New Site-This Is What I Warned You About

OK. I have to put you through this one more time, at least those who have stuck with me so far.
The new website is But The What. In Internet speak, it is http://www.butthenwhat.com/.

While you can click on that to get there, you can also use this LINK to get there as well.

Bookmark it, add it to your favorites, whatever so you don't lose it. I am not moving again. Also you probably need to add it to your feed reader if that's what you use. There is also an email feature if you want to get the posts emailed to you.

The site still needs some work but it is usable now.

Thanks for your patience and expect some interesting things.

Tom

Citigroup Sets The Bar Higher For The Next Round

Ok, this is something of a blockbuster. Here's the latest from the WSJ:

The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.

Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.

In addition to the capital, Citigroup will have an extremely unusual arrangement in which the government agrees to backstop a roughly $300 billion pool of its assets, containing mortgage-backed securities among other things. Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed.

Citigroup would also agree to work to modify -- if possible -- troubled mortgages held in the $300 billion pool, using standards created by the FDIC after the collapse of IndyMac Bank.

The government is not expected to require any management changes, as that was seen as potentially being too destabilizing.

Let's parse this.

The government agrees to go on the hook for another $300 billion. Out-of-pocket is $20 billion that goes to shore up Citi's capital without as so far reported any equity for the government. Citi takes the first loss on the guarantee of assets in an amount of $37 billion to $40 billion (don't you like the way we throw around a billion dollars or so?) and then various parts of the government pick up the rest with the Fed eating the lion's share. Citi gets charged a modestly higher rate of interest, but nowhere market, for the new capital and the government doesn't demand any management changes for fear of destabilizing...what? Oh, and by the way, Citi is genuflecting at the altar of mortgage modifications.

Here's what we don't know. What assets are we guaranteeing and how does that guarantee kick in and require real money? Why is there a $3 billion gap in what Citi has to absorb as a loss? Why the fig leaf of parcelling the losses out among various parts of the government and why is the Fed involved at all in the loss sharing arrangement? And finally, why do the people that negotiated this think that changing management could possibly be anymore destabilising than the current situation.

This is lunacy. Just take the bitch over (excuse the language) and be done with it. Investment bankers erecting incredibly complex financial castles on sand are to a large part to blame for this situation and now they seem intent on transferring that skill to the public sector. This is nothing more than an artifice designed to camouflage a failed bank.

Tom Lindmark

Obama's Team Says They Aren't Waiting Any Longer

Yahoo news (sorry about that) quotes some Obama advisers as saying they aren't going to wait for the inauguration to engage the economic problems. This sounds to me like the first mistake he has made.

A cardinal rule of those in waiting is not to engage until you can control events. The Obama team isn't there yet. Moreover, they are acting without complete information and that is always a dangerous position in life or politics. This is still a political game and the Republicans still control the White House. Bush is said to be working hard to insure a smooth transition but don't be surprised if some other officials in the administration aren't setting the Obamites up for an embarrassing gall.

FDR eschewed all attempts by Hoover to draw him during the interregnum. Obama should have learned from that.

Tom Lindmark

WSJ Confirms Aid For Citi

That didn't take long. Here is a WSJ article that reports the government is indeed discussing the purchase of some of Citi's toxic assets.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.

Behind the push is a broad effort to shore up faith in the New York company, which saw its stock price tumble by 60% last week to a 16-year low.

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.

It would seem that Paulson's plan to put the balance of the TARP funds on the shelf until the next administration arrives has changed yet again.

So where do we go from here. If the AIG saga provides any guidance, the amount of aid to Citi will most likely grow. More to the point, who is next. Citi doesn't have an exclusive on the ownership of junk. This buys Citi some time but why won't the markets train their sites on Bank of America, JP Morgan, a large swath of the European banking community as well as smaller banks. Indeed, this might well throw the whole system into turmoil as it seems to be an admission that the original recapitalization via the TARP was less than what the system needs.

With Watergate it became political gospel that you can survive the scandal but the cover up will kill you. We may be finding a corollary to that when it comes to bank resuscitations. It might well be that half measures fool no one and inevitably lead to what you hoped to avoid.

Tom Lindmark

Citi Update

I haven't been able to confirm this but Calculated Risk is reporting that the government is set to buy up to $100 billion of assets from Citi to keep it afloat. Treat this report with caution as CNBC, the source for Calculated Risk, has been off base before.

Tom Lindmark

Upping The Ante On The Obama Recovery Plan

Senator Charles Schumer said today that the Obama recovery plan announced on Saturday would likely run into the range of $500 billion to $700 billion. Schumer said, "To make this work you need five per cent of GDP." It's a little like a new New Deal, but you do it before the Depression occurs, not after."

It's not surprising to see this thing growing like Topsy. As I said last night in my post, I still want someone to tell me where this money is going to come from.

Tom Lindmark

more:here

Different Views Of Stimulus Plans

Last night I wrote a post about Obama's plan for economic recovery. It's heavy on spending and light on tax cuts. This morning there's a little more information that highlights the differing views as to how the problem should be approached. One involves the British solution and the other points out a growing divide between the Democrats and Republicans on the issue.

First, the U.K. is opting for tax cuts to drive their stimulus program. News reports are that the VAT will be cut from 17.5% to 15% which is the lowest level allowed under European Union rules. There are a few other tax measures as well including a tax rebate to low-income workers and a tax exemption on foreign dividends. Interestingly, the Conservatives are coming out against the plan arguing that it is going to produce a "tax bombshell" in a couple of years.

Contrast that plan with the Obama plan which is very heavy on stimulus spending some of it highly targeted towards green industries. Today, the Republican minority made it somewhat clear that they favor the British approach. John Boehner, a Republican member of the House from Ohio, suggested that cutting capital gains taxes and the corporate tax rate would be the preferred method of increasing employment. He proposal for capital gains relief specifically proposed that any equities purchased over the next two years ought to be exempt from capital gains taxation.

Personally, I feel the British probably got this one right much as they did with their solution to the banking crisis. Grandiose stimulus spending plans tend to be hijacked to some extent by special interests so that the overall impact is lessened. Moreover, to the extent it is targeted on specific industries, particularly when those industries are in their infancy, the beneficial affects tend to be muted. Tax cuts take the discretionary element away from politicians and allow the market to allocate the benefits.

But don't expect the Democrats to follow the British. There are far too many campaign debts to be paid and central planning is an idea whose time has come, at least for a while.

Tom Lindmark

more: U.S. Plan, British Plan

What Becomes Of Citi?

There should be some news on Citigroup tomorrow. Any bets? I'm of the opinion that they announce discussions about major spin offs and try to tough it through. Here's a link to a Telegraph article musing about the outcome.

Regardless, of what happens tomorrow, unless the market eases up on them they're toast. My bet still remains a government take over or quasi-nationalization.

Tom Lindmark

Summers Gets The Other Top Econ Job

So it's Larry Summers to head the Council of Economic Advisors. This should be interesting. Summers has always impressed me as an in your face type of guy. Geithner at Treasury is your prototypical public servant. Look for lots of leaks and back channel bull.

My bet is that Geithner doesn't last more than a year or two. There's a big difference between the academic environment of the Fed and the rough and tumble of Washington and White House politics.

Tom Lindmark

more: here

Is The Volt Viable

Here's an interesting post on the WSJ economics site. It asks the question if with oil prices falling whether or not the green movement gets stalled.

I think it does but the post doesn't argue that fact but simply asserts that technology has taken us to a point at which alternative fuel vehicles are viable. I beg to differ. The article asserts that the Volt will get 100 miles to the gallon. I don't know where that number came from but even GM doesn't make such a claim. In fact the Volt is an extremely limited vehicle in terms of utility and has a significant drawback Its range is significantly limited so in essence it is nothing more than a golf cart encased in a car body.

The American people have shown a strong resistance to being pigeonholed into cars they don't like. If the Obama administration attempts to strong arm the consumer into buying something they don't want. they may indeed rue that decision.

Tom Lindmark

Obama As Helicopter Ben

Barack Obama gave some indication today of the direction he intends to go in order to get the economy back on track once he is in office. In his radio address, he also seemed to signal that he was going to start engaging sooner rather than waiting until after the inauguration.


From the New York Times:

President-elect Barack Obama signaled on Saturday that he would pursue a far more ambitious plan of spending and tax cuts than anything he outlined on the campaign trail, setting the tone for a recovery effort that could absorb and define much of his term.

In the Democrats’ weekly radio address, Mr. Obama said he would direct his economic team to design a two-year stimulus plan with the goal of saving or creating 2.5 million jobs. He called it “a plan big enough to meet the challenges we face.”

While specifics on his tax agenda weren't forthcoming, speculation is that he will now work out some sort of tax relief plan for low and middle income wage earners, yet defer his promised tax increase for upper income citizens. Any eventual tax increase will be accomplished by letting the Bush tax cuts expire in 2011. This will, of course, not be billed as a tax increase and Congress will be spared the agony of having to go on record in favor of a tax increase. This course would seem to result in a much broader tax increase than he promised during the campaign as the Bush tax cuts were spread across the income spectrum.

The price tag for the stimulus plan is put at $300 billion. Estimates are that this is the opening bid and it could easily be much higher. That begs the question of how he plans to pay for it. Ignoring the cost of the various programs in place or likely to go into place to keep the economy stable, which is kind of like ignoring a very big elephant, tax revenues are going to crater. The recession will certainly devastate income tax revenue and you can kiss capital gains tax revenue goodbye for some time. At the rate that the government is spending money, the issue of who is going to provide it becomes a legitimate question. All the more so if some of the larger sources of capital are so constrained by their own problems or so impoverished by the fall in commodity prices that they can't continue to buy our bonds.

I'll leave for another day a discussion about how much good this sort of massive government spending will do. For now, I think that there is a chance that the Obamites might well find that they are more fenced in than they think with respect to their range of policy choices. If we do end up in a world of reduced capital availability, a massive government program might well do as much harm as it does good as it crowds out the private sector. Let's hope that they have some really good, wise men and women that think all of this through.

(I suppose this will become a routine thing but Obama posted his radio speech on YouTube. Dutifully I have included it below.)

Tom Lindmark

Appraisal Angst

During the height of the housing boom, appraisals became something of a joke. It was not at all unusual for a mortgage loan broker to call several appraisers until he or she found one that would deliver the value "needed" to close the deal. The meltdown exposed just how wildly overvalued many houses had been and the inevitable pendulum swing to stricter appraisal standards occurred. An article in the New York Times about the problems that stricter appraisal standards are causing reveals a certain sense of denial that I see and hear frequently from real estate professionals as well as the general public.

The article points out that lenders are scrutinizing appraisals and kicking back or flat cutting appraised values when they don't agree with the valuation presented by the appraiser. Pretty standard stuff but what struck me was the degree of seeming displeasure with the new order. Consider these comments:

“A house is only worth what the bank says,” said Terry Hastings, a partner at Hamilton Mortgage, in Ridgefield. “It’s not worth what the buyer says anymore.”

“The banks are much less willing to make any exceptions at all,” said Bob Grace, a broker with Anchor Mortgage, in Westport. “They are looking for ways to squash a deal, as opposed to finding a way to make it work.”

“You have banks that know what’s going on and accept it,” said Chris Downey, managing partner at Redding Appraisal Group, “and you have banks that are a little ridiculous.”

Worse, sometimes the only available comps include a foreclosure or a short sale. Because such properties typically sell below market rates, they can drag down a neighboring house’s perceived value.

I particularly like the last excerpt concerning the affect of a foreclosure sale dragging down the perceived value. I think that says an enormous amount about the state of denial that many are in concerning home values. But the larger point is that there is, at least to me, a sense of yearning for the good old days in these comments. More to the point, and this is drawn from other experiences not just from this article, there appears to be a feeling that we will go back to the way things were once this little crisis passes.

I've had numerous conversations with others concerning things like 100% mortgages, home equity lines of credit, no income verification loans and on and on. Generally, the thesis that I hear is that these will be back, often from those shut out of the process now because they need these products to buy a house. Not only is there an absence of recognition that to a large extent these type of lending practices ignited the bonfire but a sometimes vocalized belief that there is nothing toxic or dangerous about them.

I would tend to dismiss this as somewhat typical of human nature, but I wonder if people may have gotten so hooked on easy credit that they might demand its return. If so, and if that dependency is widespread then we might see a rerun sooner than we expect. The political class does not do well in denying this sort of thing to the general populace and might well go back down the road if votes are to be garnered.

Tom Lindmark

The Dems Try And Drag Obama Into The Auto Swamp

Franklin Roosevelt, despite overtures from Herbert Hoover, famously refused to engage the issues of the Great Depression until after his inauguration. Roosevelt reasoned, politically correctly, that the road to collaboration would brand him sooner than necessary with the incipient disaster. Barack Obama is doing the same but unfortunately he does not live in a simple age. The forces of the media are much stronger and are pushing him towards engagement.

The crisis du jour is the auto mess and his own party seems to be dragging, or at least trying to drag him into the middle of it. Yahoo! News, admittedly not the best source but certainly one that has been pro-Obama, has an article this evening that seems to hint at a bit of frustration over the fact that he is not more involved. The article is ambivalent at best but if you read between the lines, this appears to be an issue which the Obama camp wants to avoid at all costs. The worst possible outcome would be to push him towards a forcefull advocacy of a bailout to a couple of companies that eventually ended up in the bankruptcy courts.

I don't blame Obama for sitting this one out. He can't control the debate or the outcome so any action on his part is filled with nothing but downside. I do blame the press and some in his own party for trying to force him to jump into a fight in which they are trying to protect too many constituencies. Either the greens, unions or the Midwestern voters who put the Democrats and Obama over the top are going to have to be stiffed. Obama is right to let the lame ducks do the stiffing.

Tom Lindmark

Two More Friday Failures

I jumped the gun this evening. There were two more banks that bit the dust this evening and one isn't inconsequential.

Downey Savings and Loan located in Newport Beach, CA and PFF Bank of Pomona, CA both were taken over. Downey had assets of $12.8 billion and deposits of $9.7 billion. PFF reported assets of $3.7 billion and deposits of $2.4 billion. All of the banking operations were acquired by U.S. Bank.

U.S. Bank entered into a loss share agreement with the FDIC which requires the bank to assume the first $1.6 billion of losses from the asset pool created from the two banks. Unless I missed it the FDIC did not indicate what its projected loss or cost from this latest shutdown will likely cost. I suspect it is not insignificant.

As part of the transaction, U.S. Bank agreed to institute a loan modification agreement similar to that instituted by the FDIC on the IndyMac loan portfolio it now owns. Sheila Bair is evidently determined to impose her prescription for the salvation of the world on just about anything she gets her hands on.

These aren't insignificant failures. Once again it's a reminder that we are a ways from getting out of this haunted forest.

Tom Lindmark

more: Reuters, FDIC

First Warning

Hopefully, sometime this weekend, I will be moving this blog to a WordPress platform. I will try and give everyone lots of warning. I will put up a final post with specific links and directions to the new blog site. It is still going to be called But Then What. If you subscribe via an RSS feed you will need to reestablish it once the new site is operational.

In the meantime, I'm going to take advantage of perfect late November Sonoran Desert weather and spend a day on the golf course. I will post a few things later Saturday afternoon. For those of you reading this in colder climes I am not trying to rub your noses in anything. Quite the contrary, I mention it only to persuade you to visit Arizona this winter when the snow and cold becomes too much to tolerate. Lord knows we need you to come down here and spend your money.

Tom Lindmark

Friday Failure

Here is the latest FDIC seizure. The Community Bank (great name, huh?) of Loganville, Georgia has been taken over. This is a small four branch operation. Reuters has the details. The interesting part of the story is that this is the third Georgia bank to go down this year. That's a reasonable percentage of the 20 banks closed so far. What gives down there?



But it wouldn't be a good weekend without a little drama. Does Citi make it through to Monday or does it open up under someone elses banner or even the banner of the FDIC. For an interesting take on the situation read Bronte Capital's post today. My bet is that they open for business as usual and Paulson puts a big slug of TARP money into them. Not very dramatic but I've personally had enough drama for one year.

Tom Lindmark

Into The Valley Of Death Rides Timothy Geithner

I'm sure you've heard the news that Timothy Geithner, the President of the New York Fed, has been tapped to be the next Treasury Secretary. The stock market as is its wont celebrated on the receipt of the news. Why is any one's guess. If you know as little about the guy as I then you might find this short post in the WSJ economics blog informative.

As I said, I don't know him and certainly don't have any opinion to offer. I wish him good luck of which he is going to need boatloads. And I wonder what possesses people to leave perfectly wonderful job like the one that Geithner seems to have to move to the cesspool of D.C.

Tom Lindmark

Be Careful What You Wish For

There seems to be more than a fair amount of sentiment that Congress is derelict in its duty in adjourning for several months in the middle of the worst economic crisis in whatever year you care to name. Let me suggest that it may be the best thing that can happen to us.

It would seem to be abundantly clear that their are limits on what government can do in a period such as this. Despite all of the maneuvering and TARP bills, squabbling, congressional hearings, lobbying for bailouts and endless press briefings, little or nothing has been accomplished since they reconvened. In fact, their presence in Washington may have been counter productive. Surely, the markets have turned thumbs down on their performance.

At this point in time, particularly on the eve of a significant transfer of power, the inclination of politicians is not so much to solve immediate problems rather it is to position themselves and their programs for advancement in a new milieu. To expect anything else would be to imbue these creatures with more good will than they deserve. Now is not the time for problem solving so much as intrigue.

Rest assured that come the New Year, or more precisely January 21 they will spring once more into frenzied action. On that date, we may indeed pine for this halcyon holiday period when at least they were doing no harm.

Tom Lindmark

We Should Have Seen It Coming

If you're one who believes that there is little new under the sun than the following from the WSJ economics blog might well reinforce that view. It's some thoughts from Irving Fisher, an economist who lost his shirt in the crash and then turned to analyzing the elements of the Depression.

He outlines the problems of over-consumption, over-spending and over-indebtedness, and what their effects can be. He might as well be talking about the recent housing bubble when he writes: “Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100% per annum by borrowing at 6%, he will be tempted to borrow, and to invest or speculate with the borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts… The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible”

It seems as if Mr. Fisher pretty much described some seventy years ago what to be wary of during a period of extremely low interest rates. Do you find it as eerie as I do?

We study history in order to have some sense of how to avoid its not infrequent repetitions. Ben Bernanke is reputed to be one of the more eminent economic scholars on the subject of the Great Depression. History may well show that he was, to paraphrase Bill Buckley, standing athwart Alan Greenspan and yelling Stop! On the evidence to date, that would not seem to be accurate. Instead, he seems to have been more an enabler than siren. We can only hope then that his senses serve him better in leading us out of this mess than they have in avoiding it to begin with.

Tom Lindmark

Is The Sun Setting On Citigroup?

As unbelievable as it sounds, it looks as if Citigroup's days may be numbered. The Wall Street Journal is reporting that there are high level meetings, including a board meeting tomorrow, that are reviewing the bank's options.

According to the Journal, among other considerations are the sale of various assets and the sale of the entire company to another. The usual suspects, Goldman and Morgan Stanley, are mentioned as potential acquirers or merger partners. It's hard to see how either would be materially better off if they did go to the altar but stranger things have happened.

Citi continues to maintain that it has ample liquidity and is in no financial jeopardy. The market which has beaten its stock down by 50% this week would seem to be of a different opinion. I wrote a couple of days ago that a Citi truly in trouble would be the ultimate headache for Paulson. Do you think that Citi might be the reason he left a lot of the TARP money in the bank?

Tom Lindmark

Fannie And Freddie Play Kick The Can With Foreclosures

Fannie and Freddie announced late today that they would suspend foreclosures until January 9th. From Reuters here is the story:

Fannie Mae and Freddie Mac, the two biggest U.S. home loan finance companies, on Thursday said they would suspend foreclosures of occupied homes until early 2009, as the government moves to stem the tide of home losses plaguing the economy.
Fannie Mae and Freddie Mac said the hiatus on foreclosures -- which will run from November 26 through January 9 -- will give mortgage servicers more to work out easier borrowing terms for troubled homeowners.

I'm no fan of the idea that eliminating foreclosures will get us to the Promised Land and I think that foreclosure moratoriums are foolish in the extreme since they only defer the inevitable. Recent experience with them-Massachusetts for example-have pretty clearly proved the point that once the moratorium's deadline passes, foreclosures blossom. But I think there is something even more troubling about this particular announcement.

It seems to be of a piece with the manner in which the Washington class has used the two in the past. Specifically, as a vehicle to carry out social and political goals without the need to debate and appropriate funds in the sunlight. Once again, Fannie and Freddie are pursuing goals with no demonstrable profit motive at the behest of their federal overseers. Taken together with the vague and sloppy manner in which the TARP was enacted along with the Fed's refusal to divulge the types of collateral it is accepting, a picture of a quite imperious ruling class seems to be emerging.

I would look for the moratorium to carry on much longer than its announced expiration date. The end game is going to be an attempt to shove unpayable mortgages into the bankruptcy courts. Right now the lawmakers are playing "stall ball" until they have the numbers necessary to make that move.

Tom Lindmark

What Is The Bond Market Trying To Tell Us?

It was a pretty historic day in the credit market with prices rising and yields falling to practically unheard of levels. Not only are yields unbelievably low but the speed at which they have fallen is unprecedented. Jansen at Across the Curve tells the story better than anyone. When you get to his site, the link is to part 1 of a two part post about the market today, hit the home button and look for the second post.

I tend not to be a doom and gloom sort of person. I've felt that we would muddle through all of this, albeit with some discomfort. The moves in the credit markets, however, are causing me more than a little discomfort. I want to believe that there are technical factors as well as emotion driving bond prices so high, yet I can't shake a nagging feeling that the market may be telling us something we would just as soon not know.

Tom Lindmark

Who Has This Kind Of Money?

Try this one on for size. FBR says that the financial system needs $1 trillion to $1.2 trillion pumped into it. They also hypothesize that it will take three to five years to return to normal.

Remember-was it about a year or a little more ago-when Bernanke said the subprime crisis was completely containable and wouldn't result in losses exceeding, say $50 billion?

Tom Lindmark

More:FBR

Maricopa County Insanity

One of the things about economic crises is that you get to see how arrogant and ignorant politicians are. Usually they display both simultaneously. Case in point is the Maricopa County Board of Supervisors. For those of you who don't know who this is, it is the governing body for Maricopa County, Arizona. Phoenix is the major city located in the county.

On Tuesday, the Board of Supervisors decided to sacrifice $86 million in capital improvements in order to build a $340 million criminal court building. To put this into perspective, the county currently faces a $58 million revenue shortfall, the city of Phoenix is looking at a $250 million deficit and recently petitioned the federal government for a piece of a $50 billion advance from the TARP and the state is looking at a gap in revenues versus expenditures of somewhere between $1.3 billion and $1.5 billion.

Now I can't find the article that appeared in the Arizona Republic yesterday about this on their website which ticks me off because I now have to type a lot. But here is the logic these folks employed:

We consider it a business decision...It's one that's made apart from the ups and downs of the current economy. We've been saving money for at least eight years, and it's the right way to do economic stimulus, with 500 jobs the next three years during construction. We're doing it with cash, we're injecting that savings account back into the economy, that will circulate several times, all to local employees and contractors and so on.

We're going to save money because of the recession. As long as the economy struggles, it's the best time for government projects to step up.

I suppose that there are some shareholders somewhere that are happy that these guys aren't making business decisions for them. Frankly, it makes one want to cry. If indeed they do have $340 million squirreled away in a savings account at the local credit union then perhaps it might be the time to devote some of that to addressing their budget shortfall. But noooooo, we will spend the money we diligently saved on a monument and unfortunately cut services which will ultimately require a tax increase to make up for our deficit. Like, I said, arrogance and stupidity resplendent.

I was going to highlight all of the inconsistencies in the statements but I'm a bit too frustrated at this point in time. Feel free to leave any comment you like pointing out just how divorced from rational thought these folks happen to be.

Tom Lindmark

CPI And New Home Construction Slide

Here are a couple of data points for you.

The graph to the left, courtesy of Jake at EconomPicData.com, pretty clearly shows you what happened to prices during the past month. Overall, prices fell 1% from September to October, though the core rate fell only 0.1%. The large decline is due primarily to the implosion of the price of crude oil. Nevertheless, the decline is the largest since before World War ll and the decline in the core rate is the first such since 1982.

The news touched off the usual flurry of discussion about deflation rather than inflation rearing its ugly head and the usual spate of stories about the difficulties of coping with it. For a refreshing and cautionary take about not getting ahead of ourselves with worries about deflation let me refer you to an article in the WSJ economics blog today. The author points out that in 2002 the Fed started worrying about deflation which of course never occurred. Yet, to an extent that concern was part of the rationale for the low interest rate policy that they pursued to disastrous results. He sounds a warning about reading too much into today's numbers.

The other point is the same old story about new residential construction. Down again. Housing starts (this includes multi-family) were down to 791,000 in October. Once again we go back to the World War ll times, this time just after the war, to find such similarly dismal results. Single family home starts were down 3.3% to 531,000. It's a tough row we're hoeing right now but it has to be done. Until the excess supply is worked off it's unreasonable to expect this number to change much.

Tom Lindmark

More: Housing Starts, CPI

Questions About IndyMac's Loan Modification Experiment

I wanted to get this up last night and ran out of time. Housing Wire has a good short article calling into serious question the statistics being put forth by the FDIC with respect to its aggressive loan modification experiment at IndyMac.

You no doubt have see Sheil Bair, the Chairwoman of the FDIC, stumping for aggressive government supported loan modifications and even going so far as to have dismissed as insufficient the recently announced modification program of Fannie and Freddie. She continues to trumpet the plan she put in place at the failed IndyMac Bank. Ms. Bair was last seen before a Congressional committee reporting that of 40,000 eligible borrowers, over 5,000 had their loans modified.

The article properly points out that the FDIC has failed to provide any information that would permit a realistic assessment of the success or failure of the program. They have never disclosed, despite a request for the information, how many loan mods were done prior to the FDIC seizure of the institution. Hence there is no benchmark, no way to know how many of the 5,000 loan modifications occurred on their watch and how many occurred prior to their involvement.

You will want to read the entire article to find some other interesting data points, such as the fact that 25% of the modifications for the entire portfolio were delinquent after just on post-modification payment. Ms. Bair and the rest of the establishment seem to believe that they have a blank check to pursue their individual projects without the need to justify their efficacy.

Tom Lindmark

Racial Discrimination And The Credit Crisis

I suppose this was inevitable. As reported in Housing Wire, a so-called consumer advocacy group, the National Community Reinvestment Coalition, filed a complaint with HUD alleging that Moody's and Fitch had engaged in discrimination.

I can't stand to type this stuff, so here is what they have to say:

“The complaint alleges that Moody’s and Fitch issued false and inflated ratings for securities backed by problematic high-cost loans. Reckless and irresponsible lending has restricted housing opportunity for countless African-American and Latino families who have already lost their home or are now in jeopardy of foreclosure,” said John Taylor, president and chief executive officer of NCRC. “The Emperor had no clothes, and yet the rating agencies continued to say he was dressed in his Sunday’s finest.”

I wasn't aware that the credit crunch had only hit a couple ethnic classes. Silly me, I thought we were all suffering.

Tom Lindmark

An Alternative To F&F And Ugly Developments With Commercial Mortgages

I had a busy day, so I'm just beginning to catch up on everything. As I bounce around I'm realizing that a day I thought was mild from the point of a lot of dramatic news had some pretty interesting things going on. Here are a couple that just caught my attention.

The first one from the WSJ goes under the heading "It's about time." I've been looking for someone to stand up and start taking a leadership role. Anyone! Just speak truth to power. Who would have thought that a Southern banker like Ken Lewis might do just that? Mr. Lewis has proposed a solution to the future of the mortgage industry that won't sit well with the power brokers of Washington.

Lewis bucks the trend to centralized control of the mortgage markets by suggesting that in fact the country should migrate to a system of private financing of mortgages. Basically, he calls for scrapping the Fannie/Freddie system. He acknowledged that in the short-term it would be necessary for the government to use its control of the two to push down rates but argued for a system that moves away from that system eventually. Props to him for at least having the courage to stand up and suggest that even though the Emperor may be clothed, he at has at least inappropriately revealing socialist attire.

The second one, also from the WSJ, is not comforting. It confirms what a lot of people have been whispering among themselves concerning the prospects for commercial mortgage backed securities. Two big commercial mortgage backed securities were said by Credit Suisse to be likely to default. These loans were just packaged in the last year. The loans involve a $209 million loan on two Westin hotels in Tucson and Hilton Head and a $125 million loan in Corona, California.

The fact that these are recent loans is particularly discomfiting. Commercial loans generally contain an interest reserve (sort of a negative amortization feature) that lets the borrower and lender pretend that with time all things will be fine. It works so long as either property values increase and you can refinance or the economy booms and your revenues exceed by a large margin your projections. Neither of those circumstances currently exist, hence the loans are likely to go bad.

The commercial mortgage market has largely flown mostly under the radar so far. Partly because the concepts are more arcane and not easily conveyed by the mass media and partly because of the ability of the lenders to keep zombie projects alive via interest reserves and other concessions. The rubber, as it always does, is going to hit the road sooner or later. It appears from this report it may be sooner and when that happens, look for a lot more strain on the banking sector, particularly the regionals. Though this is an event that effects the CMBS market, it has repercussions for the banking sector given their appetite for commercial real estate loans.

If Obama and company are at a loss with what to do with the TARP money that Paulson is leaving them, they might want to start looking at this sector.

Money Problems For The Emerald Isle

I've written before and continue to believe that what could tip this entire situation into chaos would be a string of Icelandic type failures among some of the more developed countries. The banking system can be controlled, I'm not sure that the same holds true in the event of some significant defaults by industrialized countries.

The Republic of Ireland is the case in point today. Credit Writedowns has a good post today on problems of a very fundamental nature that seem to be encircling the country. Things like beef prices collapsing, policemen not getting paid and rumors of cash shortages. The sort of things that shouldn't be happening in a country such as Ireland.

The government of Ireland has guaranteed all of its bank deposits, in fact it was one of the first Eurozone countries to do so. The problem is that it does not have the capacity to honor that guarantee in the event of a run on its banks. To compound the issue, Ireland is a member of the EEC and does not have the liberty of printing its own currency. Therefore, any crisis would not be just an Irish problem but one that would involve the entire community. Quite frankly, it could test the union itself.

In the U.S. the press has paid too little attention to the issue of country defaults. I hope we continue to have the luxury of avoiding paying it more heed, but I am fearful that it may come to occupy us a great deal more.

Tom Lindmark

Two Views Of The Credit Markets

It's always interesting to look at the views people express of markets based on their vantage point. Case in point today is the testimony of Bernanke before the House committee and the thoughts of John Jansen who writes Across the Curve.

First Bernanke's testimony seemed frank in that he cited improving conditions in the credit markets but also noted that there was still strain particularly with regard to credit spreads. Here is part of what he said:

The primary objective of these and other actions we have taken is to stabilize credit markets and to improve the access to credit of businesses and households. There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks. The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit. However, overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.

While admitting that there is still dysfunction, he seems to paint a picture of improving conditions. Reading it I would take away a sense that we seem to be moving in the right direction and that time seems to be working in our favor.

Now contrast it with some of Jansen's comments today. Remember, Jansen is a former bond trader who appears to have a lot of daily input from his fellow colleagues on the front lines. So here is how it looks from the trenches:

The corporate bond market as measured by the IG 11 has begun to crumble. The index is currently quoted 226/228 which is about 19 basis points wider on the day.Why the sharp spike out in that spread today? I think it is partly a result of the significant widening in other spreads. I posted earlier about the subprime market and the CMBS market and the significant weakening in those sectors. It would be uncharacteristic for the corporate market not to follow suit.

There are other factors at work, too. The much heralded and universally acclaimed corporate child of that avuncular multi billionaire from the heartland Warren Buffet, Berkshire Hathaway, has seen some trouble in its CDS spreads. The company is AAA but the CDS is wrapped around 400 and is 25 wider today. That has caused a bit of angst (and probably some schadenfreud) among participants in the corporate bond market. It reminds me of a Latin phrase. Quis custodiet ipsos custodes? Loosely translated it means who shall guard the guards themselves. The ever vigilant market is watching Berkshire and apparently does not like what it sees.

I won't print what he said about the CMBS market, except to note that the pullback on the use of further TARP funds has put it into a tailspin. I'll leave a link to both of his posts at the end of this.

But, his comments about the corporate bond market and particularly about the views of some traders towards Berkshire Hathaway certainly doesn't give me the same sort of relative comfort that I take from Bernanke's comments. In fact, it leaves me with the impression that we may well be on as thin of ice as ever, with little being needed to push things if not over, than near the cliff.

I follow Across the Curve on a daily basis. I'm not a trader and have never been one, thus I tend to gloss over some of the more technical items he discusses. I do have a lot of respect, though, and learn a lot from the sense of market sentiment he captures. In the case of the somewhat disparate views of Jansen and Bernanke, I am inclined today to put more faith in what Jansen has to say.

Tom Lindmark

More:Across the Curve: Corporate Market, CMBS Market
Bernanke's Statement

Oil And Autos-A Couple Good Links

Here are a couple links to articles in the WSJ economics blog. One is a roundup of opinions on the auto bailout and the other a very good post about how much the positive effects of the drop in oil prices has on the economy.

I recommend both but the one on oil is particularly insightful.

Tom Lindmark

more: Oil, Auto Opinion Roundup

Bush Gives Rest Of TARP To Obama

The Bushies did something that many are calling gracious and magnanimous. They announced they wouldn't spend anymore of the TARP money unless absolutely necessary.

I agree that a lame duck administration shouldn't be spending vast sums of money at this point in time, particularly when it involves the fundamental reordering of the economic system of the United States. I doubt, however, that their motives are all as high-minded as many would suggest. Simple political logic says you get out of this as soon as you can and let the other party take the arrows in the back.

So, a good move but one that probably isn't as high minded as they would have us believe.

Tom Lindmark

more:here

Paul Volker's Dire Assessment Of The Economy

Former Federal Reserve Chairman, Paul Volker, offered some unsettling comments to a gathering in London today.

As reported by the Telegraph, Mr. Volker described the current situation as unlike anything he has ever seen (and he has seen a lot):

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

I'm old enough to remember the Carter years and well remember the catastrophe that credit controls wrought. Any suggestion that we are in a period such as that is alarming indeed. Mr. Volker also had an interesting comment regarding his advice to Barack Obama. Remember, he is one of his financial advisers.

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

That advice is going to put Mr. Obama in a difficult place with his own party, particularly the older, more liberal part of the party, to which most of the leadership of the House and Senate are a part. Campaign promises and natural inclinations will mitigate in favor of throwing money. It is truly going to be a test for Obama to repress that road if indeed that is what he means to do.

Just for the fun of it, let me leave you with Volker's assessment of where the blame should lie for the mess. It's not original but I like the way he put it.

Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised risk.

Tom Lindmark

WSJ Breaking The Mold

Something quite interesting just happened. The Wall Street Journal appears to be adopting some blogosphere techniques.

I get email alerts from the WSJ about breaking news. So I just received one about Jerry Yang stepping down as the head of Yahoo. I clicked on the link which took me to their website and at the top was a breaking news banner about Yang. I clicked on it expecting to be taken to a normal Journal article and found myself on the Boomtown blog. All right WSJ, welcome to the world.

If you want to try it, here's the link to the Journal. I don't know how long the link will stay up.

Obama's Comments On 60 Minutes

I didn't see Obama's interview on "60 Minutes" so this from Yahoo (consider the source) is all that I know about it. Nevertheless it's hardly left wing. In fact, there are echoes of a certain war mongering Republican President.

I won't tire you with reprints, here is the link. It's a short article. Take a look for yourself and tell me what you think.

Tom Lindmark

Keep A Weather Eye Out This Week

Keep your eyes open, this might be an interesting week. There was some deterioration in the credit markets after Paulson dissed the idea of buying bad assets and the battle over Detroit will heat up. There's also a fair amount of economic data coming out.

Here are some comments on the credit markets via Across the Curve.

What follows is the thoughts of a trader on the rise in Libor the last two days:

Libor set higher for the first time in 24 days. The market took this as anaffront to spreads and proceeded to buy Libor/OIS pretty heavily.

Why? well,yet again this marks a potential turning point in the credit cycle as libor hastended to trend in a meaningful manner and more specifically, over the past fewweeks one bank has done a tremendous job in getting libor lower.

Does thismark the end? If this is the case, then we could be in for a wild ride overthe next few weeks.

Two days do not make a trend, but I would treat any
surprise moves higher in libor as a warning and would not fight what couldpotentially be another substantial widening.

Volatility will surely be higher

I aplologize for the formatting but that's how it was posted. Forget the esthetics and concentrate on the message. It comes from a pretty credible guy.

Tom Lindmark

The Hundred Million Dollar Garage

I'll get off this kick I'm on about the cities lining up for federal help but bear with me for just one more post. Let's take a quick look at one example of how local governments have landed themselves in this mess.

City North is a sprawling retail, office, residential housing development on the north side of Phoenix. The development was highly sought after by the city of Phoenix which found itself in a battle to land the project with its neighboring city of Scottsdale. Both cities had the requisite vacant land and as luck would have it, the land that each had available abutted the border of the two cities.

Now Scottsdale is an upscale and pretty small community when compared to Phoenix but its name has a lot of cache. The two things it lacks is the tax base of Phoenix and a compliant citizenry. Being much smaller and largely populated by an educated upper class, the political machine knows only too well that it is under a microscope, particularly so when spending big sums of money is involved.

The developers of City North read the tea leaves quite well and played the cities off against each other. Phoenix with more money and more political latitude of action won the project. How? The city agreed to rebate half of all sales tax revenues generated at City North for the next 11 years to the developers of the project. Those rebates are projected to come in at right around $97.4 million.

Supposedly Arizona law forbids this type of giveaway unless there is a quid pro quo. I won't bore you with the constitutional and statutory minutiae so trust me, that Phoenix had to make it look like they got something for this. What did they get? Parking spaces. That's right for about $100 million, the developer agreed to build a parking garage that would be city owned. Now anyone can park there and there is no parking fee revenue but the city does own the garage.

So now we have the spectacle of Phoenix getting in line for federal assistance at the same time that money is flowing into the city and back out to private interests. And you wonder why this gets under my skin?

Tom Lindmark
More: Here

Consumer Spending Implosion

There is little reason to kill a bunch of pixels writing about the state of consumer spending. These charts from Jake at EconomPic Data tell the story completely. The question, of course, is does it get worse or are we at the bottom?

Words To Remember

Paul Kedrosky at Infectious Greed had a great quote that we should all get reprinted and put somewhere we can refer to time and time again. Here it is, but if you want the full impact you have to go to his site.

So the actions of people relying on history change history, and that is what people lose track of..

Tom Lindmark

Auto Companies, Democrats And Tangled Webs

I'm on a Wall Street Journal kick today. Another good article on Friday by Kimberley Strassel dissecting the political game going on with the bailout provisions for the Big Three automakers. It's a wonderful example of how quickly campaign donations and promises can tie a party in knots.

Here are the players and the dilemma:

What do bleeding Detroit auto makers, Colombia and green groups have in common? Not a lot, unless you are Nancy Pelosi.

If there was a moment that highlights to what extent the Democratic Party has become captive to its special interests, this might be it. Mrs. Pelosi and Harry Reid have spent this week demanding that Washington stave off a car-maker collapse. What makes this a little weird is that Mrs. Pelosi and Mr. Reid are Washington. If they so desperately want a Detroit bailout they could always, you know, pass one.

Strassel is being a bit disingenuous as the Democrats still would potentially have to contend with either a Bush veto or a filibuster in the Senate. Both would be unlikely given political stakes, though. She goes on to recount how the Democrat's got cold feet as the financial crisis deepened and the car companies started looking shaky. Not wanting to get blamed for advancing money that might later get tied up in say a GM bankruptcy they hatched their plan.

The plan? Make it the Bush administration's responsibility to give Detroit cash -- namely by claiming after the event that the $700 billion rescue package for financial institutions was in fact a rescue package for auto makers. This was attempted with several hilarious "colloquys" -- pre-scripted dialogues between members that were quietly inserted into the Congressional Record after the vote, all aimed at rewriting the "intent" of the law. Say, this one, from Oct. 1:

Michigan Sen. Carl Levin: "As Treasury implements this new program, it is clear to me from reading the definition of financial institution that auto financing companies would be among the many financial institutions that would be eligible sellers to the government. Do you agree?"

Connecticut Sen. Chris Dodd: "Yes, for purposes of this act, I agree that financial institution may encompass auto financing companies."

Fun. Meanwhile, Democrats passed $25 billion in aid for Detroit, though under the careful guise of "green" funds to help it meet new fuel-efficiency standards.

It's not pleasant to see how these guys bobb and weave to get things done, is it? The article then notes that the whole apple cart was upset when Treasury Secretary Paulson dug in his heels and insisted that TARP was for financial institutions thus placing the party in what is beginning to look like a no win situation.

If that weren't enough, the administration has had the temerity to take Democrats at their legislative word, and demand the auto makers actually use that $25 billion in green funds for . . . green retooling. Which, needless to say, isn't going to help the Big Three CEOs pay their upcoming health-care bills.

And so Mrs. Pelosi has been landed with Detroit, again. The auto makers have staged a brilliant PR campaign, tying their misfortunes to today's financial mess -- never mind those decades of mismanagement. They've warned that the ripple effect of a crash could cost three million to four million jobs. Democrats have also undoubtedly been reminded by UAW President Ron Gettelfinger that those come from his union, which recently helped Mrs. Pelosi win an election.

The problem is how not to offend the other groups that just helped her win an election. The White House has intimated that its price for Democratic legislation in a lame-duck session would be the passage of the Colombia trade agreement. Yet Mrs. Pelosi has successfully sat on that deal for months at the demand of the broader union movement, which just spent hundreds of millions to increase Democratic majority.

Meanwhile, another trial balloon -- a proposal to loosen the rules governing the $25 billion in green money -- sent Mrs. Pelosi's environmental friends bonkers. They also just spent big helping Democrats, and insist the money go to building clean cars, not digging out Detroit.

The financial crisis might have well have tipped the scales in favor of the Democrats this election cycle. At the same time, the immediacy of the problems force decisions that in normal times would be worked out over months. The payback for Democrats is that their hand is getting forced while promises and money spent are very much on the minds of their supporters.

Tom Lindmark

TARP Aid For The Cities-A Few Thoughts

Last night in a post I noted the plea by several cities including my hometown of Phoenix for a piece of the TARP action. I want to follow-up with a couple of thoughts but before I do, let me update the story.

The city of San Jose has jumped on the bandwagon and wants some too. They suggested the nice round number of $14 billion. They figure they contribute 2% to the nation's GDP and thus deserve 2% of the pie. It might be overreaching a bit since their entire annual budget is $3.3 billion. If you don't ask you never receive.

Anyway, San Jose and the rest list three critical needs that cause them to come hat in hand to the TARP till. In no particular order it is immediate cash requirements, infrastructure spending and unfunded pension liabilities. Let's take a quick look at all three.

To the extent that a local governmental entity is out of cash, facing bankruptcy or whatever dire straits they might have gotten themselves into, I think it should be pretty much up to the state in which they happen to be located to work things out. Most if not all states have the ability to borrow substantial sums of money and it's in their best interest not to have their cities conducting going out of business sales. There is usually a pretty complex arrangement among states and cities with regard to how they carve up the tax revenue kitty, so let them rearrange the relevant shares and take care of their own business.

I could go on forever about infrastructure investment. Let me just do two things. One direct you to a good article in the Wall Street Journal on Friday that reminds once again that government spending for stimulus including infrastructure investment is a zero sum game. Government spending cannot create wealth, only the private sector can, so money directed to the cities for infrastructure projects only succeeds in rewarding the beneficiaries while some other part of the economy pays the price. In essence, Phoenix gets work for its unemployed while Omaha pays the bill.

Second, the cities have a propensity to allocate their infrastructure dollars, particularly the mega-federal type dollars, to marginal projects. Phoenix is a great example. We are about to open what amounts to no more than a demonstration light rail system. The project will serve a minute portion of the city yet the cost even with massive federal support is inordinately expensive. If history is any guide, operating it will only drain the city's finances more. This project was rammed through at the height of the housing bubble when Phoenix was awash in tax receipts. As we now know, it might have been wise to put some of this aside rather than investing in infrastructure.

The talk of needing TARP money to fund unfunded pension liabilities is both surprising and expected. Surprising, since for many years, local and state governments have vehemently insisted that their pension plans were in great shape while refusing to divulge the details needed to objectively verify that claim. It's expected because a number of experts have been asserting for some time that this is the issue that could cause a complete meltdown of a local or state governmental entity. San Diego has already demonstrated just how ugly it can get when overly generous benefits run up against funding realities. This is one huge problem that TARP can't solve. You might well throw the entire $700 billion at it and not make a dent. Besides, there is a vehicle that already exists at the federal level to solve these problems. It's called the Pension Benefit Guaranty Corporation.

In the WSJ today, Mark Sanford, the governor of South Carolina has an essay titled "Don't Bail Out My State." Among other reasons, here is one he cites as a reason for his opposition to directing TARP or any other type of federal aid to state and local governments:

Do you now have to be a financial "bad boy" to win?

Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.

Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?

Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.

At the very least, if federal money is to be thrown to the states and cities then at least let it come with strings attached. It should not be free and should be advanced in the form of a loan with a decent return to the federal government. Done in that manner, the borrowers will have to budget their expenditures in such a manner as to provide for repayment.

The G20 Outlind A Plan For Salvation

The G20 meeting to solve the world's economic crisis has concluded. No definitive word yet on whether or not we awaken on Monday to see that all is well again but what they accomplished can be found in this communique courtesy of the WSJ.

Now if you don't have time to read it let me tell you in a couple of sentences what they agreed upon. In general, they agreed that things have to be done and they have to talk to each other about the things that need to be done and they want their finance ministers to study the things that need to be done and get back to everyone later. They also announce that they had reached agreement on five key objectives during the conference. I found the first one to be the most profound. They reached a common understanding of the root causes of the global crisis. They chose, however, not to share this with any of us, so we are all left still wondering what went wrong.

They actually did agree, as much as you can at these sorts of things, on a few things that actually have some substance. They were:

Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;

Refrain from imposing any new trade or investment barriers for the next 12 months;
and

Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.

Sounds good but we'll see. If anything those goals either give Obama fits or provide him with cover to begin reneging on his wilder campaign promises. It certainly won't, however, please his friends in Big Labor or on the Left side of the party.

Tom Lindmark

More TARP Beggars

A couple new supplicants turned up today at the TARP window.

Hartford Financial Services announced it is buying a thrift holding company, Federal Trust Corp, of Florida for $10 million in order to turn itself into a bank. As such it will then be eligible for a capital injection from the TARP slush fund. If you follow this, you can see that Hartford is going to part with $10 million and then have the government inject something on the order of $10 billion plus into the new entity. So all you have to do to become systemically important is evidently to buy a bank, no matter how puny, and then you can't be allowed to fail. Do you see the possibilities here for me and you?

If that leaves you breathless consider this. The mayors of Philadelphia, Atlanta and Phoenix sent a letter to the Treasury ask that a $50 billion portion of the TARP authorization be set aside to help cities. They suggest that the funds be used to cover infrastructure projects, fund short-term cash needs and help cover unfunded pension liabilities.

I happen to live in one of those cities, Phoenix to be specific, and I can assure you that the situation is dire. Sales tax receipts are cliff diving and an unimaginable $100 million budget shortfall that was projected in the middle of the summer has turned into a projected $250 million shortfall. I'd bet my last penny that's too small. The cuts that are going to have to be made and the sacrifices that the citizens will be called upon to bear are going to be draconian.

I will expand on this theme over the weekend. Cities, counties and states are going to slam into a wall that will devastate them. For the moment let me just observe that we are starting to get into an area that is fraught with two major problems. One, the Treasury of the United States might not have the wherewithal to bail out local governments without serious long term harm to the national economy. Two, the political friction that this will engender could be monumental as those areas of the country that have been fiscally responsible are asked to come to the aid of the spendthrifts. The restrictions that are likely to be attached to any bailout funds will likely be politically unpalatable.

Tom Lindmark

Freddie Loses Big Bucks, FDIC Has A New Plan

A couple things on the housing front, neither surprising.

As reported by Reuters, Freddie Mac reported a loss of $25.3 billion today. This tidy sum puts Freddie in a negative equity situation thus necessitating a capital infusion from the Treasury. The company's regulator has already submitted an invoice to Treasury for $13.8 billion to get the company back to a positive number.

All of this begs the question as to why we are supporting two of these giant cash sucking machines. Why don't we get rid of one of them and reduce some overhead? They're mirror images of one and other so it's not like theirs some special expertise that one needs that the other doesn't have. Just a thought.

On a more amusing (sort of) note, Sheila Bair, Chairwoman of the FDIC, proposed her own mortgage modification scheme. Ms. Bair made no secret of her disdain for the plan rolled out earlier this week by Fannie and Freddie. Her plan would be modeled after the program she put in place at IndyMac. Among other things it would pay servicers $1000 for modification expenses and have the government share in 50% of any redefault losses. The IndyMac plan also calls for principal reductions which was not a part of the F&F plan earlier this week.

Ms. Bair has being beating the drum on modifications for at least nine months now. It's kind of hard to figure out what the motivation might be, though a cynical person might suggest she's angling for a bigger role in the Obama administration. So far her success with IndyMac's portfolio has been modest at best. Her report on results delivered a couple weeks ago indicated that only 3500 borrowers out of a pool of 60,000 who are eligible to participate in the FDIC plan have even bothered to respond to overtures.

I'll repeat a theme-probably not for the last time-that we have a bunch of people running around Washington absolutely no clue as to what to do save propose one program after another with no regard whatsoever for the ability of the country to pay for it.

Tom Lindmark

Logic In Wonderland (AKA Washington)

A faint wisp of sanity wafted through our nation's capital today. The Office of the Comptroller of the Currency told the credit card companies and banks today that their proposal to defer their losses on credit cards was a non-starter.

As background, various big purveyors of credit card debt proposed that they write-off up to 40% of their credit card receivables and that the lucky recipients of their largess be excused, at least temporarily, of the need to pay taxes on this gift. In exchange for this gesture, the various creditors would not be required to recognize their losses until the remaining balances on the credit cards were paid off, assuming, of course, that ever occurred. Left unsaid was the rather obvious fact that the magic forty percent number is just about what they are going to have to declare uncorrectable regardless of whether or not their plan was approved.

The OCC saw through this subterfuge and in a letter today basically said, no way. Here is their logic:

"The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," wrote Timothy W. Long, the OCC's senior deputy comptroller for bank supervision policy. "Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system."

I rather suspect that the OCC will be brought to heel. Nevertheless, when we write the history of this period I hope their is at least a footnote that notes that at one point in time a regulator tried to cling to logic.

Tom Lindmark

Is Cit Dead Meat

Is Paulson's worst nightmare about to become real? Or to phrase it perhaps more appropriately,
will the next Secretary of the Treasury have to deal with the demise of Citibank?

The Wall Street Journal today paints a picture of a company engaged in meltdown in the executive suite. Board dissatisfaction with the Chairman, board dissatisfaction with the executive management team, finger pointing among management and all in all enough intrigue to keep any fan of Machiavelli happy for some time. Throw in a stock price at less than nine bucks a share and you have a pretty messy situation.

Felix Salmon wrote today that the stock is priced at a level which discounts a pretty high probability that it might go to zero. He also points out the dilemma facing the government if this behemoth does indeed start floundering. It's not just too big to fail, it's also too big to save. Layer on top of that the problems inherent in selling it off if it does crater and you have the makings of an Excedrin headache.

There is more than a fair bit or irony here. Citi and AIG are the poster children for financial institutions that own more than their share with what used to be called franchises. A mere two or three years ago, the players would have been lined up around the block to buy the assets that AIG has on the block and the assets that Citi may be putting up for sale. Today, you probably couldn't pay someone take them. No that's too harsh, they have great money making machines that someone should be bidding on but everyone's too broke to bid.

Even the oil sheiks are busy pouring their diminishing cash flow into their own banks to keep them afloat. Asia? Forget about it. They may have some cash here and there but after Morgan and a few other ill-timed investments discretion is the word of the day. Not even the vaunted vulture funds appear ready to pounce.

So what's at work here. For the time being I'll just suggest that nobody knows which way to go. Too much uncertainty about government actions (who wants to go into the insurance biz and have to go up against Uncle Sam?) and just pain old fear seem to be keeping everyone on the sidelines. I have a long post in mind for this but in the meantime if you have any ideas leave me a comment or email me.

Tom Lindmark