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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