Four of a kind

Sokol’s Dirty

My bet is that Mary Schapiro over at the SEC started looking at Sokol as of this morning. The optics on this one are terrible. So there has to be some noise from the regulator. I’m also willing to bet that nothing comes from it. Insider trading is a very tough case to make. Wiretaps and witnesses are needed.

I was on both the buy and sell side. I pitched a thousand deals and listened to the sale from the other side of the desk. The rules were always the same. If you were talking a deal you didn’t trade the stock. Period.

It might be useful to have Citi chime in on this. What are their house rules on this? They were pitching this deal to Sokol. If anyone on that deal team were trading the stock they would be out in an hour. If Berkshire has no hard rules on this, well, shame on them and shame on Warren B.

One thing that rubs me is that Sokol has made it out that he was just trying to make a few extra bucks so that he could give some more away. Like he is a nice guy. Bullshit. He’s just another predator.

 

Mortgages Outstanding

The FRB 4th Q 2010 Mortgages Outstanding report is hardly worth looking at. Nothing is happening in mortgage land. The lines are basically flat.

The FRB info is stale, but Fannie just released its report for February. Same thing. There is no growth in mortgages. There continues to be a very small month to month declines.

I was looking at this data and trying to draw some conclusions on how “healthy” these $10.5T of mortgages are. I have no reliable data on key variables, so I set up a matrix. The question I want to answer is how much real equity is behind all this paper today?

How much equity was there behind the housing stock in 2006? The answer is, A) At least 5%, but B) less than 50%. So the variables would be 10, 20, 30 and 40%.

How much has residential real estate fallen in value since 2007? It’s the same as above. At least 5% but less than 50%. So I considered what it looks like using drops in values of 10, 20, 30 and 40%.

I think equity (fair value minus mortgage) was around 15% in 2006. There was a lot of 100% cash out ReFi-ing going on back then. There was also a lot of high LTV mortgages being handed out. 15% equity is a generous assumption. I think the average loss of value is about 30% nationwide. This too masks reality as the biggest concentrations of homes are in areas that saw greater than 30% declines.

The conclusion is that there is still very substantial negative equity in the broad mortgage pool. The number starts with $1T. You can make your own dot on the chart. We ain’t out of these woods yet.

Price of ‘Talent’

Ed DeMarco, the fellow running the FHFA, appeared before the Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises today.

He had 16 pages of prepared remarks. All boring except for the last paragraph:

I am concerned that legislation to overhaul the compensation levels and programs in place today with the application of a federal pay system to non-federal employees carries great risk for the conservatorships and hence the taxpayer. I understand and have sympathy for what might motivate such a proposal, but I must report to this Subcommittee my firm view that such an action would, on balance, increase costs to taxpayers and risk further disruptions in housing market.

If DeMarco was talking with some friends he might have said it differently:

I need finance people. Lots of them. I need people who understand credit. MBS Traders. Back office types. People who understand and can price derivatives. Market economists. I need managers.


But I can’t get them. Government pay doesn’t draw the talent we need. I’m sitting on a time bomb. A 6 trillion book and the good people are all leaving. The private sector is sucking them up.


I know it sounds crazy but we have to pay the head of a government agency 4Xs what the president makes. The geeks who evaluate our derivative book earn (on Wall Street) 3Xs what a congressman makes.


I see no way around this. I fear it will end badly.

De Marco is a smart fellow. Consider his words a warning. We really don’t want the guys who finished last in the class running these beasts. (Fan and Fred are not going away anytime soon). The flip side is equally unacceptable. Big salaries for mid level management and geeks at Fan and Fred? That would go over big…… We ain’t out of these woods yet.

Supply

Dian L. Chu did a good summary of the supply side of crude. Bottom line; Cushing is full (damn near). If supply and demand have anything to do with the outcome the price is headed lower. Tough to argue with.

I wrote about the Cushing issue some time ago and got what I thought was an interesting comment from someone:

Today is March 2. A 100 tank car train left Stanley North Dakota loaded with Bakken oil headed to St. James Louisiana...delivered price was $104.60 a barrel....burlington northern rail road is charging $6 a barrel for freight...........bypassing cushing oklahoma because it is full.........and with limited oil out of the offshore rigs it pays to haul it all the way across the continent.........wow.

That was a month ago. Nothing has changed. High grade crude for Gulf delivery is still at a very big premium to WTI. $14 bucks as of this afternoon.

 

A few questions:

Are trains running with crude? If not, why not?

Is the $6/brl a good number for transportation? If so why the apparent arbitrage?

Are “we” paying gas prices based on Cushing or LLS?

It looks like there is a boatload to be made here. Is there? Who’s making it?

Social Security hits 60

Social Security had its 75th birthday last year. A more important event will take place in April of 2011. That will be the first month that Social Security benefit payments hit $60 billion. Think of that. $60b a month is one hell of a lot of money. This payout (annualized) is approximately equal to the entire GDP of the Netherlands, Turkey or Indonesia. It is 50% higher than the entire economy of Switzerland.

SS first hit the $50 billion mark in December of 2007. It took 42 months to add another $10b to the monthly payout. The next ten billion will come more quickly. The “base case” assumption by the Social Security Trust Fund puts that at October of 2013 (31 months). Their more pessimistic or “high cost” estimate suggests we could hit the $70b mark as early as March of 2012 (23 months).

Of course this never stops rising. The SSTF expects that the $100 billion a month level will be reached in 2019 (base case) and as early as 2017 should the ‘high cost’ scenario play out.

Things really look bad for SS when you consider the revenue numbers from payroll taxes. This chart tracks past and projected pay roll tax revenue versus benefits (based on the Trust Fund's Base Case)

The High Cost analysis is even worse. For what it is worth, I see almost no chance that the ‘high cost’ will be achieved. It’s going to be even worse than this:

The 2011 - 2019 projected cumulative shortfalls between payroll taxes and benefits are as follows:

Base Case Deficit…..411 billion

High Cost Deficit…..972 billion

There is a pretty serious debate going on in Washington about what to do with SS. At 6% of GDP and 20% of the budget SS has to come on the table. There are many in this discussion that hold to the belief that SS can’t be touched. 

If the budget deficit outside of SS was at 3% and the medium-term outlook was for sold GDP growth (with low inflation) the USA could possibly afford the economic cost that SS is about the bring to bear. But sadly, that is not the situation we are looking at. Outside of SS, the country will produce deficits of 10% of GDP and will require Trillions of new debt annually.

It is important to remember that every dollar of deficits at SS requires a dollar of additional debt to be held by the public. The defenders of SS keep looking at something called a Trust Fund that was supposed to “pay” for all of the SS red ink. But the defenders fail to understand that drawing down the Trust Fund just means that we go deeper in the hole on Debt Held by Public.

The Paul Krugmans and Dean Bakers of this debate have held to the position that the amount of debt the country issues on an annual basis is not a metric to seriously consider. They think that the funding deficit resulting from the real economy and at Social Security doesn’t matter.

I think they are wrong. If we wait 2 or 3 more years to wake up to the realities of funding SS, the cost of addressing the problem will be significantly higher. Failure to take this beast on today will probably result in substantial cuts in payouts for all beneficiaries in the not too distant future. That would be the worst possible outcome for the Krugmans and Bakers. For the life of me I can’t understand why these guys don’t see what's coming. The history books may well say that the staunchest defenders of SS were responsible for it’s demise. 

On QE3, Wall-Mart, Munis and the briar patch for the banks

A “proper” subsidy?

What’s the proper function of the Muni bond market? Keep in mind that this is not ‘free money’ we are talking about. Munis are tax-free. So there is always a subsidy attached to their issuance. Building a new bridge or highway has benefits for the public. Financing school construction and all manner water/sewer projects also benefits the public. There are dozens of examples I could give where the tax subsidy is justified as it creates a greater common good. But not this one:

It’s over (QE that is)

All of the Fed talk of late points in one direction. There will be no QE3 after 6/30/2011. We have not heard from Bernanke on this. I doubt we will. But I do expect that either the WSJ, NYT or WAPO will have an article in the next week or so that has the Chairman’s words embedded in the story. That article will be the point in history were the QE experiment actually dies.

We will still have QE1-Lite. This is the re-investment of principal from MBS holdings. Given that interest rates have risen significantly the prepay speed of the MBS is going to slow to a trickle. Future POMO operation will be in the $10-15b monthly range. They will have little to no impact.

The question in my mind is will we see a reversal of the QE consequence to the big markets? Is the private sector economy able to operate successfully without $100b a month in POMO? We are about to find out.

IMHO the Fed should have started the process of regularizing credit costs a year ago. They should never have done QE2. If that had been the case we would not have seen the big jump in equities. Inflation would be somewhat tamer. But they chose instead to step on the gas at precisely the wrong moment. Bernanke got spooked by bad numbers in the summer. He made a bad choice and when he got pregnant with QE2 nine months ago he got stuck with the policy. To have changed direction at midstream would have meant that Ben would have to acknowledge the mistake. Not likely.With the benefit of hindsight even he would (privately) admit to that today.

But now we have to (again) go through withdrawal of a short-term sugar high. That has always been messy in the past. Uncertainty (AKA: Volatility) is going to have to rise as a result. Fast markets are coming.

Rumors of News?

WASHINGTON (MarketWatch) — Officials at five major banks involved in home-loan-service settlement talks have been summoned to Washington for a face-to-face meeting with state and federal regulators, the first since a proposed settlement leaked out.

I wish I were at this "friendly" chat. Look for this to be the “Big Fix” to the mortgage foreclosure crisis. The big banks will yell and scream at all the proposals. In the end this will cost them at least $20b. But they will love the results.

Remember the Uncle Remus story of the rabbit who begs to be thrown in the briar patch?

Brer Rabbit shuddered. "Hanging is a terrible way to die! Just terrible! But I thank you for being so considerate. Hanging is better than being thrown in the briar patch.


Scratch out my eyeballs! Tear out my ears by the roots! Cut off my legs! Do what'nsoever you want to do with me, Brer Fox, but please, please, please! Don't throw me in that briar patch!"

We know how that story ended….

Speaking of briar patches, getting eyeballs torn out, and having legs and arms hacked off, how about that Wal-Mart - Supremes story that is due out today?

The shares are $52. I think that is a neutral price. Meaning the market does not know how to handicap this massive lawsuit. It should break one way or the other. It should do it by the close. My bet? The Supremes fold 5 to 4. There will be no class action law suit against the company that "America Loves" (to hate).

Ask and Listen

The head of the Minneapolis Fed, Narayana Kocherlakota gave a presentation in Marseilles, France on Friday. This was another attempt at convincing the public that the Fed can fix anything provided they are left to their own devices and have unlimited capacity to print money. The presentation was a “No Sale” for me.


The deep thinkers in Minneapolis have come up with a new formula. Bubbly Equilibria? What does that mean?

I suppose that someone has to create such drivel. The formulas were based on an Apples and Bananas economic model. Unfortunately the real world is a bit more complex.

The bottom line from Mr. K is that bubbles of any kind don’t create a threat to employment provided that the Fed provides the “appropriate” level of monetary stimulus. He does point out the limits of monetary policy due to the limitations of zero interest rates. So really this is just a defense of QE. His words:

“The bubble collapse has no impact on unemployment or output, given sufficiently accommodative monetary policy,”

This suggests that the Fed can "fix" all bubbles. What Mr. K does not seem to get is that the Fed is the one that causes bubbles. They do it with accommodative monetary policy. We are seeing this in ink every day. Look at the S&P, look at the CRB and look at the two-year note. They are all at bubble levels today. It’s cheap money and loose monetary policy that did it. The current bubbles formed by the Fed will pop. And when (not if) they do, guys like Kocherlakota will respond with: “We need more stimulus!!”

We do need some folks at the Fed who are purely academic economists. But they should not be pulling the strings on policy. We need pragmatists. Ones that can look beyond the next six months and say, “We should follow policies that promote long –term stability”. The current policies that create bubbles, and then fight them when they burst with more monetary stimulus, are old school. We need some new leadership. That leadership should not come from academia.

Want some evidence of that? (Reuters)

In one of the paper's more surprising claims, Kocherlakota suggested that extending unemployment benefits -- sometimes seen as adding to the jobless rate because it can discourage those receiving benefits from actively seeking jobs -- actually reduces it.

Mr. K. has to get out of ivory tower and talk to the people. He may be able to argue that extending unemployment benefits is countercyclical. But if he bothered to ask around and see what is happening he would understand that extending unemployment just creates more unemployed. I’d be happy to introduce him to a few folks that maxed out unemployment because it was much easier than working. But those people found work as soon as the checks stopped.

I suspect he would hear as much back in Minneapolis (if he bothered to ask). He would also hear that the folks in his district are just sick and tired of bubbles and the Fed that keeps causing them.

Ben's in a Bind

If you were Ben Bernanke and wanted to prove to the world that the policy of QE was working you would show this slide. This tracks the change in the Fed balance sheet and the S&P.

What’s not to like about this? The total US stock market capitalization is up north of $4 trillion in the past few years. A lot of folks got rich in the process. Millions of 401k are fatter too. But it is also true that the vast majority of American’s did not see much from this. Once again, the bulk of the $4T is in the top 10%. The fellow who sent this to me said, “laying the S&P over the Fed Balance Sheet growth kind of turns one’s stomach”. That’s my reaction as well.

As much as he may like to, Bernanke can’t show this graph. It will blow up in his face. He can’t show a positive correlation of QE to higher stocks. If he does, somebody is going to show the next two charts.

The first tracks the growth in the Fed Balance Sheet and the CRB. This lines up even better than the stock chart. One look at this and you have to conclude that QE = Inflation. 

The state of housing is still the central issue today. It is much more relevant to the health of the economy than high PE multiples. How did QE do for this segment of the economy? Can you say "lousy"?

Case Shiller 20 City Home Price Index Seasonally Adjusted

For the vast majority of American’s QE has been a dismal failure. Stock gains for the average guy were offset by losses in real estate. There was no wealth affect there. For those with few stocks and a house it was anther two-year loss in most cases. All savers lost as interest rates were kept artificially low. At the same time the cost of everything (except that IPad) is going up.

Sure the top 5% “fat-cats” got, well, fatter. I’ve always thought that the “trickle down” theory was, well, bullshit.

The Crisis in Portugal??

Everyone knew that Portugal would have to roll over and accept a bailout at some point. It was inevitable that this has happened. The lines crossed some time ago. Portugal has too much short-term debt. The cost of rolling it over (if possible at all) would be too high. Debt service at free market rates would kill the country. So there is no sense in keeping up the charade any longer. It was Portugal’s dependence on ST debt that did them in. This chart shows how the maturity schedule of existing debt simply overwhelmed their capacity to refinance.

What would you call this? ‘Mismanagement’ comes to mind. The Portuguese Treasury put the country at risk. Rather than point fingers it would be ‘nicer’ to conclude that Portugal had no option but to borrow short-term. It would be fair to blame the economic leaders of the EU. They knew for years that Portugal’s ST debt was a time bomb. The lessons of Greece and Ireland and their dependence on money with a short string are fresh in their minds.

Okay. You got that? ST debt = death. The greater the reliance on ST financing the greater the systemic risk. Now look at the US debt profile. Compare it to Portugal. Who looks worse to you?

When looking at a country’s aggregate debt and maturity profile it is important to look at the borrower's current status. But it is much more important to look at the relative change of ST debt on a year over year basis. Clearly the US is going in the wrong direction. It's happening at a pretty good clip. 

The argument that will be put to me is that the USA is a Reserve Currency and therefore can never be faced with the Portuguese disease of “no rollover”. Hogwash. Like I said, “Mismanagement” comes to mind.

On the "Wink and Nod"

When it comes to long term economic modeling there are two critical variables. (I) population and its relative growth over time and (II) labor force participation rates. If you get these two numbers right the job of forecasting the future gets easier. As a result, there is a significant amount of academic analysis of these factors.

The CBO is out with a report on the topic. A very thorough job at that. This is a clinical economic analysis. Just the facts maam. This is the language that the CBO uses to describe America’s illegal migration:

Unauthorized Residents.
CBO estimates that, on net, about 400,000 unauthorized residents (foreign-born people who are not authorized to live, work, or study in the country) left the United States in 2010. It anticipates little change in the number of unauthorized residents in 2011, but it projects net inflows of about 1.4 million in 2014 and again in 2015 as the economy recovers and demand for labor strengthens. Beginning in 2016, the projected net flows of unauthorized residents taper off and reach 270,000 (the same as SSA’s projection) in 2020.

I don’t want to initiate a debate on what America should or shouldn’t do on the emotive topic of illegal migration. Instead focus on how nutty it is that we actually model our economic outcome based on the current status quo. And the assumption is that nothing will change until 2020 at the earliest.

I don’t fault the economist who came to these conclusions. This is the “base case”. It is part of the broader macro economic outlook that the CBO uses to look into the future and make baseline economic predictions. I read most of the stuff from the CBO. Everything they produce has this Subject To:

What is a baseline?

A budget baseline is a projection of future spending and revenues based on the general assumption that current laws and policies remain unchanged.

Now I’m confused. There is no question that the CBO’s assumptions are not based on Current Law. There is nothing legal at all about the expectation of 5mm ‘Unauthorized Residents’. Therefore the forecast must be made based on the assumption that Current Policies will remain in place.

But what are the policies? The ones set forth by the President? These are his words from the State of the Union. I don’t read this to mean that it is US “Policy” to have millions of illegals.

• Continue to make border security the responsibility and priority of the federal government,
• Hold accountable businesses that break the law by exploiting undocumented workers,
• Make those living in the United States illegally take responsibility for their actions, and
• Strengthen our economic competiveness by creating a legal immigration system that meets our diverse needs.

The US is spending about $4b a year in the Border Patrol. They just spent $1b on a new high-tech surveillance plan. Then they scrapped it. Surely the CBO is aware of these on budget expenses. It’s hard to see billions being spent and then conclude that it is the “Policy” of the US to allow 500k Unauthorized Residents a year into the system.

So the CBO definition of, “What is a baseline?” should be changed to read:

A budget baseline is a projection of future spending and revenues based on the general assumption that current laws, policies and or predictable illegal activity remain unchanged.

But that won’t happen. To change the CBO language to reflect Reality would make the whole process look foolish. But actually when you look at it, it is foolish either way. We’re kidding ourselves at so many levels.

On Wall Street this kind of stuff used to be called the “Wink and nod”. I’m not familiar with the equivalent in D.C. Any suggestions?

Google’s Letter from the SEC

Back in October Bloomberg ran a story on how Google pays little in taxes on foreign source income. I wondered at the time if this story would go anywhere. It seems that it has.

This nice letter from the SEC is the last thing that Mr. Schmidt wanted to see. Probably this is good for the stock, right?

Sec Google Letters

IRA takes on PMI – Credit Unions take on the banks

PMI should be dead!

I got into writing financial blogs three years ago for one reason. It was the mortgage insurance industry “PMI” that got me out in the open. I saw first hand what a terrible concept this was. I saw (in advance of the problem) that PMI was going to result in a mortgage explosion for the country. Of course it did.

I had a family member working at one of the big PMI firms. I argued with them regarding the insanity of what they were doing. Before the crisis the response was always the same, “We're doing God’s work of getting people into their own homes. Plus we’re making a boatload in the process.”

In my opinion there is nothing more dangerous to our financial health than PMI. It should have been banned years ago. It is the ultimate derivate of credit risk. If it were not for PMI the disaster that hit us in 2007 would not have been anything close to as severe as it was.

Yes I want PMI banned. Yes I want the likes of AIG (United Guaranty) out of the business. But that will not happen. My fallback position is that it should be illegal to securitize ANY PMI loan. I want to have PMI backed loans rejected as eligible for purchase by Fannie and Freddie. If there must be PMI, keep it out of the risk of taxpayers. If private lenders want to make mistakes with this, let them. They will go out of business and we will be rid of them and their poor choices.

There is an excellent, must read article on this from the folks at Institutional Risk Analyst today. We can only hope that the “deciders” in D.C. read it.

Link to IRA.

Credit Unions go for blood

Interesting article at the WSJ this morning re Credit Unions. It would appear that a law suit is about to get filed against the big banks (again). Five of the nation’s biggest credit unions had their balance sheets polluted with crap CDOs. Now they want their money back. From the article:

The National Credit Union Administration, or NCUA, has threatened to sue several investment banks unless they refund over $50 billion of mortgage-backed securities sold to the five institutions, called wholesale credit unions.

The names involved?

The NCUA is accusing Goldman Sachs Group Inc., Bank of America Corp.'s Merrill LynchCitigroup Inc unit, . and J.P. Morgan Chase & Co. of misrepresenting the risks of the bonds to wholesale credit unions.

Surprised? I’m not. Goldman Sachs has commented on the pending litigation:

Goldman said the NCUA "has stated that it intends to pursue...on behalf of certain credit unions for which it acts as conservator" claims that offering documents for certain securities Goldman sold "contained untrue statements of material facts and material omissions  ."

Untrue statements of material facts?? Material omissions?? I’m shocked!

Watch this case as it evolves. This may set an interesting precedent. It could very well backfire on the US Treasury Department. Way back in the spring of 2008 our good friend Hank Paulson (and former T.Sec.) forced Fannie Mae to issue a $1 billion + Preferred Stock offering. Fannie of course went bust less than six months later. The offering document on this deal was littered with material omissions and misstatements of facts. But this deal was pushed out to the public by the Treasury Secretary. All the big banks (led by Merrill) sold this swill to the public.

If the NCAU wins its fight with the banks, the lawsuit against Treasury re the garbage Fannie pref is assured.

Wall Street Journal - “Spring Planting”

I have pounded the table on numerous occasions regarding the Wall Street Journal’s reporting of Federal Reserve policy. In particular I have been critical of articles by Jon Hilsenrath. Jon’s writing and reporting have been excellent. My problem has been that he clearly has been projecting the words of Ben Bernanke into his reporting. He has done that without appropriate attribution. For me this is dis-information. If Bernanke has something he wants to say, let him say it so all can read, understand and critique it. Leaking his thoughts on policy toward QE2 was a way of Bernanke using the press to shape public opinion on monetary policy. The cozy relationship between the WSJ and the Fed facilitated the implementation of the policy. Call that a “snow job”. A big one.

I believe we have another example of this today. The WSJ has a front page article by Damian Paletta titled: Insolvency Looms as States Drain U.S. Disability Fund.

This is an excellent article that I would put on the 'must read' list when this issue of entitlements in America is discussed. But I’m convinced the article was functionally planted by Washington Inc.

It’s quite possible that the WSJ article will be the basis for policy choices that are adopted by our legislators over the next year or so. If you accept that the story was a plant, the question(s) to ask are who planted it and why?

That thing that we know of as Social Security is made up of two distinctly different programs. The OASI (Old Age Survivors Insurance) and the DI fund (Disability Fund). Even a cursory look at the dynamics of what is generally referred to as OASDI (combined) shows that the immediate problem facing SS is the Disability Fund.

The WSJ article describes in detail just how far the DI side of the equation has fallen out of whack. DI is an accident and needs to be fixed. So the Journal did ‘us’ a service with the story. Right? I think wrong. The plant article sets up a “solution” to SS. Fix up DI and don’t touch OASI.

The DI fund could be patched by (I) tighter availability requirements (II) small (relative) increases in payroll taxes and (III) some contribution to the DI operating expense from the general budget.

However, a quick fix on DI is just a mask for the much larger problems that are brewing at the Retirement Fund. The SS Trust Fund forecast benefits payments for the combined OASDI as follows:

DI Benefits 2011-2019………$1.4T……16%

OASI Benefits 2011-19….......$7.1T……84%

We are going to put a patch on 16% and ignore the 84%.

My conclusion that the WSJ story was planted is based on the following from the article:

"Beatrice Disman is in charge of the Social Security Administration's New York region, which oversees operations in Puerto Rico. She said…………………."

Ms. Disman does not talk to the WSJ. Ever. Her boss does not have the authority to permit her to talk to the Journal either. The Press Office at SS does not let the WSJ talk to staff employees. The decision to allow Ms. Disman to speak with the WSJ was made at the highest levels of SS. In my opinion this interview was granted with express consent of Stephen Goss the Chief Actuary at SS.

My guess is that this story was his idea. If that were to be the case then even Mr. Goss would not have done this without the blessings from the White House. Those blessings (and urgings) would have come from the current budget director Jack Lew. I doubt even Mr. Lew would have initiated this without a nod from the President. That is the way Washington works. When people “willingly” talk to the press they do it with an objective in mind. And that means that every word is scripted. (the "Who")

The Retirement Fund is truly a political third rail. No one wants to touch it. The DI is not such a hot potato. When American learns (thanks to the WSJ) that the folks in Puerto Rico and other states are milking the DI system there will be no opposition to some “fixes”. The end result will be that all the politicians will be able to say that they were responsible for saving SS when in fact all they have done is kick the can down the road on the much larger issue of the retirement entitlements. That's the "politically desirable" short-term solution. (the "Why")

To be sure the DI needs a fix. But if that is done without touching the OASI it will be at our country’s long-term peril. And that is exactly what I think the Journal’s article portends.

I wonder if the folks at the Journal understand that they are getting dangled on a string. I think they do. I’ll ask them, but I’m not expecting a reply.

Quickies

FALLOUT

It was just a few weeks ago that I wrote about some evidence that I was seeing that suggested the real estate market in my neck of the woods (North of NY on the Hudson) was stabilizing. I was aware of a number of transactions for upper end homes that looked encouraging. To be sure this price action was at levels that were about 40% below the froth of 2007. Supply and demand seemed to be leveling out at around 2002 values. So we have had a lost decade. But I was a bit encouraged by what I saw as evidence of increasing demand.

Now the update. Two of the deals I referred to have cratered. The reason? No mortgage money? Not the case, these were all cash buyers. Sellers remorse? Hardly, not after two years on the market.

The reason for the busted deals? It was the Indian Point Nuke that did them in. Both of the deals I know of (and apparently a few others) had the happy buyers walking as the homes in question were inside of the ten-mile radius of a 40 year old and badly flawed nuke. Apparently the events in Japan have caused some re-thinking.

Some RE agents are taking the issue head on. Rather than hiding the fact that there is a nuke nearby they are highlighting it as an “Upside”. They provide a copy of the following story suggesting that Governor Cuomo will soon close IP and when it does all that depressed real estate is going to pop by 20%.

 Proving once again that real estate agents, like car dealers and bankers, have no shame.

Cuomo’s comment from New York Magazine:

"It should be closed. This plant in this proximity to the city was never a good risk."

On Hot Money

I have been pounding the table over the issue of banking secrecy for some time. I don’t like when Potentates can stash huge dollars in secret accounts. I don’t like it when drug dealers, pirates, dirty politicians or anyone else has a convenient and safe place to hide money. I think these policies work against the common good. When a guy like Ghaddafi can stash the odd $20 billion in US banks there is something wrong.

I have been amazed at the level of opposition I get on this theme. There is a large group out there that believes that no regulations are good regulations. I am no fan of regulations, but it is equally clear to me that we need some rules that are followed. If we don’t, we just promote and encourage lawlessness. Sorry.

For those that think I am off in left field with this notion I provide you with a letter from those good folks at the American Banking Association. They are doing everything they can to keep foreign accounts in the dark. So those that think secret accounts are such a good idea are actually in bed with the likes of the ABA. I think both of them should change their tune. At a minimum they ought to consider who they are sleeping with.

Link to letter. Some snippets:

Know your enemy

Gadhafi……..WSJ

Gaddafi……..London Telegraph

Qaddafi…….NYT

Kadafi………LA Times

Kaddafi…….Christian Science Monitor

Gadahafi…..Yahoo

Khadafy……NY Daily News

Ghadafi…….NZZ

Khaddafi…..NZZ

Khadifi……..Wikipedia

Ghaddifi……Daily Mail

Shipping News

The Baltic Dry index has bounced 50% from 1000 to 1500 in the past month. Other indexes have followed suit. I asked a friend in shipping if this a true turnaround or just a dead cat bounce in an index that fell 75% (peak to trough) in 10 months.

I got an interesting response. In this fellow's opinion the improved outlook can be attributed to a big deal by the Carlyle Group (DC hedge fund). Bloomberg link

The Carlyle Group, the world’s second-biggest private equity fund, said it’s forming a venture to buy more than $5 billion in container, dry bulk, and tanker vessels as well as other shipping assets.

So is this a good sign for the industry? Yes and no was the answer.

Anytime an entity commits big capital like this it will affect the whole industry. Pure supply and demand suggests ships are gong to up in value. So that seems like good news.

But the other side from the Greek shipper:

“For years we have all made a fortune shipping raw materials and other goods to and from China. The Chinese know this. The China/Carlyle deal will create competition that now does not now exist. I am afraid that our biggest customer will no longer need our ships. Long-term this will be bad for us.”

Chinese dominance of the global economy is growing every week. Nothing is going to slow that ship down. It's written in stone.

On the spin

So I was out of touch for seven hours or so. I check in with the news sources just now on all the stories that matter. Unbelievable how much things have changed in a third of a day. Even more unbelievable is that all of the news is good.

First of is the No Fly (“NF”). Jim Cramer said on the TV the other day that as soon as the NF is announced, it is off to the races. The NF means that all that Libyan crude and gas is coming back on line in just a few days. Any supply issues that were nagging the market have been relived by just the news. Oil should be under 90 and headed to 80 in just the next few weeks!

There is also very reassuring news on the Japan nuke front. None other than the leader of the free world has spoken. Obama has made it very clear that there is no risk of radiation on US soil. From Hawaii to Guam and Samoa. From Alaska down to the coast of Mexico. Not any place where the American flag flies is there ANY risk of exposure that would/could have a medical consequence. This is very reassuring news. There is no risk what so ever to America. None.

Important developments at the failed nuke site. There are now 300 hundred people attempting to deal with the problem. As one news report highlighted this is a 600% improvement in just 24 hours. Clearly progress is being made.

We now have fire trucks on location that are able to squirt water on the stricken reactors and storage sites. I was not aware that this technique could be so successful. Apparently putting out a 3,000 degree fire of boiling spent rods is not as difficult as first thought. Even better is the helicopter. The pictures I saw showed that the Huey was able to drop the water with pinpoint accuracy. Not a drop was wasted. What an elegant solution.

The final bit of info that should bring a resolution to the nuke problems is that the French have airlifted in 100 tons of boric acid. Just in case that might not prove to be enough the S. Koreans are sending another 56 tons. Problem solved.

Once again I am surprised. I thought boric acid was only useful for killing cockroaches. Some say it can be helpful with a yeast infection. But now we know that old-fashioned 20 Mule Team Borax is all that is needed to absorb any unwanted radiation.

The now, more than adequate, water supply coupled with the magic of borax creates the favorable status that bankers refer to as “Two ways out”. Lawyers think of it as, “Belt and suspenders”. There are options, there are solutions, there’s little risk.

The final bit of data is that the G7 Central Bankers are now acting as one in coordinated global currency intervention. This truly is good news. The steady hands of the central bankers have eliminated downside market risk. With the risk now behind us only the upside is left. The Yen carry trade now has the blessings of all those well meaning central bankers. We know how powerful a force this can be. This is the “stealth” QE3-4 that Bernanke desperately needs and wants. The circumstances will give him good “cover”. When global inflation ratchets up again as a result of the Free Money Card from the G7 Ben can say, “Don’t blame me. It was the other guys that made me do it”.

A look at the latest “smart thoughts” from virtually every financial institution and TV talking head is that the tragic events of the past few weeks can lead to only one conclusion. Global growth is about to explode. Yes there may be a hiccup for a bit, but the future is as bright as it has been for some time.



Not one fucking word of this is true. It will take years for those nukes to cool down. There is more risk in front of us than behind. The resources being brought to bear are inadequate. There is no quick fix, including borax. I truly hope the winds will always be favorable. But that is just a hope. If the citizens decide they want to be at least 200 miles away it would have major consequences to the capital and the country. There is no Japanese growth story until the nuke issue has been resolved.

In a few hours NATO forces will take out the airports and anti-aircraft installations in Libya. I have no doubt that they will control the skies. But they will not strafe forces loyal to Ghadaffi. They will not put boots on the ground. The civil war in Libya just got notched up, not down. Where is the next NATO No Fly? Jordon? Syria? Bahrain? Algeria? How about Iran? A few big protests over there and all we have to do is send in a carrier or two and do the No Fly?? We shall see if this leads to stability in the ME. I see it is as an act of desperation. One that will bring significant negative consequences.

The G7 lit a fire tonight. I think this was also an act of desperation. When markets don’t do what they want Central Bankers come to the rescue. They fix the markets. Just like that. They buy stability with printed money. And they tell you there is no cost to it. Simply not true.

Those bankers that are spinning a tale of upside opportunity are an interesting part of the mix. You don’t normally see them coming out of the woods together like this. The noise from the “good news” boys seems a bit too orchestrated for me. One thing that may be a factor is the calendar for new issues, secondary’s and big syndicate bond deals. There is a ton of paper that wants/needs to get sold. It is sitting on the shelf waiting for a window. Those bankers have a good reason not to rain on their parade. But really, how can they be so confident when there is so much uncertainty?


Sorry for the rant. I’ve been around for a bit. I’ve always made note of the events that shape us. Never in my life have I seen so much spinning and manipulating. It is coming from heads of state, government officials, central bankers, commercial bankers and the press. It will be interesting to see how long the spinning and manipulating will work. Not long is my guess.

Spin, Spin and more Spin

Sheila says goodbye to the ABA

I have gone both ways with Sheila Bair. I have criticized some of what she has done and applauded others. She gave a speech to the America Bankers Association today. She summed things up pretty well. Early on in the presentation she made this significant remark:

This may be my last opportunity to speak with you before the end of my term in June.

Read this to mean that she is out. This is a big job that requires a transition period. A new FDIC head has to be named soon. Given the politics of this position and the daggers being bandied about in D.C. I think this has to come by 4/30. Just six weeks away. Should be interesting.

Given that this was her last opportunity to address all the big bankers in one room it was a good time for Sheila to beat up on the audience:

I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy.

Apparently this woke the audience up. Guys were choking on their bagels. This must have also gotten the coffee cups rattling:

My reading of recent polling data on how the public views banks also speaks to the need for a different approach from your industry. In April 2010, a Pew Research poll found that just 22 percent of respondents rated banks and other financial institutions as having “a positive effect on the way things are going in this country.”


This was lower than the ratings they gave to Congress, the federal government, big business, labor unions, and the entertainment industry.

She warned the banks:

What is important for you to recognize is that this type of reputation risk will eventually have implications for your bottom line and the confidence of your investors and customers.

All this is old news to Zero Hedge readers. But it's a pretty big deal when the outgoing head of the FDIC says it.


Notes:

(I) We have not seen the last of Ms. Bair. I don’t think she is a presidential candidate, but she would make a good VP. Her name is on this list. She might be our next Treasury Secretary. I’m "ABT" (anyone but Tim). She could also run the Fed. Bernanke has erred with QE2. He will take heat for the inflation that is brewing. It just might be that he goes back to Princeton in a year. Her name is definitely on that list.


(II) I finally got around to dumping my accounts with the big banks. I am now with a Community Bank. They do everything the big slobs do. They don’t have branches on every corner. Who cares? Community Banks are now lending. The big guys are not. Their deposit rates are better. Plus you get to say “screw you” to a Morg, a Citi or a BoA.

IRS on BABs: "No Data"

I hate uncertainty. Most things have a degree of probability that I can live with. Not the Japan story. How bad could this get? It’s difficult to put bounds on it. Nothing to do but wait for clarity. I hate waiting. In the meantime I am trying to focus on the usual things. They don’t seem to have much significance. In more normal times the following info would be worth noting. I think it closes the door forever on the BABs program. A bit of the history:

The Build America Bond program came out of the 2008 stimulus legislation. It was a subsidy for Munis. Washington paid 35% of the interest expense for new muni bonds. The program was very popular with State Treasurers and Wall Street.

The program expired at the end of 2010. Obama, the Democrats and the big Blue states (Cali, NY & Il) and every lobbying outfit in DC (paid by Wall Street) pushed to get BABs extended with the rest of the tax cuts. The Republicans nixed it.

In the President’s budget there is another request for a new BABs deal. The proposal is for a rebate of 28%.

A group of Democratic Congressmen has sponsored new BABs laws. H.R. 992 sets the rebate at 32% in 11’ and 31% in 12’.


I actually believe that BABs is a significant piece in the puzzle. The absence of BABs is not a crisis. But it is another chink in the muni armor. Without it, states will not be able to issue as much debt. Interest expense is likely to rise as a result. Projects will be shelved or delayed. Economic growth will suffer. Jobs will be lost and infrastructure will get more neglected. We know the formula, Debt=Growth.

I also find the BABs story fascinating as it is central to the Republican effort to strangle Blue states. This is all about presidential politics. The “Reds” think that if they make things even tougher on the poor folks in Illinois they just might win the White House.

Well here is the ammunition those Reds need:

The critical issue on BABs has always been the actual Federal tax receipts from investors holding the BABs securities. In a perfect world investors would be in a 32% tax bracket, therefore a 32% subsidy is “Revenue Neutral”.

I (and many others) have maintained that the BABs bonds went to non-tax hands. My guess is that the IRS would be lucky if they got 15% back. So the true subsidy by federal taxpayers was 20% of the interest on muni debt. A very big deal for Cali, NY and Il.

I have been working to get the answer to the question, “What are the actual tax receipts for BABs?”

I asked the CBO. They are supposed to “score” H.R. 992. To value the bill they would have to come up with a number for tax income. They did not answer me.


I asked the OMB. This is the White House budget so I thought they would have a basis for their proposal. They did not answer either.


The IRS is where this data is. So I wrote them too. Guess what? I got an answer: (my emphasis)

In response to your request for the percentage of tax collections from bonds associated with Build America Bonds, we will not be able to answer your request. Unlike tax-exempt bonds build America bonds are taxable, but the IRS Tax-Exempt area collects no data on the tax obligations associated with them.

So there is no data. Period. After two years and ~$200b of bond issuance nobody really has a clue what it is costing us. And for that reason alone any talk of a BABs revival is D.O.A.

I’ll send this to the Republican leaders. The absence of information needed to make an informed vote is a good place to hide behind. They might just need some cover on this one. I can’t think of a presidential election that was won without California and New York playing a role. Net-net the Reds are spiving the two biggest states.

The guys who wear the white spats on Wall Street play hardball for money. The guys in DC do it for power.

Local Notes

My Nuke

I’m by no means an expert on nuclear power plants and their safety. But I live about 9 miles from one. From my third floor you can see the lights and roof of the containment dome. So if this one melts, I ‘m toast. If it blows up, I probably won’t hear the noise….

Doesn’t phase me a bit. My number is much more likely to come up from something other than a nuke.

I am bothered by the sirens. They test them every couple of months. All the dogs go crazy for 10 minutes. The birds just leave. Most kids under 5 start crying. It’s a noise you can’t escape. Other than the sirens there have been some plans to evacuate folks like me. The local joke is this sign:

When Indian Point blows up we’re supposed to go to this location and wait for a bus. Like some poor bus driver will really show up when the radiation is falling. It’s not a joke, but it is a joke.

 Indian Point is 24 miles north of NYC, right at sea level on the Hudson River. It was built in 1962. The original reactor has been decommissioned. In 1974 IP 2&3 were brought on line. The water-cooled reactors are pushing 40 years old. Indian Point is one mile from a fault-line. The facility was designed to withstand an earthquake of 6.1 (5.1 is estimated to be the highest).

You tell me. What’s so different between Indian Point and those in Japan that are now melting down?

A coalition of people have been trying to shut IP down for as long as I can remember. In 2008 I thought it would happen. Governor Elliot Spitzer and the County Exec, Andy Spano, publicly promised that the operating license for IP would not be renewed. But Spitzer got caught with his pants down and Spano got cremated in an election. So nothing happened with IP. Some recent developments:

• On January 7, 2010, NRC inspectors reported that an estimated 600,000 gallons of mildly radioactive steam was intentionally vented after an automatic shutdown of Unit 2. The levels of tritium in the steam were below those allowable by NRC safety standards.

• On November 7, 2010, an explosion occurred in the main transformer for Indian Point 2. The accident is still being investigated.

My bet? Indian Point will be closed in less than a year. 

One thing about this? IP (when it's running) provides 30% of Westchester/NYC power needs. Electric rates have nowhere to go but up. Big time.

Potholes

I was driving around this weekend. Unbelievable how bad the roads are. I’ve not seen them like this before. The tough winter is the culprit. The potholes are just exploding now that it is warm and wet.

I was cruising on the elevated section of the Bruckner Expressway. This road alternates between being a parking lot and a racetrack, depending on traffic. I was travelling at 60 doing my best to dodge potholes when I fell into a big one. Sidewall blowout. And I’m on a four-lane highway in the South Bronx, wearing a suit. So I swerve off the road and join the other losers who have busted tires.

In my stupid car you can’t replace one tire. Apparently the slightly different road-wear eats up the transmission. So I just got two new tires. Big bucks. I checked with my guy. The same tires are up 30% in price in just the past year. They are going up 3-5 % a month of late:

Yokahama Tire ^ 8% 4/1/2011

Michelin ^ 12% 3/1/2011

Hanook ^ 9% 3/5/2011

Cooper ^ 12% 2/6/2011

Bridgestone ^ 12% 3/1/2011

We’re going to get it both ways on this. In the years to come our roads will be deteriorating. Every budget, from the smallest town to the Federal government, will be cutting back on maintenance. We will blow out more tires as a result. The price of those tires is rising about 15 times faster than the CPI. But actually this will not show up in the CPI that Bernanke is looking at. The end result will be that we will all be a bit poorer. And we will continue to follow a misguided monetary policy. We can’t eat an IPod. And it won’t work as a spare.

OOPs! Where does this go?

Daniel Mudd, the former CEO of Fannie Mae got a Wells notice from the SEC on Friday. I have been waiting years for this to happen. There is a good reason this action is so late in coming. This case could open the door for culpability of the Federal Government in the collapse of the US mortgage agencies.

The Wells notice is a very significant ratchet up of this story. Prosecution is not assured, but a big investigation is certain.

Mudd, who is now the CEO of buyout firm Fortress Investment Group, commented on the bad news from the SEC in predictable fashion. He denied everything: (Bloomberg)

“I could not disagree more with this turn of events. The disclosures and procedures that are the subject of the SEC investigation were accurate and complete. These disclosures were previewed by federal regulators, and have been issued in the same form since the company went into government conservatorship.”

I have always believed that Mudd is dirty. He had ample foreknowledge that the wheels were coming off at Fannie (and the entire mortgage market). If he argues that he did not, he will just look dumb. When he spoke to Bloomberg he was reading from a script prepared by big-shot lawyers. Again his words:

These disclosures were previewed by federal regulators.

Mudd and his lawyers are spot on with this comment. It is a shot across the bow of the SEC. If Mudd had used real words in his statement he would have said:

“We prepared statements and sent them to our regulator, OFHEO. They reviewed them and agreed with them. Fannie has letters from OFHEO that says we were clean. Don’t blame me for the blowup. Blame our regulator!”

OFHEO (Office Of Federal Housing Enterprise Oversight) was run by James Lockhart. I don’t think he is responsible for the collapse of the GSE’s. But I have always been convinced that he covered up the problems from the day he took over as the head of OFHEO. OFHEO did fail as a regulator. There can be no doubt about that at this point.

I hope the SEC pushes this hard. I hope there is a trial. If there is, I am betting that Mudd takes a walk. His reporting/disclosure was approved by Lockhart. That legal conclusion (should it come) would be very damaging to the government. It opens the door for a ton of lawsuits.

-Lockhart is now Vice Chair at Wilbur Ross’s holding company. He is advising on investments in distressed mortgages. Fitting.

-Don’t read this as an argument to buy the very distressed securities of Fannie and Freddie that are now trading in the “Pinks”. If there were to be some legal action I think it would be to the benefit of those poor suckers who bought and held Agency preferred and common prior to the conservatorship in the fall of 2008. That said, the Fannie Pref is up 400% in just the past few months. Go figure…..

CBO to 'everyone': Bend Over!

The Congressional Budget Office came out with a thick report titled: (love the graphics)

This 240 page beast has something for everyone to hate. More than 100 recommendations on ways that expenses could be cut, or revenues increased. You’d have to go through this line-by-line to find which idea will hurt you worse. My guess is that the average American family will get hit by at least a half dozen of the options.

There are a number of suggestions that may prove “popular”. For example a transaction tax on large financial institutions generates $71b over 10 years.

Impose a Fee on Large Financial Institutions = 71b

Increase Alcohol taxes.

Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon = 60b

Or any of these:

Raise Tax Rates on Capital Gains = 48b

Set the Corporate Income Tax Rate at 35 Percent for All Corporations = 24b

Tax Carried Interest as Ordinary Income = 21b

Reduce Funding for the Arts and Humanities = 5b

Cut the Number of Aircraft Carriers to 10 and the Number of Navy Air Wings to 9 = 1.8b

These things look interesting. But as you go through the report you get to see just how big these numbers are. While it may sound good to raises taxes on booze it really does not make much of a dent in the big picture. We need big numbers. Some of the suggestions that actually help fill the bucket:

Impose a 5 Percent Value-Added Tax (over 10 years) = +2.5 Trillion

Impose a Price on Emissions of Greenhouse Gases = 1.8 Trillion

Limit the Tax Benefit of Itemized Deductions to 15 Percent = 1.2 Trillion.

Limit or Eliminate the Deduction for State and Local Taxes = 862b.

Increase Individual Income Tax Rates (1% increase on income and AMT) = 702b

Accelerate and Modify the Excise Tax on High-Cost Health Care Coverage = 650b

Increase the Maximum Taxable Earnings for the Social Security Payroll Tax = 457b

Tax Social Security the Same Way That Distributions from Defined-Benefit Pensions Are Taxed = 438b

Accelerate and Modify the Excise Tax on High-Cost Health Care Coverage = 310b

Increase Excise Taxes on Motor Fuels by 25 Cents = 291b

What’s not to hate about these ideas? The one that stands out in my opinion? We’re getting a VAT.