Tag Archives: economy

WTF TBTF BAC?

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This post by Fec about Bank of America put me off my breakfast:

So that’s $53T in unregulated derivatives being backstopped by $1T in customer deposits. And remember, those derivatives are largely contracts made with the other TBTF banks, so that if one goes down, they all go down. And there’s no way in hell the FDIC (the taxpayers) can cover those kind of losses.

At this point, I can’t imagine why anyone would leave their money, much less own stock, in a TBTF bank.

I remember the deregulation of the '90s. At the time it made sense to me that a bank could start offering their customers investment services since, you know, it let them do stuff with their money without having to inconvenience themselves with dealing with two (or more) different people.  Then again I didn't know jack about banks or the markets so it isn't a real surprise that I couldn't see the possible negatives in a deregulated environment.  In retrospect the deregulation doesn't seem like it was such a good idea, even to a financial fool like me.

**Update**- In a later post Fec provided a link to a good article explaining the Bank of America situation.

A Modern Day, Budweiser-Drinking Karl Marx

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If I were to paraphrase what PIMCO's Bill Gross wrote in his investment letter it would be, "Financiers of the world your ride on the backs of laborers is coming to an end. If you want to keep living in luxury you better find a way to make sure they feel justly rewarded and not like you're bending them over the rail…so to speak." Here's an excerpt of what he wrote:

Ultimately, however, both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize. Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. Washington, London, Berlin and yes, even Beijing must accept this commonsensical reality alongside several other structural initiatives that seek to rebalance the global economy. The United States in particular requires an enhanced safety net of benefits for the unemployed unless and until it can produce enough jobs to return to our prior economic model which suggested opportunity for all who were willing to grab for the brass ring – a ring that is now tarnished if not unavailable for the grasping. Policies promoting “Buy American” goods and services – which in turn would employ more Americans – should also be reintroduced. China and Brazil do it. Why not us?
If structural solutions are not put in place, a six-pac market observer should look at both stocks and bonds as rather flabby knock-offs of their former selves; no resemblance at all to Jack LaLanne but more to a 55-year-old terminator grown fat and rendered out of shape by years of neglect and perhaps greed for short-term profits as opposed to long-term balance. There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years. A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”

H/T to Ed for the link.

She Makes a Good Point

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I’ve liked Elizabeth Warren since I saw her in a documentary about the credit card industry.  She makes a lot of sense a lot of the time.  If you watch this short clip I think you’ll find what she says to make a lot of sense, but if you’re like me you’ll recognize that in the end she leaves one large question unanswered: “How big a chunk should the successful factory owner pay forward?”  Watch the video and you’ll know what I’m referring to.

Like I said I don’t think anyone, well at least anyone who’s semi-adult and reasonable, will dispute that the successful factory owner didn’t get that way on his own and benefited from the many resources provided by our society and that the factory owner needs to “pay it forward.” I do think, however, that many semi-adult and reasonable people can and will disagree quite vehemently as to HOW MUCH the factory owner should pay forward.

Failure is an Option

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In this post Lex shares these thoughts from Barry Ritholtz on what might happen if too-big-to-fail banks are actually allowed to fail.  My favorite line from Ritholtz is this: "Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Let’s hope we do it correctly this time."

Not So Desperate Housewives

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The latest article from Rolling Stone's Matt Taibbi, the preeminent Wall Street basher, is titled The Real Housewives of Wall Street and it's a doozy.  First there's the story of two wives of Wall Street bigwigs who put together a company in 2009 to take advantage of federal bailout funds:

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment…

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

But this exploration into the adventures of two wives of Wall Street scions leads to bigger questions:

And then there are the bailout deals that make no sense at all. Republicans go mad over spending on health care and school for Mexican illegals. So why aren't they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?

Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That's right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

I'm still waiting for the Feds to launch JERP – Jon's Economic Relief Program.  When they do I'm hitting the beach baby.

Happy Days Will Be Here Again. Eventually.

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Wells Fargo economists say that the economy is improving (h/t to Ed Cone for the link), but that North Carolina has a very long slog in front of it in terms of job creation.  No surprise to anyone who's been paying attention, but interesting just the same:

North Carolina, which had become accustomed  to outperforming the national economy, has underperformed the nation for much of the past decade.  The unemployment rate, which had remained comfortably below the national unemployment rate from 1975 to 2000, has been at or above the national rate for the past decade. Moreover, job growth has been seriously lacking and nonfarm employment is actually lower today than it was at the tail end of the long 1990s business expansion…

North Carolina’s economy also appears to be  on the mend, although a surprisingly weak employment number for the month of November has raised some questions as to how much conditions have actually improved. Private sector payrolls had increased in 8 of the first 10 months of 2010, before plunging by a nation’s worst 11,500 jobs in November. On a year-to-date basis, private sector jobs are now roughly even with where they were one year ago, which is well off the 35,000 jobs we expected to be added this year…  

North Carolina is also facing more structural issues than the nation is. Not only is the state still reeling from the aftermath of the housing  boom, which has weighed on employment in construction and financial services, but it is also dealing with the ongoing restructuring of its industrial base. Manufacturers have eliminated 318,000 jobs across North Carolina over the past decade, with many of the losses occurring in the state’s smaller metropolitan and rural areas. When financial services, technology, tourism and construction were booming, many of these displaced workers could be absorbed in other jobs in the Triangle or Charlotte. Today, however, these industries are growing more slowly and displaced workers are remaining unemployed for longer periods of time…