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

Archive for the ‘Government funds’ Category

Goldman’s Jan Hatzius: ‘Substantial Hangover’ in U.S. Economy

Posted by Larry Doyle on August 25th, 2009 8:22 AM |

Say what you want about Goldman Sachs in its entirety, but I tip my cap to Goldman economist Jan Hatzius for an extremely forthright and aggressive interview I just watched on Bloomberg Surveillance.

In so many words, Hatzius seems very concerned about a double dip recession here in the United States in 2010. That is my assessment. Hatzius himself did not use that phrase.

Highlights of his commentary include:

>> call for a 3% GDP in both the 3rd and 4th quarters of 2009 driven by fiscal stimulus programs and inventory buildup.

>> without the benefits of the stimulus and further inventory rebound, the U.S. economy will suffer from a ‘substantial hangover’ in 2010.

>> Hatzius does not see China or other surplus nations suffering from this hangover. He is quite bullish on prospects for the Chinese economy.

What are the effects of our hangover and implications for government policy?

>> likely double digit unemployment with no quick improvement

>> Federal Reserve will likely keep the Fed Funds rate at 0-.25% for all of 2010

>> no inflationary pressures for a few years

>> given lack of growth in the private sector, very real chance that the Federal Reserve will extend its quantitative easing program in which it purchases liquid assets (U.S. Treasury debt, agency debt, and mortgage-backed securities). Hatzius threw out that there is a very real possibility the size of the Fed’s balance sheet could double to $4 TRILLION. Be mindful that the Fed’s balance sheet has already doubled over the course of this crisis!!

>> substantial decline in commercial real estate has yet to occur.

>> Cash for Clunkers will likely add .3 to .4 to current quarter GDP, but some of that is certainly pulling demand forward and will be ‘paid back’ with slower growth in 2010.

>> when the economy does gain traction, he believes Bernanke (whom Obama will reappoint to another term) will raise rates aggressively.

Hatzius’ assessment is consistent with the Main Street economy which remains disconnected with Wall Street price action. While Main Street has a headache and hangover, Wall Street rocks on with easy money from Washington.

When will Main Street get in on the action?


Turbo-Tim Takes ‘Indirect’ to a Whole New Level

Posted by Larry Doyle on June 25th, 2009 6:48 AM |

tim-geithnerIs it too much to expect increased transparency and integrity in the Brave New World of the Uncle Sam economy? Don’t expect to get a ‘direct’ answer from Turbo-Tim Geithner. Why?

Geithner just redefined ‘indirect’ buying in our U.S. Treasury auction process without a hint that this major piece of information was even up for review. Let’s look deeper into this sleight of hand. The Wall Street Journal sheds a little bit of light on this development in, Is Foreign Demand as Solid as It Looks?

The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.

When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.’s budget deficit.

But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

Why is this development so meaningful? Very simply, as the United States deficit explodes and Treasury auctions skyrocket, our funding needs will increase accordingly.

With BRIC nations (Brazil, Russia, India and China) threatening to purchase fewer Treasuries – if not outright sell our debt going forward – we become ever more dependent on finding other outlets for our bonds. If ‘indirect’ buyers, that is foreign entities, purchase fewer Treasuries, then it is not a stretch to envision our interest rates moving higher to attract other buyers.

Rather than waiting for a potentially unpleasant development, Geithner appears to have proactively used some artifice in redefining ‘indirect’ buyers to include not only foreign entities but also domestic buyers who place orders to purchase Treasuries through a primary dealer.

By broadening the definition, Geithner and team are able to disguise the true level of foreign buying.  When questioned on this redefinition, how did Tim respond?

Treasury officials didn’t respond to requests for comment.

So much for increased transparency and integrity. Why should we be surprised? Although healthy markets love transparency and integrity, tax cheats are not typically fond of these principles.


Wall Street – Washington: “Pay to Play”

Posted by Larry Doyle on June 3rd, 2009 7:46 AM |

In my opinion, the relaxation of the FASB’s (Federal Accouting Standards Board) mark-to-market rule was nothing more than a vehicle to allow banks to “cook their books.”  The “cooking” of the books put the burner on a low simmer in order to allow the banks sufficient time to generate earnings. Those new earnings can and will be used to offset the currently embedded losses on the toxic assets still residing in the banking industry.  

The FASB did not relax their accounting rule without enormous pressure applied by both the Wall Street and Washington chefs.  The Wall Street Journal reports, Congress Helped Banks Defang Key Rule:

Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter.   

I have numerous questions and comments on this topic, including:

1. If this accounting rule was so insidious, why was “mark-to- market” accounting ever enacted in the first place?  

Sense on Cents: As with any accounting rule, the “mark-to-market” was implemented to create transparency.

2. Are the toxic assets still on the bank books?

Sense on Cents: Most definitely. They are merely being masked via this relaxation.

3. Banks maintain the toxic assets don’t actively trade and, when they do, they trade at levels not reflective of their true values.

Sense on Cents:  These assets have traded everyday and at levels assuming a heightened level of future defaults on the underlying mortgages. If the banks believe the market levels are not reflective of true value, then why haven’t they and global investors raised the funds to purchase these massively undervalued securities? Investors trust the market assumption of future defaults.  

The WSJ reports:

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. 

4. Wall Street paid approximately $28 million in contributions and lobbying to effect this accounting change. The banks made these payments while in receipt of billions of dollars of TARP funds (taxpayer/ government assistance). Did Wall Street effectively utilize taxpayer funds in order to “pay” Washington so the banks could continue “to play” their game?

Sense on Cents: In my opinion, most definitely!!

5. How long had the “mark-to-market” been in effect prior to its relaxation?

Sense on Cents: Decades. It worked just fine.

6. Why didn’t banks lobby in the 2000-2006 era that assets were being overvalued via this accounting standard?

Sense on Cents: Bank executives were being “paid” from those inflated valuations. 

7. Given that the banks now utilize internal pricing models to value the toxic securities, are those models and their embedded assumptions made public so investors can have some degree of transparency?

Sense on Cents: NO!! Why would the banks want the “cooking” exposed?

In summary, this version of “pay to play” will be seen as a watershed event in the Brave New World of the Uncle Sam economy. Why will future economic growth underperform? The banking industry will be forced to continue to set aside reserves against the embedded toxic assets. In so doing, the banks will have less credit to extend to consumers and business.


For more on this topic, I submit:

Putting Perfume on a Pig
April 2nd; post written the day FASB relaxed the mark-to-market standard

Freddie Mac, Fannie Mae Deja Vu?
May 28th; post highlighting the massive embedded losses in the Federal Home Loan Bank system. These losses are masked by the relaxation of the mark-to-market.

Legalized Bribery
February 16th; post highlighting Chuck Hagel and Leon Panetta implicating Washington politicians’ endless pursuit of money. 

How Wall Street Bought Washington
March 9: post highlighting the massive money spent by Wall Street to curry influence in Washington.

Independent Investigation Required

Posted by Larry Doyle on April 21st, 2009 1:14 PM |

How does our economy and country move forward after having experienced rampant abuses throughout our financial industry? It is disheartening that we have not already seen an aggressive pursuit and prosecution of many involved in these financial improprieties. Bloomberg releases a story today indicating House Speaker Pelosi Wall Street Probe Modeled on Pecora After Wall Street Crash.

While a thorough investigation is critically important to improve the health and well being of our markets and economy, I would propose we employ an independent investigation. Why?

Our financial industry is intertwined with the regulatory and political oversight which is supposed to monitor it. If we employ a currently sitting legislative body to investigate Wall Street, can or will we receive a truly unbiased analysis? Do we recall Franklin Raines of Fannie Mae being questioned by members of Congress who had received significant campaign contributions from Fannie?  The “investigation” of Freddie and Fannie was certainly more theatre than true investigation. Will we get the same with Ms. Pelosi’s probe? Bloomberg offers:

House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.

The Pecora review “was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings,” Donald Ritchie, associate historian for the U.S. Senate, said in an interview. (more…)

Behind the Scenes . . .

Posted by Larry Doyle on April 9th, 2009 7:14 AM |

A mixed bag of items you may have missed in the midst of some of the daily noise and pandering:

1. Bloomberg reported this morning that the government (Treasury and Federal Reserve) expects ALL 19 banks undergoing the Bank Stress Tests to pass!! Wahoo!! Bloomberg further reported, however, that certain banks may continue to need ongoing capital injections. Would the proctors of the exam please release the questions so the FDIC can provide a more thorough review? What a SHAM.

Please review, Bank Stress Tests: Major Sham?

2. The Federal Reserve yesterday released the minutes of its March 18th meeting. The Fed revised its projection for a bottoming of unemployment to mid-2010 from the end of 2009. Additionally, they lowered their projections for a turn in the economy. Lastly, in regard to the Fed’s purchases of government and mortgage-backed securities, they had differing opinions as to how to approach these purchases. The FT reports:

one Fed policymaker wanted to stick to buying mortgage-related securities. Another wanted to add only more Treasury purchases. Buying both was a way to keep everyone happy and hedge the Fed’s bets in the light of uncertainty as to which type of asset purchase might prove effective.

“Several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,” the minutes say.

Michael Feroli, an economist at JPMorgan, said the “uncertainty rationale” was novel. It added up to an experimental, portfolio-based approach to policy rather than one driven by strong conviction.

For what it is worth, on the day of the Fed’s announcement to buy both government and mortgage-backed debt, rates rallied close to 40 basis points, a truly historic move. Since then, those rates have totally reversed. While the Fed is buying, obviously somebody else is selling. Who may that be? The U.S. Treasury for one. I mean, the Treasury could literally walk the government notes and bonds down the street in Washington to the Fed and put these securities in their vault while the Fed simultaneously puts cash deposits into the Treasury vault.

Do you get the sense, though, that Fed officials are winging it to a large extent? I do. (more…)

Games of Chance: TALF, PPIP, TARP, FDIC, FASB

Posted by Larry Doyle on April 7th, 2009 2:40 PM |

In thinking about the economy, markets, and our banking system, my memory brings me back to my early days in New York. While working my way along 8th Avenue back to my apartment in Hell’s Kitchen, I would happen upon numerous versions of the classic NYC “hustle.” The shell game (also 3 card monte) was rampant in NYC in the ’80s. Mayor Giuliani cleared out this game, along with a host of other street scenes. For those not familiar with this game, there was a constant need for new players with new money to keep the game alive.

Why do these games remind me of our current banking system? The similarities are scary. Let’s access the most recent piece from John Mauldin’s site to “view the games.”

Mauldin’s guest, John Hussman, comments on these various “games” (TALF, PPIP, TARP, FDIC, FASB), in which taxpayers bear the brunt of the risk in the government’s engagement with financial institutions. Hussman writes of the PPIP:

this is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.


Remaining on Guard…

Posted by Larry Doyle on April 4th, 2009 10:07 AM |

I much prefer a rallying stock market, but I am not a day trader trying to catch moves for quick flips. I look for changes in economic fundamentals (incorporating both private sector and public sector inputs), assess those changes with market technicals (overbought and oversold conditions), and position myself accordingly.

The big wild card in current analysis is the impact of public sector inputs. Many of the maneuvers utilized by the Treasury and Federal Reserve have never been used prior to this economic downturn. Are they working? To what extent? What are the unintended consequences? What is the time delay from implementing a program to measuring its impact on the economy? These questions are the topics of protracted discussions by economists, bankers, analysts, and money managers around the globe. I’d also like to address them here at Sense on Cents.

My market instincts tell me that programs injecting trillions of dollars across wide swaths of the market are not without costs. These costs in the form of “crowding out“, distorted competition, changed behaviors (AIG undercutting insurance rates), moral hazards, and inflation are very real. The challenge is assessing the risks of these long term costs versus the necessity of providing sufficient capital and liquidity backstops to support the economy.  (more…)

G-20: Commitments, Comments, Questions!!

Posted by Larry Doyle on April 2nd, 2009 1:14 PM |

British Prime Minister Gordon Brown just delivered a statement highlighting the results of the G-20 conference in London.  There must have been a lot of work done behind the scenes over the last few months because it’s hard to imagine there was a lot of debate over issues within a 36 hour time frame at this conference.  I will grant the world’s political leaders their due as it is most important at times like these to convey a strong, uniform front. 

Let’s review the objectives and commitments, each followed by questions and/or comments that I have:

1. Address countries providing tax havens.
My question:  who will police?

2. Develop a Financial Accounting Stability Board to regulate currently unregulated financial entities, primarily hedge funds. 
My questions: how will it be staffed, operated, and judgments adjudicated? (I don’t like FASB as the acronym to be confused with Federal Accounting Standards Board)

3. Develop global policies and outline to address compensation
My questions: who and how will this be implemented? how will it be regulated? will there be punishments for those not participating?

4. Develop a global systemic risk oversight body. 
My Question: who and how? (more…)

Did Wall Street Flip Off Treasury Today?

Posted by Larry Doyle on March 25th, 2009 4:55 PM |

The U.S. government was heavily involved in the bond market today. How did they do? They bought high and sold low. What happened?

The Fed announced last week that they would engage in buying hundreds of billions of government and mortgage securities in an attempt to move interest rates lower and spark consumer and corporate borrowing. Today, the Fed made their initial purchase under this program at mid-morning. Thanks to MB, I learned that Wall Street offered the Fed three times more bonds than it actually purchased. I gather that the Fed wanted to be extremely patient and diligent in their purchases. In any event, at mid-morning the Fed would have bought bonds near the market highs of the day.

Later in the day, Treasury issued multiple billions in 5yr notes. How did they do with this sale? Not very well. Wall Street backed up their bids an almost unheard of 5 basis points (.05%) to fully underwrite these bonds. What happened? (more…)

Treasury Seeks Unprecedented Power

Posted by Larry Doyle on March 24th, 2009 8:47 AM |

I have written at length about the problems within the banking, insurance, hedge fund, and consumer finance industries over the last 6 months. While the bulk of the media focus has been on the banking industry – and primarily the large money center banks – the erosion in asset values at these other financial companies has been accelerating.

This past Sunday evening on my weekly radio show, NQR’s Sense on Cents with Larry Doyle, I spoke extensively about the massive financial shortfall within the insurance industry. In addition, relatively early on I warned that the hedge fund industry had likely been severely mismarking many investments. From a piece I wrote on November 12, 2008:

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt they have positions that are grossly mismarked and have many positions that are totally illiquid. For many investors in these funds, these are truly “roach motels.” Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

The same can be said for a number of private equity shops. Consumer finance companies with large holdings of a variety of consumer assets are fighting for their lives as delinquencies and defaults on these assets ratchet higher. (more…)

Recent Posts