress? The UPI reports,

Even though Republican leaders have warned Democrats against using the tactic and others say it may hinder future legislation where bipartisan consensus is needed, Obama Thursday reiterated his support for the move in a meeting with congressional leaders, White House and Capitol Hill sources told the Times.

The president and his congressional allies believe using the budget reconciliation process to pass healthcare reform may be the only way to implement measures that have eluded lawmakers for years, the newspaper said.

Given Arlen Specter’s switch of parties, I honestly believe the only real check on Democratic spending at this juncture may be polls from currently controlled Democratic states showing significant voter unrest.

I view the use of the reconciliation process as just another step towards our political process in Washington being totally out of control….and it will be expensive to clean up!!


Is The Government Bond Bubble Getting Ready To Burst?

Posted by Larry Doyle on April 30th, 2009 5:45 AM |

The equity markets have rebounded significantly over the last seven weeks. The Dow and S&P are now down approximately 4-6% on the year. The tech heavy Nasdaq has distinguished itself and is up approximately 10% on the year.

At this juncture, if the equity markets are implying that the economy will not slip into Depression, then the bill for the stability in equities is being transferred to participants in the bond market. Government bonds are facing an almost weekly avalanche of tremendous supply. This week the market is absorbing over $100 billion in 2yr, 5yr, and 7yr Treasury securites. Take a deep breath and next week the market is faced with over $75 billion in 3yr, 10yr, and 30yr government securities. The Treasury is likely going to sell 30yr government debt on a monthly basis!! 

The Federal Reserve has been the biggest buyer of Treasury and mortgage-backed securities. The Fed’s balance sheet may be large but it is not endless. What have 10 yr. Treasury securities done on the year? Even in the face of massive buying of these securities by the Fed, the 10yr has backed up almost 1% to a current level of 3.1%. That rise in rates is very significant. 

I have maintained and continue to maintain that interest rates will move higher given the overwhelming demand for funds by global governments to pay for deficit spending. Central banks around the world may try to hold the respective bond markets up and interest rates down but investors will continue to demand a higher rate of interest in the process. 

As government rates move higher, mortgage rates, and other corporate rates will likely move higher as well. If we get a whiff of early signs of inflation which I believe is coming these rates could ratchet higher and the bubble in the government market would not merely burst but would actually explode.


Citi Wants Its Cake and to Eat It, Too

Posted by Larry Doyle on April 29th, 2009 7:15 PM |

Hasn’t the public had enough of excessive compensation and abusive bonus practices for employees of organizations saved by Uncle Sam? Why and how is it that Citi Seeks Approval to Pay Out Bonuses.

Vikram Pandit, the CEO of Citigroup, and every other executive at Citi needs to know that as wards of the state, you earn a government wage. While Vikram and team may decry the dissolution of their franchise, they need to wake up and smell the coffee. There would be no franchise at Citi without the taxpayer having injected tens of billions of dollars.

Citi employees took the risk in choosing to work at the firm just as any employee takes company risk in any firm. If any Citi employee wants to leave, my advice is “don’t let the door hit you on the way out.”  Citi management may believe it is critical to the franchise to retain these employees in order to generate earnings and repay the government. My response is that with a Fed Funds rate at 0% and lending rates of between 5-20%, Citi will generate earnings without the risks embedded in proprietary trading.

If Citi can sell a division intact to generate income, why aren’t they already pursuing it? The WSJ offers further color:

Citigroup is trying to get U.S. approval for special bonuses for many of its employees. In a meeting earlier this month with Treasury Secretary Timothy Geithner, Citigroup CEO Vikram Pandit made the case for the stock-based bonuses. Executives are describing the bonuses as “retention” awards to perk up demoralized employees who the company worries are vulnerable to poaching by rival firms, people familiar with the matter said.

A person familiar with Mr. Geithner’s thinking said the Treasury hadn’t made a decision on whether to allow the bonuses. It is unclear how much Citigroup would pay out in bonuses if the government approved the move. A Citigroup spokesman declined to comment on details of the proposed compensation plans.

Citigroup’s request comes after Congress, the public and the president blasted pay practices on Wall Street. Bonuses at American International Group Inc. and Merrill Lynch & Co. ignited political infernos in Washington.

Citigroup has already gotten its own share of criticism for excessive spending, thanks in part to its aborted plans earlier this year to buy a new corporate jet. The company has received $50 billion in taxpayer aid, and the U.S. government is protecting Citigroup against most losses on $301 billion of its assets. The Treasury is poised next month to become Citigroup’s largest shareholder, owning as much as 36% of its common stock.

Why is this issue even being aired? Why hasn’t Turbo-Tim told Vikram and team, the answer is “NO.” Two letters, “N” and “O”. Which one of those don’t they understand?


Review of Economy, Fed Reserve Statement, and Market

Posted by Larry Doyle on April 29th, 2009 2:57 PM |

The Federal Reserve released its regular statement on the economy at 2:15pm. The statement includes:

1. no change in the Fed’s interest rate policy with the Fed Funds rate remaining between 0-.25%.

2. no change in the Fed’s asset purchase program of government and mortgage-backed securities. 

3. overall economic activity remains weak but the pace of decline is slowing.

4. inflation remains below the Fed’s long term target.

5. the Fed will employ all available tools at its disposal to help the economy recover.

The equity markets are having a strong upward move today based not on the Fed’s statement but reaction to the DRAMATIC decline in inventories reflected in this morning’s VERY weak GDP report. If an equity market rallying after a VERY weak GDP report seems counterintuitive it is due to the fact that if and when consumer demand picks up it will drive production.

In my opinion, banking on a pickup in consumer demand is a big if. With credit tight and likely to remain tight, I believe our economy needs to and will adjust to lessened demand. 

The WSJ comments on this economic activity, U.S. Economy Shrank At 6.1% In First Quarter:

Weaker investment in housing combined with the enormous inventory adjustment to pull the economy downward. But the aggressive drawdown of stockpiles of goods, while hurting the economy in the short run, is beneficial because it is an important step toward bringing inventories under control and ending a production freefall. U.S. industrial production retreated a fifth straight month in March, recent data show. Over the past 12 months, output was down nearly 13%. Capacity use by industries receded to 69.3%, a historical low since records began in 1967.

One area of concern for me is the uptick in prices. Although economists and analysts are panning the near term inflation risks, in my opinion, this risk should not be underestimated. The increase in prices in today’s GDP report has received little coverage, but 

Price indicators within Wednesday’s report suggested inflationary pressures rose in first-quarter 2009, easing fears of deflation. For instance, the price index for personal consumption expenditures fell by 1.0%, a decline much smaller than the fall of 4.9% in the fourth-quarter 2008. The PCE price gauge excluding food and energy rose 1.5%, after increasing 0.9% in the fourth quarter.

Free money in the form of a 0-.25% Fed Funds rate will continue to help banks recover but government deficits as far as the eye can see must be addressed. If the economy stabilizes, look for interest rates to ratchet higher. 

In fact, in today’s trading government bonds are down and rates are back to the highs seen last November. 


“FINRA Is Supposed To Police The Market”

Posted by Larry Doyle on April 29th, 2009 6:52 AM |

I have written extensively about FINRA’s ownership of Auction Rate Securities over the last few months. This morning Bloomberg reports, FINRA Oversees Auction-Rate Arbitrations After Exiting Market.

The Bloomberg article (I am humbled by Bloomberg quoting me in the story) answers a number of questions I have raised, while also opening the door to other issues needing to be addressed:

1. Was FINRA blinded – if not totally conflicted – in addressing the trading, selling, and marketing of Auction Rate Securities? Try 862 million times.

2. Was FINRA lucky, prescient, or well informed in the timing of the sale of their own Auction Rate Securities? We may never know but given that their first “guidance for investors” was not published until after the market had totally frozen, they certainly did not provide much investor protection as is their mandate.

3. I have also written, and Bloomberg highlights, that FINRA had money invested in hedge funds. In light of market developments, I think the public has a right to know which hedge funds. Will FINRA release that information?

4. I unearthed all the information of FINRA’s investment activities from its 2007 Annual Report published in April 2008. I am still waiting for FINRA to release its 2008 Annual Report and wonder why it seems to be delayed.

5. As we move forward with likely regulatory changes for Wall Street, I believe the very nature of a self-regulatory organization funded by the banks it is charged to oversee presents massive conflicts of interest. This specific situation of FINRA’s investment in ARS is indicative of those conflicts. Will Congress have the courage to address these conflicts and serve the public interest in the process?

“To me it smacks of incompetence and negligence,” said Larry Doyle, who worked 23 years on Wall Street and runs a Web site called Sense on Cents. “Finra is supposed to police the market.”

I view FINRA as akin to the palace guard. The question remains, Does The Palace Guard Have No Clothes?


Dianne Feinstein Exposes Herself Under the TARP

Posted by Larry Doyle on April 28th, 2009 3:30 PM |

Senators Dianne Feinstein (D-CA) and Olympia Snowe (R-ME) proposed legislation earlier this year to create transparency in the distribution and use of TARP funds. From Feinstein’s own website:

Senators Feinstein and Snowe are the authors of bipartisan legislation, called the Troubled Asset Relief Program Transparency Reporting Act, which would promote transparency and establish strict accountability standards for firms receiving TARP funds. The bill was originally introduced during the 110th Congress on November 20, 2008, and was reintroduced with a new bill title for the 111th Congress on January 6, 2009.

“American taxpayers put hundreds of billions of dollars on the line to rescue financial institutions, but we still don’t know how this money is being spent,” said Senator Feinstein. “This lack of transparency is simply unacceptable. Taxpayers deserve better, and the time has come to restore confidence in this unprecedented effort. Clear restrictions must be imposed on firms receiving assistance. These include tougher reporting requirements, lobbying prohibitions, and a ban on lavish and unnecessary expenditures.” (more…)

Did Big Ben Bernanke and Heavy Hank Paulson Break The Law in Buying Ken Lewis’ Silence?

Posted by Larry Doyle on April 28th, 2009 12:15 PM |

The intrigue involved in Bank of America’s takeover of Merrill Lynch goes well beyond standard Wall Street negotiations. Did Fed chair Ben Bernanke and then Treasury Secretary Hank Paulson break the law in the process of pressuring BofA CEO Ken Lewis to complete this bank merger? Bloomberg’s Jonathan Weil has easily distinguished himself amongst all journalists in aggressively addressing this topic. Weil pulls no punches in writing One Nation, Under Banks With Justice For No One.

Lewis, as CEO of Bank of America, possessed material non-public information about Merrill Lynch and was obligated by law to release that information to his shareholders. Lewis unequivocally maintains Bernanke and Paulson pressured him not to release that information which would have potentially derailed the merger. Why didn’t Lewis get Bernanke’s and Paulson’s position in writing? Did Lewis ask for it in writing?  Did Paulson and Bernanke knowingly avoid  a legal quagmire by not contractually committing in writing to increased government support for Lewis’ acquiescence?

Weil provides a clear expose of this situation. I commend him! He writes:

The spectacle of Ben Bernanke and Henry Paulson running roughshod over Kenneth Lewis and his minions at Bank of America Corp. raises a pivotal question for all Americans: Is the U.S. a nation of laws, or a nation of banks?

Let’s start by examining the facts disclosed last week in a letter by New York Attorney General Andrew Cuomo while taking pains to present the actions of each player in this drama in the fairest possible light. (more…)

Low Tide Will Reveal Rats Scurrying Amidst The Garbage

Posted by Larry Doyle on April 28th, 2009 9:09 AM |

Every exterminator will tell you that he never finds just one rat. Bernie Madoff has been exposed as an enormous rodent. Is Allen Stanford also a rat? Who else may be in the pack? Mary Schapiro, head of the SEC, revealed yesterday that the SEC is reviewing 150 other hedge funds to determine whether they also operated Ponzi schemes. Reuters reports, U.S. SEC Has About 150 Hedge Fund Probes.

Hedge funds are currently unregulated. How could the SEC have found potentially another 150 “rats” in the space of a mere three months since Ms. Schapiro has been on the job? My instincts lead me to believe the following:

1. Ms. Schapiro is trying to convey a sense of leadership and progress on fraud investigations after the abysmal performance on the Madoff scheme.  The SEC needs to burnish its image and Ms. Schapiro is trying to address that with this news release.

2. I have no doubt that many other hedge funds did operate as Ponzi schemes and likely had money invested in Madoff knowing he was the largest rat.  As investigators from the SEC have reviewed the list of Madoff investors, the info there has likely led to other hedge fund frauds.

Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.

3. We know that FINRA, the self-regulatory organization overseeing Wall Street, had investments in hedge funds, fund of funds, and private equity. That info was provided in the FINRA 2007 Annual Report. We are STILL waiting for the release of the FINRA 2008 Annual Report. Could FINRA have invested in Madoff? Could FINRA have invested in other hedge fund Ponzi schemes? Why by April 28th has FINRA still not released their Annual Report? (more…)

Markets Catch the Flu, Down 2% Overnight

Posted by Larry Doyle on April 28th, 2009 6:48 AM |

The global equity markets are down approximately 2% overnight for a variety of reasons, including:

1. Citi and BofA will likely be forced by regulators to raise more capital. Company shares are down 7-8% on this news. It also seems likely that regulators will force changes on the boards of these companies. Do not be surprised to see management changes as well. Has Ken Lewis become a government liability based upon his assertion of being pressured by Hank Paulson and Ben Bernanke to complete the BofA-Merrill Lynch merger?

Is this story of increased capital needs really news? I don’t think so.

On the regional bank front . . . Suntrust, Regions Financial, and KeyCorp are speculated to need increased capital.

When it is widely accepted that our domestic banking system still has $750 billion to $1 trillion in embedded losses, it can’t be the case that all the banks are fine. In my opinion, Geithner did investors a disservice last week in promoting the overall health of the banking industry.

Bloomberg provides more insight: Citigroup, Bank of America Decline on Capital Report.

2. Markets are also down based upon some weak earnings news, increased loan loss provisions at NAB (National Australia Bank), and price declines in commodities due to the impact of the swine flu outbreak.

In my opinion, the markets and investors have gotten somewhat complacent given the rally in equities since early March. I still view risks as very high. It is growing increasingly likely that we will have a meaningful government presence as equity holders in some critical industries for a protracted period. This development will not only occur in the United States but in many regions globally. The impact of this government presence will effect not only specific companies but, in turn, industries as a whole. (more…)

Recent Posts