Mike Konczal has published his fifth piece on Mortgage Fraud for Dummies, entitled "The Necessity of Government Action and Ways Out of the Crisis". Mortgage servicers are not federally regulated and are subject to a hodge-podge of state regulations. The servicers need to be taken out of the driver's seat and no excuses allowed. He holds that it is time for banks and corporations to obey the law and cease profiting from fraud. The time for the weak and poor, and increasing the middle class, to have a fair say and be protected from the bulldozer of the rich and powerful. The program needs to be government run, involuntary, and standardized on both the modification and foreclosure end. He also says it is time to reconsider the investor tax break of REMIC's and disallow them if the loan holding entity forecloses above a set percentage of its mortgages.
Later, Konczal writes on the chain of documentation and the act of foreclosure as delineated by Barry Ritholtz as well as several of posts by other bloggers which he uses to show how serious and well understood the problem is.
In yet another subsequent post, Konczal expands on the systemic risk posed by foreclosure frauds in that the electronic processing may place into question whether there were any properly documented "true sales", which could create a Lehman weekend crisis. He then briefly mentions MERS which is an electronic processing and tracking service of mortgages and which is deeply involved in the mortgage fraud controversy.
MERS is a company which has NO employees, only officers. Of these officers, there are an unknown number of corporate Assistant Secretaries (some estimate are in the hundreds, maybe thousands) who sit in their homes scattered across the country attesting to documents by signing them as they are presented to them by MERS without question. MERS services approximately 60% of U.S. mortgages. The Washington's Blog post linked in this paragraph goes into the MERS process and the lack of any attempt by the signers to know the facts behind the attestation they make. MERS is a keystone in the Foreclosure Gate.
Here is an in depth paper written by an attorney, Christopher Peterson, who teaches law at the University of Utah which provides a detailed analysis of MERS and how it operates and ends by questioning whether the democratic governance of the nation's real property recording system has been subverted. This paper will tell you more than you want to know about MERS.
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Wednesday, October 13, 2010
Tuesday, October 12, 2010
Foreclosure Gate: Mortgage Fraud Made Simple
In our weekly economic and market commentary, we mentioned Mike Konczal's piece on foreclosure fraud and how to easily understand it: Foreclosure Fraud for Dummies, 1: The Chains and the Stakes.
His series on this is now up to four articles and they are important enough that if you did not run into them via the link in my weekly commentary, you should definitely read them all thoroughly.
His second piece, What is a Note, and Why is it so Important?, covers the deceptive counter PR campaign by the banks that a correctly filed and produced document is not important, when in fact it is a crucial legal document necessary in a just procedural court. Beyond that the sellers of mortgaged backed securities are afraid that the trusts set up to hold these securities will force the sellers to repurchase the securities.
In the third piece, Why are Servicers so bad at their Job?, Konczal shows that the problem was in the creation of the securities and the removal of the actual mortgages from the books of banks, who historically had usually sought restructuring rather than foreclosure when the loans were still on their books. Servicers do transaction processing and handle default situations. As such they have economic incentives to not negotiate any modification to a good loan. Bankruptcy court records show a problem with documents from servicers beginning in the late 1990's. Servicers are not subject to the Fair Debt Collections Act and many of the mortgages from the largest banks are second or third mortgages.
In the fourth piece, How could this explode into a Systemic Crisis?, Konczal is concerned that the mortgage insurers do not have the liquidity for a nation-wide halt in foreclosures and Congress might be pressed to act too quickly without proper debate of the issues to bailout the banks and mortgage insurers. If trustees do not force the depositors and sponsors to purchase mortgages without notes, investors could sue them. This could encourage tranche warfare between junior and senior tranche holders. Much of this activity would focus around the four largest banks. If the insurance market froze and the stock market panicked over the possibility of waves of lawsuits, this could again force Congress to act precipitously without proper consideration to bail them out and possibly abandon individual rights and equal protection under the law.
We have already seen the White House indicate it is ready to back the mortgage insurers and bankers over proper legal procedure and the protection of individual rights. Konczal will be writing a fifth article how the debate should be formed and fixes found. In my weekly commentary, I linked to Felix Salmon suggestions on this subject. It will be interesting to see what Mike Konczal proposes.
Print Page
His series on this is now up to four articles and they are important enough that if you did not run into them via the link in my weekly commentary, you should definitely read them all thoroughly.
His second piece, What is a Note, and Why is it so Important?, covers the deceptive counter PR campaign by the banks that a correctly filed and produced document is not important, when in fact it is a crucial legal document necessary in a just procedural court. Beyond that the sellers of mortgaged backed securities are afraid that the trusts set up to hold these securities will force the sellers to repurchase the securities.
In the third piece, Why are Servicers so bad at their Job?, Konczal shows that the problem was in the creation of the securities and the removal of the actual mortgages from the books of banks, who historically had usually sought restructuring rather than foreclosure when the loans were still on their books. Servicers do transaction processing and handle default situations. As such they have economic incentives to not negotiate any modification to a good loan. Bankruptcy court records show a problem with documents from servicers beginning in the late 1990's. Servicers are not subject to the Fair Debt Collections Act and many of the mortgages from the largest banks are second or third mortgages.
In the fourth piece, How could this explode into a Systemic Crisis?, Konczal is concerned that the mortgage insurers do not have the liquidity for a nation-wide halt in foreclosures and Congress might be pressed to act too quickly without proper debate of the issues to bailout the banks and mortgage insurers. If trustees do not force the depositors and sponsors to purchase mortgages without notes, investors could sue them. This could encourage tranche warfare between junior and senior tranche holders. Much of this activity would focus around the four largest banks. If the insurance market froze and the stock market panicked over the possibility of waves of lawsuits, this could again force Congress to act precipitously without proper consideration to bail them out and possibly abandon individual rights and equal protection under the law.
We have already seen the White House indicate it is ready to back the mortgage insurers and bankers over proper legal procedure and the protection of individual rights. Konczal will be writing a fifth article how the debate should be formed and fixes found. In my weekly commentary, I linked to Felix Salmon suggestions on this subject. It will be interesting to see what Mike Konczal proposes.
Print Page
Economy & Market Week Ended 10/8/2010
The unemployment report for August showed a net loss of 95,000 jobs. Private employment was up 64,000 but public employment was down 159,000. The unemployment rate remained unchanged at 9.6%. The official discouraged worker figure increased to 17.1% up from 16.7% the prior month. If one used the old 1994 calculation for discouraged workers the number would be closer to 22.8-23%. The unemployment to population ratio remained unchanged at 58.5% and the labor participation rate was 64.7%. Part-time involuntary workers increased 612,000 to 9.5 million. We have long maintained that continued high unemployment is being used to hold inflation down while the financial sector builds its capital ratios back up. The growing question is why do the rich get bailed out on the backs of the general citizenry?
Gold continues to advance to new highs and silver is at 30 year highs. There is some market talk to a possible gold resistance line around $1355. Bottom line, if your local newspaper has articles on owning gold and people in Starbucks are talking about buying gold, it could very well be time to sell and harvest profits. The use and value of gold is very misunderstood as we have said time and time again.
In the context of gold, consumers should be wary of traveling gold buyers and research local gold buyers for the best price. Along the same line, over a year ago we profiled the VA benefit called the special Aid & Attendance Benefit with the help of an Illinois Department of Veteran's Affairs counselor and how the seminars by "financial advisers" on how to get these benefits, etc are a scam. No veteran or their family can be charged more then $10 to help get benefits. VA and State offices are prepared to help veterans and their families obtain benefits and provide information for free. Those so-called advisers attempt to sell an unnecessary trust with its own checking account and/or annuity and life insurance as well as charge the trust for their services. When it comes to veteran's benefits always contact the VA or State veteran's offices.
The mortgage Foreclosure Gate continues to unfold and grow with the banks desperately waging a PR and lobbyist campaign to insure the White House will not take any action to protect the American people as is being very well documented on the blog nakedcapitalism. Many others are also wading into this subject with Mike Konczal's analysis of how the foreclosure fraud is worked and its meaning being a classic must read. Felix Salmon has made three common sense suggestions for resolving the mess none of which, in my opinion, will be acted upon, because they defeat the profitable purposes of the foreclosure fraud by the banks and the title insurance companies are scared.
John Hussman is his weekly commentary (10/3) emphasized that the economic date we see coming in is mixed and, while it is a bit less negative than expected, it continues "... to deteriorate in a manner consistent with stagnate economic activity". A look at economic activity of several indices show that the "... data implies tepid growth but not outright contraction". He maintains that a fresh downturn in the economy is not only a possibility but a likelihood.
Robert Reich had an excellent post on income inequality and how the rich have not only become wealthier but also more politically powerful to the extent that tax cuts, despite being less economically stimulative, for the rich are more important than tax cuts for the other 99% of the citizenry who need the help.
The Small Business Jobs and Credit Act of 2010 has some provisions in it that effect how workers can treat their deferred accounts. It allows carving out a part of a deferred annuity to create an immediate annuity. It allows the holder of a 401(k), 403(b), or 457 plan the ability to convert at least part, although in a more limited way than that available to holders of a traditional IRA, to a Roth 401(k).
The meme of uncertainty, which has been so prevalent since June, has temporarily given way to fear of a currency war. Nations around the world have for some time been defending themselves against the weak dollar and attempting to either boost exports or control prices, interest rates, and investment bubbles. If this were to get out of hand, the protectionist policies which would ensue and multiply around the world would be economically disastrous. While China's currency is undervalued, it is also pegged to the U.S. dollar. In fact, the talk and fear of a currency war serves the same purpose as the uncertainty meme; it is a sideshow, a diversion from the actual problems which exist in different countries, such as China and the United States, which must be dealt with by each country internally with an understanding that there are global, as well as nationally, consequences for right and wrong actions. If China appreciates the yuan (renminbi), the dollar is devalued. It would appear that the United States wants a further devaluation of the U.S. dollar beyond that caused by lower interest rates, which has also led to a flood of money into emerging countries driving their exchange rates up. If the Fed and other central banks around the world are to engage in quantitative easing by buying bonds and mortgages and lower interest rates, the potential global deflation could be staggering. Quantitative easing may be fine for banks liquidity and profits, but it is not relevant to spurring economic growth.
Market Report: No banks failed this week. The unofficial problem bank list is up to 877 banks.
DOW/ Volume NASDAQ/Volume
Mon <78.41>/down 12.8% <26.23>/down 1%
Tue 193.45 /up 30.9% (highest vol since 9/1) 55.31 /up 15%
Wed 22.93 /down 20.9% <19.17> /down 1.4%
Thu <19.07>/down 6.3% 3.01 /down 14.4%
Fri 57.90 /up 3.1% 18.24/up 7.7%
Week 176.80 31.16
Mon Oil down 11 cents to $81.47; Dollar stronger
Weak economic news for the day.
Tue Oil up 1.35 to 82.82; Dollar weaker
Market liked Bank of Japan QE plan and 0 to .1% interest rate.
Wed Oil up 41 cents to 83.23; Dollar weaker but mixed against the pound
ADP private employment survey was down more than expected; tech stocks were down; oil
supplies were up 3.1 million barrels, gas supplies were down 2.6 million barrels; distillate was down 1.1 million barrels.
Thu Oil down 1.56 to 81.67; Dollar stronger but mixed against the yen
Teen retailer and luxury sales are up; weekly jobless claims were down 11,000 to 445,000; 4 week
moving average was down 4000 to 455,750; continuing claims were down 48,000 to 4,462,000.
Fri Oil was up 99 cents to 82.66; Dollar weaker
Weak unemployment report <64,000> farm stocks up; market appears to want QE --- will
there be a sale off in the market if we get QE in November?
United States:
ECRI Weekly Leading Index at <7.0> up from <7.8>.
Gallup survey shows unemployment up to 10.1% in September in a last 1/2 month surge which was probably not picked up in the BLS unemployment report released this week.
BLS annual job loss revision (February for January 2011 report) preliminary estimate is <366,000>, which means there were that many less jobs than reported during 2010.
U.S. factory orders were down .5% August; ex transportation orders were up .9%.
Pending U.S. home sales were up 4.3% August to 82.3 (still 20 below a year ago).
ISM non-manufacturing index was up to 53.2 from 51.5 (August) which was more than the 52.0 expected; employment was up to 50.2 from 48.2.
Office vacancy rate is at a 17 year high.
According to the American Bankers Association, consumer delinquency rate was 3.00% up from 2.98% in Q2; it had been dropping.
As of June 30, 78 bailed out banks have problems severe enough to threaten survival.
U.S. bankruptcies were down 11% in first 9 months of 2010.
Sanofi-Aventis $69/share offer for Genzyme has turned hostile.
Evans (Chicago Fed) favors more accommodation in the face of continuing high unemployment; Fed might aim to overshoot 2% inflation target temporarily to bring down high cost of credit.
ADP private employment survey is down 39,000 jobs in September (expected up 20,000).
88% of NYSE stocks are overbought as of Wednesday. There is a massive short accumulation in the Nasdaq 100.
If economic growth is 2% per year, unemployment will grow to 11.9% by 2020; if 3% growth, unemployment will be 45% by 2020; if 6% growth, unemployment will be 5% by 2012.
40% of Americans fear they will run out of money for health care and are delaying retirement.
Joseph Stiglitz said the Fed monetary easing and quantitative easing has created chaos globally in currencies.
U.S. consumer credit in August was up 1.75% annualized; revolving credit decreased 7.25%; non-revolving credit increased 1.25%.
Fisher (Dallas Fed), who opposes QE, said the debate at the next FOMC (Fed Open Market Committee) will still continue.
U.S. city tax revenues are down 3.2% in 2010.
Bullard (St. Louis Fed) said the decision at the next FOMC (Fed Open Market Committee) will be tough, because the economy has slowed but not so much that something should be done.
Bank of America extended its mortgage foreclosure freeze to all 50 states; PNC is halting in 23 states for a month.
Wholesale inventories were up .8% in August.
International:
China has offered to buy Greek bonds and Chairman Wen said China will undertake great effort to support the eurozone. China is diversifying it's currency holdings. It has also bought Spanish bonds.
China also said the global financial crisis has demonstrated the need for China to focus on "structural problems" and stimulate domestic demand to stabilize and grow the economy. Even before the recession, China's economic development lacked balance, coordination, and sustainability according to Chinese officials.
The United Kingdom Accounting and Actuarial Board has opened an investigation into Ernst & Young and its report to the FSA (UK financial regulatory authority).
Bank of Japan announced $418 billion monetary easing program to buy corporate debt as well as government debt and cut interest rates to a range of zero to one-tenth of a percent.
The Markit eurozone services PMI (Purchasing Managers Index) was down to 54.1 September from 55.9; six month low.
Moody's warned it may cut Ireland's credit rating again, citing need for additional austerity. To me, this appears to be counter productive as Ireland is suffering from austerity which is stagnating growth while publicly bailing out Irish banks to the benefit of shareholders, officers, and bondholders at great expense to GDP.
Australia central bank kept its interest rate at 4.5%. There is growing concern about the appreciation of the Australian dollar.
The ECB will accept one week deposits to drain excess (?) liquidity from the market; it also stepped up bond purchases with $730 million last week.
Eurozone retail sales were down .4%.
Eurozone wants China to appreciate the yuan (renminbi).
Bank of England held interest rate at .5%; QE is on hold.
ECB held interest rate at 1%.
Estonia's inflation rate is up 4.0% annualized and .8% for the month.
German manufacturing orders were up 3.4% in August on strong foreign demand. German exports were down .4%; production was up 1.7%; manufacturing output was up 3.4% (primarily cars).
France's trade gap was up in August.
Canadian building permits were down 9.2% by value.
China sold a record 2.02 trillion yen ($24.5 billion) of Japanese debt in August after seven months of buying.
French service sector index was up 1 to 102 in September.
Canadian jobs were down 6600 in September (expected up 10,000) which may indicate jobs growth is faltering; its workforce shrank 11% with unemployment at 8%.
Print Page
Gold continues to advance to new highs and silver is at 30 year highs. There is some market talk to a possible gold resistance line around $1355. Bottom line, if your local newspaper has articles on owning gold and people in Starbucks are talking about buying gold, it could very well be time to sell and harvest profits. The use and value of gold is very misunderstood as we have said time and time again.
In the context of gold, consumers should be wary of traveling gold buyers and research local gold buyers for the best price. Along the same line, over a year ago we profiled the VA benefit called the special Aid & Attendance Benefit with the help of an Illinois Department of Veteran's Affairs counselor and how the seminars by "financial advisers" on how to get these benefits, etc are a scam. No veteran or their family can be charged more then $10 to help get benefits. VA and State offices are prepared to help veterans and their families obtain benefits and provide information for free. Those so-called advisers attempt to sell an unnecessary trust with its own checking account and/or annuity and life insurance as well as charge the trust for their services. When it comes to veteran's benefits always contact the VA or State veteran's offices.
The mortgage Foreclosure Gate continues to unfold and grow with the banks desperately waging a PR and lobbyist campaign to insure the White House will not take any action to protect the American people as is being very well documented on the blog nakedcapitalism. Many others are also wading into this subject with Mike Konczal's analysis of how the foreclosure fraud is worked and its meaning being a classic must read. Felix Salmon has made three common sense suggestions for resolving the mess none of which, in my opinion, will be acted upon, because they defeat the profitable purposes of the foreclosure fraud by the banks and the title insurance companies are scared.
John Hussman is his weekly commentary (10/3) emphasized that the economic date we see coming in is mixed and, while it is a bit less negative than expected, it continues "... to deteriorate in a manner consistent with stagnate economic activity". A look at economic activity of several indices show that the "... data implies tepid growth but not outright contraction". He maintains that a fresh downturn in the economy is not only a possibility but a likelihood.
Robert Reich had an excellent post on income inequality and how the rich have not only become wealthier but also more politically powerful to the extent that tax cuts, despite being less economically stimulative, for the rich are more important than tax cuts for the other 99% of the citizenry who need the help.
The Small Business Jobs and Credit Act of 2010 has some provisions in it that effect how workers can treat their deferred accounts. It allows carving out a part of a deferred annuity to create an immediate annuity. It allows the holder of a 401(k), 403(b), or 457 plan the ability to convert at least part, although in a more limited way than that available to holders of a traditional IRA, to a Roth 401(k).
The meme of uncertainty, which has been so prevalent since June, has temporarily given way to fear of a currency war. Nations around the world have for some time been defending themselves against the weak dollar and attempting to either boost exports or control prices, interest rates, and investment bubbles. If this were to get out of hand, the protectionist policies which would ensue and multiply around the world would be economically disastrous. While China's currency is undervalued, it is also pegged to the U.S. dollar. In fact, the talk and fear of a currency war serves the same purpose as the uncertainty meme; it is a sideshow, a diversion from the actual problems which exist in different countries, such as China and the United States, which must be dealt with by each country internally with an understanding that there are global, as well as nationally, consequences for right and wrong actions. If China appreciates the yuan (renminbi), the dollar is devalued. It would appear that the United States wants a further devaluation of the U.S. dollar beyond that caused by lower interest rates, which has also led to a flood of money into emerging countries driving their exchange rates up. If the Fed and other central banks around the world are to engage in quantitative easing by buying bonds and mortgages and lower interest rates, the potential global deflation could be staggering. Quantitative easing may be fine for banks liquidity and profits, but it is not relevant to spurring economic growth.
Market Report: No banks failed this week. The unofficial problem bank list is up to 877 banks.
DOW/ Volume NASDAQ/Volume
Mon <78.41>/down 12.8% <26.23>/down 1%
Tue 193.45 /up 30.9% (highest vol since 9/1) 55.31 /up 15%
Wed 22.93 /down 20.9% <19.17> /down 1.4%
Thu <19.07>/down 6.3% 3.01 /down 14.4%
Fri 57.90 /up 3.1% 18.24/up 7.7%
Week 176.80 31.16
Mon Oil down 11 cents to $81.47; Dollar stronger
Weak economic news for the day.
Tue Oil up 1.35 to 82.82; Dollar weaker
Market liked Bank of Japan QE plan and 0 to .1% interest rate.
Wed Oil up 41 cents to 83.23; Dollar weaker but mixed against the pound
ADP private employment survey was down more than expected; tech stocks were down; oil
supplies were up 3.1 million barrels, gas supplies were down 2.6 million barrels; distillate was down 1.1 million barrels.
Thu Oil down 1.56 to 81.67; Dollar stronger but mixed against the yen
Teen retailer and luxury sales are up; weekly jobless claims were down 11,000 to 445,000; 4 week
moving average was down 4000 to 455,750; continuing claims were down 48,000 to 4,462,000.
Fri Oil was up 99 cents to 82.66; Dollar weaker
Weak unemployment report <64,000> farm stocks up; market appears to want QE --- will
there be a sale off in the market if we get QE in November?
United States:
ECRI Weekly Leading Index at <7.0> up from <7.8>.
Gallup survey shows unemployment up to 10.1% in September in a last 1/2 month surge which was probably not picked up in the BLS unemployment report released this week.
BLS annual job loss revision (February for January 2011 report) preliminary estimate is <366,000>, which means there were that many less jobs than reported during 2010.
U.S. factory orders were down .5% August; ex transportation orders were up .9%.
Pending U.S. home sales were up 4.3% August to 82.3 (still 20 below a year ago).
ISM non-manufacturing index was up to 53.2 from 51.5 (August) which was more than the 52.0 expected; employment was up to 50.2 from 48.2.
Office vacancy rate is at a 17 year high.
According to the American Bankers Association, consumer delinquency rate was 3.00% up from 2.98% in Q2; it had been dropping.
As of June 30, 78 bailed out banks have problems severe enough to threaten survival.
U.S. bankruptcies were down 11% in first 9 months of 2010.
Sanofi-Aventis $69/share offer for Genzyme has turned hostile.
Evans (Chicago Fed) favors more accommodation in the face of continuing high unemployment; Fed might aim to overshoot 2% inflation target temporarily to bring down high cost of credit.
ADP private employment survey is down 39,000 jobs in September (expected up 20,000).
88% of NYSE stocks are overbought as of Wednesday. There is a massive short accumulation in the Nasdaq 100.
If economic growth is 2% per year, unemployment will grow to 11.9% by 2020; if 3% growth, unemployment will be 45% by 2020; if 6% growth, unemployment will be 5% by 2012.
40% of Americans fear they will run out of money for health care and are delaying retirement.
Joseph Stiglitz said the Fed monetary easing and quantitative easing has created chaos globally in currencies.
U.S. consumer credit in August was up 1.75% annualized; revolving credit decreased 7.25%; non-revolving credit increased 1.25%.
Fisher (Dallas Fed), who opposes QE, said the debate at the next FOMC (Fed Open Market Committee) will still continue.
U.S. city tax revenues are down 3.2% in 2010.
Bullard (St. Louis Fed) said the decision at the next FOMC (Fed Open Market Committee) will be tough, because the economy has slowed but not so much that something should be done.
Bank of America extended its mortgage foreclosure freeze to all 50 states; PNC is halting in 23 states for a month.
Wholesale inventories were up .8% in August.
International:
China has offered to buy Greek bonds and Chairman Wen said China will undertake great effort to support the eurozone. China is diversifying it's currency holdings. It has also bought Spanish bonds.
China also said the global financial crisis has demonstrated the need for China to focus on "structural problems" and stimulate domestic demand to stabilize and grow the economy. Even before the recession, China's economic development lacked balance, coordination, and sustainability according to Chinese officials.
The United Kingdom Accounting and Actuarial Board has opened an investigation into Ernst & Young and its report to the FSA (UK financial regulatory authority).
Bank of Japan announced $418 billion monetary easing program to buy corporate debt as well as government debt and cut interest rates to a range of zero to one-tenth of a percent.
The Markit eurozone services PMI (Purchasing Managers Index) was down to 54.1 September from 55.9; six month low.
Moody's warned it may cut Ireland's credit rating again, citing need for additional austerity. To me, this appears to be counter productive as Ireland is suffering from austerity which is stagnating growth while publicly bailing out Irish banks to the benefit of shareholders, officers, and bondholders at great expense to GDP.
Australia central bank kept its interest rate at 4.5%. There is growing concern about the appreciation of the Australian dollar.
The ECB will accept one week deposits to drain excess (?) liquidity from the market; it also stepped up bond purchases with $730 million last week.
Eurozone retail sales were down .4%.
Eurozone wants China to appreciate the yuan (renminbi).
Bank of England held interest rate at .5%; QE is on hold.
ECB held interest rate at 1%.
Estonia's inflation rate is up 4.0% annualized and .8% for the month.
German manufacturing orders were up 3.4% in August on strong foreign demand. German exports were down .4%; production was up 1.7%; manufacturing output was up 3.4% (primarily cars).
France's trade gap was up in August.
Canadian building permits were down 9.2% by value.
China sold a record 2.02 trillion yen ($24.5 billion) of Japanese debt in August after seven months of buying.
French service sector index was up 1 to 102 in September.
Canadian jobs were down 6600 in September (expected up 10,000) which may indicate jobs growth is faltering; its workforce shrank 11% with unemployment at 8%.
Print Page
Saturday, October 9, 2010
The "Invisible Hand" is Risk Aversion
The myth of the Invisible Hand as a part or justification of market theory has become pervasive. It is used incorrectly to justify self serving conduct as productive of social good and to paint all governmental regulation, without respect to the need to protect rights and maintain a level competitive playing field, as antithetical to a free competitive market. In fact as Gavin Kennedy, who is a contemporary expert on Adam Smith, has succinctly said, "Smith never wrote anything about ‘how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest’." His blog, Adam Smith's Lost Legacy, is well worth reading and this is a list of his blog posts on the Invisible Hand.
The economist, Maxine Udall, ended her recent post, "The (Crippled) Invisible Hand", on the Invisible Hand myth with the above link to Gavin Kennedy. She very compactly lays out how the myth of the Invisible hand over the last 30 to 40 years has actually crippled the Invisible Hand. The "Invisible Hand" is mentioned only once in Adam Smith's "The Wealth of Nations". Gavin Kennedy has written on how the "Invisible Hand" is a metaphor. Maxine Udall correctly identifies the metaphor as risk aversion.
Just as I have written on the use of proper risk management by banks and the regulatory process in Canada and the failure and refusal of banks and the regulatory process in the United States to use proper risk management, Maxine Udall has identified the lack of risk aversion promulgated by a mythical competitive market driven by unfettered self-interest a prime mover in the current widening of income inequality and abuse of the public interest by a privileged few who are allowed to engage in risky behavior and keep the profits when they succeed and dump the losses on the public when they go to far: "A crippled risk-averse invisible hand is not the only reason for the concentration of wealth and power in the financial sector, but it is one of the reasons and an important one. That's why a no-strings, no-pain bailout of the same wonderful guys who gave us the most recent crisis was such a mistake. It amputates the invisible hand of risk aversion. With no down side, they're pretty much free to deliver more of the same. The only solution to this particular aspect of finance is wiser, more risk averse investors; wiser, more risk averse shareholders; and wiser, more risk averse management."
The unknowing perpetuation of myth is too easily harnessed by those who would purposefully promote illusion of freedom in the fancy dressing of "politically correct" and, consequently, demanded interpretations of historical texts and concepts long debated in a truly free society. Add over 80% of the money controlled by 1% of the people and you can easily understand why some political candidates and public media mouth pieces are so richly underwritten and lobbyists abound wherever the people's representatives might speak out and take action.
Print Page
The economist, Maxine Udall, ended her recent post, "The (Crippled) Invisible Hand", on the Invisible Hand myth with the above link to Gavin Kennedy. She very compactly lays out how the myth of the Invisible hand over the last 30 to 40 years has actually crippled the Invisible Hand. The "Invisible Hand" is mentioned only once in Adam Smith's "The Wealth of Nations". Gavin Kennedy has written on how the "Invisible Hand" is a metaphor. Maxine Udall correctly identifies the metaphor as risk aversion.
Just as I have written on the use of proper risk management by banks and the regulatory process in Canada and the failure and refusal of banks and the regulatory process in the United States to use proper risk management, Maxine Udall has identified the lack of risk aversion promulgated by a mythical competitive market driven by unfettered self-interest a prime mover in the current widening of income inequality and abuse of the public interest by a privileged few who are allowed to engage in risky behavior and keep the profits when they succeed and dump the losses on the public when they go to far: "A crippled risk-averse invisible hand is not the only reason for the concentration of wealth and power in the financial sector, but it is one of the reasons and an important one. That's why a no-strings, no-pain bailout of the same wonderful guys who gave us the most recent crisis was such a mistake. It amputates the invisible hand of risk aversion. With no down side, they're pretty much free to deliver more of the same. The only solution to this particular aspect of finance is wiser, more risk averse investors; wiser, more risk averse shareholders; and wiser, more risk averse management."
The unknowing perpetuation of myth is too easily harnessed by those who would purposefully promote illusion of freedom in the fancy dressing of "politically correct" and, consequently, demanded interpretations of historical texts and concepts long debated in a truly free society. Add over 80% of the money controlled by 1% of the people and you can easily understand why some political candidates and public media mouth pieces are so richly underwritten and lobbyists abound wherever the people's representatives might speak out and take action.
Print Page
Thursday, October 7, 2010
Influence Requires Discretion or How Bank's Mortgage Fraud Almost Became Legal
In our Saturday post we mentioned the building firestorm involving apparently fraudulent mortgage foreclosure documents and processes. Today CNBC made it graphic with an article about a bill on the President's desk which might bail the banks out of the mortgage foreclosure frauds by changing the notarization process and taking it out of the authority of the states. Subsequently, the White House issued a statement, which morphed the CNBC article, that the bill would not be signed, although the issue would be studied for future appropriate action. This bill had languished in the Senate Judiciary Committee without hearing until it was removed from the Judiciary Committee on September 27th and passed with a unanimous vote without debate.
As Yves Smith wrote yesterday, this bill was possibly an attempt by the banks to bull doze over state laws and pave a freeway out to institutionalized abuse.
Today, Yves Smith wrote about Representative Grayson's written request that the Financial Stability Oversight Council investigate banks failure to adhere to contractual and legal requirement in the mortgage and mortgage backed securities markets as a systemic risk. While Yves Smith quotes Felix Salmon on where the foreclosure mess is heading, her naked capitalism blog has, and I trust will, paid extensive attention to these mortgage foreclosure frauds and the fundamental damage it is doing to individual liberties and the legal process.
President Obama needs to clearly and fundamentally define his position going forward as one which favors the American people and the protection of their inalienable rights to life, liberty, and the pursuit of happiness, which in 18th Century term meant the opportunity to provide food, clothing, and shelter for one's family as opposed to protecting the powerful monied interests of the financial banking empire at the expense of the common citizen.
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As Yves Smith wrote yesterday, this bill was possibly an attempt by the banks to bull doze over state laws and pave a freeway out to institutionalized abuse.
Today, Yves Smith wrote about Representative Grayson's written request that the Financial Stability Oversight Council investigate banks failure to adhere to contractual and legal requirement in the mortgage and mortgage backed securities markets as a systemic risk. While Yves Smith quotes Felix Salmon on where the foreclosure mess is heading, her naked capitalism blog has, and I trust will, paid extensive attention to these mortgage foreclosure frauds and the fundamental damage it is doing to individual liberties and the legal process.
President Obama needs to clearly and fundamentally define his position going forward as one which favors the American people and the protection of their inalienable rights to life, liberty, and the pursuit of happiness, which in 18th Century term meant the opportunity to provide food, clothing, and shelter for one's family as opposed to protecting the powerful monied interests of the financial banking empire at the expense of the common citizen.
Print Page
Currency Wars
In our last post we noted that Brazil's finance minister commented on a global currency war. His comment has elicited an avalanche of international comment, including the IMF and World Bank. We have been commenting for almost two years that a weak U.S. dollar is a burden on developing countries. A weak dollar combined with low interest rates is economic warfare. For some time Switzerland has been intervening to lower the value of the Swiss franc. South Korea, Australia, Brazil, China, and recently, Japan, have, among others, bought U. S. dollars or otherwise taken action to protect its currency and control asset prices. A weak dollar combined with low interest rates forces investments in growing countries which drives their currency and asset prices up. The Chinese currency is known to be undervalued as well as pegged to the U.S. dollar. Consequently, any appreciation of the Chinese renminbi is a devaluation of the U. S. dollar.
We have previously discussed Chinese and American military interests in economic warfare.
There have been numerous studies and articles on U.S. and Chinese imports/exports and the weak dollar and appreciation of the Chinese currency. There does not appear to be any appreciable benefit to the United States for the renminbi to be appreciated in value with respect to either exports or jobs. Any lost Chinese exports would go to other Southeast Asian countries and would most likely cause increased prices in the United States rather than increase internal production. U.S. import levels are likely to remain as they are implying needed internal consumption within a slow growth economy. Lost export jobs in China could conceivably be more disruptive as difficult rebalancing for internal service and production jobs from export, interest rates, and shift of income from corporations, finance, and real estate to households.
The verbal intensity of this issue runs the risk of masking the real problems within the United States and within China and how they are contributing to the global current account imbalances problem. To a degree, there are always currency "wars"; it is only when they escalate into a mutually destructive tariff war or a currency crisis does it become a financial crisis conflict.
Print Page
We have previously discussed Chinese and American military interests in economic warfare.
There have been numerous studies and articles on U.S. and Chinese imports/exports and the weak dollar and appreciation of the Chinese currency. There does not appear to be any appreciable benefit to the United States for the renminbi to be appreciated in value with respect to either exports or jobs. Any lost Chinese exports would go to other Southeast Asian countries and would most likely cause increased prices in the United States rather than increase internal production. U.S. import levels are likely to remain as they are implying needed internal consumption within a slow growth economy. Lost export jobs in China could conceivably be more disruptive as difficult rebalancing for internal service and production jobs from export, interest rates, and shift of income from corporations, finance, and real estate to households.
The verbal intensity of this issue runs the risk of masking the real problems within the United States and within China and how they are contributing to the global current account imbalances problem. To a degree, there are always currency "wars"; it is only when they escalate into a mutually destructive tariff war or a currency crisis does it become a financial crisis conflict.
Print Page
Saturday, October 2, 2010
Economy & Market Week Ended 10/1/2010
In the prior week, we saw GMAC (Ally Financial) put foreclosures on hold. This week we saw J. P. Morgan and Bank of America do the same. In addition to investigations by numerous state attorney generals, J.P. Morgan Chase, Bank of America, Citibank, HSBC, PNC Bank, U. S. Bank, and Wells Fargo have been contacted by the Comptroller of the Currency about their foreclosures procedures. The problems, as we have previously outlined, revolve around automatic processing of foreclosure documents requiring a personal knowledge affidavit, misrepresentations in court, and the sudden appearances of loose title transfer signatures (allonges) which are required to be permanently affixed to the mortgage documents. Yves Smith of naked capitalism has done several posts on this subject both before and after this post. She has also documented how Florida's special Foreclosure Courts staffed by retired judges are a disgusting example of injustice and lack of proper judicial procedure in steam rolling foreclosures forward over truth and rights to due process. Foreclosure mill law firms and judges have been presenting and accepting improperly executed documents and fraudulent information, because the banks and mortgage holders do not want to take the time to properly and legally document ownership and provide the personal knowledge review legally required.
In the prior week we had commented on NBER (National Bureau of Economic Research) had declared the recession over in June 2009 and that some economists were remarking that NBER usually waited for at least one or two economic indicators to recover to pre-recession levels before making such a determination, but this pronouncement was made with no indicators having recovered. Hussman in his weekly commentary last Monday focused on the supplemental downloadable data provided by NBER and shows that with respect to GDP (Gross Domestic Product) we are not out of the woods yet. His analysis of unemployment shows continued job pressure going forward and oncoming economic weakness. While presently defensive, he stressed that his investment style is long term.
Paul Krugman has continued his argument that the Chinese currency (renminbi) is undervalued and requires U. S. political action in the form of tariffs, because diplomacy has failed. Michael Pettis has continued to argue that China has a complicated internal problem of currency, savings, interest rates, wages, and consumption which present a situation in which the political choices are not good given the double edged sword of any attempt to rebalance internally will create very difficult improvements versus economic hardships in any choice of how or what to rebalance. It very much appears China does not understand the position of the United States and Europe and the United States and Europe do not understand or appreciate the internal economy of China.
What is totally lost in much of the discussion about appreciating the value of the renminbi is that such an appreciation would result in a devaluation of the U.S. dollar. Is this what the current administration wants --- a devaluation of the U.S. dollar? without Treasury or Federal Reserve action? A weak dollar is not going to fuel exports from the U.S. and it will increase prices in the U.S. Tariffs on imports will only add to the price increases. The global economy does not need China's growth shattered by disruptive internal imbalances. The weak dollar is driving up the price of oil without strong economic growth or demand. Gold is at an all time high and silver at a thirty year high while the stock market has been going up during the month of September. Market correlations seem to have become obsolete and non-existent.
TARP will end tomorrow, but the outstanding bailouts will continue. Many financial sector analysts are bemoaning the end of TARP seeing it as an underrated federal program despite its favoritism of financial banks profitability at the expense of the cost to the American people and the high long term continuation of unemployment. Some analysts would like to see it available to bailout states and municipalities despite not having any legal authority to use TARP money and programs for such a purpose. Treasury still insists TARP will be profitable, although the number of banks delinquent in dividend payment has risen.
The U.S. Treasury is considering converting its preferred stock to common as a means to gradually sell the common stock and exit AIG. It would convert approximately $49.1 billion of preferred to 1.66 billion common shares at a loss of about $6.6 billion, which would dilute current common shareholders to 7.9% from 20%, but they will receive warrants for common shares at $45 strike. There was no explanation of why warrants will be issued.
Back in April we detailed how Ireland's bailout of its banks with a bad bank was done for the benefit of creditors and at the expense of the taxpayer, i.e., it was an example of a "bad" bad bank. This week saw the Irish banks bailout heating up effecting bond spreads in Europe and increasing default speculation. While the Irish government was considering how the bailout should be modified, there were unconfirmed reports early in the week from Germany that the ECB had considered a bailout plan for Ireland but decided against it. This report pushed yields of Irish banks debt up. Then Moody's cut the debt rating of Allied Irish, which is a bank which was not even included in the European stress test. It should be noted that the European bank stress test also did not include real estate mortgages (and Ireland's difficulty is partially the result of a real estate bubble) in the tests. While Ireland has been the poster child for European imposed austerity, which has significantly lowered Ireland's economic growth, its people have been remarkably quiescent. By the end of the week, the Irish government had announced it would cost up to $68 billion to bailout Anglo Irish and Allied Irish (with both now nationalized with the nationalization of Allied Irish) or 32% of Ireland's GDP. The Irish citizenry has begun to publicly question the burden being placed upon them and some are calling for new elections.
Civil demonstrations and strikes are spreading across Europe and, with respect to strikes, there is obvious international coordination. Romania had police officers and other unions protesting cuts in salaries and pensions and a government minister resigned. Protests and strikes in France against pension reforms are expected to resume. Wage pressures and potential union action in Germany is heating up. We should see more strikes and protests in many European countries in the next two months. The question is to what extent social unrest will be controlled or spread as the UN has forecast; yet, the IMF wants more austerity. In the meantime, one eurozone sovereign bond after another appears to be "chiseled" out and demoted by the "market" to higher yields and larger spreads on speculation, while European economic and ECB officials hold the rope without attempting to pull it in to safety, while asserting united action as if they were one.
Market Report: 2 banks failed = 129 for year
DOW/Volume NASDAQ/Volume
Mon <48.22>/ down 14.1% <11.45>/down 14.3%
Tue 46.10 / up 12.1% 9.82 / up 13.1%
Wed <22.86>/ down 1.8% <3.03>/down 1.0%
Thu <47.23>/ up 27.0% (distribution day) <7.94>/ up 12.6%
Fri 41.63 / down 15.6% 2.13 / down 19.9%
For Week <19.38> <10.47>
The market was up Tuesday on bad economic news and down Thursday on good economic news.
Mon Oil was up 3 cents to 76.52; Dollar stronger but mixed against the pound
economic business/manufacturing activity shows slowing
Tue Oil down 34 cents to 76.18; Dollar weaker but mixed against the pound
poor economic news; Green Mountain Coffee down after hours on news SEC investigation
into inventory/revenue recognition
Wed Oil up $1.68 to 77.86; Dollar weaker
protests and strikes across Europe
Oil supplies down 500,000 barrels, gas supplies down 3.5 million barrels, distillate supplies down
1.9 million barrels
Thu Oil up $2,11 to 79.97; Dollar weaker but mixed against the pund
market down on good economic news
weekly jobless claims down 16,000 to 453,000, 4 week moving average down 6250 to 458,000,
continuing claims down 86,000 to 4,457,000
Fri Oil up $1.61 to 81.58; Dollar weaker
National Institute of Supply Management Purchasing Manager's Index (ISM PMI) down from prior
month (economy slowing)
In the United States:
National ISM PMI (Institute of Supply Management Purchasing Manager's Index) fell to 54.1 from 56.3; new orders fell to 51.1 from 53.1; inventories at factories are growing. This shows growth, but confirms slower growth.
The ECRI WLI (Weekly Leading Indicators) improved to <7.8> this week from last week's <8.7>. <10> is considered recessionary. This shows contraction but improving growth.
U.S. consumer spending for August was up .4% (expected .3) and core (without food or energy prices included) PCE (Personal Consumption Expenditures) was up .1%. Real PCE, annualized, was up .2%. Personal income was up .5% (expected .3), but the increase was due to a one month boost in jobless benefits.
Chicago ISM PMI was up to 60.4 from 56.7; new orders were up to 61.4 from 55.0. This is showing better than expected growth. It is also the 12th straight month of expansion for this regional index.
Kansas City Fed manufacturing index September production up to 14 from zero; new orders were up to 10 from <1>. This regional index is also showing stronger than expected growth.
U.S. Q2 GDP was revised up to 1.7% from 1.6%.
U.S. truck tonnage was down 2.7% in August, which indicates slowing growth.
Case-Schiller 20 city price index, which is a three month average, was up 3.2% and down .1% seasonally adjusted. The price decline which began in July will not be apparent until the October report.
Bank analyst, Meredith Whitney, expects states to be the next credit crisis and has released a study through her consulting firm. She also said she expects bank earnings in Q4 to be lower ("hammered") from lower trading revenue and a double dip in housing.
The Treasury missed the deadline to sell all of its Citi shares as the Citi share price fell and treasury slowed sales.
Dallas Fed Texas manufacturing index for September was mixed with production up to 4.0 from <.1> but new orders up to <3.0> from <9.3>, which indicate new orders are still in contraction.
Southwest is buying AirTran for $3.4 billion and picking up its gates.
FDIC is delaying the authority to dismantle large financial companies in order to give regulators and financial industry more time to study how it will work.
Unilever is buying AlbertoCulver for $5.7 billion.
Chicago Fed economic activity for August down to <.53> from <.11>, which shows increased, but marginal, contraction.
Walmart made an offer to buy South African company Massmart for $4.25 billion. Massmart is the largest basic food wholesaler in Africa and the third largest distributor of consumer goods as well as a leading retailer in Africa.
FDIC set rules to require banks selling securitized assets to keep 5% of the product on their balance sheet and to use asset backed securities of failed banks to repay taxpayers or depositors at the expense of securities buyers.
Employers can expect to pay 9% more in 2011 for health care cost (biggest increase in 5 years); employees cost is expected to rise 12%. We are also seeing insurance companies dropping health insurance completely (Principal), withdrawing from some states, and dropping policies for individual children with the mandate to provide insurance to a previously uninsurable child. The PPACA but costs before benefits and the insurance companies are going to pick where and what they provide and make more money doing it.
The IRS will no longer mail tax forms and instructions to taxpayers beginning with 2010 taxes in 2011. They claim only approximately 11 million people actually submit paper forms not submitted through preparers or electronically. The forms will be available over the internet from the IRS website and post offices.
The Fed, if quantitative easing is resumed (QE2), may continue large purchases of long term Treasuries or it may make smaller purchases with amounts set at each FOMC (Federal Reserve Open Market Committee).
The Richmond Fed manufacturing activity index was down to <2> from 11; new orders were down to zero from 10 seasonally adjusted. This is the first drop in seven months.
Tuesday morning Apple opened down 5.7% for no apparent reason, although several possible reasons were floated. Also on Tuesday, the market was heading down when at 9:01 Central time there was a large volume spike, for no known reason, and the market started heading back up. After hours on Tuesday, Green Mountain Coffee fell 15% on possible SEC investigation of revenue recognition in relation to its one cup inventories.
AIG is nearing sale of two Japanese insurance companies to Prudential for $4.8 billion.
U.S. Treasury will sale $2.2 billion of Citi TRuPS (trust preferred securities) received for guaranteeing assets. The guarantee was terminated in December 2009.
Blair (FDIC) wants higher minimum reserve ratios (insurance funds balance to insured deposits) --- currently 1.35 with the Dodd-Frank bill; even 2% would not insure banks would have enough insurance assessment in a crisis.
GM monthly auto sales were up 22.1%. Auto sales vs year ago: GM up 10.5%, Ford up 46%, Chrysler up 61%, and Toyota up 17%.
New HP CEO, Leo Apotheker, who was SAP CEO for 7 months before resigning after consumer complaints about increases in maintenance fees, said HP's focus should be software. HP stock went down3% on Friday at the beginning of the market.
Late Thursday night, Congress passed an extension of the high cost Fannie/Freddie/FHA loan limits of $729,750.
Banks are doing away with proprietary trading desks, but proprietary traders are going to direct customer trading desks. Just changing names?
Rosengren (Boston Fed) said unemployment reflects general decline across all industries and expansion of Fed reserves may signal determination to reduce disinflationary pressures. It is his firm view that policymakers should implement policies consistent with achieving full employment and appropriate level of inflation.
Plosser (Philadelphia Fed) opposes more asset purchases for feat it will create public expectation of Fed monetizing the deficit. He expects U.S. growth of 3-3.5% in the next two years. He expects hiring to pick up in 2011 but remain along sectoral, geographic problematic skill imbalances.
Kocherlakota (Minneapolis Fed) revised his GDP estimate to 2.4% in second half of 2010 and 2.5% in 2011.
Evans (Chicago Fed), who supports QE2, said "... optimal policy response at zero-bound is to lower the real interest rate, almost surely by employing unconventional policy tools. Theory also indicates that, in the absence of such policy stimulus, the factors that generate high risk aversion could very well stifle a meaningful recovery, keep unemployment high and reinforce disinflationary pressures --- clearly undesirable equilibrium."
Pinalto (Cleveland Fed) said growth is too slow to reduce stubborn unemployment and she is assessing effectiveness of Fed tools.
Bernanke said it is not uncommon for recovery after a financial crisis to be slow.
Dudley (New York Fed) said more Fed easing warranted if the economic outlook does not change.
U. S. Treasury auctions:
2 yr Treasury, $36 billion, yield .441%, bid to cover 3.82, foreign 39.0%, direct 10.78%.
5 yr Treasury, $35 billion, yield 1.26%, bid to cover 2.96, foreign 50.1%, direct 8.7%.
7 yr Treasury, $29 billion, yield 1.89% (record low), bid to cover 3.04, foreign 50.24%, direct 13.38%.
International:
Japan's recovery slowing again and another $55 billion stimulus being considered with no plans on how it would be use released.
Bank of Korea intervened to lower its currency (the won) by buying U.S. dollars.
Brazil's finance minister warned of a global currency war.
Europe's central banks have slowed gold sales for year ended 9/26 under Central Banks Gold Agreement (CBGA) to 62 tons down 96% from 2004-2005 497 tons. It is expected that the CBGA cap will keep sales low.
China imposes a tariff on U.S. poultry imports.
Bank of England Governor Charles Bean gave a speech demanding savers start spending and stop living off income in low interest rate environment.
UK GDP Q2 remained unchanged at 1.2%.
French consumer spending was down 1.6% August (it was up 2.7% in July).
ECB is not renewing emergency lending programs which mature this week and Q4 in order to wind down.
HSBC's China PMI up to 52.9 in August from 50.0.
Official Chinese government PMI up to 53.8 from 51.7.
German retail sales in August down .2%.
UK PMI down to 53.4 from 53.7.
Print Page
In the prior week we had commented on NBER (National Bureau of Economic Research) had declared the recession over in June 2009 and that some economists were remarking that NBER usually waited for at least one or two economic indicators to recover to pre-recession levels before making such a determination, but this pronouncement was made with no indicators having recovered. Hussman in his weekly commentary last Monday focused on the supplemental downloadable data provided by NBER and shows that with respect to GDP (Gross Domestic Product) we are not out of the woods yet. His analysis of unemployment shows continued job pressure going forward and oncoming economic weakness. While presently defensive, he stressed that his investment style is long term.
Paul Krugman has continued his argument that the Chinese currency (renminbi) is undervalued and requires U. S. political action in the form of tariffs, because diplomacy has failed. Michael Pettis has continued to argue that China has a complicated internal problem of currency, savings, interest rates, wages, and consumption which present a situation in which the political choices are not good given the double edged sword of any attempt to rebalance internally will create very difficult improvements versus economic hardships in any choice of how or what to rebalance. It very much appears China does not understand the position of the United States and Europe and the United States and Europe do not understand or appreciate the internal economy of China.
What is totally lost in much of the discussion about appreciating the value of the renminbi is that such an appreciation would result in a devaluation of the U.S. dollar. Is this what the current administration wants --- a devaluation of the U.S. dollar? without Treasury or Federal Reserve action? A weak dollar is not going to fuel exports from the U.S. and it will increase prices in the U.S. Tariffs on imports will only add to the price increases. The global economy does not need China's growth shattered by disruptive internal imbalances. The weak dollar is driving up the price of oil without strong economic growth or demand. Gold is at an all time high and silver at a thirty year high while the stock market has been going up during the month of September. Market correlations seem to have become obsolete and non-existent.
TARP will end tomorrow, but the outstanding bailouts will continue. Many financial sector analysts are bemoaning the end of TARP seeing it as an underrated federal program despite its favoritism of financial banks profitability at the expense of the cost to the American people and the high long term continuation of unemployment. Some analysts would like to see it available to bailout states and municipalities despite not having any legal authority to use TARP money and programs for such a purpose. Treasury still insists TARP will be profitable, although the number of banks delinquent in dividend payment has risen.
The U.S. Treasury is considering converting its preferred stock to common as a means to gradually sell the common stock and exit AIG. It would convert approximately $49.1 billion of preferred to 1.66 billion common shares at a loss of about $6.6 billion, which would dilute current common shareholders to 7.9% from 20%, but they will receive warrants for common shares at $45 strike. There was no explanation of why warrants will be issued.
Back in April we detailed how Ireland's bailout of its banks with a bad bank was done for the benefit of creditors and at the expense of the taxpayer, i.e., it was an example of a "bad" bad bank. This week saw the Irish banks bailout heating up effecting bond spreads in Europe and increasing default speculation. While the Irish government was considering how the bailout should be modified, there were unconfirmed reports early in the week from Germany that the ECB had considered a bailout plan for Ireland but decided against it. This report pushed yields of Irish banks debt up. Then Moody's cut the debt rating of Allied Irish, which is a bank which was not even included in the European stress test. It should be noted that the European bank stress test also did not include real estate mortgages (and Ireland's difficulty is partially the result of a real estate bubble) in the tests. While Ireland has been the poster child for European imposed austerity, which has significantly lowered Ireland's economic growth, its people have been remarkably quiescent. By the end of the week, the Irish government had announced it would cost up to $68 billion to bailout Anglo Irish and Allied Irish (with both now nationalized with the nationalization of Allied Irish) or 32% of Ireland's GDP. The Irish citizenry has begun to publicly question the burden being placed upon them and some are calling for new elections.
Civil demonstrations and strikes are spreading across Europe and, with respect to strikes, there is obvious international coordination. Romania had police officers and other unions protesting cuts in salaries and pensions and a government minister resigned. Protests and strikes in France against pension reforms are expected to resume. Wage pressures and potential union action in Germany is heating up. We should see more strikes and protests in many European countries in the next two months. The question is to what extent social unrest will be controlled or spread as the UN has forecast; yet, the IMF wants more austerity. In the meantime, one eurozone sovereign bond after another appears to be "chiseled" out and demoted by the "market" to higher yields and larger spreads on speculation, while European economic and ECB officials hold the rope without attempting to pull it in to safety, while asserting united action as if they were one.
Market Report: 2 banks failed = 129 for year
DOW/Volume NASDAQ/Volume
Mon <48.22>/ down 14.1% <11.45>/down 14.3%
Tue 46.10 / up 12.1% 9.82 / up 13.1%
Wed <22.86>/ down 1.8% <3.03>/down 1.0%
Thu <47.23>/ up 27.0% (distribution day) <7.94>/ up 12.6%
Fri 41.63 / down 15.6% 2.13 / down 19.9%
For Week <19.38> <10.47>
The market was up Tuesday on bad economic news and down Thursday on good economic news.
Mon Oil was up 3 cents to 76.52; Dollar stronger but mixed against the pound
economic business/manufacturing activity shows slowing
Tue Oil down 34 cents to 76.18; Dollar weaker but mixed against the pound
poor economic news; Green Mountain Coffee down after hours on news SEC investigation
into inventory/revenue recognition
Wed Oil up $1.68 to 77.86; Dollar weaker
protests and strikes across Europe
Oil supplies down 500,000 barrels, gas supplies down 3.5 million barrels, distillate supplies down
1.9 million barrels
Thu Oil up $2,11 to 79.97; Dollar weaker but mixed against the pund
market down on good economic news
weekly jobless claims down 16,000 to 453,000, 4 week moving average down 6250 to 458,000,
continuing claims down 86,000 to 4,457,000
Fri Oil up $1.61 to 81.58; Dollar weaker
National Institute of Supply Management Purchasing Manager's Index (ISM PMI) down from prior
month (economy slowing)
In the United States:
National ISM PMI (Institute of Supply Management Purchasing Manager's Index) fell to 54.1 from 56.3; new orders fell to 51.1 from 53.1; inventories at factories are growing. This shows growth, but confirms slower growth.
The ECRI WLI (Weekly Leading Indicators) improved to <7.8> this week from last week's <8.7>. <10> is considered recessionary. This shows contraction but improving growth.
U.S. consumer spending for August was up .4% (expected .3) and core (without food or energy prices included) PCE (Personal Consumption Expenditures) was up .1%. Real PCE, annualized, was up .2%. Personal income was up .5% (expected .3), but the increase was due to a one month boost in jobless benefits.
Chicago ISM PMI was up to 60.4 from 56.7; new orders were up to 61.4 from 55.0. This is showing better than expected growth. It is also the 12th straight month of expansion for this regional index.
Kansas City Fed manufacturing index September production up to 14 from zero; new orders were up to 10 from <1>. This regional index is also showing stronger than expected growth.
U.S. Q2 GDP was revised up to 1.7% from 1.6%.
U.S. truck tonnage was down 2.7% in August, which indicates slowing growth.
Case-Schiller 20 city price index, which is a three month average, was up 3.2% and down .1% seasonally adjusted. The price decline which began in July will not be apparent until the October report.
Bank analyst, Meredith Whitney, expects states to be the next credit crisis and has released a study through her consulting firm. She also said she expects bank earnings in Q4 to be lower ("hammered") from lower trading revenue and a double dip in housing.
The Treasury missed the deadline to sell all of its Citi shares as the Citi share price fell and treasury slowed sales.
Dallas Fed Texas manufacturing index for September was mixed with production up to 4.0 from <.1> but new orders up to <3.0> from <9.3>, which indicate new orders are still in contraction.
Southwest is buying AirTran for $3.4 billion and picking up its gates.
FDIC is delaying the authority to dismantle large financial companies in order to give regulators and financial industry more time to study how it will work.
Unilever is buying AlbertoCulver for $5.7 billion.
Chicago Fed economic activity for August down to <.53> from <.11>, which shows increased, but marginal, contraction.
Walmart made an offer to buy South African company Massmart for $4.25 billion. Massmart is the largest basic food wholesaler in Africa and the third largest distributor of consumer goods as well as a leading retailer in Africa.
FDIC set rules to require banks selling securitized assets to keep 5% of the product on their balance sheet and to use asset backed securities of failed banks to repay taxpayers or depositors at the expense of securities buyers.
Employers can expect to pay 9% more in 2011 for health care cost (biggest increase in 5 years); employees cost is expected to rise 12%. We are also seeing insurance companies dropping health insurance completely (Principal), withdrawing from some states, and dropping policies for individual children with the mandate to provide insurance to a previously uninsurable child. The PPACA but costs before benefits and the insurance companies are going to pick where and what they provide and make more money doing it.
The IRS will no longer mail tax forms and instructions to taxpayers beginning with 2010 taxes in 2011. They claim only approximately 11 million people actually submit paper forms not submitted through preparers or electronically. The forms will be available over the internet from the IRS website and post offices.
The Fed, if quantitative easing is resumed (QE2), may continue large purchases of long term Treasuries or it may make smaller purchases with amounts set at each FOMC (Federal Reserve Open Market Committee).
The Richmond Fed manufacturing activity index was down to <2> from 11; new orders were down to zero from 10 seasonally adjusted. This is the first drop in seven months.
Tuesday morning Apple opened down 5.7% for no apparent reason, although several possible reasons were floated. Also on Tuesday, the market was heading down when at 9:01 Central time there was a large volume spike, for no known reason, and the market started heading back up. After hours on Tuesday, Green Mountain Coffee fell 15% on possible SEC investigation of revenue recognition in relation to its one cup inventories.
AIG is nearing sale of two Japanese insurance companies to Prudential for $4.8 billion.
U.S. Treasury will sale $2.2 billion of Citi TRuPS (trust preferred securities) received for guaranteeing assets. The guarantee was terminated in December 2009.
Blair (FDIC) wants higher minimum reserve ratios (insurance funds balance to insured deposits) --- currently 1.35 with the Dodd-Frank bill; even 2% would not insure banks would have enough insurance assessment in a crisis.
GM monthly auto sales were up 22.1%. Auto sales vs year ago: GM up 10.5%, Ford up 46%, Chrysler up 61%, and Toyota up 17%.
New HP CEO, Leo Apotheker, who was SAP CEO for 7 months before resigning after consumer complaints about increases in maintenance fees, said HP's focus should be software. HP stock went down3% on Friday at the beginning of the market.
Late Thursday night, Congress passed an extension of the high cost Fannie/Freddie/FHA loan limits of $729,750.
Banks are doing away with proprietary trading desks, but proprietary traders are going to direct customer trading desks. Just changing names?
Rosengren (Boston Fed) said unemployment reflects general decline across all industries and expansion of Fed reserves may signal determination to reduce disinflationary pressures. It is his firm view that policymakers should implement policies consistent with achieving full employment and appropriate level of inflation.
Plosser (Philadelphia Fed) opposes more asset purchases for feat it will create public expectation of Fed monetizing the deficit. He expects U.S. growth of 3-3.5% in the next two years. He expects hiring to pick up in 2011 but remain along sectoral, geographic problematic skill imbalances.
Kocherlakota (Minneapolis Fed) revised his GDP estimate to 2.4% in second half of 2010 and 2.5% in 2011.
Evans (Chicago Fed), who supports QE2, said "... optimal policy response at zero-bound is to lower the real interest rate, almost surely by employing unconventional policy tools. Theory also indicates that, in the absence of such policy stimulus, the factors that generate high risk aversion could very well stifle a meaningful recovery, keep unemployment high and reinforce disinflationary pressures --- clearly undesirable equilibrium."
Pinalto (Cleveland Fed) said growth is too slow to reduce stubborn unemployment and she is assessing effectiveness of Fed tools.
Bernanke said it is not uncommon for recovery after a financial crisis to be slow.
Dudley (New York Fed) said more Fed easing warranted if the economic outlook does not change.
U. S. Treasury auctions:
2 yr Treasury, $36 billion, yield .441%, bid to cover 3.82, foreign 39.0%, direct 10.78%.
5 yr Treasury, $35 billion, yield 1.26%, bid to cover 2.96, foreign 50.1%, direct 8.7%.
7 yr Treasury, $29 billion, yield 1.89% (record low), bid to cover 3.04, foreign 50.24%, direct 13.38%.
International:
Japan's recovery slowing again and another $55 billion stimulus being considered with no plans on how it would be use released.
Bank of Korea intervened to lower its currency (the won) by buying U.S. dollars.
Brazil's finance minister warned of a global currency war.
Europe's central banks have slowed gold sales for year ended 9/26 under Central Banks Gold Agreement (CBGA) to 62 tons down 96% from 2004-2005 497 tons. It is expected that the CBGA cap will keep sales low.
China imposes a tariff on U.S. poultry imports.
Bank of England Governor Charles Bean gave a speech demanding savers start spending and stop living off income in low interest rate environment.
UK GDP Q2 remained unchanged at 1.2%.
French consumer spending was down 1.6% August (it was up 2.7% in July).
ECB is not renewing emergency lending programs which mature this week and Q4 in order to wind down.
HSBC's China PMI up to 52.9 in August from 50.0.
Official Chinese government PMI up to 53.8 from 51.7.
German retail sales in August down .2%.
UK PMI down to 53.4 from 53.7.
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Tuesday, September 21, 2010
Are Illinois Pension Funding Disclosures Fraudulent?
In my last post, "Illinois is #1 in Underfunded Pensions", I ended with the newly enacted two tier pension system which will apply to future hires starting in 2011 and indicated there are actuarial and accounting questions with respect to how the long term savings from the adoption of a two tiered system were applied. This has come as a surprise and I know of only one Illinois newspaper (Champaign-Urbana) which has mentioned the New York Times article entitled, "The Illusion of Pension Savings". We have previously commented in detail on the failure of Illinois mainstream media to discuss Illinois pension systems risky investment policies.
While we have been a public proponent of a two tiered pension system as economically necessary, however distasteful or unfair, given the growing underfunded liabilities of the Illinois pension systems, Illinois officials have apparently taken a concept designed to create future cost savings and used grey areas of actuarial language and governmental accounting standards to purposefully calculate the savings by including all current employees (not just future employees to whom the calculation should apply) in the actuarial cost methods calculation and then applied the "future" savings to the current State budget reducing the required pension funding amount.
This does not pay down principal; it does not keep up with interest; and it actually increases debt annually. It is not a responsible funding method. It is particularly not responsible and, in fact, very risky for an underfunded pension system to adopt such a cost methods calculation.
When the State of Illinois issued public documents this year, which stated the cost method used did not permit the cost of future benefits to be factored into the current year contributions, it caught the attention of actuaries who questioned the disclosure and the cost methods used as well as discourage Illinois from adopting the deceptive method. One actuarial consultant to the State recommended they clarify the disclosures and also said the funding method "may not be an appropriate one."
This has caused the Actuarial Standards Board to begin a review of necessary standards revision, particularly since Texas, Rhode Island, Ohio, and Arkansas use similar methods.
Recently, New Jersey signed a SEC consent order acknowledging that New Jersey had engaged in misleading and incomplete disclosures (to improve the perception of their credit risk) to investors with respect to pension system funding. The investigation had taken three years and no one was charged. According to the State of Illinois Office of Management and Budget, the SEC has not contacted them and they are confidant the disclosures were complete and accurate.
It appears that the State of Illinois officials were aware of the grey interpretation and purposefully chose to use it as a plug in the current deficit budget.
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While we have been a public proponent of a two tiered pension system as economically necessary, however distasteful or unfair, given the growing underfunded liabilities of the Illinois pension systems, Illinois officials have apparently taken a concept designed to create future cost savings and used grey areas of actuarial language and governmental accounting standards to purposefully calculate the savings by including all current employees (not just future employees to whom the calculation should apply) in the actuarial cost methods calculation and then applied the "future" savings to the current State budget reducing the required pension funding amount.
This does not pay down principal; it does not keep up with interest; and it actually increases debt annually. It is not a responsible funding method. It is particularly not responsible and, in fact, very risky for an underfunded pension system to adopt such a cost methods calculation.
When the State of Illinois issued public documents this year, which stated the cost method used did not permit the cost of future benefits to be factored into the current year contributions, it caught the attention of actuaries who questioned the disclosure and the cost methods used as well as discourage Illinois from adopting the deceptive method. One actuarial consultant to the State recommended they clarify the disclosures and also said the funding method "may not be an appropriate one."
This has caused the Actuarial Standards Board to begin a review of necessary standards revision, particularly since Texas, Rhode Island, Ohio, and Arkansas use similar methods.
Recently, New Jersey signed a SEC consent order acknowledging that New Jersey had engaged in misleading and incomplete disclosures (to improve the perception of their credit risk) to investors with respect to pension system funding. The investigation had taken three years and no one was charged. According to the State of Illinois Office of Management and Budget, the SEC has not contacted them and they are confidant the disclosures were complete and accurate.
It appears that the State of Illinois officials were aware of the grey interpretation and purposefully chose to use it as a plug in the current deficit budget.
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Illinois is #1 in Underfunded Pensions
We have repeatedly spoken and written publicly about the horrible underfunding of Illinois pension systems, including here. Illinois now ranks as having the worse underfunded pension systems out of all fifty states according to recent data accumulated by the Bloomberg Cities and Debt Briefing in the U. S Pensions Funds Ranking by Bloomberg News at 50.6% underfunded for all Illinois pension systems.
Part of Illinois' funding problem (2005 study) was the adoption in 1995 of a RAMP funding program that would increase State funding payments in future years to reach 90% funding by 2045. The increasing funding amounts are impractical (2007 study) and often suspended by the General Assembly.
This has contributed to the Teacher's Retirement System and, to a lesser degree, the State Universities Retirement System to engage in risky investing policies involving securitized derivatives. With the Illinois State Board of Investment, all three have high domestic and international equity exposure and low hedge fund direct investment. Illinois pension systems do not have adequate staff to individually investigate due diligence on investments and rely on third party investment managers. While the Illinois State Board of Investment has posted 8.9% investment return for FY2010 and the SURS has reported 16.7% for FY2010, the Teacher's Retirement System has yet to post their FY2010 return. In June, the spokes person for TRS was estimating 19% but has made statements in September that it was 13%.
The sad fact is that benefit payments from the Illinois State Board of Investment were 10% in FY2010 and the benefits paid by the TRS were supposedly 12%. Although employee and employer contributions continue to be made, the failure to make the required actuarial funding of liabilities will escalate the under funding with the percentage of benefits paid increasing to levels which cannot be sustained by investment return and employee/employer contributions. Here is a video on how the more conservative Illinois State Board of Investment could run out of money in ten years or slightly more. While this is extremely serious and must be addressed immediately, it is not a "death spiral" yet.
In a Chicago Federal Reserve paper, Lance Weiss provides an overview of the Illinois pension problems and funding and provides two gross solution alternatives: 1) reducing costs by reducing benefits, increasing invest return, reducing administrative costs, and finding alternative funding sources or 2) deferring costs by changing funding policy, changing actuarial assumptions, changing actuarial funding method, and changing actuarial asset valuation method. It should be noted that the 2003 Pension Obligation Bonds of $10 billion mentioned in his paper were not fully deposited in the pension funds but partially used for other States expenditures.
In another Chicago Federal Reserve paper by Laurence Msall again details the current Illinois budget problem and the necessity to institute pension reforms. He references the recently enacted legislation to raise retirement ages, limit pension double dipping, and limit pension wages which applies only to future participants. He continues his argument, with which I am in general agreement although we might disagree on some details, that cutting State expenses cannot achieve enough savings without significantly damaging essential social safety services and a tax increase is necessary which includes specific funding for pensions.
In "Coping with Unfunded Pension Liabilities", Howard Cure delineates the general causes, current situation, and competing political pressures. He also lists revenue streams, special purpose revenue, defined contribution plans, and the use of tiered pension systems as possible funding solutions. He mentions that Illinois in the recently enacted pension reform legislation adopted a two tiered pension system applicable to future participants hired after January 1, 2011. Unfortunately, it has since been disclosed that there are actuarial and accounting problems with how the two tiered pension system was used in the current FY2011 budget. I will cover this in more detail in my next post
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Part of Illinois' funding problem (2005 study) was the adoption in 1995 of a RAMP funding program that would increase State funding payments in future years to reach 90% funding by 2045. The increasing funding amounts are impractical (2007 study) and often suspended by the General Assembly.
This has contributed to the Teacher's Retirement System and, to a lesser degree, the State Universities Retirement System to engage in risky investing policies involving securitized derivatives. With the Illinois State Board of Investment, all three have high domestic and international equity exposure and low hedge fund direct investment. Illinois pension systems do not have adequate staff to individually investigate due diligence on investments and rely on third party investment managers. While the Illinois State Board of Investment has posted 8.9% investment return for FY2010 and the SURS has reported 16.7% for FY2010, the Teacher's Retirement System has yet to post their FY2010 return. In June, the spokes person for TRS was estimating 19% but has made statements in September that it was 13%.
The sad fact is that benefit payments from the Illinois State Board of Investment were 10% in FY2010 and the benefits paid by the TRS were supposedly 12%. Although employee and employer contributions continue to be made, the failure to make the required actuarial funding of liabilities will escalate the under funding with the percentage of benefits paid increasing to levels which cannot be sustained by investment return and employee/employer contributions. Here is a video on how the more conservative Illinois State Board of Investment could run out of money in ten years or slightly more. While this is extremely serious and must be addressed immediately, it is not a "death spiral" yet.
In a Chicago Federal Reserve paper, Lance Weiss provides an overview of the Illinois pension problems and funding and provides two gross solution alternatives: 1) reducing costs by reducing benefits, increasing invest return, reducing administrative costs, and finding alternative funding sources or 2) deferring costs by changing funding policy, changing actuarial assumptions, changing actuarial funding method, and changing actuarial asset valuation method. It should be noted that the 2003 Pension Obligation Bonds of $10 billion mentioned in his paper were not fully deposited in the pension funds but partially used for other States expenditures.
In another Chicago Federal Reserve paper by Laurence Msall again details the current Illinois budget problem and the necessity to institute pension reforms. He references the recently enacted legislation to raise retirement ages, limit pension double dipping, and limit pension wages which applies only to future participants. He continues his argument, with which I am in general agreement although we might disagree on some details, that cutting State expenses cannot achieve enough savings without significantly damaging essential social safety services and a tax increase is necessary which includes specific funding for pensions.
In "Coping with Unfunded Pension Liabilities", Howard Cure delineates the general causes, current situation, and competing political pressures. He also lists revenue streams, special purpose revenue, defined contribution plans, and the use of tiered pension systems as possible funding solutions. He mentions that Illinois in the recently enacted pension reform legislation adopted a two tiered pension system applicable to future participants hired after January 1, 2011. Unfortunately, it has since been disclosed that there are actuarial and accounting problems with how the two tiered pension system was used in the current FY2011 budget. I will cover this in more detail in my next post
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Friday, September 17, 2010
Can Risky Illinois Pension Fund Investments Be Made Invisible?
After we published "How Risky Are Illinois Pension Funds?" as a follow-up to a segment on our radio show, a spokesperson for the Illinois Teacher's Retirement System wrote a rather long op-ed piece entitled "Facts about pension system alleviate uncertainty for teachers" in the State Journal-Register on September 8th in which the pensions funds are assured to be safe, that pension payments of $2.7 billion paid in 2008-2009 created a $4 billion stimulus in the economy, and assets are being sold in 2010 as they were in 2009, because the State of Illinois in the General Assembly has failed this year and over the years to adequately fund Illinois pension funds as required. We have previously had Laurence Msall of the Civic Federation of Chicago on our radio show in the past to discuss the underfunding of Illinois pensions and what the State must do if it is avert disaster in the future. We have also written on the need of the State to properly fund pensions and address many years of poor government which may leave no choice but a tax increase, despite a slow economic recovery from a recession which is flirting with a double dip, which is normally a time in which a tax increase is not economically desirable or prudent, because the cuts, without a revenue increase, necessary to balance the budget going forward would be destructive of public safety and welfare.
Our article had discussed the proposed 2010 asset sales by the Teacher's Retirement System (possibly $3 billion), the State Universities Retirement System (possible $1.2 billion), and of the Illinois State Board of Investment (possibly $840 million), which invests for the other Illinois pension funds, as reported by Crain's Chicago Business and other news sources..
Our article had also discussed Alexandra Harris' Medill Reports article "Illinois pension fund use OTC derivatives to recoup returns, jeopardizes pensions", which was published in June but has gotten no main stream media attention in Chicago or Springfield, which we can find. When the Teacher's Retirement System spoke person's op-ed appeared in the State Journal-Register, we immediately emailed the editor with a link to our article. We did not get even the courtesy of a response; just silence. Such an unprofessional lack of response got us wondering why and we did some research to see if there had been other posts on blogs and found two on Pension Pulse. The first referenced a zero hedge post which accused the Teacher's Retirement System of being dangerously risky and the second referenced a demand by the Teacher's Retirement System spokesperson to remove the zero hedge comments. I had both zero hedge posts on the subject of the Teacher's Retirement System, including an earlier zero hedge post on the Medill Reports article, which I had missed when it was published. I concentrated on Harris' article and the Illinois Auditor General's audit report of the Teacher's Retirement System.
Further research led me to the disparagement of current economic research still in process by Joshua Rauh at Northwestern University on state pensions. Rauh's research is still in the form of working papers and a continuing project. Earlier in May we had discussed his research on the underfunding of state pensions on the radio show. The Teacher's Retirement System disparagement was part of an Issues Update in which the TRS defended itself on many issues, even asserting that the fiscal year ending June 30, 2010, will have a return of 19% and defended it's use of derivatives. The disparagement of Rauh concentrated on a NPR very brief condensation of state pension systems ranking the Teacher's Retirement System as the fourth riskiest in the country and the classification of investments as risky if they were not fixed income or cash. The TRS argues that all investments are risky to one degree or another, no analysis of individual category risk was made, and the TRS manages risk. To me it appears that the general finance classification of risk was used, because fixed income bonds were not classified as risky, although they can be risky and lose money. Bottom line, the disparagement is smoke exhaled as a screen to obfuscate rather than enlighten with specific risk management procedures and substantiation of acceptable fiduciary risk.
To demand removal of comments, to disparage in general, and to benefit from media silent refusal to print or comment on the issue of investment risk is pretty heavy weight political magic. It made me even more curious. It caused me to re-read the Medill Reports article two more times, review the TRS audit report investment category by category, review the audit report of the Illinois State Board of Investment, review the audit report of the State Universities Retirement System, review the Teacher's Retirement System website information, review the State Universities Retirement System website, and review the Illinois State Board of Investment website information.
On the websites, I found investment information as of 6/30/2010 for the Illinois State Board of Investment showing a FY2010 return of 8.9%; investment information as of 7/31/2010 for the State Universities Retirement System showing July return and FY 2010 return of 16.7%; and investment information as of 3/31/2010 for the Teacher's Retirement System (the information used in the Medill Reports article) with no FY 2010 as of fiscal year end 6/30/2010 investment return information. In the Medill reports article the TRS spokes person stated there would be a $158 million gain in the derivatives category by June 30, 2010 with $5 million from CDS, swaps, and swaptions out of a projected return of $627 million. The other pension systems could post their FY 2010 (ending June 30) investment return, but the Teacher's Retirement System has not been able to do so as of this day in September. Why?
In the investments of the Illinois Board of Investment, they use puts, calls, futures, and foreign currency contracts but they do not use collateralized mortgage obligations (CMO), credit default swaps (CDS), swaps, or swaptions. While collateralized mortgage obligations are on the balance sheet, none were listed as remaining as of 6/30/2009. In the investments of the State Universities Retirement System, derivatives are thrown into fixed income but listed currency, CMO, swaps, swaptions, and CDS (both buy and sell protection). Currency forward contract positions, futures, puts, and calls are more traditional, older derivatives. CDO (collateralized debt obligations), CMO, CDS, swaps, and swaptions are securitized derivatives that date from approximately 1997-98 with J. P. Morgan for all practical purposes, although some limited but marginal use existed in the early 1990's, and are far more risky and dangerous. The Teacher's Retirement System uses puts, calls, futures, currency contract both buy and sell, CDS buy and sell, CMO, CDO (other two systems do not use), swaps, and swaptions, which make them look more like an unfocused trading hedge fund. The derivatives loss in 2009 for the TRS was $381, 367, 366 with a net derivatives category loss of $6,848,438 which means they had approximately $755,886,294 invested in derivatives in FY2009, which was a year (July 2008 - June 30, 2009) in which they lost $4.4 billion. One derivatives trader was quoted in the Medill reports article saying, " TRS basically sold insurance and now it has an enormous short volatility position." They are making bets on long term Treasury yield curves and global interest rates. In the Medill Reports article Dale Rosenthal, a former hedge fund strategist, characterized the TRS portfolio as primed for speculation, because, if they were hedging investments or mitigating risky investments, they would be on one side of the swaptions and CDS rather than buying and selling. They even buy and sell within the same currency forward contracts. Yet, the TRS spokes person said TRS the derivatives are spread across each asset class as complimentary positions, which means that no one manager or separate group of managers are directly responsible for derivatives investing. Frank Partnoy, a law and finance professor who worked as a derivatives structurer on Wall Street, said TRS is not investing smart but chasing returns and not maintaining prudent, effective internal controls. Rosentahl is also quoted in the Medill Reports article as comparing the TRS portfolio with the disastrous hedge fund Magnetar.
The Yale Endowment has often been characterized as aggressive with its use of illiquid investments for higher return but there investment allocation is actually more conservative than the TRS and other two Illinois pension systems with respect to domestic and foreign equity exposure. If you look at actual Yale allocations in 2009 (on PDF page 7), you will see only 7.5% for domestic equity, 9.8% for foreign equity, 4.0% for fixed income, absolute return 24.3%, private equity 24.3%, real assets 32.0% and cash <1.9%>. Obviously, Yale is not taking substantial risks in domestic or foreign equity and has chosen to forgo less risky fixed income which is itself a material risk. TRS has 30.5% for domestic equity, 20.3% for foreign equity, 17.5% for fixed income, 3.6% for absolute return, 8.3% for private equity, 9.6% for real assets, and .9% for short term investments. This would appear to be risky with such high allocations for domestic and foreign equities. The Illinois State Board of Investment is very similar equity allocations but with more fixed income (appears to be too much). The State Universities Retirement System also has similar equity ( PDF page 4) allocations and a fixed income allocation which is perhaps at the top of an appropriate range, but it also has 24.8% of its allocations in passive investments. In chasing returns, the Illinois pension funds have chosen to chase returns in the equity markets with higher allocations which are consequently more risky however liquid. All three systems have target returns of 8.5%. Yale has chosen more sophisticated, albeit more illiquid, investments for higher return (they got burnt in 2008 with the global financial crisis seizing up liquidity).
We ask again where are the Teacher's Retirement System FY2010 returns, both total and by category? When will the main stream media start picking at the pungent facts? How long will this story remain suppressed? Are the investment policies of the Teacher's Retirement System too risky in the performance of its prudent fiduciary duty? If the staff is not concerned, should the Board, in the performance of its fiduciary duty, be concerned?
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Our article had discussed the proposed 2010 asset sales by the Teacher's Retirement System (possibly $3 billion), the State Universities Retirement System (possible $1.2 billion), and of the Illinois State Board of Investment (possibly $840 million), which invests for the other Illinois pension funds, as reported by Crain's Chicago Business and other news sources..
Our article had also discussed Alexandra Harris' Medill Reports article "Illinois pension fund use OTC derivatives to recoup returns, jeopardizes pensions", which was published in June but has gotten no main stream media attention in Chicago or Springfield, which we can find. When the Teacher's Retirement System spoke person's op-ed appeared in the State Journal-Register, we immediately emailed the editor with a link to our article. We did not get even the courtesy of a response; just silence. Such an unprofessional lack of response got us wondering why and we did some research to see if there had been other posts on blogs and found two on Pension Pulse. The first referenced a zero hedge post which accused the Teacher's Retirement System of being dangerously risky and the second referenced a demand by the Teacher's Retirement System spokesperson to remove the zero hedge comments. I had both zero hedge posts on the subject of the Teacher's Retirement System, including an earlier zero hedge post on the Medill Reports article, which I had missed when it was published. I concentrated on Harris' article and the Illinois Auditor General's audit report of the Teacher's Retirement System.
Further research led me to the disparagement of current economic research still in process by Joshua Rauh at Northwestern University on state pensions. Rauh's research is still in the form of working papers and a continuing project. Earlier in May we had discussed his research on the underfunding of state pensions on the radio show. The Teacher's Retirement System disparagement was part of an Issues Update in which the TRS defended itself on many issues, even asserting that the fiscal year ending June 30, 2010, will have a return of 19% and defended it's use of derivatives. The disparagement of Rauh concentrated on a NPR very brief condensation of state pension systems ranking the Teacher's Retirement System as the fourth riskiest in the country and the classification of investments as risky if they were not fixed income or cash. The TRS argues that all investments are risky to one degree or another, no analysis of individual category risk was made, and the TRS manages risk. To me it appears that the general finance classification of risk was used, because fixed income bonds were not classified as risky, although they can be risky and lose money. Bottom line, the disparagement is smoke exhaled as a screen to obfuscate rather than enlighten with specific risk management procedures and substantiation of acceptable fiduciary risk.
To demand removal of comments, to disparage in general, and to benefit from media silent refusal to print or comment on the issue of investment risk is pretty heavy weight political magic. It made me even more curious. It caused me to re-read the Medill Reports article two more times, review the TRS audit report investment category by category, review the audit report of the Illinois State Board of Investment, review the audit report of the State Universities Retirement System, review the Teacher's Retirement System website information, review the State Universities Retirement System website, and review the Illinois State Board of Investment website information.
On the websites, I found investment information as of 6/30/2010 for the Illinois State Board of Investment showing a FY2010 return of 8.9%; investment information as of 7/31/2010 for the State Universities Retirement System showing July return and FY 2010 return of 16.7%; and investment information as of 3/31/2010 for the Teacher's Retirement System (the information used in the Medill Reports article) with no FY 2010 as of fiscal year end 6/30/2010 investment return information. In the Medill reports article the TRS spokes person stated there would be a $158 million gain in the derivatives category by June 30, 2010 with $5 million from CDS, swaps, and swaptions out of a projected return of $627 million. The other pension systems could post their FY 2010 (ending June 30) investment return, but the Teacher's Retirement System has not been able to do so as of this day in September. Why?
In the investments of the Illinois Board of Investment, they use puts, calls, futures, and foreign currency contracts but they do not use collateralized mortgage obligations (CMO), credit default swaps (CDS), swaps, or swaptions. While collateralized mortgage obligations are on the balance sheet, none were listed as remaining as of 6/30/2009. In the investments of the State Universities Retirement System, derivatives are thrown into fixed income but listed currency, CMO, swaps, swaptions, and CDS (both buy and sell protection). Currency forward contract positions, futures, puts, and calls are more traditional, older derivatives. CDO (collateralized debt obligations), CMO, CDS, swaps, and swaptions are securitized derivatives that date from approximately 1997-98 with J. P. Morgan for all practical purposes, although some limited but marginal use existed in the early 1990's, and are far more risky and dangerous. The Teacher's Retirement System uses puts, calls, futures, currency contract both buy and sell, CDS buy and sell, CMO, CDO (other two systems do not use), swaps, and swaptions, which make them look more like an unfocused trading hedge fund. The derivatives loss in 2009 for the TRS was $381, 367, 366 with a net derivatives category loss of $6,848,438 which means they had approximately $755,886,294 invested in derivatives in FY2009, which was a year (July 2008 - June 30, 2009) in which they lost $4.4 billion. One derivatives trader was quoted in the Medill reports article saying, " TRS basically sold insurance and now it has an enormous short volatility position." They are making bets on long term Treasury yield curves and global interest rates. In the Medill Reports article Dale Rosenthal, a former hedge fund strategist, characterized the TRS portfolio as primed for speculation, because, if they were hedging investments or mitigating risky investments, they would be on one side of the swaptions and CDS rather than buying and selling. They even buy and sell within the same currency forward contracts. Yet, the TRS spokes person said TRS the derivatives are spread across each asset class as complimentary positions, which means that no one manager or separate group of managers are directly responsible for derivatives investing. Frank Partnoy, a law and finance professor who worked as a derivatives structurer on Wall Street, said TRS is not investing smart but chasing returns and not maintaining prudent, effective internal controls. Rosentahl is also quoted in the Medill Reports article as comparing the TRS portfolio with the disastrous hedge fund Magnetar.
The Yale Endowment has often been characterized as aggressive with its use of illiquid investments for higher return but there investment allocation is actually more conservative than the TRS and other two Illinois pension systems with respect to domestic and foreign equity exposure. If you look at actual Yale allocations in 2009 (on PDF page 7), you will see only 7.5% for domestic equity, 9.8% for foreign equity, 4.0% for fixed income, absolute return 24.3%, private equity 24.3%, real assets 32.0% and cash <1.9%>. Obviously, Yale is not taking substantial risks in domestic or foreign equity and has chosen to forgo less risky fixed income which is itself a material risk. TRS has 30.5% for domestic equity, 20.3% for foreign equity, 17.5% for fixed income, 3.6% for absolute return, 8.3% for private equity, 9.6% for real assets, and .9% for short term investments. This would appear to be risky with such high allocations for domestic and foreign equities. The Illinois State Board of Investment is very similar equity allocations but with more fixed income (appears to be too much). The State Universities Retirement System also has similar equity ( PDF page 4) allocations and a fixed income allocation which is perhaps at the top of an appropriate range, but it also has 24.8% of its allocations in passive investments. In chasing returns, the Illinois pension funds have chosen to chase returns in the equity markets with higher allocations which are consequently more risky however liquid. All three systems have target returns of 8.5%. Yale has chosen more sophisticated, albeit more illiquid, investments for higher return (they got burnt in 2008 with the global financial crisis seizing up liquidity).
We ask again where are the Teacher's Retirement System FY2010 returns, both total and by category? When will the main stream media start picking at the pungent facts? How long will this story remain suppressed? Are the investment policies of the Teacher's Retirement System too risky in the performance of its prudent fiduciary duty? If the staff is not concerned, should the Board, in the performance of its fiduciary duty, be concerned?
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