Sense on Cents

SEC “Slap on the Wrist” Promoted Fraud

Posted by Larry Doyle on December 9th, 2009 3:06 PM |

When the punishment does not fit the crime, is there any surprise that crimes, frauds, and other unsavory behaviors will persist? Human nature and pervasive greed on Wall Street being what they are, the environment for fraud was a breeding ground.

Many thanks to a loyal reader for sharing a recent story which highlights this dynamic in a favorite topic here at Sense on Cents, auction-rate securities. McClatchy writes, For the Feds, Some Firms Are Too Big to Punish:

Then in 2006, the SEC cited Citigroup and other firms for improperly marketing “auction rate securities,” bonds issued by municipalities, student loan entities and corporations. The agency censured Citigroup and fined it $1.5 million, and Citigroup promised to clean up its sales practices. The SEC indicated that was good enough: In its attempt to deter more lawbreaking, the SEC declared, “this settlement is appropriate.” Read the rest »

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Treasury Leaves TARP on the Field

Posted by Larry Doyle on December 9th, 2009 12:15 PM |

We learned all we need to know about the economy today. How so? The fact that Treasury Secretary Geithner has chosen to extend the TARP (Troubled Asset Relief Program) to October 2010 is a clear indication that our economy, primarily housing and employment, needs Uncle Sam’s support.

While Geithner couches this support in terms of “just in case,” we should not be so naive. The American Banker highlights this development in writing, Treasury Extends Tarp to 2010:

The Treasury Department announced Wednesday that it would extend the Troubled Asset Relief Program to Oct. 3, 2010.

In a letter to lawmakers, Treasury Secretary Tim Geithner cited improvements in the economy but said Tarp must be extended due to remaining challenges for homeowners and small businesses.

That’s right. The outlook for housing and jobs remains challenged, all assertions to the contrary aside.

“This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats,” Geithner wrote.

Unforeseen threats? Come on, Tim. Be straight with us. Try ongoing bank failures due to losses on loans. Read the rest »

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British Taxman Whacks ‘The City’

Posted by Larry Doyle on December 9th, 2009 9:04 AM |

You’re a mean one, Mr. Grinch…!!

Are British bankers headed to the pub early today to drown their sorrows? Little doubt, as the Chancellor of the Exchequer Alistair Darling (British equivalent to Treasury Secretary Tim Geithner) announced that year-end bonus pools for British banks will be hit with a one-time, top line tax of 50%!! Ouch!!

Bloomberg provides a brief synopsis this morning in writing, Darling Levies 50% Tax on U.K. Bank Bonuses Above 25,000 Pounds:

Chancellor of the Exchequer Alistair Darling said he will impose a one-time 50 percent tax on banks for all bonus payments of more than 25,000 pounds ($41,000).

The tax, effective from today until April 5, will be levied as a surcharge on the employer. It will apply to all banks and building societies operating in the U.K., including subsidiaries of foreign banks.

The Treasury estimates the tax will raise about 500 million pounds and affect about 20,000 bankers.

What does this mean? Take 50% off the top line of the bonus pool and then distribute the balance. Those bonus proceeds are then subject to the U.K.’s current tax rates, the maximum of which is right now 40%.

Add it all up and the effective tax rate for the majority of the bankers impacted is between 65 and 70%!!

What does the crowd in Washington and on Wall Street think about that?

While I am not one for increasing taxes, the fact is the British banks and the U.S. banks were saved by the taxpayers. This tax is merely a return of some of the taxpayers’ money.

While the bankers will view Darling as Mr. Grinch, do you think the unemployed laborer in the U.K. or here in America has any real sympathy for those in the City or on Wall Street?

Would the crowd in Washington have the stones to impose a similar one-time hit on Wall Street?

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Two Sets of Books Require Two Sets of Accounting Standards

Posted by Larry Doyle on December 8th, 2009 2:43 PM |

What was at the core of the current economic crisis?

The financial transactions embedded in the SIVs (structured investment vehicles) located off-balance sheet within our major financial institutions brought our country to its knees. As the securities housed in these SIVs plunged in value, Uncle Sam was forced to ride to the rescue and bail out Wall Street.

Uncle Sam’s bailing required not only billions in dollars but also the coordination and complicity of the accounting industry. The Federal Accounting Standards Board (FASB) knows that Congress, supported by Wall Street, jammed revised accounting standards in place in order to facilitate Uncle Sam’s bailout.

The FASB, in an attempt to save face and a degree of integrity, has pushed back on Wall Street by passing FAS 166 and 167 which would require investments in off-balance sheet vehicles to be brought on-balance sheet. The implementation of FAS 166 and 167 is imminent and would require financial institutions to set aside increased capital against selected assets.
Read the rest »

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Obama Administration Ready to Admit Failure of Mortgage Modification Program

Posted by Larry Doyle on December 8th, 2009 11:19 AM |

Throwing good money after bad is not a practice that generates long term success and prosperity. In fact, the unintended consequences and costs of dysfunctional government programs should never be discounted. While intentions of certain programs may be noble, the practicality of Uncle Sam’s attempt to manipulate a market is not easily achieved. I am writing about the results of the Obama administration’s mortgage modification program.

I highlighted the state of this program in October in writing, “Mortgage Modifications: Statistically Insignificant”:

Status of Efforts
• 63 servicers had signed participation agreements for the first-lien modification program;
• More than 1.3 million solicitation letters for HAMP loan modifications to borrowers;
• More than 328,000 HAMP trial modification offers to borrowers;
• More than 209,000 HAMP trial modifications had started;

. . . and of the 209,000 mortgage modifications (.3% of total homeowners) started in the country, how are we doing?

• 1,080 borrowers had successfully completed the trial period and received HAMP modifications.

Yep. A whopping 1,080 borrowers have successfully completed the trial period and received modifications. A full .5% of those modifications that had started. Yes, a full 1,080 homeowners. I am sure there are plenty of homeowners still in the trial period, but even 209,000 homeowners as a percentage of the overall housing market is hardly significant.

What have we learned about housing over the last few months? Servicers have little interest in this program. Homeowners who are more than 30 days past due also have little interest in this program. The number 1,080 is clear evidence of that and, in my opinion, renders the entire mortgage modification program statistically insignificant.

Today we learn the Obama administration will release details later this week indicating that 6% of those mortgages in the modification process have now or will ultimately be successfully and permanently modified. Read the rest »

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Have Mortgage Delinquencies Peaked?

Posted by Larry Doyle on December 8th, 2009 9:43 AM |

This past May, I designated mortgage delinquencies as “The Most Critical Economic Statistic.” I wrote then and continue to believe now:

Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?

Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies.

While assorted analysts and economists have called the bottom in housing numerous times, rest assured a true bottom will not be established until we see a meaningful decline in mortgage delinquencies. Why? There is a strong correlation between delinquencies, defaults, and foreclosures. Until delinquencies decline, the supply of homes coming onto the market through the foreclosure process will not abate.

While analysts and economists have been wrong in their calls to this point, I keep my eyes and ears open when another entity calls a peak in the rate of delinquencies. I witnessed another one again this morning. Read the rest »

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David Levy Provides Sense on Cents

Posted by Larry Doyle on December 7th, 2009 2:50 PM |

I enjoy coming across individuals whom I have not previously met or read. Why? Individuals with new insights and perspectives provide real mental stimulus especially during challenging economic periods. I engaged just such an individual this morning in reading CFO Magazine. David Levy of the Jerome Levy Forecasting Center was recently interviewed and provided some fabulous insights on the economy, deflation, corporate earnings, bank balance sheets, and assorted other hot topics. This interview, entitled A Contained Depression, is a must read:

If you’re breathing a little easier because the Great Recession seems to be ending, consider this: the U.S. economy may remain in a “contained depression” for months or years to come. That warning comes from economist David Levy, chairman of the Jerome Levy Forecasting Center, an economic research and consulting firm. Levy originally coined the term to describe the recession of 1990–1991 and the subsequent halting, jobless recovery. Earlier this week, he talked with CFO about the prospect of a similar scenario unfolding today. An edited version of the interview follows.

What is the state of the economy today?
We’re in for a much longer period of contained depression [than we saw in the 1990s]. The single most overlooked observation about the U.S. economy in the postwar period is that balance sheets grew faster than incomes, decade after decade, both assets and liabilities. The problem is that asset values have to be justified by returns they can earn — or by expectations of future capital gains, and that’s where you get into bubbles. What went on in the postwar period couldn’t go on indefinitely. We were able to make it go on longer by dropping interest rates in the last two recessions, but we can’t do that anymore. We have to shrink the value of assets on balance sheets and shrink liabilities. And that makes it very difficult for the economy to operate. Read the rest »

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Will China 2009 Repeat United States 1929?

Posted by Larry Doyle on December 7th, 2009 12:05 PM |

“Those who do not learn from history are doomed to repeat it.”

George Santayana (Spanish born American Philosopher, Poet and Humanist who made important contributions to aesthetics, speculative philosophy and literary criticism. 1863-1952)

The economic boom of The Roaring Twenties here in the United States was closely linked with the massive financing of debt provided to post WWI-Europe. The U.S. was the envy of the world given its economic engine and subsequent economic surplus. Economic historians are well aware that the excess capacity in the United States precipitated The Great Crash of 1929.

Fast forward 80 years. Is China 2009 the equivalent of the United States 1929? Is the United States 2009 the equivalent of Europe 1929? How will the relationship between the People’s Republic of China and the United States play out? I addressed this critically important dynamic this past January in writing, “Prisoner’s Dilemma.”

I recently read and reviewed a fabulous piece produced by Black Swan Trading addressing this topic. This short piece, entitled Currency Currents, is strongly recommended. I submit:

Therefore, I think the key macro event i.e. major sustained risk event, will likely flow from protectionism. Rebalancing is the trigger for protectionism in a world when the major player, China, suppresses its currency. Read the rest »

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All Eyes on the U.S. Dollar Index

Posted by Larry Doyle on December 7th, 2009 9:22 AM |

What’s leading the market both up and down?

Regular readers here at Sense on Cents are fully aware of my focus on the U.S. dollar as the primary driver of our markets over the course of the last half year. This past summer, the BRIC nations regularly railed on our greenback as the international reserve currency. Japan jumped on that bandwagon, as well.

The pressure on the greenback supported by the Fed’s easy money policy served as the fuel that launched our markets from the intermediate pullback experienced in early July.

Check out the patterns in the U.S. Dollar Index versus the movement in the S&P 500 since early July. These indexes are almost mirror images of each other. While the order of magnitude is not exact, the direction is very highly correlated.

I certainly believe this correlation will continue and rest assured active traders on Wall Street are watching this relationship closely as well. In fact, what happened overnight? Equity markets traded off as the U.S. Dollar Index continued to firm. Read the rest »

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“Open Mic Night” on No Quarter Radio’s Sense on Cents with Larry Doyle, Sunday Night at 8pm ET

Posted by Larry Doyle on December 5th, 2009 5:20 PM |

UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar.

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Are we turning a corner on our economic landscape? Should we expect that 2010 will be a return to normal? What’s normal? The ups and downs of our economy and the resulting ebb and flow within our markets continue to present more questions than answers. On that note, what questions are on your mind? What would you like to discuss? Even if you don’t have questions but would like to share personal and professional experiences as you navigate your own economic landscape, please join me Sunday evening from 8-9pm ET for “Open Mic Night” on No Quarter Radio’s Sense on Cents with Larry Doyle. Additionally, if you’d like me to address a specific topic, please leave your request in the comments section.

As a reminder, all of my radio shows are archived and previous episodes can be listened to right here at Sense on Cents by clicking on the No Quarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all No Quarter Radio programming is available as a free podcast on iTunes. From the iTunes Store, type “NQR podcasts” in the search window.

Many thanks to Larry Johnson and the rest of the team at No Quarter USA blog for providing such a vibrant media vehicle as No Quarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!

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