Monday, November 30, 2009

Radio Show 11/28/2009 Leftover & Additional AIG & FED Policy Information

 We talked about AIG and Goldman Sachs and how Goldman Sachs profited in shorting mortgage backed assets while dumping them on AIG and while refusing to make collateral concessions on AIG credit default swaps which the monolines did.  Goldman got 100% in the bailout while the monolines got stuck.  Janet Tavakoli has said Goldman Sachs should be made to buy the Maiden Lane III from the FED and carry them on their own balance sheet.  Here is another good AIG/Goldman analysis in naked capitalism.

We talked about Fed policy and how Tom Duy, an economist who writes about the Fed, was upset and the comments Yves Smith of naked capitalism had on his article: here is that post for you to read in full.  And here is an earlier Duy  post on how the FED has put itself in a corner and is engendering a lack of trust from the public.

Bernanke wrote a commentary as well as gave Congressional testimony that proposed financial reforms threaten the independence of the Fed and would seriously impair the economic stability of the US and could damage the financial health of the future.  He said these measures are very much out of step with the global consensus, but in actuality the UK has been far more aggressive in seeking financial reforms and regulations to the point that Geithner has said the US would not go that far.  Naked capitalism had a very good article on Bernanke's published commentary which you should read.

St. Louis Fed President, Bullard, not only said he would support continued purchase of mortgage backed assets past the March deadline, but he also said the Fed would have a hard time raising rates in the face of worsening unemployment, but "if inflation expectations start to get out of control, that could trump the unemployment rate".

Chicago Fed President Evans is very over optimistic when he expects unemployment to peak at 10.5%, because he was also surprised to see it reach 10.2%.  I think it will go to 11%.  He sees no problem with core inflation and expects rates to remain low for an extended time.

At the end of the show I was observing that Lloyd's Bank is planning to issue $22.3 billion shares at 37 pence per share which will dilute existing shareholders by 59.5% at 1.34 to 1 existing shares as of the closing price on 11.23/2009 -- that is 36.5 billion shares.

There are a growing number of articles expressing concern about Chinese over capacity, because it wastes resources, erodes profits, deters research and development, encourages companies to but corners on health, safety, environmental impact, and quality control.  Unneeded capacity raises the risk of non-performing loans, which is the real concern of the financial world; they could live with all the rest of the negatives of over capacity.

The five largest Chinese banks have had to submit plans to the Chinese regulators on how they will raise capital after unprecedented lending has eroded their capital levels.  Earlier in the year the minimum capital level ratio was raised to 10%.

FDIC's Bair has cautioned that financial reforms which contemplate the break up of banks should be carefully and fully evaluated for safety and soundness isues.

There was a pro-con post in Economist's view on psychological sentiment  and its value in determining whether a recovery is happening.  I found it interesting but lacking as it did not fully addressed how expectations may be facticity based or fear based or over exuberant based.  Proper policy should be more important.  There is a difference between rational and irrational behavior.

The private sector economist, Dave Rosenberg, said last week that we are in a form of Depression resulting from a prolonged period of credit excess which collapses yielding asset deflation and credit contraction.  I think we have definitely seen asset sector deflation as opposed to general deflation and definitely credit contraction, but we have also seen the formation of asset bubbles globally on the weak dollar and low interest rates in the US.  The stock market is at least 20%over valued.  He went on to say that having so many people say the recession is over causes him to be nervous.  In my opinion this shows the reason many people see the possibility of a double dip just as there was in the Great Depression and could occur is any serious recession without proper job creating stimulus.

Janet Tavakoli (see above) in another publication questioned a Warren Buffet interview (she wrote a book on Buffet) in which he seemingly implied that his Goldman Sachs investment was made because the government had removed the moral hazard.  This incensed Tavakoli to write that it was as if Buffet was saying it is okay to use someone else's credit card because they won't notice it  and they will have more wealth by the time the payment is due.

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Sunday, November 29, 2009

Bank Tier 1 Ratios

On the 11/28/2009 show I mangled a Tier 1 commentary and may have ended up implying the opposite of what I meant as I was rapid firing information.

A Tier 1 ratio can be in two forms: 1) a capital ratio in which it is core equity to core capital or total assets or 2) a risk capital ratio in which it is core equity to total risk weighted assets.  It is a measure of financial strength and the higher the ratio  (2:10 is 20%) the better.

The example and information I was using on the show should have been to remember that when Lehman Brothers failed it had a Tier 1 ratio of 11%.  The median Tier 1 ratio for large and mid-cap banks is in the range of 8.4 to 10%, which is lower (riskier) than Lehman when it failed.  That means many banks are lower (worse). The higher the ratio/percentage the better

The FED/Treasury stress tests set a minimum of 4% for Tier 1 in determining tangible common equity, which yields a lower percentage than Tier 1 core equity.  What would the minimum have  been for core equity Tier 1? They should have included the core equity Tier 1 for comparison.  See this older post from Baseline Scenario for an explanation of tangible common equity.  Also banks have not had to mark to market toxic assets and some do not even include toxic assets which are government insured on their balance sheets, which brings a significant question of how accurate and comprehensive the risk weighted assets were.

I had a lingering feeling from the show that I misspoke and botched a clear conveyance of the magnitude of how fragile the current situation really is.

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Friday, November 27, 2009

Krugman and the Tobin Tax

In a 11/20/2009 post below entitled, Jobless Prosperity", I included a communication I had sent Paul Krugman and another I had sent Mark Thoma about unemployment, deficits, and the Nobel economist James Tobin.   On the 26th, Krugman published "Taxing the Speculators" in the New York Times and Thoma republished it on his blog Economist's View.  I had also mentioned the more aggressive UK program to regulate financial institutions and their executives.  Please read the article in either one of the links.

I also had in my communication a questions relating to deficits and how the are exited after sustained recovery.  In blog post today, "Deficits: The Causes Matter", Krugman discussed how the causes of a deficit are important and how the causes, to an extent, define, how the deficit must be dealt with and when.

I do not know how coincidental the article and the blog post were, but they are both greatly appreciated.  Tobin's Tax was a concept developed to decrease economically undesirable and dangerous trading by taxing the specific type of financial transactions.  And just today we are seeing that financial institutions are already trying to test how credit default swaps are settled in this article on Bloomberg,com.  The current process was designed to abnegate the need for regulation.  If they do not get it, and have all kinds of reasons why a clearinghouse is liquidity "inconvenient", then maybe a Tobin Tax is just what they should get.

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Wednesday, November 25, 2009

FED: Asset Bubbles -- We Ain't Got No Stinkin' Asset Bubbles

Last week the Fed was out in full asset bubble denial in public speech after public speech from different Fed officials.  Mr. Bernanke said "it is not obvious there are any large misalignments in asset prices today."   But El-Erian, CEO of Pimco, said, "In seeking to avoid qa depression occasioned by the financial crisis, the Federal Reserve now finds itself having inadvertently placed a large bet on a recovery driven by asset prices."

Fed Vice-Chairman Kohn said U.S. asset prices do not clearly appear to be out of line with the economic outlook and business prospects or the level of risk free interest rates.  He continued to say if asset bubbles are recognized, they should be addressed with regulation and supervision of specific markets or financial firms rather than raising rates.

Yellen, Fed President San Francisco, said further research was necessary to determine the connections between monetary policy, systemic risk,  and financial firms.  She said uncertainty remains over whether central bankers should attempt to lean against potentially dangerous swings in asset prices.  "The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals."

Yet, there were reports at the same time that supposedly knowledgeable sources were saying the Fed will be increasing scrutiny of banks to ensure they can withstand reversal of soaring global asset prices.

Yves Smith in a naked capitalist blog, said in relation to the Fed's low interest policy: 

"But the second reason for keeping rates low is explicitly to keep asset prices aloft. The bubble is an explicit goal of policy. Remember, early in the crisis, they was talk of the markets being irrationally depressed. Funny how it is only prices that are seen as inconveniently low, and not ones that are insanely high, that are criticized."

In the November FOMC minutes released this week, they  said

"However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming  from the decline in the foreign exchange value of the dollar, could boost inflation pressures." 

"Members noted the possibility that some negative side effects might result from the maintenance of very low
short-term interest rates for an extended period, including the possibility that such a policy stance could lead
to excessive risk-taking in financial markets or an unanchoring of inflation expectations."

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Tuesday, November 24, 2009

Saturday 11/21 Radio Show Leftover Information

As is well known, there is no way to cover all information and topics every week.  These were leftover from last Saturday.

Treasury will auction the TARP warrants of J. P. Morgan, CapitalOne, and TCF Financial, because those banks do not want to buy their warrants back.

IMF officials made opposing public statements over whether the dollar should continue as a single world reserve currency or whether it is no longer reliable, implying the need for a basket of currencies as is already used to settle trade accounts between nations,

China said low United States interest rates threaten the world economy.

United Kingdom regulators will be allowed to tear up some bank bonus agreements --- they also are proposing to limit banker salaries and to make it easier for banks to be sued (until the late 19th Century, British bankers could be held personally liable for bank failures).

UK currency still bears "Bank of England: I promise to pay bearer on demand ___ pounds."

Lloyd's faces paying 54 million pounds tax bill on HBOS tax avoidance in which HBOS transferred swap transactions to Cayman Islands subsidiary.

Roubini, the NYU economist, said there are two economies --- a small recovery economy and a larger economy in a deep, persistent downturn; he expects lower revision of Q3 GDP from 3.5% as does Dallas FED President, Fisher.

60 day delinquent mortgage loans are up to 6.25% in Q3 2009 --- record high --- foreclosure action is at 1.42% --- there are 14.4% loans in foreclosure.

Fitch warned insurers face $23 billion loss on commercial property --- insurers hold $450 billion in commercial loans --- MetLife and Prudential have both indicated defaults will rise next year,

Japan Q3 GDP was up 1.23% but it is expected to slow to .3% in Q4 and to .1% in Q1 2010.

Some analysts are voicing a concern that a real estate bubble may be building in China (although Krugman says their population requires building --- no big deal) because their stimulus program appears to be encouraging investment in unused buildings, implying speculation.

Geithner is urging Congress to legislate financial system reforms but he only wants a single regulator --- the Fed.  Democrat Representative DeFazio has called for the resignations of Geithner and Larry Summers.

UCBH, whose bank failure two weeks ago cost TARP $298.7 million, paid $7.5 million in dividends in May and did not make their August TARP payment.

The Dodd financial reform proposals, which are functionally dead in a a puddle of pretense, would actually politicize the Fed by substituting political appointees for the 3 business sector directors and 3 public interest with no bank ownership interests of each Fed district bank.  6 political appointees combined with 3 bank member directors is a major step to dis-functional abuse.  On the other hand, it would have the boundaries of each Fed district redrawn.  This is long overdue --- San Francisco is way too big, as one example.

Bernanke said, "The flow of credit remains constrained, economic activity weak, and unemployment much too high.  Future setbacks are possible."  He also said economic headwinds have reduced bank lending.

Bullard, St. Louis Fed President, said we need a falling unemployment rate before the Fed can take action to avoid spurring inflation.

Plosser, Philadelphia Fed President, denied asset bubble in Asia and sees no concern in the weak dollar, although commercial real estate remains a problem.

Lacker, Richmond Fed President, is hopeful there will be a reasonable rate of growth, but there will not be a rapid improvement in the labor market conditions.  Patches of weakness will persist into recovery and that creates a threat that business and consumer sectors will develop a lack of confidence with respect to inflation and the necessity to continue policies to promote recovery.

Hoenig, Kansas City Fed President, said the economy faces significant weakness, financial institutions need to be allowed to fail, there were flaws in financial oversight, and credit agencies need reform.

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Friday, November 20, 2009

"Jobless Prosperity"?

This week a story on on 11/16 about Bernanke lunching with Wall Street originally had a title which included "jobless prosperity" buoys market and they later changed it to "jobless rebound". What rebound?

Jobless claims continue high over 500,000 each week. Even extended benefits will run or for at 1 million people by January.

James Tobin, the Nobel economist, was famous, besides his Q ratio for valuing companies and the market, for his general equilibrium level paper relating monetary policy and unemployment. While acknowledging an equilibrium level, he maintained through his life that forced unemployment was incompatible with a free society as well as an unproductive loss of talent and resources. I do not see any economist today advocating for Tobin's principles. I see no one considering whether a Tobin Tax to control profitable volatility and risk taking on futures trading (such as happened with oil) and derivatives. Given his abhorrence for unnecessary selective governmental regulation, I believe his attempts to regulate systemically dangerous firms would be more focused on the risks as opposed to salaries and bonuses and size.

This all ties in to the weak dollar/strong dollar debate, credit rationing, unemployment, and what effect a weak dollar or a strong dollar would have on reducing a deficit after a sustained recovery with employment as well as controlling inflation. A weak dollar has allowed financial institutions to recapitalize, although they are generally insolvent if their balance sheets were properly reported, while credit rationing and unemployment has been used to hold inflation down.

These issues are very worthy of civil public debate. This week I asked both Mark Thoma of the University of Oregon and Paul Krugman elongated questions on these issues. While I do not expect to get a response from either one, I am hoping they will write something in the near future which addresses not just a need for s second stimulus that actually targets unemployment, because the first stimulus was an economically inefficient pork pie, but also embraces the caring economic principles of James Tobin, who had his childhood roots in Champaign-Urbana, Illinois, in a cohesive explanation.

I wrote Mark Thoma:

What do you think of Joseph Gagnon's post,

particularly his assertion that the falling dollar will not be a problem as long as there are no policies attempting to keep unemployment below its equilibrium level? What effect would targeting unemployment with U6 at 17.5% (22% if older 1990's calculation used) with an efficient stimulus have relative to his argument? Given the weak dollar carry trade, how can asset bubbles and debt purchases be maintained without the expectation of inflation and then inflation itself becoming a multiple for an increasing deficit more than a multiple for increased GDP which would allow a faster reduction of the deficit?
How is a jobless recovery in which a significant number of the unemployed over 55 (if not 50) may never ever get an interview for a job consistent with their experience and ability much less a job consistent with their experience worth the defense of the financial system status quo?

Denninger of MarketTimer has very convincingly shown the correlation of the weak dollar strong stock market and strong dollar weak stock market beginning in late 2008 to the point where the market is conservatively 20% over valued. In my mind the stock market has become a carry trade. During this stock market upturn, the banks had ability to issue stock and debt to add to their capitalization which still leaves their balance sheets a fiction. If Bank of America valued its assets using the same process forced on Fannie May and Freddie Mac, it would have to post a 50-80 billion dollar loss provision.

Is there no one advocating the principles of James Tobin?

To Paul Krugman I wrote:

Could you comment in a future post or article on how James Tobin  might approach the current unemployment, deficit, liquidity, weak/strong dollar, and credit issues of the current financial crisis?

When I read a reasonable article by James Gagnon on The Baseline Scenario entitled, "Who's Afraid of a Falling Dollar?"  and come away from it with a queasy disgusting feeling, I have to ask who is standing up for the principles of James Tobin with respect to unemployment?  How is unemployment not being used to hold inflation down while the systemically dangerous recapitalize?  Is credit rationing keeping unemployment high?

Would a Tobin Tax on futures trading like oil and on derivative transactions be productive in limiting "unproductive" financial transactions, particularly when the trading profits become so risky they create unemployment, while maintaining liquidity and still be consistent with his fear of selective, knee jerk governmental regulation?  (I found Allessandri and Haldane's "Banking on the State" November 2009 Bank of England interesting in this regard).

I find it hard to believe he would tolerate arguments that it is ok and a good thing to have a "Jobless Prosperity" as I saw headlines on this week.

Yet the legitimate arguments relating to weak dollar/strong dollar in relation to economic recovery, interest rates/credit availability, and how a deficit would be reduced after sustained recovery (I am particularly concerned if a weak dollar would actually extend a deficit longer than a strong dollar recovery; it would seem inflation with a strengthening dollar might be more controllable and lead to deficit reduction with GDP growth faster than inflation with a weak dollar particularly since the United States is a net importing country and we are already seeing higher import prices with a weak dollar).

I see these as very interrelated, but I have probably asked too many questions.

If they write something in the future, good, but my point is that part of the eternal defense of individual liberty is caring. How is it okay to finance the recapitalization of systemically dangerous financial firms on the families of unemployed workers while at the same time we refuse to fire the executives who ran these systemically dangerous firms and programs and we refuse to strip the improperly valued toxic assets from their hands and off their balance sheets? Sweden did it in the 1990's and kept the banks private and stronger. Why can't we do it?

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529 Plan Losses

Today, Oregon obtained a $20 million settlement from Oppenheimer on the $36.2 million loss of their 529 Plan participants invested in the supposedly conservative Core Bond Fund, which went south in 2008 because it was heavily invested in Lehman bonds and mortgage derivatives.  In Illinois, the loss to 529 Plan participants was $85 million but I can find nothing that Illinois has received a settlement.  The Illinois Treasurer was one of the first state officials to accuse Oppenheimer of improper investing practices and joined with other states, including Oregon, to seek restitution.  What is the status?

We have had a 529 Plan representative on our show representing the Illinois Treasurer in the past.  I always find any retirement or 529 Plan, etc., which does not provide information on the underlying assets of investments unacceptable.  Assets of the a fund are one of the key factors I look at in choosing funds for clients.

Bottom line, as I have said on numerous occasions, your first priority is to funding your retirement before funding an educational fund or buying long term care policies.  But, then, that is why retirement planning is an individualized process involving when that individual will need money, where it will come from, and how to avoid running out of money in retirement while maintaining a desirable quality of life.

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What this Blog is about

The Pursuit of Financial Happiness(tm) is a weekly radio show about the accumulation towards retirement and  the distribution of retirement and how to make those more successful.  As the current financial crisis unfolded, the macroeconomic and economic news on the show which helps investors make decision became more important and took up more time, making it harder to cover investing and retirement planning issues.

Hopefully, this Blog will allow me to post information I did not get to during a show, provide some links to information, and to elaborate in more detail or make my point more clear.

The Blogs listed on the right are one's I have found interesting and/or informative; they are not a complete list of blogs I visit.  The links on the right are one's I believe anyone might find informative, but I am not listing all the sites I use.  With respect to finance, pensions, retirement, economics, investing, I use several academic sites available to me at MIT, Boston College, University of Michigan, and The Wharton School of the University of Pennsylvania  among others which it would not be proper for me to provide links.

I try to keep politics out of my show and just discuss the issues.  Anyone who has listened to me knows how critical I can be of individual policy makers of both parties.  I believe we need a free discussion which is derived from a civil debate.  No issue is black and white, which is why my professional advice is always individualized to the client without bias or cookie cutter approaches.  I come from an academic background in which our texts were the original books and papers of the thinkers and discussion of ideas was a necessary critical analysis, give and take as no idea, however a revolutionary an advance at the time, has proven to be immutable or absolutely correct as knowledge grows.

At the same time, in the 18th Century, the pursuit of happiness was a philosophical concept which held that man had the inalienable right to provide food, clothing, and shelter for his family.  It has always been necessary for the individual to defend individual rights from the encroachment of any power which would seek to limit those rights.  There will always be those who consider themselves a special, elite class who know better than others or a privileged class who believe they have a greater purpose in a pursuing a greater self-serving Greed.  Over half of the U.S. House of Representatives and Senate are millionaires.  We live in an age in which 1% have more wealth than 95% of the people.  What makes you think you are in the other 4%?

We all need to stand up and discuss and debate issues, but there are those of both political spectrum's who either want to limit civil discussion or shout it down, who have opinions so firm they cannot listen, or are too afraid to listen, communicate, and learn from each other.  There can be no consensus of free people without a civil debate from which no one is excluded.  It is no longer fashionable, as it was in the 18th century when it was socially acceptable for anyone to get on the box in the public meeting places and speak or to freely debate ideas in coffee houses.

Investing and retirement shows no mercy for the undisciplined, uninformed, bigoted, or those too fearful to act.  It does require an even playing field on which all the players are governed by the same rules.

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