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May 4 (Bloomberg) -- Short sellers, the bane of Wall Street executives last year, are back.
The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.
Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.
“People are either positioning themselves for the potential of a preferred-to-common conversion, or they have an increased perception of risk in these companies,” said Andrew Baker, an equity strategist at Jefferies & Co. in New York.
The Federal Reserve plans to release results of the tests on May 7. At least six of the 19 firms under review will require additional capital to absorb losses if the recession worsens, people briefed on the preliminary results said last week.
Short sellers borrow shares and sell them hoping to make a profit by replacing the stock after prices fall.
Douglas Cliggott, manager of the Dover Long/Short Sector Fund in Greenwich, Connecticut, said he is shorting some bank stocks on expectations they will lose value as earnings deteriorate. New York-based hedge fund manager Daniel Loeb is betting that financial firms needing more capital will exchange preferred shares for common to bolster their balance sheets. He’s seeking to profit from the price difference between the two securities by buying preferreds and shorting the common.
Converting Preferreds
Citigroup is in the process of converting as much as $52.5 billion of preferred, including $25 billion held by the government. Charlotte, North Carolina-based Bank of America, the largest U.S. lender by assets, will change $25 billion to $45 billion of preferred shares into common to raise capital, said Richard Staite, an analyst at Atlantic Equities LLP in London, in a report to clients last week.
Wells Fargo & Co., based in San Francisco, and three smaller rivals -- BB&T Corp., SunTrust Banks Inc. and Regions Financial Corp. -- also may have to turn their preferred shares into common as a result of the stress tests, according to analysts at New York-based Creditsights Inc.
To entice investors to accept common shares, companies may offer preferred holders a premium to the current price, said Phillip Jacoby, a managing director of Stamford, Connecticut- based Spectrum Asset Management Inc., which oversees $6 billion. Citigroup is offering holders of the $2.04 billion 8.5 percent Series F preferred $21.70 worth of common shares, 24 percent more than their price of $17.48 as of May 1.
Tangible Common Equity
By exchanging preferred for common, banks would be able to increase their tangible common equity, or TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury.
Regulators want TCE to equal about 4 percent of assets, up from an earlier target of 3 percent, people with knowledge of the situation said last week. Seven of the banks under review have ratios of less than 4 percent, company reports show.
“Banks are going to need more capital,” Jacoby said. “Treasury doesn’t care about dilution. All they care about is financial mass and loss-absorption ability to offset what could be more nonperforming loans and writedowns in the future.”
‘Vicious Cycle’
The increase in short selling occurred as the S&P 500 Financials Index posted its best two months since 1989, when Standard & Poor’s started keeping records. The 80-member index has surged 41 percent since Feb. 27.
Stephen Wood, who helps manage $151 billion as senior strategist at Russell Investments in New York, said the stress tests will narrow the breadth of the rally.
“It will end up resulting in a differentiation of the shares,” Wood said. “It will be a vicious cycle for the companies that are not doing well. The share price will go down in anticipation of dilution with the issuance of new shares.”
Short sellers were accused last year by Wall Street chief executive officers, including Lehman’s Richard S. Fuld and Morgan Stanley’s John J. Mack, of using abusive tactics to attack firms.
SEC Ban
Fuld, 63, told congressional investigators on Oct. 6, less than a month after Lehman filed the biggest bankruptcy in history, that short sellers played a role in a “storm of fear” that led to the demise of the 158-year-old firm. Mack, 64, helped persuade government officials in the days following Lehman’s collapse to suspend short selling, which he said was sending his New York-based firm’s shares into a free fall.
The U.S. Securities and Exchange Commission imposed an emergency ban on bearish bets on more than 900 finance-related companies for a three-week period that ended Oct. 8. The agency also tightened requirements on delivering borrowed securities and imposed rules that require hedge funds to privately report short sales to the agency.
The SEC will convene a meeting May 5 to discuss proposals for restricting short sales, including an outright ban when a stock’s price declines.
“The ban last year crushed a lot of hedge funds and their investment strategies,” Perrie Weiner, a partner at the law firm DLA Piper in Los Angeles, said in a telephone interview. “There are much cooler heads now. They are looking at ways by which they can say, ‘We’ve got a better regulated market, and we are on the road to recovery.’”
Short Interest Rising
Short interest rose after Feb. 27 for 14 of the 18 publicly traded companies under review by the Fed, according to Bloomberg data. Citigroup’s increase was the biggest at 509 percent, followed by New York-based insurer MetLife at 66 percent, American Express at 44 percent and Bank of America at 42 percent. The average increase for the 18 companies was 47 percent. It was 201 percent excluding Citigroup.
Representatives for Citigroup, Bank of America, MetLife, and American Express declined to comment.
Detroit-based GMAC LLC, the auto and mortgage lender that received a $6 billion government bailout and is one of the 19 companies undergoing stress tests, wasn’t included in the Bloomberg data because it isn’t publicly traded.
The total short interest for the 18 firms as of April 15, the last date for which New York Stock Exchange data are available, was 2.1 billion shares, or 7.1 percent of those available for trading. That compares with 1.05 billion shares on July 15, or 4 percent of those available for trading.
‘Winners and Losers’
Excluding Citigroup, which accounted for about half of the increase, the total stood at 866.1 million shares on April 15, higher than all but one period last year and 2.9 percent shy of the July peak.
The number of shares sold short in Morgan Stanley totaled 52 million on April 15. While that’s down 12 percent since Feb. 27, it’s higher than the 45.3 million shares on Sept. 15, when Mack was lobbying lawmakers and regulators for a ban.
The large short positions will fuel volatility in stock prices when regulators announce the results of the stress tests, said Matthew McCormick, a fund manager at Cincinnati-based Bahl & Gaynor Investment Counsel Inc., which oversees $2.1 billion.
“With that massive amount of short interest, what those traders are saying is that they feel this process is not going to be managed well,” said McCormick, whose firm doesn’t own any bank stocks. “There are going to be definitive winners and losers, which is exactly the opposite of what the government wanted to do.”
Shorting Citigroup
Loeb’s Third Point LLC, which oversaw $1.8 billion as of April 1, was among investors shorting Citigroup stock and buying the preferreds. While the bank’s delay in completing the exchange has eroded his returns, Loeb told investors last week that he expects to reap gains when other banks swap preferred for common stock.
“We expect to see more opportunities in this area as restructurings create more movement in markets,” Loeb told his investors in an April 28 note. He confirmed the authenticity of the letter and declined to comment further when contacted by Bloomberg News.
Cliggott, whose fund beat 97 percent of its peers last year, according to Bloomberg data, said he’s short New York- based American Express and Goldman Sachs Group Inc. because of his outlook for diminished earnings for the two firms. He unwound his short positions in New York-based JPMorgan Chase & Co. and Wells Fargo, saying the outcome of the stress tests for those banks is “too big of a wildcard.”
“There are a fair number of people in the marketplace who believe many financial stocks are extremely expensive given the rapid contraction of earnings,” Cliggott said, citing the decrease in leverage in the industry as well as deterioration in consumer credit. “The government has added tremendous uncertainty about the future of the U.S. financial sector.”
April 29 (Bloomberg) -- At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.
While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.
By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.
“The challenge that policy makers will confront is that more will be needed and it’s not clear they have the resources currently in place or the political capability to deliver more,” said David Greenlaw, the chief financial economist at Morgan Stanley, one of the 19 banks that are being tested, in New York.
Final results of the tests are due to be released next week. The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose. Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner and other regulators are scheduled to meet this week to discuss the tests.
Options for Capital
Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.
Firms that receive exceptional assistance could face stiffer government controls, including the firing of executives or board members, the Treasury chief has warned.
Today, Kenneth Lewis, chief executive officer of Bank of America, faces a shareholder vote on whether he should be re- elected as the company’s chairman of the board. While Lewis has been at the helm, the bank has received $45 billion in government aid.
‘Out of Our Hands’
Scott Silvestri, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on Lewis yesterday. Lewis said earlier this month that the firm “absolutely” doesn’t need more capital, while adding that the decision on whether to convert the U.S.’s previous investments into common equity is “now out of our hands.”
Citigroup, in a statement, said the bank’s “regulatory capital base is strong, and we have previously announced our intention to conduct an exchange offer that will significantly improve our tangible common ratios.”
Along with Bank of America and New York-based Citigroup, some regional banks are likely to need additional capital, analysts have said.
By taking the less onerous path of converting preferred shares, the Treasury is husbanding the diminishing resources from the $700 billion bailout passed by Congress last October.
‘Politically Constrained’
“Does that indicate that’s what the regulators actually believe, or is it that they felt politically constrained from doing much more than that?” said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington.
Geithner said April 21 that $109.6 billion of TARP funds remain, or $134.6 billion including expected repayments in the coming year. Lawmakers have warned repeatedly not to expect approval of any request for additional money.
Some forecasts predict much greater losses are still on the horizon for the financial system. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year.
Geithner has said repeatedly that the “vast majority” of U.S. banks have more capital than regulatory guidelines indicate. The stress tests are designed to ensure that firms have enough reserves to weather a deeper economic downturn and sustain lending to consumers and businesses.
‘Thawing’ Markets
He also said there are signs of “thawing” in credit markets and some indication that confidence is beginning to return. His remarks reflected an improvement in earnings in several lenders’ results for the first quarter, and a reduction in benchmark lending rates this month.
Financial shares are poised for their first back-to-back monthly gain since September 2007. The Standard & Poor’s 500 Financials Index has climbed 18 percent this month, while still 73 percent below the high reached in May 2007.
Finance ministers and central bankers who met in Washington last weekend singled out banks’ impaired balance sheets as the biggest threat to a sustainable recovery. Geithner has crafted a plan to finance purchases of as much as $1 trillion in distressed loans and securities. Germany has proposed removing $1.1 trillion in toxic assets.
April 27 (Bloomberg) -- Bank of America Corp., the second- largest U.S. home lender after buying the biggest provider of credit before property prices slumped, hopes to bolster its mortgage brand as it drops the Countrywide Financial Corp. name.
The campaign includes a new consumer disclosure intended to let applicants see potential mortgage costs, said Barbara Desoer, the Charlotte, North Carolina-based bank’s mortgage chief. The one-page “Clarity Commitment” form includes worst- case scenarios for adjustable loans, reflecting a survey of 5,000 customers, she said in an April 23 telephone interview.
The company is promoting Bank of America Home Loans as it retires the Countrywide image 10 months after buying the company, starting two days ago at branches in California. Bank of America wants to send consumers a message along with the name change, hoping to build on “very strong momentum” after writing $85 billion of mortgages last quarter as rates fell to the lowest on record, she said.
“Signage and business cards are certainly one thing,” said Desoer, 56. “But it’s also about what the brand promises: That’s to be a responsible lender and help create successful homeowners.”
Bank of America has created Internet tools to help consumers understand “how much home they can reasonably afford, and help them take into consideration all of the costs of homeownership,” Desoer said. The bank also will offer “flat- fee” mortgages to homebuyers visiting its branches, she said.
‘Robust Marketing Campaign’
The company plans a “robust marketing campaign that includes multiple media,” Desoer said, declining to detail the cost. The Countrywide brand was created in 1969 by Angelo Mozilo, the butcher’s son from the Bronx who sold his lender last year, and co-founder David Loeb.
Bank of America reported a $4.25 billion first-quarter profit as mortgage production surged to $85 billion from $22 billion a year earlier. Origination profits totaled $1.6 billion, helping to make up for higher provisions for bad loans. The shares have fallen 77 percent in the past year to $8.92 as of 4 p.m. in New York Stock Exchange composite trading.
The government has provided capital and guarantees of $163 billion to Bank of America, which also bought Merrill Lynch & Co. last year. Writedowns and credit losses amid soaring mortgage defaults at the world’s largest financial companies total more than $1.3 trillion.
Under the “flat fee” program, Bank of America’s charges covering most typical third-party and lender expenses will total $1,995, $2,495 or $2,995, depending on the state. The program will expand to refinance loans and most other locations and customers next year, she said.
‘No Fee’ Loans
The bank sold a “no fee” mortgage starting in May 2007. Consumers found the loan more “suspicious” than the latest offer, thinking “there’s no free lunch,” Desoer said. Costs such as paying interest for the remaining days in the month in which the mortgage closed weren’t excluded. The bank stopped offering the product this year, said Dan Frahm, a spokesman.
The “no fee” loan covered appraisals and title work, and waived mortgage-insurance requirements on some loans with less than 20 percent down payments or home equity with no higher interest rates, Floyd Robison, who preceded Desoer, said in an interview at the time. That product can’t be easily sold after an origination today, Desoer said.
Bank of America has closed “a handful” of loans this month as it begins to process about 200,000 “reservations” for mortgages made possible by rule changes for Fannie Mae and Freddie Mac, the government-run mortgage-finance companies, she said. President Barack Obama said the program to aid borrowers who owe 80 percent to 105 percent of the current value of their home may help 4 million to 5 million homeowners lower payments.
Loan Rates Fall
Federal Reserve Chairman Ben S. Bernanke is buying as much as $1.25 trillion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage securities to drive down home-loan rates.
The rate on a typical 30-year fixed mortgage averaged 4.80 percent last week, a survey by McLean, Virginia-based Freddie Mac showed. Rates fell from 6.46 percent in late October to 4.78 percent for the week ended April 2, the lowest in records since 1971.
Foreclosed properties helped drive down home prices in 20 U.S. cities by an average of 19 percent in January from a year earlier, the fastest decline on record, according to an S&P/Case-Shiller index.
Countrywide originated $1.3 trillion of mortgages in 2004, 2005 and 2006, and Bank of America made $470 billion, according to newsletter Inside Mortgage Finance data. San Francisco-based Wells Fargo & Co., which originated more than $100 billion last quarter, made almost $1.1 trillion during the period.
Name History
Washington Mutual Inc., the failed Seattle thrift whose assets JPMorgan Chase & Co. bought in September, lent almost $700 billion.
In a 2006 interview, Mozilo said that when he helped create Countrywide 40 years ago, at age 29, the name represented a potentially unreachable goal in a market that lacked national home lenders. The name also was a target for comedian Dana Carvey, who joked at a 2004 Mortgage Bankers Association dinner that the company could be called “All 50 States” Mortgage."
Mozilo didn’t return a telephone message today. Loeb died in 2003. The two also created a business that became IndyMac Bancorp, the thrift seized by regulators last year that was spun off by Countrywide in 1985.
Published: April 26 2009 22:35 | Last updated: April 26 2009 22:35
Two more foreign investors in Chinese banks are expected to cash in lucrative stakes and raise a total of more than $2bn this week as a lock-in period ends for their holdings in Industrial and Commercial Bank of China.
Allianz, the German insurer, holds nearly 2 per cent of ICBC, while American Express, the US financial group, owns 0.4 per cent, and each is free to offload half of their holding as early as Tuesday.
Such a sale would raise a combined $2.1bn, based on the bank’s closing share price in Hong Kong on Friday.
The remaining shares can be sold in October.
People familiar with the situation expect Allianz and American Express to waste little time in selling the maximum number of shares permitted.
“The timing of any sale will of course depend on market conditions,” said one. “But don’t be surprised if it happens soon.”
The two shareholders invested in ICBC, which is now the world’s biggest bank by deposits and market capitalisation, alongside Goldman Sachs in 2006 as part of a wave of overseas investments in Chinese banks.
Goldman, which holds 4.9 per cent of the Chinese lender, some on behalf of investors, last month pledged to retain at least 80 per cent of that stake until April 2010. Its stake is worth more than $8bn at current prices.
Allianz and American Express are expected to hire investment bank Goldman Sachs to oversee any potential share sale.
In 2005 and 2006, Beijing had sought foreign capital and technical expertise to boost its then moribund banking sector and cement what was billed as the start of a “strategic” relationship.
However, in the wake of the global credit crisis, many cash-strapped western banks decided to cash in their lucrative stakes as soon as lock-ins started to expire this year.
UBS and Royal Bank of Scotland gave up their holdings in Bank of China, raising a combined $3.2bn, while Bank of America pocketed $2.8bn by selling a chunk of its stake in China Construction Bank.
Allianz and American Express said last month that they would explore all potential sale methods that would maximise value and minimise market impact “with a preference for a private sale to investors”.
Regardless of the potential stock sale, ICBC and American Express plan to expand their strategic partnership, which includes credit card products development, marketing, risk management, customer service and staff training.
ICBC has been issuing American Express-branded credit cards in China since 2004.
The raft of stock sales by overseas investors has triggered frustration in China, where senior officials have decided that any fresh foreign strategic investment in its banks will be subject to a lock-up period of at least five years.
A five-year minimum tie-in was necessary to “ensure the safety of China’s banking system”, Liu Mingkang, chairman of the China Banking Regulatory Commission, recently told a seminar in Beijing."
Published: April 1 2009 18:40 | Last updated: April 1 2009 18:40
Foreign investors in Chinese banks will in future be forced to accept a lock-up period of at least five years, China’s top banking regulator said, after a series of share sales by US and European financial institutions.
In recent months, companies such as Bank of America, UBS and Royal Bank of Scotland have sold down all or part of their stakes in China’s largest state-owned banks immediately after lock-up periods of three years expired.
The new five-year minimum lock-up was necessary to “ensure the safety of China’s banking system”, Liu Mingkang, chairman of the China Banking Regulatory Commission, told a seminar in Beijing, according to people familiar with the matter and also state media reports.
Mr Liu also said Beijing would not reconsider current ownership limits for Chinese banks, which restrict single foreign investors to a 20 per cent holding and all foreign investors to no more than a combined 25 per cent stake in any Chinese bank.
The Chinese regulator decided last year not to allow a higher level of foreign involvement in domestic institutions.
That decision had not been publicly acknowledged until now and could affect the strategy of the few foreign banks that still have the ability and appetite to expand their presence in China.
HSBC, for example, bought 19.9 per cent of China’s Bank of Communications in 2004 in an agreement that would allow it to raise its stake to 40 per cent if and when the government was to raise foreign investment limits.
BofA, RBS, Goldman Sachs, Germany’s Allianz, Singapore’s Temasek and others bought shares in China Construction Bank, Bank of China and Industrial and Commercial Bank of China with promises they would help to improve the Chinese banks’ risk management and managerial capabilities.
But apart from a few minor initiatives, the partnerships largely failed to produce tangible results and when three-year lock-up periods started to expire in recent months most of these “strategic” investors sold all or part of their holdings at a profit at a time when most global banking institutions were in dire need of fresh capital.
Only Goldman has made a public commitment to hold the majority of its stake in ICBC for at least another year.
Temasek, Singapore’s state investment agency that has stakes in both BoC and CCB, has made private commitments not to dump its shares in the market, according to Chinese banking executives."
March 30 (Bloomberg) -- A former Bank of America Corp. customer service representative pleaded guilty to running a $14 million Ponzi scheme that promised investors 24 percent annual returns, the third criminal case he has admitted to.
Antoine David Haroutunian, 47, of Glendale, California, pleaded guilty to mail fraud at a hearing today in federal court in Los Angeles, U.S. Attorney Thomas O’Brien said in a statement. Haroutunian, who is scheduled to be sentenced Aug. 3, faces as long as 20 years in prison, according to the statement.
Haroutunian earlier this month pleaded guilty to a separate case of bank fraud for obtaining customer account information he used to make unauthorized withdrawals in 2003, according to the statement. The theft caused Bank of America $450,000 in losses, O’Brien said.
In a third case, Haroutunian pleaded guilty to tax fraud for obtaining a $183,345 tax refund based on fictitious gambling winnings and losses, according to the statement. He faces as long as 120 years in prison in the bank-fraud case and five years in the tax-fraud case. Sentencing for those cases will be on Aug. 10, O’Brien said.
Michael Proctor, a lawyer for Haroutunian, didn’t immediately return a call seeking comment.
The cases are U.S. v. Haroutunian, 08-01037, 08-01038, and 09-00186, U.S. District Court, Central District of California (Los Angeles.)"
Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.
I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:
"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).
Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).
Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.
Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.
I was mostly involved in the corporate synthetic CDO side.
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms: AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
And the conspiracy thickens.
Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.
The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.
Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:
Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.
"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."
And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).
So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.
This wholesale manipulation of markets, investors and taxpayers has gone on long enough."
By Francesco Guerrera in New York and Krishna Guha in Washington
Published: March 24 2009 23:31 | Last updated: March 24 2009 23:31
The government’s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors, executives and analysts have warned.
Senior bankers say the authorities’ latest drive, announced on Monday, to cleanse financial groups’ balance sheets by encouraging investors to buy troubled residential and commercial mortgages will prompt banks to record losses on those portfolios.
The government will also use its “stress tests” to force banks to take more aggressive provisions on these loans, creating a stronger incentive to sell. This process will increase the pressure on banks that have large loan portfolios to raise fresh funds from investors or the government if capital markets remain frozen.
The possibility of further government injections is set to weigh on banks such as Citi, in which the authorities are about to buy a 36 per cent stake, BofA, Wells and other recipients of federal aid.
“The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank.
Citi and BofA declined to comment.
Wells said it would support “any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the US tax payer”, but said it had not seen all the details of Treasury’s proposals.
Accounting rules allow banks to carry loans on their balance sheets at their original value and set aside a percentage of the losses expected over the lifetime of the loan.
However, the government plan, which offers investors generous financing to buy banks’ distressed assets, will force institutions that sell loans at a discount to take a writedown equal to the difference between the original value and their sale price.
Some analysts believe the potential writedowns would deter banks from taking part in the plan, which was unveiled by Tim Geithner, Treasury secretary.
Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”
But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made “in consultation with regulators” – a sign that the authorities might put pressure on banks to sell toxic assets.
Policymakers say the Geithner strategy is intended to fix the disconnect between the market and the banks by restoring investor confidence in their financial statements.
Outside investors and bank executives are miles apart in their assessments of the true capital position of the banks, making it impossible for them to agree a price at which to recapitalise.
By forcing a more realistic and forward-looking assessment of expected losses on bank loans through the stress test, and creating a secondary market that establishes the expected credit losses on loan portfolios, the authorities intend to force banks to write down these loans.
It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.
And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks' debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.
This sort of thing was predicted here and elsewhere. Welcome to yet more looting.
As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post...
But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.
One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.
Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.
The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.
Yields on such securities can be as high as 22 percent, one trader noted.
BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market....
While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.
Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.
Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.
One source said that the banks' purchases have helped to keep prices of these troubled securities higher than they would be otherwise.
Both banks have launched numerous measures to help stem mortgage foreclosures, and months ago outlined to the government their intention to invest in the secondary market to expand the flow of credit."
I hate to tell everybody this, but we own a large part of Citi, for example. We expect them to make us lots of money. We are shareholders. We want them to make lots of money. If they don't try, they'll be sued, by us.
That's what happened in TARP. It was a hybrid plan. Citi and the government don't have the same interests. On the one hand, we've given Citi a social purpose goal for the money ( namely, lend at all costs ), while, on the other hand, as shareholders, we simply expect them to make us money, and forget about social goals. Which is it?
Glenn Schorr, the banking analyst from UBS, is leaving the firm, according to an internal memo Tuesday obtained by Dealbook.
The memo said that Mr. Schorr was departing immediately and that Mike Carrier, who reported to Mr. Schorr, would be taking over coverage of Goldman Sachs and Morgan Stanley. The firm said it would “communicate our intentions with respect to the balance of Glenn’s coverage in the near future.”
Bank of America is also losing two prominent members of its research team. Bloomberg News reported Tuesday that Richard Bernstein, its chief investment strategist, and David Rosenberg, the chief North American economist, plan to leave the bank within two months.
Mr. Bernstein will form his own money management firm, and Mr. Roseberg will join Gluskin Sheff & Associates in Toronto, Bloomberg said.
The UBS memo did not give a reason for Mr. Schorr’s departure or say what he might do next. Mr. Schorr did not respond to e-mails or phone messages Tuesday. Mr. Schorr and Mr. Carrier both came to UBS in March 2003 from Deutsche Bank.
In November, Citigroup laid off Prashant Bhatia, who covered a range of brokers and asset managers such as Fortress Investment Group, Merrill Lynch (now part of Bank of America) and BlackRock. Earlier in the fall, Bank of America dismissed Michael Hecht, who covered investment banks. Goldman Sachs eliminated the banking analyst role all together last year, laying off William Tanona.
Some of the departures have been voluntary, though. Meredith Whitney recently left her position as a banking analyst for Oppenheimer to create her own firm, Meredith Whitney Advisory Group.
Read the UBS memo below.
– Cyrus Sanati
Memorandum
March 24, 2009
To: US Equities Research, US Equities Sales From: David Bleustein, Director of US Equities Research, Raul Esquivel, Head of Americas Equities, Mark Steinert, Head of Global Equities Research
We regret to announce that Glenn Schorr has decided to leave UBS, effective immediately. Over the past six years, Glenn has contributed tremendously to the Financials sector. We would like to thank Glenn for his accomplishments and wish him well in all his future endeavors.
Michael Carrier will assume lead coverage of Goldman Sachs and Morgan Stanley. We will communicate our intentions with respect to the balance of Glenn’s coverage in the near future.
Please join us in congratulating Michael on his additional responsibilities."
Me:
Your comment is awaiting moderation.
I think that this explains Bernstein’s departure: From Clusterstock:
BofA’s Bernstein Calls For His Own Eventual Layoff (BAC) Dan Colarusso
So let us get this straight. Bank of America stock strategist Rich Bernstein says the Federal government’s bank rescue plan won’t work and that Washington should let the failing ones…well….fail.
That may cause some teeth-gnashing by his boss, Ken Lewis. As Bernstein’s note hit the wires, his corporate master was testifying about his own Girl Scout cookie sales and work with Mother Teresa (at least that’s how our new hero, Rep. Michael Capuano parsed it). Bernstein said the government should increase deposit insurance, seize assets, shut “large” banks and encourage takeovers.
His note also said:
“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable. The latest Treasury program is simply another attempt to stymie the consolidation process.”
March 19 (Bloomberg) -- An American International Group Inc. unit sued Countrywide Financial Corp., accusing the mortgage lender of misrepresenting the underwriting standards of loans the company insured.
“As a result of the unprecedented number of defaults in the mortgage loans, United Guaranty has already paid out insurance claims totaling over $30 million and is exposed to additional claims of several hundred million dollars more,” AIG said today in a complaint filed in federal court in Los Angeles.
Countrywide, which was bought by Bank of America Corp., sought insurance for the mortgage loans to increase the credit ratings of mortgage-backed securities in which the loans were bundled, according to the complaint.
Shirley Norton, a Bank of America spokeswoman, declined to comment on the complaint.
The case is United Guaranty Mortgage Indemnity Co. v. Countrywide Financial Corp., U.S. District Court, Central District of California (Los Angeles.)"
NEW YORK (Reuters) - Bank of America Corp (BAC.N) has put a private bank it inherited from Merrill Lynch & Co on the block, and the largest U.S. bank may try to sell other assets as well.
But unlike rival Citigroup Inc (C.N), which is planning a radical overhaul, Bank of America may not need capital so badly that it has to swallow hard and sell key assets it would rather keep, industry experts said. That may be just as well, given the dearth of buyers and difficulty of getting financing.
"I haven't got the impression that they're close to doing much of anything of a reasonable size," said Jeff Harte, an analyst at Sandler O'Neill & Partners LP.
Since Citigroup last month received a second government bailout, Bank of America has tried to fend off investor fears that it could be next to need more help.
Bank of America has taken $45 billion from the government's $700 billion Troubled Asset Relief Program, including $20 billion in a January bailout that also included the government sharing in losses on some toxic assets, mainly at Merrill. Its stock has fallen about 67 percent since the start of the year.
Last month an industry banker told Reuters that Bank of America was trying to sell First Republic Bank, which Merrill bought in 2007 for $1.8 billion. The banker did not want to be identified because the sale process is private.
Were Bank of America to need more capital, it could try to dispose of other assets such as its 16.6 percent stake in China Construction Bank Corp (601939.SS) and a nearly 50 percent interest in asset manager BlackRock Inc (BLK.N), or businesses such as asset manager Columbia Management, experts said.
Bank of America sold part of its Construction Bank shares in January for $2.83 billion, and has said it plans to sell more when a lock-up period expires in August 2010 -- but not sooner. Its stake is worth about $19 billion now.
BlackRock has a market value of around $12 billion. Columbia Management, meanwhile, said it had $386.4 billion in assets under management as of December 31. That could make it worth $7.7 billion, assuming a price of 2 percent of managed assets, which one analyst said could be used as a ballpark estimate.
Getting rid of some or all of those holdings would stop short of a true restructuring involving the offloading of capital-heavy businesses such as mortgage lender Countrywide Financial Corp and credit card issuer MBNA Corp, said Seamus McMahon, a partner in Booz & Co's banking practice.
Shedding First Republic may simply be an effort to dispose of non-core businesses rather than a bid to raise capital, he said.
"If they really want to restructure, they have got to get major lending businesses off their books," McMahon said. "This is housekeeping."
Bank of America declined to comment.
DISTANCE FROM CITI
The bank has tried to demonstrate that its financial health is better than that of Citigroup, which said in January that it will split into two operating units, selling or winding down non-core assets.
Citigroup also agreed to give a controlling stake in its Smith Barney brokerage to Morgan Stanley (MS.N) for an initial $2.7 billion payment. Morgan Stanley may take over the entire business after five years.
"Bank of America is in reasonably good condition with a strong capital base and a very positive cash flow," said Richard Bove, an analyst at Rochdale Securities. "If you believe that to be the case, there's no reason for them to do asset sales."
Still, one analyst said Bank of America may need more capital to absorb credit-related losses tied to Countrywide and Merrill.
"They have a better franchise than Citi relative to the deposit base," said Paul Miller, an analyst at FBR Capital Markets. "But they are very weak on their capital levels and they took on portfolios -- Merrill Lynch, Countrywide -- that are going to cause some problems.
"I think you're going to see more and more sales of other things throughout these next weeks," Miller added.
Unfortunately, market conditions may leave Bank of America facing the same difficulty selling assets that other financial companies, including Citigroup and the insurer American International Group Inc (AIG.N), are having.
Indeed First Republic, also a specialist in luxury home lending, may fetch a lower price than the $1.8 billion Merrill paid, experts said.
"You can justify a full price for that entity," said New York-based Park Avenue Bank Chairman Donald Glascoff, who has an expertise in real estate finance and mortgage securitization. "But I think the markets are so roiled that to find somebody who will pay a full price will be difficult."
"Bank of America is now valued at around $30 billion, but the bank's retail bank, commercial bank, credit card business, mortgage lending, investment bank and its acquisition of Merrill Lynch are worth almost nothing, argues Breaking Views. The remaining value in the institution comes from stakes it owns in Banco Santander SA's Mexico outfit, Brazil's Banco Itau, BlackRock Inc. and China Construction Bank.
Bank of America has been lumped in with Citigroup Inc. (NYSE:C) because both have taken the same amount of TARP bailout funds from the government. Nationalization rumors have plagued them both, and due to this their stock prices have pretty much reflected each other's over the past month. Although both stocks are up, Bank of America's Ken Lewis has been working hard to differentiate Bank of America with Citigroup, specifically citing that analysts expect Bank of America will produce more than $100 billion in revenue and post a profit in 2009, and there is doubt that Citigroup will be able to do the same, according to The Wall Street Journal.
Sydney Finkelstein of Dartmouth College's Tuck School of Business, who also wrote an article in Forbes titled "Why Ken Lewis Destroyed Bank of America," told WFAE he believes Lewis will have to be replaced in order for investors to regain confidence in Bank of America. "In my view I don't see how he can stay on. The board has been extremely patient. Perhaps they're thinking, 'Who can get us out of this mess? We don't have anyone else on the bench' -- which is a pretty big problem if that's the case. I think too much water has passed under the bridge. I think for Ken Lewis, it's going to be very tough to hold onto that CEO job." - Maria Woehr"
WHAT sealed the fate of Bank of America? I was surprised by something Thomas Friedman said yesterday.
And many other banks — the ones that took on the most leverage like Citigroup and Bank of America — are in trouble because of all the loans on their books that can't now be repaid, such as auto loans, commercial real estate loans, credit card loans, corporate loans.
In the run up to the crisis, there was reckless behaviour on the part of Citibank, Lehman and Bear—but is it fair to put BofA in that category? By acquiring Merrill and Countrywide, BofA has lots of nasty things on its books and it has taken lots of government money. But a big reason why things are so dire is because it bought a bank in really bad shape, not because it engaged in irresponsible lending and took on too much leverage.
Not to say things would be so rosy if it had not bought Merrill. While BofA may not have been as exposed as other firms, according to William Patterson, executive director of CTW Investment Group (which claims its affiliated funds own 116m BofA shares), by March 2008 BofA had lost 30% of its market capitalisation from the previous year. That was largely the result of liquidity support agreements from the CDOs it issued.
Also, even tougher times may lie ahead. The original BofA is heavily exposed to the American consumer. That may be a problem if unemployment goes above 10%. BofA has lots of home-equity loans and credit-card default could turn out to be a big problem. But, its behaviour, prior to acquiring Merrill, would not have left it on the brink of explicit nationalisation. It seems by taking on Merrill, it also took on its poor image. That made things even worse by sinking confidence further.
So even if Bank of America did not behave as recklessly as Merrill, was the decision to acquire it equally irresponsible? A letter circulating today from Mr Patterson to Temple Sloan, the bank’s lead outside director, calls for the removal of Ken Lewis for making that decision.
The board, however, subsequently allowed Mr. Lewis to take outsized, reckless risks by acquiring Merrill Lynch in the midst of severe financial uncertainty. After hastily arranging the ill-considered acquisition, management then failed to disclose Merrill’s staggering fourth quarter losses prior to the shareholder vote on the merger. In addition, BAC’s senior management was reportedly aware of Merrill Lynch’s intent to distribute nearly $4 billion in bonuses at a time when Merrill Lynch was suffering heavy losses. It also appears that Mr. Lewis had the ability to prevent the payments under a previously undisclosed agreement.
Mr Lewis claims he had no idea how bad 4th quarter earnings were until the board voted. Though, a friend of mine who works at Merrill put the merger rather succinctly: “It’s like buying a house during Hurricane Katrina and then acting surprised later the house is uninhabitable because of flood damage."
Nonetheless, after Mr Lewis realised how bad things were at Merrill, he claims he tried to back out of the deal. But Hank Paulson pressured him to stay the course (with the understanding of $20 billion of new capital from the government).
It’s ironic that now BofA is being cast in the same light as the worst behaving banks. The decision to buy Merrill may have been bad for BofA. But can you imagine where we would be now if that same fateful weekend Merrill went down with Lehman, or if Mr Lewis did back out of the deal to buy the troubled bank? Things could be much worse, either that or the US government would explicitly own Merrill by now. Who knows? If BofA survives this, it may someday be glad it bought Merrill (assuming that house does not need to be condemned)."
"Nonetheless, after Mr Lewis realised how bad things were at Merrill, he claims he tried to back out of the deal. But Hank Paulson pressured him to stay the course (with the understanding of $20 billion of new capital from the government).
It’s ironic that now BofA is being cast in the same light as the worst behaving banks. The decision to buy Merrill may have been bad for BofA. But can you imagine where we would be now if that same fateful weekend Merrill went down with Lehman, or if Mr Lewis did back out of the deal to buy the troubled bank? Things could be much worse, either that or the US government would explicitly own Merrill by now. Who knows?"
You make a good point, but let's follow through with some conclusions from this.
First, there was serious fear on the Sunday before Lehman went bust that, if they did, Merrill would follow. The actions of the following week to get the B of A to buy Merrill seem to argue that the fear was justified. Why then take the chance of letting Lehman go bust? Why not have given more aid to the B of A to buy Lehman?
Secondly, given the tax provisions of the original TARP that helped Wells acquire Wachovia, and all of the other actions, it's obvious that the plan to take care of these large businesses was to make them bigger. But what if the size was the problem?
Thirdly, since Bernanke and Bair have said that neither the FDIC or any other government agency can seize these large banks, what was the contingency plan if that occurred? Surely somebody must have asked what would happen if a large bank became insolvent. As best as we can tell, the plan was to turn the large banks over to other large banks with government help. That is the definition of a government guarantee. If the agency that seizes insolvent banks can't seize an insolvent large bank, and we don't let banks go bust in the US, that means that the government is financially committed to saving that bank. Period.
Finally, since you make the point that the B of A was pressured to and helped in the saving of Merrill, how can we help but conclude that the government now feels honor bound to save them?
This is fun. According to Lewis everything is playing out with the Merrill acquisition just how he planned. In an interview with Bloomberg Ken Lewis says the Merrill acquisition, "still looks like a thing of beauty" at the 2:16 marker. Then 40 minutes later he says he wanted to dump Merill but the government wouldn't let him. What an odd plan he laid out.
KEN LEWIS: 02:17:07:00 And look at our ranking-- for the-- for-- for what the-- for all of January and for the-- two or three weeks in-- in February. This powerful-- corporate bank, coming together with our investment bank, you know, and-- and then Merrill-Lynch on top of it, it-- everything we thought is playing out.
...02:56:55:00 Okay. Merrill Lynch. You tried to pull out in December-- you had stated that you talked to people in-- among the regulators who said, "Sorry, you can't." (LAUGHTER) Right, you can't back out right now, and we're not going through three months of re-pricing either. What do you need to survive? (LAUGHTER) Okay, who-- how did that go? Can you tell me that story? KEN LEWIS: 02:57:23:00 Well, I-- I think it's-- I think that's-- I know it's been characterized that way, but-- but-- I would say we were strongly advised, with the emphasis on the strongly, by the government that they didn't-- that they did not think it was in our best interests or the system's best interest to do it. MARGARET POPPER: 02:57:43:00 And who in the government? KEN LEWIS: 02:57:44:00 I-- I had-- I had that told to me by-- by-- Secretary of Treasury Paulson and-- Chairman Benanti (PH). MARGARET POPPER: 02:57:54:00 Okay, and when they said that to you, and they said, "It's not in your best interests," what did they mean? KEN LEWIS: 02:58:00:00 Well, the-- the-- the downsize is that you-- downside is that you don't-- that you don't win. And so, you've got a company that may be bankrupt that you've got to take. Or that you get sued for a jillion (PH) dollars and-- and so that's-- they just thought the downside was so severe that-- and-- and the-- the hit to the system, in us not doing it-- and then-- and then the interrelationship between-- you know, what's good for America's also good for Bank of America. 'Cause we're so intertwined that it just made sense. MARGARET POPPER: 02:58:31:00 I mean, did you argue that point with 'em? 'Cause I can see the point about, you back out of Merrill Lynch and then you've got another Lehman on your hands, right? Nobody wants that. I certainly see the terror in that. KEN LEWIS: 02:58:43:00 Right. MARGARET POPPER: 02:58:43:00 I-- I still-- I mean, in terms of the downside for Bank of America, it seems to me that shareholders made it clear, they would have loved you to back out. (LAUGHTER) KEN LEWIS: 02:58:54:00 Right. Well, I mean, you've got make that call at some point, and-- and we just thought-- that it was in the best interests of the shareholders to-- to not expose them to the downside that I just mentioned, because it would be-- it'd be pretty severe. And so-- MARGARET POPPER: 02:59:09:00 So-- to not expose them to-- KEN LEWIS: 02:59:10:00 To-- to the fact that you-- let's say you-- you didn't do it. They all went bankrupt, but then you lose the case. Then you have to take 'em and-- and it's a disaster. MARGARET POPPER: 02:59:20:00 I see. KEN LEWIS: 02:59:21:00 Or, you-- something else happens but-- but Merrill's shareholders sue you and win, and it would be a large amount. MARGARET POPPER: 02:59:29:00 Okay, so either way, it's gonna cost you a lot of money. KEN LEWIS: 02:59:32:00 And-- and-- and to their credit, they said-- "We will work with you-- we-- we know this is a Merrill issue." I was told, "We view you as a strong company that has done-- that has-- has done the right thing in a difficult situation, and that-- we-- the money will be there. We'll--"
FULL TRANSCRIPT
MARGARET POPPER:
02:11:55:00 That's right. Thank you, Laurie (PH). Ken, welcome, and thanks for joining us here. We are in a period of frenzied talk about nationalization. One day it's on, another day it's off. You've made a very strong statement, and you got out ahead of everybody on this, saying, "We do not need to go back to the government for more." But then I look at half a billion more of losses at Merrill-Lynch than you reported at the end of the year. I look at unemployment rising, potentially, now to nine percent a lot of people are saying. How do you keep that commitment.
KEN LEWIS: 02:12:29:00 Well, think about it-- from-- from the standpoint of our revenue generation. If-- if you look at our-- potential revenue, even this year, without-- without some huge meltdown which we don't will-- in the credit market. We'll be-- we'll be well and north, or projected to be well north of $100 billion. And if you then-- if you then look at our expense page, you're looking at a company with-- probably $45 to $50 billion in pre-tax, pre-provision-- income. And that can-- that can (UNINTEL) a lot of money. MARGARET POPPER: 02:12:58:00 All right. Let me ask you this. When you look at that $100 billion. KEN LEWIS: 02:13:01:00 Plus. MARGARET POPPER: 02:13:04:00 Plus. What percentage comes from what I would call legacy Bank of America. Before countrywide. Before Merrill. What percentage comes from countrywide. And what percentage comes from Merrill, in those projections? KEN LEWIS: 02:13:16:00 That-- we-- we didn't do it that way. So-- I can't tell you that. What I can tell you, though, is that for the-- first-- whatever number of days of the quarter, almost two months now, the two stars, the ones that are doing the best are Merrill-Lynch and countrywide. MARGARET POPPER: 02:13:32:00 Okay. Let me ask you this. I'm gonna push you on this, only because, as I talk to analysts, they say, "When I hear that $100 billion number, I really want to know how much is Merrill. Because Merrill's earnings, obviously, go up and down." KEN LEWIS: 02:13:44:00 Right. MARGARET POPPER: 02:13:44:00 With trading. KEN LEWIS: 02:13:45:00 Right. MARGARET POPPER: 02:13:46:00 Any sense of that? Are we talking 20 percent? Less than 20? More than 20? KEN LEWIS: 02:13:48:00 We-- we look-- we looked at a more normalized-- trading environment. So, it wasn't-- it wasn't a great year. I think-- I've forgotten the year. But I think it was like 2004-2005 kind of numbers. And so, it wasn't a great year. Another way of looking at-- at what I'm talking about. If you take Bank of America, and look at 2005-2006. And-- and (UNINTEL) on that income number-- that would probably be somewhere between $18-$21 billion. Okay? So, pick a number there. And then look at-- then look at Merrill-Lynch back to even 2004. And you're gonna get-- a range of about $4-$7 billion. So, pick the low end. Pick $4 billion. Same thing for countrywide. When you look at their normalized earnings, $2.1 to $2.7 billion, pick $2 billion. Then-- then on top of that just put the (UNINTEL) for countrywide and Merrill-Lynch. That's $30 billion after taxes. Free (UNINTEL). MARGARET POPPER: 02:14:46:00 Okay. So-- KEN LEWIS: 02:14:46:00 And you can actually back and tell them to look at some inherent earning streams. And it's-- it's pretty powerful. MARGARET POPPER: 02:14:51:00 All right. But I'm listening to four out of 26 as roughly the ratio of Merrill earnings in that mix that you just described. KEN LEWIS: 02:14:59:00 No, four plus seven of (UNINTEL). MARGARET POPPER: 02:15:02:00 Okay. KEN LEWIS: 02:15:02:00 So-- so-- after tax effect the (UNINTEL) is $7 billion plus the $4 billion. MARGARET POPPER: 02:15:07:00 Okay. So, that's-- okay. So, that's a much bigger chunk of your projection here. Now, I want to ask you, in terms of-- what you're seeing at Merrill. You talked about Merrill having a good beginning of the year. My understanding is that some of the lost last year was about what we call the basis trades, correlation trades. Which are buying credit default swaps. And also owning the bond. And the idea that those two go in opposite directions. They didn't do that enough in December. And there was more of a loss. How much of that was in the $15 billion? KEN LEWIS: 02:15:44:00 Well, I don't have a percentage. But-- but it-- it was some of that. And-- and-- to John Thane's (PH) credit. He-- he kept on saying, th-- a lot of this-- these losses are embedded credit positions. And-- and we had a credit meltdown, and some things will come back. And so, we've seen that. MARGARET POPPER: 02:15:59:00 And I guess my question is, you know, will we see that again? You're seeing a positive January, probably from some of those same trades. Could you see a lousy-- I don't know how February shaped up. KEN LEWIS: 02:16:11:00 February's fine, but-- but-- absolutely. You can-- in-- in this market environment you can have two good months. You can have a bad month. You know, out of the blue. So, I'm not predicting what the quarter's gonna look like, just what's happened so far. MARGARET POPPER: 02:16:25:00 All right. So, if you look at this Merrill-Lynch acquisition now, are you still glad you did it? KEN LEWIS: 02:16:31:00 Yeah, I-- I think if you look back over the last 18 months, over the short term, it's hard to like anything, because nobody expected the severity of what's happened. Or very few expected. But the long term-- it still looks like a thing of beauty. And I-- and I can-- I can say that in two ways. One, we're seeing our financial advisors at Merrill-Lynch-- selling Bank of America products and a lot of deposits. When-- and they don't really have a lot to sell, because of the investment-- investments being as they are. Secondly-- going to-- I think it's deal logic (?), where you can actually see fees being generated. MARGARET POPPER: 02:17:05:00 Right. KEN LEWIS: 02:17:07:00 And look at our ranking-- for the-- for-- for what the-- for all of January and for the-- two or three weeks in-- in February. This powerful-- corporate bank, coming together with our investment bank, you know, and-- and then Merrill-Lynch on top of it, it-- everything we thought is playing out. MARGARET POPPER: 02:17:24:00 Well, let me ask you, in terms of capital here, and your capital position. You said you don't need to go back. We've got this stress test now. And banks have been told that today that they've got six months to earn the money-- or to raise the money, rather, if they don't have it. Is Bank of America gonna past that stress test? KEN LEWIS: 02:17:46:00 I would think. I mean, first of all it's a stress test on top of a stress test. Because what have we been through? And-- and we stress, we stress test all-- all the time. And-- and look at incr-- increased-- charge off rates, and-- and various other scenarios. And so, we-- we have a pretty good feel for-- we-- we don't know exactly what-- what's gonna be brought to us, in terms of the-- how much the stress is, but-- but-- we feel very good that we'll pass any stress test. MARGARET POPPER: 02:18:11:00 Do you have enough tangible common equity to pass what the government might impose on you there? You're down to 2.6 percent. You were at about 2.8 in-- at the end of December. KEN LEWIS: 02:18:22:00 Right. And-- and that-- the effect of Merrill was the-- was the difference. That's about $8 billion. To get to three percent. Which most people think is kind of a threshold now. And, of course, this is-- that's an obscure ratio that's never been talked about much. And that was the ratio they (UNINTEL). But the-- the market is, in fact-- looking at that. And we-- and we recognize that. But you can get-- you can-- improve that ratio a number of ways. The-- the best way is earnings. It takes about $337 million pretax dollars to move it a basis point. So, you can kind of think that (?). Secondly, you can look at marginal assets. Ones that are very thinly priced. MARGARET POPPER: 02:18:58:00 I was just gonna ask you. KEN LEWIS: 02:18:58:00 Get your assets (UNINTEL)-- MARGARET POPPER: 02:19:00:00 What-- what might you sell? I'm looking at Jamie Diamond (PH) at J.P. Morgan, cutting his dividends. You don't have that option. KEN LEWIS: 02:19:05:00 Right. No, but-- but you can-- there are marginal assets that-- that you can-- that you can actually bring down. And we're looking very hard at that. The third thing is, strategic non-strategic assets. And Merrill brings-- some of that, so that-- that we can-- we-- we'll have a chance to sell some things, which aren't strategic. MARGARET POPPER: 02:19:23:00 Black Rock? KEN LEWIS: 02:19:24:00 No, not Black Rock. (LAUGH) MARGARET POPPER: 02:19:26:00 Just guessing. (LAUGH) I mean, that is obviously a jewel in the crown. If you had to raise money fast. KEN LEWIS: 02:19:31:00 Yeah. That-- that would be-- that would be-- that would not be our intention. I mean, obviously you could. But that would not be our intention. So-- so-- but there are some other assets within-- within the-- the (UNINTEL) division. That-- that we-- that we are considering as we speak. And so we think over the next-- toward year end-- we will-- we would have a real good chance at being-- at three percent, without having-- MARGARET POPPER: 02:19:53:00 Are-- are Banco Ital (PH) or China Construction Bank (PH) on that list? KEN LEWIS: 02:19:58:00 No. Well, we-- we may overtime sell more of-- C.C.B., but-- but the point with-- with China Construction Bank is, it is a strategic partner. And we always want to have a relatively substantial stake. MARGARET POPPER: 02:20:12:00 Now, I want to move on here to the news of the minutes, which is Andrew Quolmo (PH) and his investigation of the bonuses that were paid at the end of the year by Merrill-Lynch. I understand you're going to be going to New York-- tomorrow, to talk to Quolmo about this. It's been positioned that you-- or Thane's camp seems to be trying to position it, that you could have known about this. You could have done something about this. Is that true? KEN LEWIS: 02:20:41:00 Well-- well, first-- I'm not sure anybody at Bank of America had said we didn't know something about it. Because we-- we were consulting. But-- but I-- I better leave that to the process. The-- the time-- the timing on when I'm gonna be there is kind of fluid. So, we-- we don't quite know. But-- but-- I-- I have-- I look forward to the chance to speak candidly and forthrightly and honestly. And-- and tell the story. MARGARET POPPER: 02:21:05:00 Is it true as John Thanes has said that you directed, or Bank of America directed him not to reveal the names of the five people that he has not yet revealed. Who got-- KEN LEWIS: 02:21:17:00 Yeah, I better-- I better leave it to the process now. And-- MARGARET POPPER: 02:21:20:00 All right. And when you go to talk to Quolmo, what do you expect the questioning to circle around? Is it sort of timeline? Is it authority? Your contractual authority? Do you have a sense of where that-- KEN LEWIS: 02:21:33:00 I have some sense. But-- but I-- I think it will be-- a broad-ranging-- session. With-- you know, on-- on a lot of topics. And so-- I'm ready, and I look forward to telling our story. MARGARET POPPER: 02:21:47:00 All right. Well, thank you very much Ken Lewis, Bank of America, Chairman and CEO. And Laurie and Mark, back to you.
02:24:43:00 (OFF-MIC CONVERSATION) MARGARET POPPER: 02:26:05:00 So I want to do one final question on John (PH) staying here, because I think people obviously want to know about this in terms of its effect on the bank. Is there anything about this, if this went the wrong way, that could either affect your job, or the future of Bank of America, if Andrew Cuomo decided that there was more to investigate, or that you had the authority and you didn't use it? What's your worst nightmare there? KEN LEWIS: 02:26:35:00 I don't have a worst nightmare on the-- on that. I think when we get the facts out, and we show the-- what we've done and-- and how we did it, that we'll be fine. MARGARET POPPER: 02:26:45:00 Okay. So now let's turn to more of the news here. Last night, President Obama, on television, giving a very hard-hitting, more populace-sounding view of how he was gonna treat the banks than I think he has before. One of the things he said, and I'll just quote this to you, 'cause I thought it kind of put it in a nutshell-- he said, "I know it's unpopular to help these big banks, because their bad decisions got us into this crisis."
02:27:23:00 That's pretty strong language. He's not spreading the blame here. And then he said, "If-- if we do this stress test, and anybody has to come back for more, we are gonna hold the decision-makers accountable." When you heard that, did you think, "I better brush up my resume?" (LAUGHTER) KEN LEWIS: 02:27:44:00 No, I-- I didn't (UNINTEL). Which-- this just says we need to get (UNINTEL) focus on is to getting through this and getting the government money paid and getting on with our lives. And so, that just reinforced what we want to do. MARGARET POPPER: 02:28:00:00 Okay, and how do you pay the government money back at this point? KEN LEWIS: 02:28:04:00 Well, you know, I mentioned-- or (UNINTEL) I've mentioned to you before this, $30 billion in core earnings, when you kind of go back and look at some of the historical performances of the-- of the different companies. And so, that-- that gets to be a powerful-- you know, number, that you can pay back things pretty quickly. But another way of looking at it is, if you-- if you think about six percent of being well-capitalized by repertory standards, on your tier one, we used to have-- our standard was eight percent.
02:28:30:00 Keep it 200 basis points above that. Now, because of the time, you know, ours is 10.6 percent now. Well, if you take-- if you take the difference between eight percent and two point-- the (UNINTEL) between 60 basis points, it's about the tarp money. It's about $45 billion. And so all you'd have to do is to go back to a more normalized environment and you pay it back very quickly. MARGARET POPPER: 02:28:53:00 All right. And let's talk about-- you know, getting back there, getting to this more normalized environment. One of the comments that President Obama made again was banks are fearful of lending. And he was talking about the credit market, as if they were pretty well frozen. Has he been missing your message? KEN LEWIS: 02:29:17:00 Yeah, I-- I don't think that's true. I do think it's true that in our recession that we're in, you would not be making as many loans as before, because you would see the error of your ways and pull back in some areas. I mean, ones that we're doing sub-prime obviously aren't doing sub-prime. We didn't do that, but-- and-- and you're putting back on loan values, things of that nature. But-- but let me tell you the other side of it. $115 billion in loans originated in the fourth quarter. $30 billion of mortgages at Countrywide in January. MARGARET POPPER: 02:29:47:00 Countrywide. KEN LEWIS: 02:29:47:00 Countrywide and-- and our brokerage company. I shouldn't say just Countrywide, but-- but mortgages at Bank of America. MARGARET POPPER: 02:29:53:00 Okay, and-- KEN LEWIS: 02:29:54:00 One month. MARGARET POPPER: 02:29:55:00 --in one month. How's February looking, or do you know those numbers yet? KEN LEWIS: 02:29:57:00 I don't know. I haven't see those. MARGARET POPPER: 02:29:59:00 Okay. Is the feel at Countrywide continuing as-- do you think it's continuing as strong into this later part of the quarter? KEN LEWIS: 02:30:08:00 Their strength was-- (UNINTEL), and so they're-- they're in the heart of what they do best. MARGARET POPPER: 02:30:14:00 Okay, and in terms of interest rates and what that could do for them, do you think-- they've been bouncing around a bit on mortgages? They're up, they're down. KEN LEWIS: 02:30:22:00 You-- you need to have it below five percent, with-- with rates below five percent, and then you get action. MARGARET POPPER: 02:30:27:00 And is that-- do you think we're gonna get it down there and get it-- and keep it there? KEN LEWIS: 02:30:31:00 I think everyone-- everyone in the government realizes that-- that it needs to be in that four and a half percent, five percent range and-- and we'll keep it there. I do believe that. MARGARET POPPER: 02:30:39:00 When you heard Ben Bernanke's comments, now he sounded a little softer on nationalization when he was talking this morning, and he was saying, you know, real nationalization, where the government takes you over and runs you and is the CEO. We're not doing that. Did you hear his comments and think, "Okay, that's the line I want the administration to take," or-- you know, who's running the shop there? Who are you listening to? KEN LEWIS: 02:31:07:00 Well, first of all, I don't get to listen to-- to Ben Bernanke, in every speech. And so I-- I did not hear him. But I did-- I did see some lines come across, that said that. Yes, I-- I-- we have urged the administration and-- the Federal Reserve, to go ahead and take apart (?)-- to take the stand. Either you are for nationalization or you're not. And to say it, and-- and-- and I'm so pleased that they-- that both have said it. MARGARET POPPER: 02:31:36:00 Okay. Let me ask you. In this environment, you obviously have been dealing with the government looking over your shoulder and running the bank, more than ever before. How is that working? KEN LEWIS: 02:31:49:00 You know, that's-- that's really not true. You've got, obviously, the-- the requirements of the tarp. MARGARET POPPER: 02:31:57:00 You've got the salary cap. KEN LEWIS: 02:31:58:00 But-- but you-- you don't have-- we don't have people second-guessing our decisions and things-- 02:32:03:00 (OVERTALK) MARGARET POPPER: 02:32:04:00 Well, for example, you have, you know, Northern Trust that can't have a golf outing, you know? (LAUGHTER) To reward their producers. KEN LEWIS: 02:32:11:00 Well, that's true. The-- the cosmetic things of-- all the banks-- that is a fact. Again, that's why we'll pay the money bank, because we want to run the company like we've run it, and marketing-- is a vital part of-- of doing that. MARGARET POPPER: 02:32:26:00 All right, let's talk about expectations for this year. You, right now, have about 22 billion in reserve against bad loans-- KEN LEWIS: 02:32:35:00 23. MARGARET POPPER: 02:32:35:00 23 billion-- sorry. Analysts I'm talking to are expecting that to need to go up to 28 or 29 billion by the end of the year. Does that sound outrageous to you? KEN LEWIS: 02:32:49:00 No, not at all. MARGARET POPPER: 02:32:50:00 You think that's quite possible. KEN LEWIS: 02:32:50:00 'Cause that's-- that would be easily done within our forecast. MARGARET POPPER: 02:32:54:00 Okay, so you're at-- KEN LEWIS: 02:32:55:00 I think the concept is ridiculous, that you-- that you build reserves during bad times, and release them during good. But that's a whole 'nother story. MARGARET POPPER: 02:33:01:00 Well, I-- I want to get to that too. (LAUGHTER) But I just want to finish-- KEN LEWIS: 02:33:04:00 Okay. MARGARET POPPER: 02:33:05:00 --in terms of you being adequately reserved. You're expecting those to go up. KEN LEWIS: 02:33:10:00 We expect to have-- substantial reserve fills in the first and second quarter. MARGARET POPPER: 02:33:15:00 So let me ask you about the trajectory of charge offs (?) here, in the accounting for banks is obviously complicated. You take a provision against future expected losses. That comes out of your income statements. It gets added to a reserve on the balance sheets. And when you actually charge of a loan, and say it's-- you know, deadbeat, the balance sheet goes down but the income stays and doesn't move.
02:33:39:00 But those charge-offs are the key to kind of-- how the pulse of-- of the loans are doing. Where do you expect them to go from here? You've got credit cards, you had said. You know, you expect it to follow one-- unemployment, plus maybe one percent. Is that eight? Is that nine? What are you expecting? KEN LEWIS: 02:34:01:00 We expect unemployment to be eight and a half-- I'm actually-- eight and a half to nine (LAUGHTER) and-- and then ten plus, you could get to, if that happens on your card (?), the ten that's coming in. And-- and so, yes, we expect charge-offs to rise for the entire year and to peak in the fourth quarter. MARGARET POPPER: 02:34:18:00 And are you-- is your idea that you will be adequately reserved against that by the end of the second quarter, from what you were-- KEN LEWIS: 02:34:26:00 Yes. MARGARET POPPER: 02:34:25:00 --just telling me? KEN LEWIS: 02:34:25:00 And the way the accounting works, you-- you actually might see-- provisions (?) start going down in the second-- I mean, the third and the fourth, because you'd reserve so much in the first and second. MARGARET POPPER: 02:34:36:00 Right, and-- and you're trying to look ahead and say, "What, realistically, do I need to be protected against?" Let's talk about mortgage-backed securities. There was an article out in the Journal today-- saying that Bank of America's mortgage-backed securities are among the worst performers of the top banks. I see tidbits like that and I think, "Okay, are those (UNINTEL) adequate?" KEN LEWIS: 02:35:00:00 Right. MARGARET POPPER: 02:34:59:00 Tell me-- KEN LEWIS: 02:35:00:00 Yes. MARGARET POPPER: 02:35:01:00 --can you withstand worse performance on the mortgage-backed securities? KEN LEWIS: 02:35:04:00 Yeah, remember-- I think the article also said that-- that ours were-- the ones we had originated were about a third of that who-- and had performed much, much better. And so, that would be the counter to the-- to that-- to the whole thing. Ours actually performed well, and then two-thirds were generated by others. MARGARET POPPER: 02:35:21:00 By others meaning this was mortgage brokers who-- KEN LEWIS: 02:35:23:00 Yes. MARGARET POPPER: 02:35:23:00 --generated-- I see. KEN LEWIS: 02:35:24:00 Right. MARGARET POPPER: 02:35:24:00 So these are packaged-- you packaged them-- KEN LEWIS: 02:35:27:00 Right. A third of which were our origination-- and performed very differently from the others. MARGARET POPPER: 02:35:31:00 All right, so as you look at that business going forward, what have you changed? KEN LEWIS: 02:35:35:00 Mainly, you-- you just-- you're not doing-- we're not doing sub-prime. We're not doing (UNINTEL). Bank of America did not anyway. And then we do-- right now, it's mainly 30-year big (?). MARGARET POPPER: 02:35:47:00 And are you not using mortgage brokers? Is it all originated-- KEN LEWIS: 02:35:48:00 We use-- MARGARET POPPER: 02:35:50:00 --in house? KEN LEWIS: 02:35:51:00 We use-- some, but a lot less. And we use some correspondent or-- or is-- other banks, but-- but banks (UNINTEL) perform pretty well. So-- but-- the-- loan to values and the scores are really good. MARGARET POPPER: 02:36:05:00 Okay, and so can you just give me-- a metric there, sort of, "They've come up from-- you know, 100 percent loan to value," I'm inventing these, obviously, but-- (LAUGHTER)-- KEN LEWIS: 02:36:16:00 You'd have to-- go state by state, because the-- we're requiring-- lower loan to value in certain states like California, Nevada-- Florida. And so it-- it actually does vary by state. MARGARET POPPER: 02:36:29:00 Okay, in terms of-- you know, other things that could rock that boat and shake that 100 billion plus revenue-- KEN LEWIS: 02:36:37:00 Right. MARGARET POPPER: 02:36:37:00 Merrill Lynch. Some of these losses were trading losses, is my understanding. KEN LEWIS: 02:36:43:00 A lot of them were embedded losses that-- that-- or embedded positions, and then losses because of market to market, because of an epic-- credit meltdown, in the fourth quarter. MARGARET POPPER: 02:36:57:00 So what-- that's what I want to understand. What is the breakdown between just the rough and tumble of trading? We had these positions. We got bit. And the market to market of assets they were holding on the book securities that they held. KEN LEWIS: 02:37:14:00 It's my understanding, from-- from John and others that-- that that was the-- that was the big piece bucket, the embedded credit position. MARGARET POPPER: 02:37:23:00 About 15 billion. KEN LEWIS: 02:37:23:00 Right. MARGARET POPPER: 02:37:24:00 So, and-- so embedded credit positions are just trading, is that right? KEN LEWIS: 02:37:28:00 Yeah, but it's-- it's instruments that-- that are in liquid that you can't get-- that you can't trade, and therefore, you're taking the right down-- and-- and usually, in a very thin market, where there's not a lot of-- marketability. MARGARET POPPER: 02:37:41:00 Okay, so then I understand Merrill made some money back on some of these correlation trades in January? KEN LEWIS: 02:37:52:00 I can't specifically say about each of the trades, but it-- but I can say that the mark-- some of the marks have come back and volumes have been very good. And you're not getting the further decline, and so you're-- you're now getting to see the-- the real benefit of the customer flows and the-- and the-- and the trading business. MARGARET POPPER: 02:38:09:00 And is the fixed income business holding up? Did it hold up-- KEN LEWIS: 02:38:11:00 Yes. MARGARET POPPER: 02:38:12:00 --in February? KEN LEWIS: 02:38:12:00 It's-- it's held up so far, yeah. As we-- as we've talked about before, on previous occasions-- that doesn't guarantee that it-- it-- that it'll stay that way. MARGARET POPPER: 02:38:20:00 That it holds up-- KEN LEWIS: 02:38:21:00 Right, right. MARGARET POPPER: 02:38:21:00 --tomorrow. Okay. (LAUGHTER) When you try to manage this business at Merrill, there are obviously a lot of moving parts. There are trading losses. Have you changed anything about risk management there? KEN LEWIS: 02:38:38:00 We have put-- mostly our risk management team, in-- in-- in place. And so, if you-- if you look at-- if you look at it from, in some way, that-- Bank of America risk management, but-- a lot of the line units are-- are still (UNINTEL). MARGARET POPPER: 02:38:55:00 Okay, and so are you-- how's that integration going? Is there a culture clash, if you're putting in bankers as risk managers and not investment bankers? KEN LEWIS: 02:39:03:00 Well, but these-- these-- this-- these credit people or risk people came from our investment bank, and so it's not-- it's-- they're not bankers. They're not commercial bankers. MARGARET POPPER: 02:39:13:00 Okay, (LAUGHTER) so they-- then-- KEN LEWIS: 02:39:15:00 They know what they're doing. MARGARET POPPER: 02:39:16:00 All right, and what are the caps on things like leverage? Have you set levels like that for the Merrill Lynch (UNINTEL)-- the investment banking business, specifically? KEN LEWIS: 02:39:26:00 Yeah, we've-- we've got caps in-- on everything, and then hold positions on-- on loans, and-- and we're using ours. But-- it hasn't-- it hasn't dramatically affected their ability to do business-- you'll see that when you look at-- some of the-- the fee comparisons between different institutions. We look pretty good. MARGARET POPPER: 02:39:47:00 If you had to give a rough-- you know, I think about Wall Street and a lot of these banks-- investment banks have gone down from, you know, 40 times leverage to somewhere-- somewhere between 15 and 20. KEN LEWIS: 02:40:01:00 Right. MARGARET POPPER: 02:40:01:00 Is that about where Merrill is right now, in terms of leverage for that unit, how it's-- KEN LEWIS: 02:40:07:00 Yeah, I don't-- I don't-- I don't know the leverage for that unit. And I look at the-- the (UNINTEL) ones, not just-- you know. MARGARET POPPER: 02:40:11:00 And for the-- for the bank overall, where is it? KEN LEWIS: 02:40:15:00 It would be probably 13, 14. I haven't looked at it lately, but that's-- that's usually where we're on. MARGARET POPPER: 02:40:22:00 That's kind of your target. KEN LEWIS: 02:40:23:00 Right, and interestingly, now, because the investment banks seem to be kind of taking the stocks, gonna be taking off in commercial banks, not-- I looked just recently, because of (UNINTEL), about a third of our assets now are actually market to market. MARGARET POPPER: 02:40:37:00 At-- at Merrill Lynch, you're saying. KEN LEWIS: 02:40:39:00 Throughout-- I mean, the company now, a third of our assets, because of Merrill Lynch, and in our trading book, because there's now, you know, pretty severely large-- to market. MARGARET POPPER: 02:40:47:00 Okay, and what further marks (?) can we expect, and where would they come? And now I'm talking bank-wide. KEN LEWIS: 02:40:54:00 We're-- you-- you-- you would-- you would think that-- things had been so severe that you wouldn't have anymore, but that's-- but we know that's not true. (LAUGHTER) MARGARET POPPER: 02:41:03:00 Okay, so the people I've been talking to are saying, "There are gonna be more marks," and so I'm-- I['m wondering. Is that gonna be in mortgage-backed securities? Is that gonna be, you know, just defaults on credit, as we expect those to play out? What is that gonna be? KEN LEWIS: 02:41:19:00 Actually, if I had to be just pressed on what's the year gonna look like, I do think that, if you look at the underlying-- the underlying asset, that-- that we now have on our book, that most cases, most people would say the intrinsic value is higher than those-- than those value. And so this year may just be a good old-fashioned recession with credit being what you talk about. And-- and that's not pleasant because you're gonna have large consumer losses. And it still looks like it's a consumer story, not a commercial story, if you get away from housing-related. MARGARET POPPER: 02:41:56:00 Okay, and the consumer story. Where do you see those-- you know, how high do you charge off debt, 12 percent? And I-- 02:42:07:00 (OVERTALK) KEN LEWIS: 02:42:08:00 Well, you have to tell me what unemployment's gonna be, and then you can kind of correlate it and-- and the most-- the most efficient correlation is the credit card fees. But of course, you've got (UNINTEL). We were not in-- in the sub-prime. We've got the-- we took some pretty big write-downs at-- in Countrywide, so we-- we got that pretty much handled, so that the issue for us is going to be probably small business. And-- and-- credit card. MARGARET POPPER: 02:42:34:00 Okay, and when-- what's the trajectory of the charge-offs? Do we see them peak this year or next year? KEN LEWIS: 02:42:41:00 We think they'll peak in the fourth quarter. MARGARET POPPER: 02:42:42:00 In the fourth quarter-- KEN LEWIS: 02:42:43:00 This year-- MARGARET POPPER: 02:42:44:00 --of this year. KEN LEWIS: 02:42:44:00 (UNINTEL) right. MARGARET POPPER: 02:42:44:00 Okay, so-- KEN LEWIS: 02:42:45:00 Right. MARGARET POPPER: 02:42:46:00 --and so that's why your reserves are gonna pop midyear-- 02:42:49:00 (OVERTALK) MARGARET POPPER: 02:42:49:00 --right, in the first-- okay. KEN LEWIS: 02:42:51:00 The first year quarters, right. MARGARET POPPER: 02:42:52:00 Got it. And then, as you see the commercial piece start to deteriorate, that sounds like it's lagging-- KEN LEWIS: 02:42:59:00 Right. MARGARET POPPER: 02:42:59:00 --consumers. What's-- what do those charge offs looks like? KEN LEWIS: 02:43:05:00 Well-- we-- they-- we don't see a lot of embedded charge offs at the moment. It's not to say we won't, in-- in certainly 2010 we might. The-- the irony of this reserve bill during-- during good times-- I mean, bad times, excuse me, and then releasing them as-- as the-- as the losses peak, actually then gives you available reserves to go against your commercial loans that are going up. So that-- that's the-- the hidden beauty of this-- 02:43:33:00 (OVERTALK) MARGARET POPPER: 02:43:34:00 So we might actually see reserves come down because consumer charge offs are coming down-- KEN LEWIS: 02:43:39:00 Right. MARGARET POPPER: 02:43:40:00 --but commercial charge offs-- KEN LEWIS: 02:43:41:00 Right. MARGARET POPPER: 02:43:41:00 --are rising. Is that your-- 02:43:42:00 (OVERTALK) MARGARET POPPER: 02:43:43:00 --expectation? KEN LEWIS: 02:43:43:00 Yes, and so you just take those reserves and put 'em somewhere else, but you don't have to build 'em. MARGARET POPPER: 02:43:48:00 All right, so let's talk about this accounting issue. Very interesting to me, when all of you were down on the hill, talking to Congress (LAUGHTER) and Lloyd Blankvine (PH) came out, from Goldman-Sachs, and said, "I love market to market accounting." KEN LEWIS: 02:44:03:00 Right. MARGARET POPPER: 02:44:04:00 And I thought, "I didn't think I would hear that in this room today." (LAUGHTER) KEN LEWIS: 02:44:05:00 (UNINTEL) MARGARET POPPER: 02:44:06:00 And he said, "It kept us to our risk management." KEN LEWIS: 02:44:11:00 Right. MARGARET POPPER: 02:44:12:00 Is there value to that, or do you just look at it and say, "It au-- it just forces you to reserve at the wrong time. If-- you know, what--" KEN LEWIS: 02:44:21:00 Well, there's reserving and then there's market-to-market. MARGARET POPPER: 02:44:23:00 Right. KEN LEWIS: 02:44:25:00 And-- I actually like market-to-market also, but I think they're-- my common sense tells me there are times when it's not marketing to fair value, because there is no value, because the markets are so thin. MARGARET POPPER: 02:44:36:00 It's marketing to panic. KEN LEWIS: 02:44:38:00 Right. And so-- it seems that-- that you could come up with some way to say, "There are certain times where it-- it loses its value, because things are-- are so distorted, and that you would suspend it (UNINTEL)." But that would be my only-- challenge to the mortgage market account stuff. MARGARET POPPER: 02:44:57:00 Now in terms of the reserves, the irony is, of course, the banks got beat up to change their reserve accounting in the boom time. KEN LEWIS: 02:45:04:00 Right. MARGARET POPPER: 02:45:04:00 Which boosted revenue. KEN LEWIS: 02:45:06:00 Right. MARGARET POPPER: 02:45:06:00 And boosted earnings in the good times, unless you completely flat-footed at the turn. KEN LEWIS: 02:45:14:00 Right. MARGARET POPPER: 02:45:15:00 How do you try-- how-- what do you do with reserves, to make them so that they don't manage earnings, but they don't leave you-- you know, without protection? KEN LEWIS: 02:45:27:00 Right. Well, it-- it's-- to your point, you look-- you look worse, at a time that you really need to look better. (LAUGHTER) And then you look better, at a time you don't need to look so-- to look so good. And-- what-- what I would do is say that-- that banks-- at all time have to have extra set of-- of reserves for consumer loans.
02:45:50:00 Call it, say, two percent. And then, from that point on, you-- you cover your charge offs with your-- with your provision. And-- and you-- and you can see how the bank's doing-- if it's charge off. And then, I still-- I-- I do think commercial provisioning is-- is right, because-- you can-- if that's granular, you can see the individual credits, as the risk ratings go down. You can increase the reserves, and that makes sense. But to con-- to do that on consumer just makes no sense (UNINTEL). MARGARET POPPER: 02:46:21:00 So then what do you do with consumer? You go back to the old way, where you-- you're building reserves when you've got the money to build them? KEN LEWIS: 02:46:29:00 That's what I would do. MARGARET POPPER: 02:46:30:00 Really, and you're not-- KEN LEWIS: 02:46:30:00 No, excuse me. I would-- I wouldn't do that. I would just fix that-- I would just say, "Your loan loss reserve has to be X percent of loan, of consumer loans, at all times." And so if they grow, you have to increase the reserve. If they shrink, you know-- you know, you release some. But you charge offs, you pay for 'em as you go. MARGARET POPPER: 02:46:48:00 Got it. All right. So then you're-- you're unlinking. You're changing that accounting. KEN LEWIS: 02:46:52:00 Right. MARGARET POPPER: 02:46:53:00 So that it-- charge offs are not just a balance sheet item. KEN LEWIS: 02:46:55:00 Right. MARGARET POPPER: 02:46:56:00 Okay. You-- you know, we talked about the government sort of looking over your shoulder and potentially, the signals that we were hearing last night are, you know, ready to do more of that. (LAUGHTER) KEN LEWIS: 02:47:10:00 Right, right. MARGARET POPPER: 02:47:13:00 Do you, as you-- obviously, you're talking to people in Washington. Do you have a sense of their feelings and understanding of issues, like reserves, adequate capitalization? You know, are you concerned that some of the people who might impose these rules, and they haven't yet, get it? KEN LEWIS: 02:47:35:00 Well, the-- obviously, they-- there would be some who would-- who would not get it as much as others. But I certainly think-- Larry Summers and Tim Geithner get it, and-- and I do think that people with-- within the administration would go to them-- for advice. MARGARET POPPER: 02:47:50:00 Now, some people have read this speech last night as, you know, if you had to divi-- you know, divide the administration camp into more populaced, more understanding the financial system, you put Geithner and Larry Summers on the understanding the financial system, understand that you make sure the banks are capitalized. You put Mr. Axelrod on the other side. And last night was a victory for Axelrod. Do you-- is that how you're seeing this? KEN LEWIS: 02:48:23:00 No, I-- I think, understandably, the American people are very angry about all of this, and using taxpayer money to-- to bail out banks-- et cetera, et cetera. And-- if you're the president of the United States, you-- if-- why wouldn't you acknowledge that, and-- because of-- it's (UNINTEL), and-- and I-- and I think many would-- I would-- I would bet that many reacted very positively to that. And that's just where we are in the cycle. MARGARET POPPER: 02:48:50:00 Okay, and obviously, the government has been talking a lot about loan modification. Bank of America has been working on it. KEN LEWIS: 02:48:56:00 Right. MARGARET POPPER: 02:48:57:00 One of the criticisms that I continue to hear from people, kind of out in the field, is we're not changing the principal amount. We're doing forbearance. That's-- that is the thrust of all of these modification programs. Is that your perception? Is that what you're going for? And does that solve a problem? KEN LEWIS: 02:49:19:00 Yeah, I think you can. I mean, it doesn't solve all of-- obviously, because some we're gonna need-- the principal reduction in-- or at least-- (UNINTEL). But in many, many cases, the-- the ability to-- reduce the interest rate, and then incentives for you to do that-- I think's pretty powerful. And I actually think that program was pretty well thought out. MARGARET POPPER: 02:49:43:00 All right, and so did you-- is that a crucial piece of getting our financial system back on track and getting everything functioning again? KEN LEWIS: 02:49:54:00 You used the operative word, a piece. But the-- to me, the fact that the stimulus package addresses it, the fact that you've-- got so many things being done by the fed, including a focus on keeping the rates down-- the stimulus package in general-- this thing's gonna break. There's too-- there's too many-- there's too much ammunition being-- thrown at it for it not to break at some point. So, it's just a matter of time. And it would not surprise me that sometime in the second half of next year, we do see a housing-- crisis bottom, and I think that's gonna be the signal that-- things are gonna get a lot better. MARGARET POPPER: 02:50:33:00 I want to talk about another troubled area. (LAUGHTER) It seems like that's what we get to talk about these days. 02:50:38:00 (OVERTALK) MARGARET POPPER: 02:50:39:00 But again, when all of you, chairman of the banks and CEO of the banks were down on the hill, everybody talked about the car company, and exposure to the car company. But it was clear that all down that line of eight people, that car companies were an issue, be it directly, GM or Chrysler or Ford, or indirectly to suppliers. You mentioned that you were working on a negotiation, I believe, about-- debt for Equity-- KEN LEWIS: 02:51:10:00 Debt for Equity-- right-- MARGARET POPPER: 02:51:11:00 --slot-- KEN LEWIS: 02:51:11:00 Right. MARGARET POPPER: 02:51:12:00 How's that going? What's the status of that? KEN LEWIS: 02:51:14:00 You know, I haven't heard-- I haven't heard the status in-- in the last-- week or so. We-- we did something very similar, for GMAC, and so we have a lot of expertise in-- in the area, and it was successful. MARGARET POPPER: 02:51:24:00 And this is with GM, in the current one. KEN LEWIS: 02:51:26:00 This would be-- well, I shouldn't mention the name, but-- but it's-- it's a similar thing that we did for GMAC. MARGARET POPPER: 02:51:33:00 Okay. And what would-- how would the debt-to-equity swap work, if you don't mind explaining what you did with GMAC? How did that-- KEN LEWIS: 02:51:38:00 The-- that-- just-- just that simply, that you-- that you get equity for that and-- and-- MARGARET POPPER: 02:51:44:00 But what's the ratio? Or is that-- KEN LEWIS: 02:51:45:00 I don't-- MARGARET POPPER: 02:51:46:00 You got to-- KEN LEWIS: 02:51:46:00 You do have-- you'd have to know the-- that-- this particular situation-- so-- MARGARET POPPER: 02:51:51:00 When you do that, are you concerned-- okay, then you got equity in, of all things, a car company? (UNINTEL) have a very uncertain future, particularly if it's American right now. 02:52:01:00 (OVERTALK) MARGARET POPPER: 02:52:03:00 Does that decrease value for the bank, eventually, or how do you-- KEN LEWIS: 02:52:07:00 Well, we're doing it for debt. We're doing it on behalf of the company, in talking to debt-- it's not our debt. All right-- except we have very limited exposure to the automobile industry. We do-- it-- it-- it's problems (?) when you get to suppliers, obviously, but-- but-- not-- not-- not-- a real large exposure. MARGARET POPPER: 02:52:29:00 Okay, so, you know, 'cause obviously you're worried that all these banks-- KEN LEWIS: 02:52:32:00 Yeah. MARGARET POPPER: 02:52:33:00 --who are saying, "I'm not gonna go back for tarp--" KEN LEWIS: 02:52:34:00 Right. MARGARET POPPER: 02:52:35:00 More tarp money, if you've been lending to the auto companies and they don't get their deal-- KEN LEWIS: 02:52:39:00 Right. MARGARET POPPER: 02:52:39:00 --then what happens? (LAUGHTER) All right, so, I want to go back now to the buying of Merrill Lynch. You obviously have done a lot of acquisitions. I chuckled today when I saw Hugh McCall's piece in the Observer, saying, "You know, this isn't the first time that Ken has been lambasted. Let's look at--" 02:52:59:00 (OVERTALK) MARGARET POPPER: 02:53:00:00 "--fleets (?), and that was a brilliant success." As you look at merger integration, which you point out, you guys do very well, is that a concern at Merrill? Is this a tougher nut to crack than some of the previous ones? KEN LEWIS: 02:53:16:00 It will be publicity-wise, tougher, because-- these names-- you know, names are known in the marketplace. There seems to be-- you-- you-- you wouldn't-- you wouldn't get a Wall Street Journal article on three branch managers lo-- leaving, but you might get it-- a reinvestment bank-- banker's leaving. And so, I think it will-- that will be a degree of difficulty that we haven't experienced before.
02:53:41:00 But in general? I don't think so. I-- I actually do think that-- that already, investment bankers are seeing the power of that huge corporate bank and you know, 90-- 99 percent of the Fortune 500 companies bank with us. 30 percent of the commercial-- 02:53:55:00 (OVERTALK) MARGARET POPPER: 02:53:56:00 So describe that. How are they feeling the power of that? What difference does it make to a guy, you know, trying to do-- a debt raising? KEN LEWIS: 02:54:03:00 You're-- you're talking to-- now you're talking to-- someone in the company who knows that you do-- the-- the company does the treasury management-- has had a lot of credit for 30 years, 50 years or whatever, where there's contacts (?) all throughout the organization, and so you're-- you're already a very important partner and-- and so, this may be a one-off deal. But you've got contacts and connections and a relationship that-- a one-off investment bank just wouldn't have. MARGARET POPPER: 02:54:32:00 All right, when you talk thing of beauty, you always link back to the brokerage force. You've decided to pay retention bonuses, is my understanding. Wells Fargo decided they wouldn't. When I hear that, I think, "Gee, maybe Wells is onto something," because in this environment, where are those guys gonna go get jobs? Do you need to pay them a retention bonus? KEN LEWIS: 02:54:56:00 We-- we pay retention bonuses to the top performers, and top performers can always go somewhere and-- and in fact, you're still seeing wars between then-- the-- the various companies in terms of trying to hire somebody else's talent. And so-- I have no-- I have no second guesses on that. You want-- that is the finest-- financial advice-- advisory firm in-- in the world. All the metrics say that. And-- and you want that intact. MARGARET POPPER: 02:55:27:00 Okay, and when you look at-- you know, how you're set up comparatively, particularly between the Merrill brokerage force and your branch network, I look at Wells Fargo and I think, if anybody has kind of come along and-- and set up something similar, it's-- KEN LEWIS: 02:55:46:00 Right. MARGARET POPPER: 02:55:47:00 --Wells. Do-- are they your main competition right now, and how do you view them? KEN LEWIS: 02:55:53:00 Yeah, they-- obviously, they-- they're going through something-- on a geographical basis that's a little different from us, and so hopefully we'll have some opportunities to-- you know, with disruptions-- to get-- to get business. But-- but they-- they are-- they are very good at executing, and they are very good competitors. They'll-- however, they're rational competitors, and so you don't see crazy pricing things-- things like that. So it's-- it's somebody that you'd rather compete with, but-- but it's an outstanding-- company in terms of execution. MARGARET POPPER: 02:56:25:00 Okay. You did the Countrywide deal. Are there-- you know, is there anything there that you look at and you think, "I-- I wish I had known that before I bought this." KEN LEWIS: 02:56:42:00 No-- I think, actually, you're-- you're seeing the-- you know, the beauty of it now, because their strength is-- is refis (?), and we're right in the middle of one-- so it's-- it's turning-- it couldn't turn out any better, in that sense. MARGARET POPPER: 02:56:55:00 Okay. Merrill Lynch. You tried to pull out in December-- you had stated that you talked to people in-- among the regulators who said, "Sorry, you can't." (LAUGHTER) Right, you can't back out right now, and we're not going through three months of re-pricing either. What do you need to survive? (LAUGHTER) Okay, who-- how did that go? Can you tell me that story? KEN LEWIS: 02:57:23:00 Well, I-- I think it's-- I think that's-- I know it's been characterized that way, but-- but-- I would say we were strongly advised, with the emphasis on the strongly, by the government that they didn't-- that they did not think it was in our best interests or the system's best interest to do it. MARGARET POPPER: 02:57:43:00 And who in the government? KEN LEWIS: 02:57:44:00 I-- I had-- I had that told to me by-- by-- Secretary of Treasury Paulson and-- Chairman Benanti (PH). MARGARET POPPER: 02:57:54:00 Okay, and when they said that to you, and they said, "It's not in your best interests," what did they mean? KEN LEWIS: 02:58:00:00 Well, the-- the-- the downsize is that you-- downside is that you don't-- that you don't win. And so, you've got a company that may be bankrupt that you've got to take. Or that you get sued for a jillion (PH) dollars and-- and so that's-- they just thought the downside was so severe that-- and-- and the-- the hit to the system, in us not doing it-- and then-- and then the interrelationship between-- you know, what's good for America's also good for Bank of America. 'Cause we're so intertwined that it just made sense. MARGARET POPPER: 02:58:31:00 I mean, did you argue that point with 'em? 'Cause I can see the point about, you back out of Merrill Lynch and then you've got another Lehman on your hands, right? Nobody wants that. I certainly see the terror in that. KEN LEWIS: 02:58:43:00 Right. MARGARET POPPER: 02:58:43:00 I-- I still-- I mean, in terms of the downside for Bank of America, it seems to me that shareholders made it clear, they would have loved you to back out. (LAUGHTER) KEN LEWIS: 02:58:54:00 Right. Well, I mean, you've got make that call at some point, and-- and we just thought-- that it was in the best interests of the shareholders to-- to not expose them to the downside that I just mentioned, because it would be-- it'd be pretty severe. And so-- MARGARET POPPER: 02:59:09:00 So-- to not expose them to-- KEN LEWIS: 02:59:10:00 To-- to the fact that you-- let's say you-- you didn't do it. They all went bankrupt, but then you lose the case. Then you have to take 'em and-- and it's a disaster. MARGARET POPPER: 02:59:20:00 I see. KEN LEWIS: 02:59:21:00 Or, you-- something else happens but-- but Merrill's shareholders sue you and win, and it would be a large amount. MARGARET POPPER: 02:59:29:00 Okay, so either way, it's gonna cost you a lot of money. KEN LEWIS: 02:59:32:00 And-- and-- and to their credit, they said-- "We will work with you-- we-- we know this is a Merrill issue." I was told, "We view you as a strong company that has done-- that has-- has done the right thing in a difficult situation, and that-- we-- the money will be there. We'll--" MARGARET POPPER: 02:59:50:00 So I want to just-- one last topic here, 'cause I think it bears on nationalization. Citigroup, obviously, is in very direct talks right now with the government about changing that preferred to common equity. And you-- you referred to TCE as being kind of the fad-- KEN LEWIS: 03:00:12:00 Right. MARGARET POPPER: 03:00:13:00 --ratio of the minute. KEN LEWIS: 03:00:14:00 Right. MARGARET POPPER: 03:00:14:00 But having said that, it is the ratio that the market's-- KEN LEWIS: 03:00:16:00 It is. MARGARET POPPER: 03:00:17:00 --looking at. KEN LEWIS: 03:00:18:00 It is. MARGARET POPPER: 03:00:22:00 How-- there-- there have been a lot of attempts, in the media, in analysis by analysts, to say, you know, "Citi, Bank of America, same thing." What's the difference? KEN LEWIS: 03:00:37:00 Let me see if I can answer that and not-- and not just specifically talk about Citi, because they're-- there are several banks around the world that have lost tens of billions of dollars, both in 2007 and 2008. Bank of America made $15 billion and $4 billion in those two years. And so that-- that's the first striking difference is that-- we got (UNINTEL) with the (UNINTEL), I think, because the amounts were the same on the tarp. And in retrospect, I would pick another number. (LAUGHTER) 03:01:08:00 (OVERTALK) MARGARET POPPER: 03:01:08:00 Say, we didn't get-- we got 26 (LAUGHTER). 03:01:12:00 (OVERTALK) KEN LEWIS: 03:01:13:00 Because it-- the comparison, and I won't just use Citibank, but to a lot of banks, we got (UNINTEL). This is a company with-- two point seven percent-- tangible that we can get-- we can get to (UNINTEL) with-- with $8 billion of capital. We-- we-- we're profitable. We've had one-- loss in seven-- in one quarter, in 17 years. So, we're not-- we should not be painted with that same brush, and for some reason-- we have, and it's been really unfortunate. MARGARET POPPER: 03:01:45:00 So the other thing that strikes me in this is the deposit game. It seems to me that Bank of America got that. Again, I'm using Citi only because of the top banks, as the poster child for having missed that, starting with John Reed, continuing through Sandy Weill, continuing through Chuck Prince. You've got this deposit base (?). Wells Fargo now rivals you. KEN LEWIS: 03:02:08:00 Right. MARGARET POPPER: 03:02:09:00 That-- describe to me to power of that-- why that's important. KEN LEWIS: 03:02:14:00 Well, you-- you're right and-- that was-- you did something for me that I should have done, was to have talked about this and deposit base fee. The-- total deposits now are pushing a trillion (UNINTEL) at Bank of America. And 860 billion are core (?), just day in and day out deposits that you get-- MARGARET POPPER: 03:02:33:00 But sit there. KEN LEWIS: 03:02:34:00 --not purchase money-- but very stable and that-- that's-- that's the best core deposit franchise in the world. And-- and as you say, the only-- the one that would begin to rival it would be Wells, but they don't. I mean, it-- we're (UNINTEL)-- and the second piece, dominant position in everything we do. We're not scattered around the world like some companies are.
03:02:56:00 We're very focused. You know, born in the US, and-- and so when we manage these businesses, they-- it-- it-- it's easy to control, easier to manage. And you always want to be-- have a dominant position. We're one or two virtually everywhere. MARGARET POPPER: 03:03:10:00 And how does that play into this stress test, 'cause I-- I keep thinking, somehow, you know, is the government gonna get us back, and how? KEN LEWIS: 03:03:24:00 Yeah, I don't-- I don't know, because I haven't seen it, but there are two things about-- about our liquidity. One-- just the sheer deposit base. Everybody acknowledges that and then-- and the government-- (UNINTEL) do as well. Second is, we've been so concerned-- at the holding company level, we have about two years of funding at the-- at the holding company, which means that we could pay every single maturity coming to-- without raising one penny of outside capital. MARGARET POPPER: 03:03:48:00 Right now. KEN LEWIS: 03:03:49:00 Right now. MARGARET POPPER: 03:03:50:00 Stop everything-- 03:03:51:00 (OVERTALK) KEN LEWIS: 03:03:51:00 Two years. MARGARET POPPER: 03:03:52:00 You've got two years. KEN LEWIS: 03:03:52:00 Yeah, right. MARGARET POPPER: 03:03:53:00 Okay. But just final question here. If you don't pass the stress test, and I don't know what-- how ugly that would have to be (LAUGHTER) but if you don't pass the stress test, what's the next step? Government's talking about, "You got to go raise it privately." Is there private equity out there to do that? KEN LEWIS: 03:04:15:00 We will pass the stress test. MARGARET POPPER: 03:04:18:00 (LAUGHTER) All right, fair enough. 03:04:20:00 (OFF-MIC CONVERSATION) * * *END OF AUDIO* * * * * *END OF TRANSCRIPT*"
"and then-- and then the interrelationship between-- you know, what's good for America's also good for Bank of America. 'Cause we're so intertwined that it just made sense."
I've just spent 15 minutes trying to comment on this, but words fail me. I think it's because I feel that our leaders believe him. It sounds like demonic possession. Maybe we need an exorcist.
If people did not sometimes do silly things, nothing intelligent would ever get done.
Frazer's account of the magical and religious views of mankind is unsatisfactory; it makes these views look like errors.
Are you not really a behaviourist in disguise? Aren't you at bottom really saying that everything except human behaviour is a fiction?" — If I do speak of a fiction, then it is of a grammatical fiction
Could one imagine a stone's having consciousness? And if anyone can do so—why should that not merely prove that such image-mongery is of no interest to us?
An 'inner process' stands in need of outward criteria
For a large class of cases--though not for all--in which we employ the word "meaning" it can be defined thus: the meaning of a word is its use in the language.
What Copernicus really achieved was not the discovery of a true theory but of a fertile new point of view.
mathematics is a motley of techniques and proofs.
Everything that can be said, can be said clearly.
Whenever he does anything, this is before his mind. In a way, how are we to know whether to say he believes this will happen or not?
Asking him is not enough. He will probably say he has proof. But he has what you might call an unshakeable belief. It will show, not by reasoning or by appeal to ordinary grounds for belief, but rather by regulating for in all his life
I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
All testing, all confirmation and disconfirmation of a hypothesis takes place already within a system. And this system is not a more or less arbitrary and doubtful point of departure for all our arguments; no it belongs to the essence of what we call an argument. The system is not so much the point of departure, as the element in which our arguments have their life.
What I hold fast to is not one proposition but a nest of propositions.
At the core of all well-founded belief, lies belief that is unfounded.
Knowledge is in the end based on acknowledgement.
At the end of reasons comes persuasion.
Nothing is so difficult as not deceiving oneself.
The way you use the word "God" does not show whom you mean — but, rather, what you mean.
One can mistrust one's own senses, but not one's own belief. If there were a verb meaning "to believe falsely," it would not have any significant first person, present indicative.
What has to be accepted, the given, is — so one could say — forms of life.
If a lion could talk, we could not understand him.
An entire mythology is stored within our language.
There are, indeed, things that cannot be put into words. They make themselves manifest. They are what is mystical.
Scepticism is not irrefutable, but obviously nonsensical, when it tries to raise doubts where no questions can be asked. For doubt can exist only where a question exists, a question only where an answer exists, and an answer only where something can be said.
The mystical is not how the world is, but that it is.
The subject does not belong to the world, but it is a limit of the world.
It is quite impossible for a proposition to state that it itself is true.
What do I know about God and the purpose of life? I know that this world exists. That I am placed in it like my eye in its visual field. That something about it is problematic, which we call its meaning. This meaning does not lie in it but outside of it. That life is the world. That my will penetrates the world. That my will is good or evil. Therefore that good and evil are somehow connected with the meaning of the world. The meaning of life, i.e. the meaning of the world, we can call God. And connect with this the comparison of God to a father. To pray is to think about the meaning of life.
Make sure that your religion is a matter between you and God only.
La Bête: Mon cœur est bon, mais je suis un monstre.
You can never plan the future by the past.
We must all obey the great law of change. It is the most powerful law of nature, and the means perhaps of its conservation.
Economy is a distributive virtue, and consists not in saving but selection. Parsimony requires no providence, no sagacity, no powers of combination, no comparison, no judgment.
A very great part of the mischiefs that vex the world arises from words.
It is the nature of all greatness not to be exact.
The march of the human mind is slow.
Liberty, too, must be limited in order to be possessed.
If any ask me what a free Government is, I answer, that, for any practical purpose, it is what the people think so, — and that they, and not I, are the natural, lawful, and competent judges of this matter.
A state without the means of some change is without the means of its conservation.
Better to be despised for too anxious apprehensions, than ruined by too confident a security.
Our patience will achieve more than our force.
Politics and the pulpit are terms that have little agreement.
All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter we give and take; we remit some rights, that we may enjoy others
It is one of the finest problems in legislation, What the state ought to take upon itself to direct and what it ought to leave, with as little interference as possible, to individual discretion.
History is a preceptor of prudence, not of principles.
No rational man ever did govern himself, by abstractions and universals.
I always distinguish between a man's talkative and writative character.
A revolution will be the very last resource of the thinking and the good.
... all that wise men ever aim at is to keep things from coming to the worst. Those who expect perfect reformations, either deceive or are deceived miserably.
Man acts from motives relative to his interests; and not on metaphysical speculations.
Before men can transact any affair, they must have a common language to speak otherwise all is cross-purpose and confusion.
We owe an implicit reverence to all the institutions of our ancestors.
You may talk of the tyranny of Nero and Tiberius; but the real tyranny is the tyranny of your next-door neighbor... Public opinion is a permeating influence, and it exacts obedience to itself; it requires us to think other men's thoughts, to speak other men's words, to follow other men's habits.
It is good to be without vices, but it is not good to be without temptations.
Why should it not be the whole function of a word to denote many things?
It may justly be urged that, properly speaking, what alone has meaning is a sentence
We become obsessed with 'truth' when discussing statements, just as we become obsessed with 'freedom' when discussing conduct...Like freedom, truth is a bare minimum or an illusory ideal
Like 'real', 'free' is only used to rule out the suggestion of some or all of its recognized antitheses. As 'truth' is not a name of a characteristic of assertions, so 'freedom' is not a name for a characteristic of actions, but the name of a dimension in which actions are assessed.
[O]rdinary language is not the last word: in principle it can everywhere be supplemented and improved upon and superseded. Only remember, it is the first word.
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method.
The situation in which I would properly be said to have evidence for the statement that some animal is a pig is that, for example, in which the beast itself is not actually on view, but I can see plenty of pig-like marks on the ground outside its retreat. If I find a few buckets of pig-food, that's a bit more evidence, and the noises and the smell may provide better evidence still. But if the animal then emerges and stands there plainly in view, there is no longer any question of collecting evidence; its coming into view doesn't provide me with more evidence that it's a pig, I can now just see that it is.
Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance—where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong.
"Adam Smith's Recommendations on Taxationby Nadia Weiner, Director of the Adam Smith Club of Sydney, Australia
Although Adam Smith is often quoted, the so-called "Father of Economics" has rarely been read, either by his detractors or his admirers. Consequently he is often misunderstood.
Smith, who made such a strong stand against the protectionist mercantile system of trade of his day, devoted over ONE THIRD of his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes. This is not generally known.
When examining the different forms of taxation, Smith adheres to four maxims which a good tax should conform to:
1. "The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State."
2. "The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person."
3. "Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it."
4. "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State."
Bearing all these things in mind, there are two types of taxation which obtain Smith's recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).
On the subject of luxury consumables, he is adamant about the definiton of 'luxury' and of 'necessary.' By his definition, a 'necessary' may vary from place to place and from time to time. At the time of his writing, linen shirts, leather shoes and a minimum of food and shelter were definitely to be regarded as essential to a minumum decent standard of living. Taxes on salt, soap, etc., he harshly criticized as inequitably taking from the poorest elements of society. Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: "Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed ... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."
More deserving of priase is the tax on ground-rents: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."
Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty."
The harshest condemnation of all, however, was for taxes upon labour: "In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable comodities."
Getting Involved in Bitcoin
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When bitcoin value skyrocketed in late 2013, everyone suddenly started
paying attention to this unusual currency. A large number of online
businesses alrea...
Corporate ETFs and Risk Appetite
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Via Bloomberg : Bond ETFs Awash in Pain May Be Red Flag for Risk Appetite
(1) 2018-01-22 14:56:05.415 GMT By Dani Burger and Sid Verma (Bloomberg) —
U.S. c...
Whose Gold Is JP Morgan Dumping Now?
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Author’s Note: This piece is unfinished, but the data presented here is
simply too important not to publish. They say phrasing allegations in the
form of...
The beginning of the end
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borrowed wisdom is still wisdomGreetings readers!
After 10 years, I am going to stop blogging at aguanomics.
I am doing this because I have written quite ...
*Sigh* No Forest
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In a move that should surprise no one, Canadian/Chinese forestry company
Sino-Forest filed for bankruptcy in Canada yesterday. The timing of the
filing sh...
Lahti
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I am in Lahti, Finland, to give a talk at the Lahti Symphony's Sibelius
Festival. I've been wanting to visit since I encountered Osmo Vänskä's
revelatory B...
Change Is Good (Website Redesign)
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Hey out there! Just a heads up to let you know that this blog has moved!
All this content has been migrated over to my primary website,
alexandragardner.ne...
Whether (and how) America can survive Trumpism
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Georgetown Professor Thomas Zimmer joins us to talk about polarization and
extremism, and what insights American and world history provide as to
whether ...
The ideas of Liberal liberals
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Nearly 30 years ago now I dropped out of a PhD exploring the communitarian
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articles, ch...
Nine Chapters on the Semigroup Art
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While Googling something or other, I came across Nine Chapters on the
Semigroup Art, which is a leisurely introduction to the theory of
semigroups. (While ...
Did These Physicists Just Prove True Randomness?
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A group of physicists claim they have proof that true randomness exists.
This has implications for encryption protocols and computing, but (if true)
would ...
Peston Picks is moving
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[image: Cardboard Boxes on a trolley]
My blog is dead. Long live the new blog. Or to put it another way, my page
- and those of other BBC bloggers - is hav...
Moving on
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Stephanomics is dead. Long live Stephanomics. Today's news is that this
blog is moving to a new home with a fresh format.
I know, change is hard, but the...
20 years later
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I created this blog in September 2004 with no particular purpose other than
to write a bit about Latin America and foreign policy. I'm writing more at
Su...
Sad Puppies Delete Their Own Weblog Posts!
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Brad Torgersen deletes his own weblog posts: **Rogers Cadenhead**: [Brad
Torgersen's 'Science Fiction Civil
War'](http://workbench.cadenhead.org/news/3742/...
FTX and an old blog post
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A long time ago I wrote a blog post about rehypothecation with brokers. It
is - unsurprisingly - relevant again.
In some sense crypto provides fast-track...
Schäublenomics
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The veteran German will be the most familiar face around the table as the
eurozone’s longest serving finance minister, having taken office in late
2009.
...
Rooting for Wuhan
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This, with one key correction that you will notice in the second paragraph,
is the latest edition (mailed out Feb. 9) of my occasional e-mail
newsletter, w...
Some Links
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(Don Boudreaux) TweetWriting in the Wall Street Journal, NYU physicist
Steven Koonin reports on how the Biden White House inadvertently told the
truth abou...
California's Bullet Train Boondoggle
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California voters approved the now-infamous high-speed-rail project in
2008; it was projected to cost some $33 billion and was to encompass some
800 miles,...
Thursday: CPI, Unemployment Claims, Flow of Funds
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[image: Mortgage Rates] Note: Mortgage rates are from MortgageNewsDaily.com
and are for top tier scenarios.
Thursday:
• At 8:30 AM ET, The *initial weekly ...
Trump, Russia, Tariffs, EU ... now Poland
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BTL the previous post, anon regales us with this quote relating to a
pronouncement from US Treasury Secretary Scott Bessent:
*Donald Trump has reportedly...
Historic Chart of the Day
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Based on today's Census Bureau report on April retail sales, consumer
spending at "*Food Services and Drinking Places*" (restaurants and bars,
see red li...
Michael Lewis breaks news from 2008
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Michael Lewis, of Liar's Poker fame, has emerged as a leading writer of the
credit crisis and its aftermath. I wish there were 10 of him. And if only
one o...
The President Should Not Have a License to Kill
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Free societies do not replace civilian criminal law with killing simply
because killing is easier for the government. Once we consider the victims’
suppose...
Soros on Oil and Agriculture
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From Bloomberg News:
George Soros’ $21 billion fund returned 8% last year, which is incredible
not only in light of the global crisis, but also given hi...
A Former Expat on China: Grim
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1. LaoWhy86 on YouTube Spent the last few days catching up on my China
reading and viewing, mostly those articles and videos friends, clients and
readers w...
Adjust contrast of a pdf free
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Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
It's really very simple
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[Note: I am pushing this article live two days early because ZeroHedge
somehow managed to get a hold of it and post it before I did. Needless to
say, I do...
PLEASE READ: Website Update In Progress
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Most readers know we've been hard at work behind the scenes rebuilding the
guts of the PeakProsperity.com website.
For a few months now, we've been sayin...
Drop list elements if
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I am doing a simulation in R that generates a list of simulated data
objects and then simulates emergent behavior on them. Unfortunately, it
chokes on “dat...
What’s the best type of healthcare system?
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If we’re going to improve our healthcare system, it’s worth looking closely
at the experiences of other rich democratic countries. There are two
principal ...
Long Live the Future
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This is the last of more than a thousand columns published in the Express,
which began when Denis Jambart and Christophe Barbier, asked me to be one
of the...
Best Nu Skin ReDesign ageLoc Galvanic Body Spa
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Nu Skin ReDesign ageLoc Galvanic Body Spa Is Cheap, But It Isn't Two-Penny
Product*Nu Skin ReDesign ageLoc Galvanic Body Spa* is the leading product
among ...
110. Great Expectations: The Implacable Externality
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*I saw a sign in front of a shop the other day that read, "We will exceed
your expectations." So I walked in expecting them to exceed my
expectations. By t...
Creative Destruction in Small Business Bankruptcy
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Two distantly related items caught my eye this morning, as both reinforce
the need for "creative destruction" as a response to all-too-common small
busines...
Goodbye to Credit Writedowns
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Good morning everyone, I have some exciting — and also – sad news to tell
you today. First, I am going to Bloomberg as a Senior Editor. And I am
going to...
Crisis Talk is Moving!
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Dear Crisis Talk readers, In an act of consolidation and collaboration,
Crisis Talk is merging with the World Bank's Private Sector Development
blog, where...
Morning News: December 3, 2024
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Welcome to the Post-American New World Disorder Will Trump’s Dollar
Diplomacy Roil Global Trade? China Targets Critical Metals in Tit-for-Tat
Response to U...
Save pdf smaller size mac online
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High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
Maximize the Resale Value of Your Car
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Filed under: Travel Industry, Did You Know
Did you know...
There are some easy things you can do to get more money for your used car,
with a little less ...
IEA World Congress 2021
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A few words on the International Economics’ Association online World
Congress, July 2-6, on the theme “Equity, Sustainability and Prosperity in
a Fractured...
Inside Goldman’s ABACUS Trade
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Today, in the Huffington Post, I posted a document that shows an earlier
incarnation of the ABACUS trade (although, not that different from the one
that ha...
calculated risk calls a bottom
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with some qualifications, but a bottom call nevertheless. this is not to be
taken lightly. bill is the best working commentator on US housing markets,
and ...
The Inheritance of Molecular Machinery
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It turns out mtDNA is inherited directly from the mother to its offspring,
and I just had the idea that perhaps the molecular machines responsible for
repl...
Options Action: OptionApps Top 5 for 2017-06-28
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Options Action: OptionApps Top 5 for 2017-06-28 Academic Algorithms: ( Term
LT-ST Difference ) Ticker Stock Name Close Difference 1 CAMP
CALAMP CO...
Brainteasers From My Dad
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When my sister and I were little, our Dad would challenge us with riddles
and word games. I mentioned three in my eulogy for Dad: 1. Imagine a
two-volume d...
The Dove at Peace
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Leila Abu-Saba, 1962-2009 The Dove, Leila Abu-Saba, passed away on October
8, 2008 after a five-year battle with breast cancer. She leaves behind her
husba...
Adjust contrast of a pdf free
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Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
Energy
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With almost 600 coal plants shut down since 2010, we are racing towards
a grid reliability crisis of our own making. Millions of Americans are at
risk of e...
Wisconsin in Last Place for Start-up Activity
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The Kauffman Foundation has just released its report on startup activity.
Wisconsin comes in last place in startup density. Figure 1: Source:
Kauffman Foun...
How to Believe in Free Speech
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Almost all libertarians earnestly say, "I believe in free speech."
Normally, though, this goes way beyond the right to speak freely. Most
libertarians al...
New Growth Rate Cycle Date Determined for the U.S.
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Today ECRI is announcing May 2016 as a new growth rate cycle trough date
for the U.S. Growth rate cycles are alternating periods of accelerating and
decele...
Quick update
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I just logged in for the first time in ... five years. I am occasionally
thinking about restarting this blog, but blogging is not what it was, plus
current...
Back In Business
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After six months offline, Economic Principals’ site has returned to life.
Betweentimes, EP has been appearing on Substack since March […]
Mind the Gap? Rethinking the Investor Gap Equation
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Morningstar released the latest version of Mind the Gap, an annual piece
which shares with its readers analysis that "measures the costs of bad
timing".
I...
Every Pop-up Must Span a Gully
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Every pop-up must span a gully. -- Duncan Birmingham
The gully I aim to span with my pop-ups is the imaginary separation between
the interior world of t...
Suspected rebel officers jailed in Ecuador
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AFP QUITO — A judge ordered 14 police officers held in preventive detention
as court proceedings began against the alleged perpetrators of a rebellion
in E...
Record Job Openings Not As Impressive As It Sounds
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I'm seeing a lot of headlines about a record high number of job openings.
While it's technically true that the number of job openings (as reported
in the...
Invitation to connect on LinkedIn
-
LinkedIn
Emre,
I'd like to add you to my professional network on LinkedIn.
- Emre
Emre Deliveli
Freelance Consultant & Economics Columnist at 'Self-Emp...
The Japanisation Of Europe
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By now it should be clear that the monetary experiment currently being
carried out in Japan (known as “Abenomics”) is fundamentally different from
the kind...
The search for the best middle-class tax cut
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Say you want to help struggling middle-class families by cutting their
taxes. Say you want to figure out an actually helpful plan to do that, and
not just ...
A Better Stablecoin on a Perp DEX
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Creating a stablecoin position on a perp exchange is hard, but it should
be easy. It not only caters to demand, but it also adds liquidity to perp
marke...
Puzzle: Crack the Combination XI
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The combination of a lock is four digits long and each digit is unique,
that is, each occurs only once in the combination. The following are some
incorrect...
Charmin quietly cuts roll size by 10%
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Did they think we wouldn’t notice? New Charmin toilet paper rolls are 4″
wide. Historically toilet paper has been sold in rolls that are 4.5″ wide.
Did the...
The Flipping and Flopping Edition
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Slate Money on President Obama’s flip-flop on the 529 college savings plan,
the FCC’s flip-flop on net neutrality, and Shake Shack’s flipping of
burgers bu...
Financial policy: Looking forward
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Washington is turning its attention to the future, having put out most of
the financial fires. The crisis seems to be over, but questions remain
about how ...
Ceterum autem censeo Twiterinem esse delendam
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The fresco is housed in a room that is small, but quite ornate. Four
corner-anchored medallions define the lower-than-expected ceiling's
borders. Though ...
Why Do Americans Still Hate Welfare?
-
"Welfare" remains a charged word in the American lexicon, even though it's
rarely talked about as a political issue any more. But why?
Jay Rock’s hearing
-
Friends of the blog, Vertrue and its subsidiary Adaptive Marketing, found
themselves the subject of a Senate Commerce Committee hearing yesterday
entitled,...
Live tweeting the Friday Night Dump
-
We are now offering a subset of our Pro data via Twitter. Find out more by
clicking here: https://premosocial.com/footnotedFND
When the Internet Was a Place
-
Not too long ago, the internet was a place you visited. The family desktop
sat in its designated closet or back office. In schools, there were rooms
filled...
Markets & Trump
-
Brouwer & Janachowski November 9, 2016 This Week: Markets settling down.
Probably less disruption than the headlines imply. As we write in the
morning se...
100 Positive News from 2023
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Many bad things happened in 2023. You already know them. Many tragic events
were so terrible we will never forget them and we shouldn’t. You can easily
f...
Did You Know That Gary Weiss Speaks?
-
Yes, he does, or to put it another way, I do. My well-received speaking
engagements have spanned many topics, from media bias in the Middle East to
Ayn Ran...
Democratising public institutions: Reform needed!
-
If Bahamians got through the implementation of Value Added Tax, they can
get through anything. Thus the confidence I have in reforming our public
instituti...
Moving on
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Moving on
Finally, at long last, I can tell you what I've been up to with finding a
new home for this blog. I've created a new, community-based science
b...
Paul Krugman on Food Economics
-
Paul Krugman doesn't typically write about food, so I was a little
surprised to see this. Still, I think he got most things right, at least
by my way of...
Dear Committee Members
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Like many who spend their lives in the ivory tower, I enjoy academic
satires. That includes Richard Russo's novel *Straight Man*, the movie *Wonder
Boys...
Drop everything and go out to the Gaza border!
-
Drop everything and go out to the Gaza border!
We refuse the occupation of the strip, we refuse starvation!
The government of starvation and exterminati...
Cole-Frieman & Mallon 2025 Q2 Update
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July 10, 2025 Clients, Friends, and Associates: As we close out the second
quarter of what has been an eventful year for the digital asset sector, we
would...
2016 as a ten-letter word
-
In the end of November, as it is the case every year since 2004, Oxford
Dictionaries revealed their choice for the word of the year. For 2016, they
settled...
Opendoor hires Kaz Nejatian as new CEO
-
Opendoor Technologies announced Wednesday that it has named Kaz Nejatian,
the former chief operating officer of Shopify, as its new CEO.
Carrie Gracie
-
Campaign for Equal Pay I have noticed that individuals who make a
difference, often don’t set out with that intention. Usually, an event in
peoples’ lives ...
25 or 50 Next Week?
-
*Mid-week market update*: The combination of the Quarterly Census
Employment and Wages (QCEW) weakness and a soft PPI report has moved the
market to expect...
Speaking trip this April
-
I'm speaking at Libertycon in Tbilisi on April 20th, will probably either
go or come via London. Anyone interested in a talk? I'll probably be in
Europe ...
Agricola’s Crossings
-
Over the past few weeks since I wrote a post about the account by Tacitus
of a potential Roman invasion of Ireland led by Agricola I’ve been thinking
about...
Incentives Matter, Indeed
-
Friend Ennyman rights a great piece on the role of incentives, here's the
conclusion: "Whether it's meeting deadlines, forming good habits in our
children ...
Cash transfers in other countries
-
Here’s a Newsweek story about cash transfer programs in Brazil, South
Africa, and Mexico. A mostly favorable story, too. Of course there’s no
mention of th...
InfoVis vs. i|e
-
People have set out varying hopes and interpretations for the term
“Information Aesthetics,” and they mostly differ from what this
organization was creat...
China has much to teach us. John Roberts does not.
-
So, I don’t really write here any more. I write at drafts.interfluidity.com
instead. Please follow that feed or subscribe by e-mail. I do still offer
perio...
Byron Wien Announces “The Ten Surprises” for 2013
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Byron Wien, Vice Chairman of Blackstone Advisory Partners, yesterday issued
his list of “The Ten Surprises for 2013″. This is the 28th year Byron has
given...
Residential Roofing Choices For Flat Roofs
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There are a lot of different types of residential roofing material
available for residential units. Some are more common than others and some
are cheaper...
herbal untuk jantung dan darah tinggi yang ampuh
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Apakah Anda tahu bahwa madu mampu memberikan M segala macam manfaat bagi kesehatan
manusia? Madu diakui mengingat bahwa zaman kuno sebagai obat, dan penggun...
Obama’s vague Buffett Rule a political ploy
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A few thoughts on the economics and politics of President Obama’s
tax-the-rich “Buffett Rule” and new debt reduction “plan”: 1) What problem
does the Buffe...
This blog has moved
-
To a new blog-support vendor. You can read the latest posts by clicking
here. If you're a regular reader, thank you and please update your
favorites to the...
The Surface: I Came, I Saw, I Left
-
I went to the Microsoft store in Times Square yesterday to see for myself
the new Surface tablet with the spiffy keyboard, since nobody I know
actually ...
Financial Markets Will Move To Asia
-
Chicago, they invented the Soybean futures contracts. But now, China uses
more soybeans than ... *READ THE REST OF THE ARTICLE ON THE NEW WEBSITE:
JIM ROGE...
Monday Message Board
-
Another Monday Message Board. Post comments on any topic. Civil discussion
and no coarse language please. Side discussions and idees fixes to the
sandpits,...
A CryptoFiction
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Here’s a micro-story I started with the Access Crypto Summit flash fiction
prompt in mind, left half done, and then belatedly finished off anyway,
because ...
Knowledge Problem archive 2002-2020
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This is the archive of the Knowledge Problem blog, all 4,690 posts. The
search function will help you locate posts on the various topics Mike and I
wrote a...
Comment perdre du ventre ?
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Une brioche, voici le nom que l’on donne au ventre lorsqu’il est un peu
trop rond. « On pourrait presque le pétrir avec les mains, un peu comme on
prépare ...
Multiplication of unlawful disjunctions
-
Charles B. writes: Apparently, birds are not considered wild animals by
law. Reference here, where apparently feeding them in parks in permitted
except if ...
The geopolitics of emotions
-
Are our emotions really our own, or are they products of a sociopolitical
context? While we may feel that love, fear, empathy and disdain come from
withi...
-
*above: While Menzies was far from without fault, on many issues today's
Liberal Party would be unrecognizable for him. *
*Dr Tristan Ewins*
Much ...
The Case for Mixed Deployment
-
Published on September 11, 2025 6:14 AM GMT
*Summary: *Suppose we have many different AI models, none of which we trust
isn’t scheming. Should we deploy mu...
Let a Thousand New Green Deals Bloom
-
I write that “[a] decentralized ecological approach would recognize that
managing emissions is one part of a larger equation that includes the
natural carb...
10 September 2025 – today’s press releases
-
Lib Dems call for mandatory origin labelling on beef Davey on Doha Strikes:
Starmer must summon Israeli Ambassador Ed Davey on Mandelson: Civil Service
Com...
Clinton’s Lost Votes
-
https://www.facebook.com/rchusid/posts/2670987959585088 Establishment
Democrats love to blame third party voters for Clinton losing, but The New
York Times...
Awaiting my execution: A letter from Iran
-
BREAKING: Saman Naseem’s execution did not go ahead as originally scheduled
on the morning of Thursday 19 February. More information to come. Saman
remains...
Allan Meltzer's Life Work
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The Hoover Press and the Mercatus Center have just released a new book on
Allan Meltzer's contributions to economics. The book is comprised of papers
th...
The Argentina Siren Song And Where Else It Is Sung
-
I’m back! After an extended leave of absence I’ve decided to start writing
again.
Let’s start with a story familiar to those that read MM in my first ter...
Do Higher Wages Mean Higher Standards of Living?
-
Editor's note: We have updated macroblog's location on our website,
although archival posts will remain at their original location. Readers who
use RSS sho...
The End
-
I started this blog back in 2008. What a ride it's been! Thanks to all who
took the time to interact with me -- I profited greatly from the
experience. And...
Downright intuitive and comical
-
I was on my hands and knees yesterday scrubbing a LOT of blood off a tennis
court. And yes, we won. Note to friends - my tennis is not that good, but,
I am...
How to think about AI progress
-
The Zvi has a good survey post on what is going on with the actual
evidence. I have a more general point to make, which I am drawing from my
background ...
Exhibition: Man's Inhumanity to Man
-
[ Meanwhile... in Guatemala - Mark Vallen. 1988. Pencil on paper 10" x 14".
On view at Man's Inhumanity to Man. Military death squads were responsible
for ...
Adjust contrast of a pdf free
-
Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
Recovering ancient voices from clay pots
-
MIT reports recovering voices from high-frame-rate video of a potato-chip
bag, extracting information from vibrational displacements as small as
1/100 of a...
Bond vigilantes call for “Day of Rates”
-
Flustered by the obstinate refusal of US interest rates to move up, bond
vigilantes are resorting to the revolutionary tactic *du jour*: Twitter!
In a thr...
Big D Has Your Rivalries Right Here
-
Editor's Note--Well that wasn't how we like it last week. 2-4. But this
week is rivalry week in the college where you throw out the records and
teams play ...
Environmentalists Are China's Useful Idiots
-
In his drive to achieve absolute power, Vladimir Lenin could count on
Western progressives and opportunist executives to serve as "useful
idiots." Today'...
Rebecca Wilder is moving to the EconoMonitors
-
I've decided to migrate News N Economics over to my new blog, The Wilder
View, on the Roubini EconoMonitors platform.
Really, I jumped at the opportunity t...
Monday Morning Readings
-
I've really been slacking on the posting lately. The must read:
July Economic Data Summary
Recommended:
Turning Dumpsters Into Swimming Pools
A Simple Expl...
We’ve moved to www.nudges.org. Come with us.
-
Nudges.wordpress.com has been a great home for the Nudge blog over the past
year and a half, but it’s time to move on. Where to? www.nudges.org. That’s
rig...
What to do?
-
by liberal japonicus from
https://everything.typepad.com/blog/2025/08/typepad-is-shutting-down.html
Typepad is shutting down August 27, 2025 We have made t...
Infrastructure roulette
-
In some respects it's reasonable to think about city council as being a
kind of club.
Everyone who owns property in Wellington is a member of the Welling...
More Random Than We Realize
-
I’ve previously posted on how US foreign policy, and how left vs right
ideologies, both seem less coherent that most expect them to be.
OMERS CEO on What's Ahead For 2030
-
Celine Chiovitti, Chief Pension Officer at OMERS welcomes back OMERS
President and CEO Blake Hutcheson for his third appearance on the* Pension
Blueprint...
PFM Blog announcement: we are moving!
-
iStock.com/tumsasedgars Posted by Teresa Curristine, Holger van Eden, and
Richard Allen DEAR PFM BLOG USERS – The PFM Blog will be transferring to a
brand ...
To Save America’s Cities, We Need to Let Them Fail
-
Downtown Los Angeles
America's flagship cities have become laboratory experiments for social
justice. Heavily controlled by political leaders who subscri...
Inside Bright Star
-
Read about Jane Campion's film Bright Star, chronicling the love affair
between John Keat and his neighbor Fanny Brawne, as well as the poems and
love lett...
COOPERATION IS PROFITABLE
-
part of my new - ELITE MANAGEMENT THEORY series
Personal interests are paramount – most important.
The smaller the cooperating group is the better it refle...
The Harsh Truth About India’s Godmen
-
Late last month, two Indian states and the national capital were upended by
rioting mobs protesting their spiritual leader’s conviction on two counts
of ...
The Bailout: By The Actual Numbers
-
by Paul Kiel
Quick, how many billions in the red are taxpayers on the bailout of GM?
AIG? Fannie and Freddie? Is it true that the government has reaped ...
America's attempted Quartet sophistry
-
This piece was originally published at the Middle East Channel. As
more information seeps out from the Quartet principals meeting held in
Washington ...
Check Out The New Quantifiable Edges!
-
Quantifiable Edges has undergone a complete site overhaul! Part of that
overhaul included moving the blog. New posts can be found at the address
below:
h...
Printable Bookmarks With Quotes
-
Creative Handmade Bookmarks Design With Quotes – Google Search with regard
to Printable Bookmarks With Quotes Printable Bookmarks With Quotes | Second
Star...
DOE CWG Report “Moot”?
-
Somewhat breaking news. A court filing (from 9/4) from DOE has noted that
the Climate Working Group has been disbanded (as of 9/3). This was done to
make...
Yet Another Bad Analysis of AI
-
In the past I've commented on bad discussions of thinking, intelligence,
brains, and computers, such as those by Gary N. Smith, Doug Hofstadter, Arthur
Gar...
The World Cup and Making Soccer Less Boring
-
It is World Cup time, a good time to reintroduce two posts I did one of the
last times we had the World Cup capture the imagination. One of them
suggests ...
Banking fraud - is dishonesty the new greed?
-
It has not been a good month for the financial industry: JPM's ever growing
CDS trading (and apparently mismarking) loss; PFG Best's appreciation for
Adobe...
Does Death Exist? New Theory Says ‘No’
-
Many of us fear death. We believe in death because we have been told we
will die. We associate ourselves with the body, and we know that bodies
die. But ...
When Do Consumer Boycotts Work?
-
Uber, Starbucks, Budweiser. These are just a few of the brands that have
faced consumer boycotts for taking supposedly political stances in the past
few ...
“Goodnight, and Good Luck”
-
My February 2016 valedictory editorial note on the home page of Al Jazeera
America the day we closed down. Still proud of the work we did, and the way
we c...
Moved Over
-
I’ve been blogging away over at my new blog at Next New Deal, come join me
over there! Here’s the new rss feed. I might post here once in a great
while, m...
Carolina Wolf: Carolina Wolves, #1
-
All it takes is a spark of Grrrrl power to set the swamp on fire! Debra
Henry is living the meek librarian cliche, except for the teeny hint of
magic in h...
Prediction Markets and the Kelly Criterion, Part 5
-
Perhaps the most famous proponent of the Kelly Criterion is Edward Thorp.
He founded the M.I.T. Blackjack Club, published various papers on gambling
and ...
The paradox of insular language
-
We often develop slang or codewords to keep the others from understanding
what we’re saying. Here’s an example (thanks BK) of the lengths that some
are goi...
Flash Commentary No, 1460b
-
• Fundamentals Could Not Be Stronger for Gold and Silver, nor Weaker for
the U.S. Dollar and Stocks, Despite Fed or Market Nonsense to the Contrary
• There...
If something can't go on forever, it will stop
-
This is my last post at/as Shock Minus Control. As I mentioned in my
December post, my youngest son (now 7 months) had a congenital heart defect
repaired a...
Goldman Sachs comes late to the game
-
The Financial Times ran a story Monday about Goldman Sachs becoming the
first big dealer to orient its business around electronic fixed-income
trading and ...
Whoop!
-
That is the sound of the gravitational waves hitting the LIGO detector. A
chirp. That is also the sound of the celebratory hurrah’s from the gravity
commun...
For the record
-
In response to my recent blog posts, which expressed views that are
entirely boring and middle-of-the-road for Americans as a whole, American
Jews, and Isr...
test
-
“Virtual worlds are going to be one of the first killer apps for
blockchains and perhaps the deepest users of them.” – Fred Ehrsam,
Co-Founder, Coinbase ...
Muni Madness
-
"Investors are ignoring warning signs in the $2.8 trillion municipal-bond
market, raising the risk of a reckoning, according to some market
specialists. Nu...
The politics of the General Will in Thailand
-
Excerpts from Cultural policy as general will and social-order
protectionism: Thailand’s conservative double movement Michael K. Connors
International Jour...
Sometimes, it's right on front of your eyes ...
-
The authors of this piece have failed to apply Occam's Razor in
interpreting the central empirical finding.
https://www.aei.org/research-products/report...
Russia-China Gas Groundhog Day. Again.
-
News flash (irony intended): the news media are idiots with the memory of a
mayfly. The most recent example, the breathless coverage of the supposed
gas de...
Thatcherism is dead: Thatcherism lives
-
Thatcherism is dead. It has ceased to be. It has expired and gone to meet
its maker. It has kicked the bucket, shuffled off this mortal coil and
joined the...
Bonds And Money
-
The US bond market is getting hammered lately as investors and traders
realize that (a) the economy is not collapsing and (b) the Fed will keep
rates hig...
Deepseek gets F+ in Econ
-
LLMs have trouble with this pretty-basic economics question:
Prompt: “*Is this factually accurate?*
*Positively correlated price-quantity pairs reveal th...
Announcement
-
So it is with some sadness that I have to announce that I’m going to be
leaving True/Slant. Starting in a few days I will be back blogging
exclusively at w...
Update: A Tax Compromise Offered in Illinois
-
Earlier this month I highlighted a potential tax compromise brewing in
Illinois. State senate Republicans and Democrats released a proposal to
increase I...
10 Seconds Into The Future
-
The low inflation and low interest rate environment that we experienced in
the last 20 years was only possible as inflation was exported away to low
cost p...
Issues Associated with the Current Election
-
Picture Credit: derek visser (modified to exclude extraneous comments) ||
Trump and Harris are more similar than different. Both favor the rich, they
lie, ...
Help wanted: incrementalist systems builder
-
a.k.a Toolsmith a.k.a. Geek To help forecast a hot CE product in one of the
world’s largest retailers (located in Seattle). Apply within.
‘If she killed my girl she must die’
-
An Australian woman charged with poisoning her friend must be executed if
found guilty, says the victim’s father.
A Few Quick Announcements
-
By James As I wrote a couple of years ago, I don’t post here anymore. I
just have a couple of updates for people who subscribe and may be
interested in my ...
RTO Gets Serious: October 1
-
If ever a week was ripe for delaying your return to the office, it was
this one. Hurricane Idalia cleared out the weather up and down the coast,
brin...
Is my pessimism justified?
-
I'm increasingly pessimistic about prospects for meaningful reform in the
wake of the financial crisis, and feel that a repeat, quite possibly on an
even l...
The Years Of Writing Dangerously
-
Thirteen years ago, as I was starting to experiment with this blogging
thing, I wrote the following: [T]he speed with which an idea in your head
reaches th...
Occupy Wall Street - Marine vs 30 Cops
-
Speaking of the police. Here is a link to a video of a soldier - in uniform
- protesting the treatment of demonstrators by the police.
http://perezhilton....
England Expects (note on Dunkirk)
-
First of all, let nobody say Christopher Nolan lacks a sense of humor: for
the second time, he’s kept Tom Hardy under a voice-distorting face mask for
almo...
Uncle Warren Explains It All to You
-
[image: Time for Daddy’s little dividend]
*“Sure, sure.”*
— Sidney J. Mussburger, *The Hudsucker Proxy*
Apparently some doddering old fart in Omaha, Nebr...
Low Volume Melt Up
-
*FN:* On the way down there is volume. On the way up, there is less...
waaaay less (especially for this time of the year).
Can you say algos?
So what does...
Goodbye Scienceblogs
-
Goodbye Scienceblogs
NOTE: This blog has moved. The Frontal Cortex is now over here.
I've got some exciting news: Starting today, the Frontal Cortex will ...
US Continuing Jobless Claims Fall by 3.86M
-
Continuing Jobless Claims in the United States decreased significantly last
week to 21,052,000 from a record high of 24,912,000 in the previous week.
The n...
Penny Stock Research Sources
-
Penny Stock Research Sources Just because you don’t hear about penny
stocks every day on your daily news, doesn’t mean that the penny
stock market goes wit...
Hello world!
-
Welcome to WordPress. This is your first post. Edit or delete it, then
start writing!
The post Hello world! appeared first on My WordPress.
Moving Just A Click Away
-
Tomorrow I’ll be starting to blog at National Geographic Magazine, along
with Ed Yong, Virginia Hughes, and Brian Switek. All the archives of the
Loom (f...
The Market Ticker - The Pattern of The Market
-
*Looks awfully similar to 2008.*
*Rotation back and forth, with most of the gains coming in a handful of big
names with big stories -- but no earnings to...
Arguing with Children
-
The other day the New York Times ran an op-ed about Greta Thunberg, the
teenage environmental activist. The TL;DR is that activism, particularly
the activi...
The Oil Drum writers: Where are they now?
-
- Nate Hagens is at The Monkey Trap
- JoulesBurn (Brian Maschhoff) is at Picojoule
- Euan Mearns is at Energy Matters
- Heading Out (Dave...
Mom Has Stacked Dinner Party Roster
-
GOLDEN, CO—Their eyes widening in amazement as the 43-year-old rattled off
the names of heavy hitter after heavy hitter, impressed members of the
Dreesh...
An Autopsy of American Exceptionalism
-
I’m writing this in a Parisian cafe in the year 2050. I’m doing a reverse
Hemingway, trying to become a better writer as I get into my 70s while I [
… ]
This is the end
-
Ladies and gentlemen, this is the final post I will be publishing at The
Reformed Broker....
The post This is the end appeared first on The Reformed Brok...
narratives everywhere
-
As investment professionals, we are faced with stories big and small. We
should spend more time evaluating how we analyze and react to them.
Porsche’s Next Flagship Will Be an EV Crossover
-
Despite hardcore motorsport enthusiasts collectively proclaiming the 911 as
Porsche’s greatest model of all time, it’s presently being outsold by the
all...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
The Senator Vs. the C.I.A.
-
Last week, Senator Dianne Feinstein, the chair of the Senate Select
Committee on Intelligence, announced “grave concerns” that C.I.A. officers
had …
New Book: ESCAPING PATERNALISM
-
by Mario J. Rizzo and Glen Whitman Book description The burgeoning field of
behavioral economics has produced a new set of justifications for
paternalism. ...
Gaza: Journalism is a Capital Crime
-
The world is rightly outraged by Israel’s systematic extermination of much
of the Gaza press corps. Over 200
The post Gaza: Journalism is a Capital Crime...
Thomas Struth: Striving for the big picture
-
Review by Tim Connor
As a photography student at Kunstakademie *Düsseldorf* in the 1970s, Thomas
Struth learned to create big, highly detailed pictures wi...
Assorted on India
-
India’s growth in the 2000s: Four facts
The rupee: Frequently asked questions
Talk is cheap
Conclusion: there is precious little fundamental reason for...
Trading the Odds on Monday – June 15, 2009
-
Friday’s session looked like a playbook example concerning -form a
historical and statictical perspective- the most probable outcome based on
those setups ...
Notes on Chinese inflation
-
http://noelmaurer.typepad.com/aab/2010/01/i-have-your-chinese-consumer-price-inflation-right-here.html
I don’t see that much of a mystery. The primary way i...
Go On Till You Come to the End; Then Stop
-
Go On Till You Come to the End; Then Stop
ScienceBlogs is coming to an end. I don't know that there was ever a really
official announcement of this, but t...
Pakistan Update
-
This morning in Islamabad, UNHCR and other UN staff held a special ceremony
to pay homage to colleagues killed in the bombing of the Pearl Continental
Hote...
To Russia With Love
-
Conspiracy theories are dangerous things and should generally not be
believed. OTOH, if the most benign among the plausible interpretations is
not all th...
Ten Years Since the Biggest VIX Spike Ever
-
Ten years ago today, we witnessed that largest one-day VIX spike in the
nearly three decade history of the VIX. On that day, the VIX rallied from
a prior...
The Final Addiction
-
< A few statements from evolutionary biologists: “Immunization is also
making once-rare or non-existent genetic variants of pathogens more
prevalent …....
The US Treasury’s missed opportunity
-
The US Treasury recently published the first in a series of reports
designed to implement the seven core principles for regulating the US
financial system ...
We've Moved!
-
If you're reading this, it means you've been following the
http://georgewashington2.blogspot.com address. We switched over to
WordPress, and from now on...
-
This site remains available as an archive of my informal writings between
2007-2013. For those interested in current commentary, I now post a regular
weekl...
Trump Indictment # 4 - Georgia-Part One
-
Fulton County Georgia District Attorney Fani Willis spoke about the Georgia
Grand Jury Indictment issued yesterday. A review of the Indictment and my
thoug...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
Should losers from free trade be compensated?
-
It's been a while... far too long. Suffice to say that my day job has been
keeping me very busy this year and has made blogging difficult. I want to
rect...
Aging Might Not Be Inevitable
-
There are biological underpinnings to aging—and so researchers are
investigating cell manipulations, transfusions of young blood, and chemical
compounds th...
Good Chart Checklist
-
Note: this was prepared for my ECON 3403 students, and is a list of all of
the mistakes I commonly see in student charts. Please add your suggestions
for t...
Donald Trump’s Brand Takes a Haircut
-
The Donald Trump brand has been bruised so badly by the presidential
candidate’s controversial remarks on Mexican immigration that some
marketing and licen...
Please Use Zerohedge.org
-
As zerohedge.com is currently experiencing technical issues, please use the
following website for all the latest updates: www.zerohedge.org while we
resolv...
Politics=The art of the possible Political Theory=Theory of the good, just,etc. society. Political Economy=The art of the possible Economics=Theory of economic behavior
Political Parties are comprised of: 1) Policies 2) Interest Groups 3) Ideologies 4) Cultural views
Don's Hermeneutics: Like Rabbi Yishmael's Rules, Only Not
"Searle's Sagacity":
"If a person can't explain something simply, then they don't know what they're talking about. The only exception being Kant."
"Corollary to Searle's Sagacity":
"questions should be simple and comprehensible, and meant to elicit a simple explanation."
"Samuel Johnson's Dictum":
One thing about passing fifty years of age is that I now feel old enough to invoke what I call Samuel Johnson's Dictum. It is thus: If I invoke a view based on an author that I read in the past, and that view is not actually held by that author, I'm more than willing to claim the view as originating with me. The beauty of this Dictum is that it is self-referential. It is based upon my reading of Johnson and on Boswell, but I can't remember the actual references that led me to believe that Johnson believed something like this. In any case, I do.
"Burke's Principle":
Another of my motley list of nostrums is what I call Burke's Principle. Burke's Principle holds that there is a distinction between: 1) Political Theory: A theory of the perfect society, the good life, etc. Your general political philosophy. 2) Politics: The rather messy art of governing which involves dealing with what is possible on earth and compromising as the need arises.
"Burke's Rule": "All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter. "
"Burke's Paradox": "Mere parsimony is not economy. Expense, and great expense, may be an essential part in true economy."
"Burke's Prescience":
"You can never plan the future by the past.
Letter to a Member of the National Assembly (1791)"
"Burke's Wisdom":
"A very great part of the mischiefs that vex the world arises from words.
Letter to Richard Burke"
"Bagehot's Principles":
1) If the Fed exists, it will be the Lender Of Last resort, and that has to be taken in to account in real world Political Economy. It should lend freely in a crisis to solvent banks.
2) The rules for LOLR( from here on down this includes any government guarantee ) intervention should be clear, public, and followed, otherwise Moral Hazard is ineffective. All guarantees must be explicit.
3) The terms must be onerous.
4) The LOLR should get something valuable in return.
Here are a few others:
5) The taxpayer's interests should come first.
6) Moral Hazard needs to be constantly applied by quickly liquidating problem banks in normal times.
7) Any entity receiving a guarantee will have to be supervised or regulated effectively, and violations should be quickly and severely punished.
8) There is no doubt that any entity receiving a LOLR guarantee will need to be more conservative in its practices in order to limit the liability of the taxpayer.
9) There should be a class of financial concerns that can act more freely, but they should not receive LOLR guarantees. They will be strictly supervised or regulated though, and are subject to laws against fraud, etc."
"Who can forget the end of "Planet of the Apes" when Charlton Heston, kneeling before the half-buried remains of the Statue of Liberty, slams his fists into the sand and cries, "You maniacs! You blew it up! Ah, damn you ... damn you all to hell!"
Now imagine the same scene, but with a half-buried Morgan Stanley building standing in for Miss Liberty and a time-traveling Walter Bagehot playing the lead and you've got the perfect Hollywood dramatization of the real-life tragedy that, with luck, is having its denouement on Wall Street.
Bagehot? The great Victorian man of letters, best remembered today as the second and most celebrated editor of the British magazine The Economist, wasn't exactly a hunk. But he certainly could have delivered those futile last lines with real conviction, for he was among the first to recognize the vast destructive potential of that newfangled weapon of Victorian finance: the modern central bank.
Bagehot first alerted readers to this potential and offered his suggestions for containing it in an article that appeared in The Economist after the great panic and credit crisis of 1866. That panic witnessed the spectacular collapse of Overend, Gurney & Co., which had long been Great Britain's premier investment house.
Bagehot understood that, during such panics, the Bank of England alone commanded the confidence needed to serve other financial firms as a "lender of last resort." But as Bagehot put it later in his book "Lombard Street: A Description of the Money Market" (1873), the bank's "faltering way" -- its arbitrary and inconsistent use of its unique lending powers -- tended only to make things worse.
"The public," Bagehot wrote, "is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. ... And until we have on this point a clear understanding with the Bank of England, both our ability to avoid crises and our terror at crises will always be greater than they would otherwise be."
The ultimate source of trouble, Bagehot believed, was the very existence of the Bank of England and the special privileges it enjoyed. But because nothing save a revolution seemed likely to do away with the "Old Lady of Threadneedle Street," as it was called, Bagehot's preferred, practical solution was for the bank expressly to commit itself to lending freely during crises, though on good collateral only, and at "penalty" rates.
The restrictive provisions were supposed to limit aid to otherwise solvent firms panic had rendered illiquid.
Bagehot's recommendation has since become a sort of master precept of central banking -- albeit one that's mainly honored in the breach by central bankers.
To be fair to today's central bankers, there's never been much agreement on how to apply Bagehot's rule in practice. Just what do "good collateral" and "penalty rates" mean in times like these?
While no one might precisely be able to define good collateral -- and one can debate whether the rate at which banks offer to lend unsecured funds to other banks, known as the London Interbank Offered Rate, or LIBOR rate, plus 8 percent constitutes a "penalty" rate -- who even pretends that recent central bank lending has been based on good collateral?
But rescuing insolvent firms is the least of it. The real damage comes from the Treasury's utter lack of any consistent last-resort lending rule. The recently enacted financial institutions bailout bill does little to clarify this.
That's just the sort of thing that troubled Bagehot almost a century and a half ago, when central banks were still in their swaddling clothes. Yet central bankers and governments still don't get it, despite the lip service they pay to this great thinker from our past."
"The Unwisdom of Crowds Financial panics still require what Walter Bagehot prescribed--that practical men violate their own principles. by Christopher Caldwell 12/22/2008, Volume 014, Issue 14
Neither Barack Obama nor John McCain had much of value to say about the financial crisis as it raged through the headlines this fall. Rather than shred their campaign strategies, they played it safe, as most politicians would have. But in the name of justice we ought to recall that there was one candidate who did foresee our predicament with considerable accuracy when it still lay far in the future. Ron Paul, in almost every speech he made during the Republican primaries, spoke of bubbles, reckless credit growth, and the "unsustainability" of present policy. So why isn't there more demand for the common-sense solutions he put forward? Because common sense is not much use in a financial panic.
This was the great discovery of Walter Bagehot, the prolific 19th-century essayist and journalist, who was editor of the Economist from 1860 to 1877. (His name rhymes with gadget.) Ninety-nine percent of the time, common sense is a synonym for practicality. But in a serious banking crisis, doing the commonsensical thing--hunkering down and counting your pennies--has proved to be not practical at all. Bagehot's Lombard Street is an insider's look at the Bank of England, and at the principles on which political and financial leaders act when advanced economies come under pressure. Those principles are depressing in the extreme for anyone with an uncomplicated idea of how a democracy works. But they are effective. That is why, in the so-called Anglo-Saxon world, Bagehot's book still provides the bedrock of policy thinking during financial emergencies, including our present one.
Lombard Street was published in 1873, seven years after the sudden collapse of Overend, Gurney & Co., a bank that lost £11 million, spread panic among investors, sparked a run, and became "the model instance of all evil in business." The crisis made such a deep impression on British finance and government that the country did not have another bank run for 141 years--not until Northern Rock collapsed in the summer of 2007. (English investors must have longer memories than American ones. Most of our own noxious subprime mortgages were contracted, and the securities built on them concocted, after Enron became our own model instance of evil in 2001.) It was the Bank of England that took charge of averting panic, during the Overend, Gurney crisis and thereafter. It did so by injecting credit into the economy, by bailing people out. Bagehot approved of this. Many ordinary retailers could not pay their suppliers until they got the money for the things they sold. Without credit, they would be ruined, and the ruin would spread to those to whom they owed money. This was not a question of moral failing, it was just the way a modern economy worked.
But the modern economic system interacts with the modern political system--democracy--in a rather uncomfortable way. Indeed, at more than one juncture in Lombard Street, Bagehot framed the problem of booms and busts as part of the "increasingly democratic structure of English commerce." People in a democracy are most comfortable when their institutions do the same things that they would do as individuals. In a crisis, banks--like everyone else--reflexively hoard their money. But a central bank must do the opposite. It must lend freely.
This was the most basic affront to common sense that the Bank of England presented, but it was not the worst. The worst was that the bank could carry out its necessary duties as a lender of last resort only by breaking the law. The basis of the bank's operating procedure--and of its soundness--was the Bank Act of 1844. We would call it a regime of sound money. It included stringent caps on the ratio of notes issued to reserves held. These caps were hewed to when the economy was running smoothly. Yet at the time Bagehot was writing, a quarter century later, the law had already been suspended three times. Not just that. "No similar occasion has ever yet occurred," Bagehot wrote, "in which it has not been suspended." So the law on which the solvency of the British nation rested was ironclad, except when someone felt a need to break it.
Stranger still, never did the Bank of England acknowledge its duty as the lender of last resort. Some of its governors even denied that any such duty existed. Bagehot thought the bank should come clean about what it really was:
There should be a clear understanding between the Bank and the public that, since the Bank hold our ultimate banking reserve, they will recognise and act on the obligations which this implies--that they will replenish [the reserve] in time of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.
But there was a reason for the central bankers' dissembling. If the bank ever acknowledged a duty to rescue banks by generous extensions of credit, it would create a form of moral hazard. Thomson Hankey, a Bank of England director whom Bagehot much admired (and to whom the financial writer James Grant devotes an admiring essay in his new book Mr. Market Miscalculates), called Bagehot's lender-of-last-resort views "the most mischievous doctrine ever broached in the monetary or banking world in this country."
In practice, Bagehot was right and Hankey was wrong. The bank was beyond question the lender of last resort. In principle, Hankey was right and Bagehot was wrong. Unless there was a real, credible threat that a bank would be allowed to fail, the guarantee of rescue would simply get priced into any financial bubble that developed, making things worse when the bubble popped. The situation required what we would now call "strategic ambiguity"--both Hankey's doctrine and Bagehot's practice, which contradicts it.
The situation today requires the same mix. Central banking is thus often a high-stakes game of chicken. And sometimes, when banks enter the game insufficiently scared, it will be played out to the end. It certainly was in September when the U.S. Treasury terrified the financial world by not coming to the rescue of Lehman Brothers. This was a catastrophe in terms of Bagehot's practice, but it will produce benefits in terms of Hankey's principle. It will discourage people from paying more than is reasonable for assets on the belief that they come equipped with an insurance policy (the promise of a central bank rescue) that has been underwritten by taxpayers. The Republicans who nearly derailed the Treasury's Troubled Assets Relief Program in September played a similar role.
A final problem is that there are limits to how accountable a central bank can be. Everyone is always hollering for clear rules and transparency. But a dirty secret of regulation is that it frequently influences conduct most effectively when it is capricious and opaque. Any regulatory system will reveal its vulnerabilities over long use. If it addresses economic problems in a predictable way, savvy investors will find a way to "game" that predictability. You can draw an analogy with antidepressant drugs. There is no permanent right match of medication for a depressive. Antidepressants work only until the mind (or is it the brain?) finds a way around them, at which point a new, unfamiliar drug must be substituted. In the same way, no matter how good the content of a regulatory regime, it must change periodically if big market players are to be kept from profiting off it.
As Bagehot outlined his system, he was conscious that the practical realities of banking required him to heap paradox upon paradox. There is a hint of both Andrew Jackson and Thomas Aquinas in the way he referred to central banking as an "unnatural" thing in its very conception. "The business of banking ought to be simple," he wrote. "If it is hard it is wrong." If it is hard, the banker is either delegating poorly or has entangled his institution in complex transactions where it has no business. According to Bagehot, "Adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking."
Centralizing a society's cash reserves is complicated, reckless, and artificial:
A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. A monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without. . . . The natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it.
In his ideas of company size, Bagehot harkened back to the 18th century rather than ahead to our own. To modern eyes, Bagehot is, as a factual matter, simply wrong. The natural tendency under free-market conditions is towards consolidation, and even monopoly. If you want small firms, you must protect them through government--whether this means Teddy Roosevelt-ian trust-busting, French-style subsidies to tobacconists, the EU's hounding of Microsoft, or the NIMBY anti-Wal-Mart campaigns aimed at preserving Mom-and-Pop stores. Bagehot sometimes contradicted himself on this point, noting also that "a large bank always tends to become larger, and a small one tends to become smaller," but his application of the word unnatural to a large central bank was frequent and must be taken as his settled view. It is curious that Bagehot, a contemporary of Marx, came to the opposite (and false) conclusion about how firms evolve.
Where Bagehot would agree with Marx is in his belief that there is something predictably destabilizing about modern economies. You don't need banks to have a precarious economy, or one liable to speculation--Bagehot noted that there were no banks, as we would understand them, in 1720, at the time of the South Sea Bubble and the Mississippi Scheme. But modern banking is precarious by design. "In exact proportion to the power of this system is its delicacy," he wrote. "I should hardly say too much if I said its danger." The power, delicacy, and danger all have the same source. In fact they are just different names for the same thing: leverage.
At the very opening of the book, Bagehot illustrates with exquisite simplicity how, at least in a boom economy, traders on margin can "harass and press upon, if they do not eradicate, the old capitalist." The old capitalist in question is the poor sap who believes all this stuff about neither-a-borrower-nor-a-lender-be and is foolish enough to be using his own cash:
If a merchant have £50,000 all his own, to gain 10 per cent on it he must make £5,000 a year, and must charge for his goods accordingly; but if another has only £10,000, and borrows £40,000 by discounts (no extreme instance in our modern trade), he has the same capital of £50,000 to use, and can sell much cheaper. If the rate at which he borrows be 5 per cent, he will have to pay £2,000 a year; and if, like the old trader, he make £5,000 a year, he will still, after paying his interest, obtain £3,000 a year, or 30 per cent, on his own £10,000. As most merchants are content with much less than 30 per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market.
Later, Bagehot showed that this need for leverage is no different for those selling money than it is for those selling dry goods. The banker can no more choose not to lend than the merchant can choose not to borrow:
The bill-broker has, in one shape or other, to pay interest on every sixpence left with him, and that constant habit of giving interest has this grave consequence: the bill-broker cannot afford to keep much money unemployed. He has become a banker owing large sums which he may be called on to repay, but he cannot hold as much as an ordinary banker, or nearly as much, of such sums in cash, because the loss of interest would ruin him.
In finance, once you can have leverage, you must have leverage. Once you have some leverage, getting more of it than your competitors is a matter of survival. And when governments and central banks debate whether to loosen or tighten up money, they face a constant clamor from the financial world to permit more leverage still. That is why, even in democracies, the instruments of monetary policy tend to be kept far from the influence of voters, and even hidden from view. Otherwise, credit tends to spiral. Bubbles result.
Nothing could be more foolish than to assume that this process of spiraling speculation is unleashed by "greed," unless by greed you mean human nature. Credit spirals are a darker aspect of the world Adam Smith described in The Wealth of Nations and Bernard de Mandeville did in the Fable of the Bees. Just as society can be improved by the uncoordinated action of the selfishly motivated, an economy can collapse for reasons having nothing to do with anybody's cupidity.
We should be moral in the way we think about money, but a credit system tends to make a mess of moral accounting. Bagehot described London's financial district as "a sort of standing broker between quiet saving districts of the country and the active employing districts." Decent, puritanical Suffolk farmers want to put their money in a safe place; Lancashire entrepreneurs want money to put to work. Thanks to London bankers, both can follow their wishes and make a profit in the process. We have an idea that the Suffolk dairyman is the "moral" party here (he's saving) and the Lancashire speculator the "immoral" one (he's gambling). But, once a banking system intervenes, they are both gambling and they are both saving. In good times you are welcome to mouth the folkloric cliché that holds farmers to be better people than financiers. When depression looms, you had better realize that the rain falls on the just and the unjust.
Many Americans who have wound up underwater on their houses and maxed out on their credit cards are greedy, climbing, brand-intoxicated, materialistic shopaholics who thought the world owed them a living. But just as many of them are not. They are trapped, as surely as financial institutions are, in a system based on wild borrowing. Participation in this system is not exactly required, but it is not exactly optional, either. One's quality of life is determined not just by one's purchasing power but also by one's relative economicstanding. Chagrin at seeing one's neighbors get richer faster may be a sign of bad character, but do not for a minute assume there is nothing to feel chagrin about! When it comes to the very goods people deem most essential--the proper mate; the schooling of one's children; the size, location, elegance, and comfort of one's house--relative standing is more important than absolute wealth.
Those who kept their money in savings banks in the 1990s lost out to those who did things we are supposed to disapprove of, like "spending money they didn't have," borrowing profligately to invest in stocks and even bonds, which appreciated at an average of 15 percent a year over the decade. Among rich people, how one entered the present decade had more to do with how one had done in the stock market than with how one had done in the labor market. Is that just? Of course it's not! It's easy to see now. But while the boom was going on there was all sorts of rationalizing about why it was okay that the social hierarchy should be reordered through stock and housing speculation. One line of argument was that people who did not have a ton of money in stocks, as well as those who rented rather than bought the houses they lived in, were foolish. This line of argument peaked at the turn of the decade, when Americans elected a president who had argued that the public was foolish for not launching its retirement savings onto the open seas of the stock market.
Bagehot saw that a speculative mania eventually sweeps up everyone in its path. "Every great crisis reveals the excessive speculations of many houses which no one before suspected," he wrote, "and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever." Avaricious people get hurt, but it is in the nature of crashes that they are not the ones who get hurt most. A tragic figure present in almost every historic account of speculation and collapse in history is the person who believed, year after year, that the boom was an illusion, and held himself aloof until, at the very last minute, whether out of self-doubt or deference to the opinions of his fellow man, he entered the fray and was (having bought at the top, rather than the bottom, of the market) wiped out. What a wicked irony! His punishment is as much for his long and wise forbearance as for his momentary weakness.
So the "cultural contradictions of capitalism" run deeper than we thought. The classic idea, as laid out in their different ways by the economist Joseph Schumpeter and the sociologist Daniel Bell, is that capitalism rewards diligence; diligence produces wealth; wealth begets idleness; and idleness undermines capitalism. But when, as now, push comes to shove, we can ask whether there is really anything particularly capitalist about the virtues of diligence and self-restraint. The real capitalist virtues appear to be optimism and luck. From a central-banking perspective, the cultural contradictions are not results of capitalism but elements of it.
The problem with central banking is that it reacts to a system that has been mismanaged by rewarding the managers. That is why objections to central banking, although they can come from the right (Ron Paul, Jim Bunning) or the left (Barney Frank, William Greider), tend to be populist. Bagehot was no populist. He was comfortable with the idea that what some people think should be more important than what other people think:
Almost all directors who bring special information labor under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the Bank. But you must not on this account seal up the Bank hermetically against living information.
Although he would surely fault Treasury Secretary Hank Paulson for many things, the criticism most often heard at present--that Paulson is too close to former colleagues on Wall Street, where he worked for years as CEO of Goldman Sachs--would strike Bagehot as misplaced.
Because it is on Wall Street, alas, that "the state of credit" is to be determined:
The state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry. And in the same way, nothing but experience can tell us what amount of "reserve" will create a diffused confidence.
To be blunt, credit is successfully reestablished when financial elites say, "When." Credit is close to a synonym for the mood of the ruling class. To say an economy is based on credit is to say it is based on animal mysteries. Glamour, prestige, élan, sprezzatura, cutting a figure . . . that is what the economy is made of. It is a rather terrifying thought. Viewed as Bagehot viewed it, from the perspective of a central bank in a crisis, an advanced economy looks an awful lot like a primitive economy."
"Loyal readers, please take a moment to check out Gretchen Morgenson’s column this week. She’s taken a close look at the buyout of Bear Stearns organized by the Federal Reserve, and she has come to an intriguing conclusion: that the Fed not only wanted to prevent financial havoc - it also wanted to deter speculators who were betting on big banks to fail.
Adherents of the Walter Bagehot school of central banking - and I have been among them at times - have cried foul at the sight of big bailouts and the granting of emergency credit at low interest rates. The Bagehot argument is that emergencies that arise from the risks that banks have chosen to take should not be treated with overwhelming sympathy. Emergency credit should be offered, yes, but at rates that will make banks think twice about using the safety net again. That’s not the case this time around (neither in the United States nor in Britain, and probably not in Europe either by the time the folks in Brussels are finished), so the central banks may be telling financial institutions that they can take silly risks without fear of disaster.
But if Morgenson is right, there is a long-term purpose here, too: to reduce the winnings of those who bet on failure, and thus to reduce the incentives to bring that failure to pass. And let’s face it, the speculators aren’t operating in a vacuum; their bets can start to snowball with market sentiment, as they did against Lehman Brothers last week. Still, the Bagehot argument (often called moral hazard) is also a powerful one - which one do you agree with?"
"In his 1873 book “Lombard Street,” the closest thing to a user’s guide to central banking, Walter Bagehot criticized the Bank of England’s handling of earlier panics by responding “hesitatingly, reluctantly, and with misgiving.”
Federal Reserve Chairman Ben Bernanke, who has read his Bagehot and kept a copy in his Princeton office when he was a professor, responded to recent developments first by pumping money into the markets through the New York Fed’s open-market operations and then last week by easing the terms on loans to banks from the Fed’s discount window.
Bagehot (pictured at right) still makes for good reading at times like this.
“What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. If people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued.”
Robert Feldman, Morgan Stanley’s chief economist for Japan, writes in a note today that it’s key to distinguish between internal discredit — private domestic lenders retreating — and external discredit, which Bagehot defined as a foreign drain on a bank’s money. (Bagehot’s solution to the problem of external discredit is to still lend freely but “at very high rates.”) That doesn’t apply in today’s floating rate system, Feldman says, and exchange rates don’t provide a good substitute, with the dollar’s drop against the yen suggesting we have external discredit while the strengthening against the euro saying we don’t.
Feldman writes: “My view is that the modern counterpart of ‘external discredit’ is moral hazard. The credit of the U.S. IS a problem, since no one knows how big the subprime and related housing market problems really are. Given how poorly banks know their clients, the ‘high rates’ part should come into play. There is no way to re-establish confidence unless those who have made loans to questionable borrowers pay a price for rash lending. Only then will markets regain confidence that risk is under control.
“The next stage of the credit problem — and whether it affects the real economy seriously — depend on eliminating the moral hazard,” Feldman says. “The faster the moral hazard in eliminated, the less impact on the real economy.”
Fed officials are acutely aware of the moral hazard, having resisted action for weeks to not be seen as bailing out risky investments. But they also don’t want a crisis to feed on itself. The Fed stressed its statement, in lowering the discount rate for banks, that it would accept “a broad range of collateral…including home mortgages and related assets.” The central bank sought to reassure a market that had been roiled by risky investments in subprime mortgages.
That’s how the Bank of England halted a panic in 1825, as Bagehot recounts: “A panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. ‘We lent it,’ said Mr. Harman, on behalf of the Bank of England, ‘by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power.’ After a day or two of this treatment, the entire panic subsided, and the ‘City’ was quite calm.”
"Bagehot advocated in 1873 that a Lender of Last Resort in a crisis should lend at a penalty rate to solvent but illiquid banks that have adequate collateral. The doctrine has been criticised as having no place in our modern interbank market, but this is wrong. Bagehot’s prescription aims to eliminate the coordination problem of investors at the base of the crisis. It is still a useful guide for action when the interbank market stalls.1 It makes clear that discount-window lending to entities in need may be necessary in a crisis.
Bagehot's doctrine, however, is easy to state and hard to apply. It requires the central bank to distinguish between institutions that are insolvent and those that are merely illiquid. It also requires them to assess the collateral offered. Central banks, because of information limitations, are bound to make mistakes, losing face and money in the process. This doesn’t mean they should not try. Poor collateral versus massive liquidity
The collateral should be valued under “normal circumstances”, that is, in a situation where the coordination failure of investors does not occur. This involves a judgment call in which the central bank values the illiquid assets. A central bank that only takes high quality collateral will be safe, but will have to inject much more liquidity and/or set lower interest rates to stabilise the market. This may fuel future speculative behavior. Some of this may have happened in the Greenspan era, in the aftermath of the crisis in Russia and LTCM, and after the crash of the technological bubble. The ECB and the Federal Reserve have accepted now partially illiquid collateral that the market would not. This seems appropriate and releases pressure to lower interest rates to solve the problem, something that should be done only if there are signs of deterioration in the real economy. The problem is that central banks are extending the lender of last resort facility outside the realm of traditional banks to entities, like Bear Stearns, that they do not supervise and, therefore, over which they do not have first hand information. How does the Fed know whether Bear Stearns or other similar institutions are solvent? It seems that the Fed is not following Bagehot’s doctrine here.
Finally, if banks and investors are bailed out now, why should they be careful next time? This is the moral hazard problem: help to the market that is optimal once the crisis starts has perverse effects in the incentives of market players at the investment stage. The issue is that only when the moral hazard problem is moderate does it pay to eliminate completely the coordination failure of investors with central bank help. When the moral hazard problem is severe, a certain degree of coordination failure of investors - that is, allowing some crises - is optimal to maintain discipline when investing and, amending Bagehot, some barely solvent institutions should not be helped."
http://www.house.gov/jec/imf/blueprnt.htm
"This goal is not new. In fact, it underlay Walter Bagehot's (1873) classic policy prescriptions for domestic central banking: to lend freely at a penalty rate on good collateral. Bagehot argued an elastic and immediate supply of liquidity was essential to an effectively structured lender of last resort, and that appropriate loss sharing rules in the form of collateral requirements and penalty interest rates would discourage abuse of the safety net."
"By slashing interest rates too much in 2007-2008, the Fed has accentuated the foreign drain and thus made the alleviation of the domestic drain more difficult. Yet, despite this mistake, Bagehot would approve of other actions the Fed has taken to deal with the domestic drain by unblocking specific impacted domestic markets. These include (1) swapping Treasury bonds for less safe private bonds, (2) opening its discount window to shaky borrowers, and (3) maybe even rescuing Bear Sterns. He would also approve of the relaxation of capital constraints on Fannie Mae, Freddy Mac and so on, for mortgage lending. Yet these measures will be insufficient if the foreign drain continues.
To repeat Bagehot's Rule: "very large (domestic) loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain." The Fed, and the U.S. government more generally, have so far got it only half right."
"More than a century ago, a British economic journalist, Walter Bagehot, set out the classical principles for a central bank acting as lender of last resort: lend freely in a crisis at a penalty rate against collateral. Adapted to international lending, Bagehot's rule is the proper rule for a restructured, more effective IMF."
The market maker of last resort function can be fulfilled in two ways. First, the central bank can make outright purchases and sales of a wider range of securities than they currently do. Second, central banks can accept a wider range of securities as collateral in repos, and in collateralised loans and advances at the discount window than they currently do. Following Bagehot’s rule, the MMLR should buy these securities outright or accept them as collateral only on terms that would imply a stiff financial penalty to the owner.The central bank of course already applies a liquidity ‘haircut’ even to liquid instruments offered as collateral in repos or at the discount window.Because the MMLR would have to establish a buying price ‘in the dark’, that is, unaided by recent relevant market prices, and would inevitably take on much more credit risk than central banks have become accustomed to, the ‘haircuts’ should be severe – a financial version of ‘short back and sides’.
"Further crises in 1857 and 1866 prompted the debate between Bagehot and Thomson Hankey, a director and former governor of the Bank of England. Notwithstanding the Bank’s undoubted responsibility, as trustee of the nation’s reserve, to support the financial markets, Bagehot wrote: If we ask how the Bank of England has discharged this great responsibility, we shall be struck by three things: first, . . . the Bank has never by any corporate act or authorised utterance acknowledged the duty, and some of its directors deny it; second, (what is even more remarkable), no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank; that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the London and Westminster Bank or the Union Bank manages. (1873, 153–54) Although the Bank usually in the end supplied the market, its “faltering way” caused needless uncertainty and more severe panics than if it communicated clearly that it could be counted on (Bagehot 1873, 64). According to Bagehot, the rules— to lend freely at penalty rates on sound collateral—under which assistance would be provided should be stated also. The public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. The best palliative to a panic is a confidence in the adequate amount of the Bank reserve, and in the efficient use of that reserve. And until we have on this point a clear understanding with the Bank of England, both our liability to crises and our terror at crises will always be greater than they would otherwise be. (1873, 196–97)"
One which doesn't quite:
http://www.portfolio.com/views/blogs/market-movers/2008/05/13/bernanke-on-bagehot?rss=true "Bernanke on Bagehot
I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
"So, we have, what I will call "Grant's Graham For Investing":
1) Decent Size
2) Current Assets Exceed Liabilities By Two Times
3) 10 Continuous Years Of Profit
4) 20 Continuous Years Of Dividends
5) 10 Years Of Earnings Growth Exceeding 33%
6) Price To Earnings Ratio Less Than 15
7 ) Price To Book Ratio Less Than 1.5"
"Cake As Gift Theory":
Now, I feel similarly about government incentives. When Fannie and Freddie tempted investors, this led to the housing bubble. I think that I'm going to call this the Cake As Gift Theory. I hand you a cake assuming that you have the good sense to eat it over time, and you gorge yourself and eat it at one sitting and get sick. Clearly I'm responsible for this by handing you the cake. Give you a gift or incentive, clearly I must assume that it will cause you to be irrational.
"Spigot Theory":
One other pet theory I have about finance, besides Bagehot's Principle, is the Spigot Theory. I might rename it. It applies to the low rate of interest or the sloshing pool of money explanations for the current crisis. Turn the tap too far, then you can't stop the tub from overflowing, even if you're a human agent standing right next to the tub. I call this a mechanistic explanation as opposed to an explanation based on human agency.
"The Pragmatic Milton Friedman Principle":
The Pragmatic Milton Friedman Principle. Friedman introduced a concept called the Negative Income Tax. He proposed it saying that it was a pragmatic compromise between the Welfare State and a basic libertarian position.
"Hardy's Harangue": To Me:
"There is no scorn more profound, or on the whole more justifiable, than that of the men who make for the men who explain. Exposition, criticism, appreciation, is work for second-rate minds. "
"Titchmarsh's Two Truths":
1)"Perhaps we could regard numbers as a sort of medium of exchange, like money. Most people are really interested in the goods and services which the world offers, and to them money is only a symbol for these. But it is not a meaningless symbol. A system of barter, in which we do without money and merely exchange goods, would be very inconvenient, and practically impossible in a complicated society. So a system in which we reduce all mathematics to statements such as "I have more fingers than you have noses" would be too cumbrous to contemplate seriously. Numbers are symbols, and very useful and interesting ones. To mathematicians who work with them every day they acquire a reality at least equal to that of anything else. "
2) "The question what numbers are has been much debated by philosophers, and they do not seem to have reached any agreement about it. There is nothing particularly surprising or distressing about this. It has been said that mathematicians are happy only when they agree, and philosophers only when they disagree. Philosophic doubts about the nature of number have never prevented mathematicians from getting on with their calculations, or from agreeing when they have got the right answer. So perhaps the situation is satisfactory to all parties. "
"Thoreau's Truth":About Government: "I heartily accept the motto, "That government is best which governs least"; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe--"That government is best which governs not at all"; and when men are prepared for it, that will be the kind of government which they will have. Government is at best but an expedient; but most governments are usually, and all governments are sometimes, inexpedient."
"Will's Warning": Concerning The Use Of "Socialism": Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.
"Kling's Principle":About Regulated Banks And Unregulated Financial Entities "The banks seem to find a way to take risks, and the unregulated folks seem to find a way to get guarantees."
"Janeway's Dictum": On Political Economy "Political economy is not a science, it's a clinical art, like medicine."
"Cowen's Creed": On Policies
"YOU CAN’T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake."
"Hendry's Heartfelt":
"I antagonise people,' says Hugh Hendry. 'It's part of my skill set."
"Diebel's Dare:
"You can’t be forced out further on the yield curve than a perpetual.”
"Peston's Promise": Good Until ...
"And, as I've been pointing out for some time, we are being asked to provide life support to a swathe of the real economy, from steel makers to car manufacturers.
The Government will succumb and will lend taxpayers' money to non-financial companies.
In a way, there's no choice, because we'll be hobbled for years as an economy if our few remaining manufacturers and exporters are wiped out."
"Trader's Narrative's Due Diligence":
"The process of investigation undertaken by an party to gather material information on actual or potential risks involved in a financial transaction or relationship."
My Favorite Dish: A Ritz Salad Apples, grapefruit and potatoes in a mayonnaise sauce. Delicious!
Favorite Writer: Claud Langham
Best Philosophical Analysis Ever: "You would not enjoy Nietzsche, sir. He is fundamentally unsound."
The Quotes Above
W. Bagehot, R.W. Emerson, M. Proust, W.H. Auden, W. Bagehot, P.Levine
Read J.L. Austin "A Plea For Excuses" here:
http://www.ditext.com/austin/plea.html
Read " Reflections on the Revolution in France by Edmund Burke 1790" here:
Read Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002Deflation: Making Sure "It" Doesn't Happen Here"
You who live secure In your warm houses Who return at evening to find Hot food and friendly faces:
Consider whether this is a man, Who labours in the mud Who knows no peace Who fights for a crust of bread Who dies at a yes or a no. Consider whether this is a woman, Without hair or name With no more strength to remember Eyes empty and womb cold As a frog in winter.
Consider that this has been: I commend these words to you. Engrave them on your hearts When you are in your house, when you walk on your way, When you go to bed, when you rise. Repeat them to your children. Or may your house crumble, Disease render you powerless, Your offspring avert their faces from you.
Translated by Ruth Feldman And Brian Swann
For me, being a Jew means feeling the tragedy of yesterday as an inner oppression. On my left forearm I bear the Auschwitz number; it reads more briefly than the Pentateuch or the Talmud and yet provides more thorough information. It is also more binding than basic formulas of Jewish existence. If to myself and the world, including the religious and nationally minded Jews, who do not regard me as one of their own, I say: I am a Jew, then I mean by that those realities and possibilities that are summed up in the Auschwitz number.
– Jean Améry, At the Mind's Limits, p. 94
Style is not something applied. It is something that permeates. It is of the nature of that in which it is found, whether the poem, the manner of a god, the bearing of a man. It is not a dress. W. Stevens
Man can embody truth but he cannot know it. W.B. Yeats
Do you approve of violence, Miss Boon? Nor do I. It reeks of spontaneity C. Langham
J.L. Austin
'there is no simple and handy appendage of a word called "the meaning of the word (x)"'
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method
L. Wittgenstein
94. But I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
95. The propositions describing this world-picture might be part of a kind of mythology. And their role is like that of rules of a game; and the game can be learned purely practically, without learning any explicit rules.
96. It might be imagined that some propositions, of the form of empirical propositions, were hardened and functioned as channels for such empirical propositions as were not hardened but fluid; and that this relation altered with time, in that fluid propositions hardened, and hard ones became fluid.
97. The mythology may change back into a state of flux, the river-bed of thoughts may shift. But I distinguish between the movement of the waters on the river-bed and the shift of the bed itself; though there is not a sharp division of the one from the other.
98. But if someone were to say "So logic too is an empirical science" he would be wrong. Yet this is right: the same proposition may get treated at one time as something to test by experience, at another as a rule of testing.
99. And the bank of that river consists partly of hard rock, subject to no alteration or only to an imperceptible one, partly of sand, which now in one place now in another gets washed away, or deposited.
100. The truths which Moore says he knows, are such as, roughly speaking, all of us know, if he knows them.
L. Wittgenstein On Certainty Go here To Read http://budni.by.ru/oncertainty.html
From "The Snowfall" by D. Justice
The landmarks are gone. Nevertheless
There is something familiar about
this country.
Slowly now we begin to recall
The terrible whispers of our elders
Falling softly about our ears
In childhood, never believed till now.
Jackson's Rules Of The Road
I'm going to be a happy idiot And struggle for the legal tender Where the ads take aim and lay their claim To the heart and the soul of the spender And believe in whatever may lie In those things that money can buy Thought true love could have been a contender Are you there? Say a prayer for the pretender Who started out so young and strong Only to surrender
Gotta do what you can just to keep your love alive Trying not to confuse it with what you do to survive
And in the end they traded their tired wings For the resignation that living brings And exchanged loves bright and fragile glow For the glitter and the rouge And in the moment they were swept before the deluge
Don't confront me with my failures I had not forgotten them
But its a long way that I have come Across the sand to find you here among these people in the sun Where your children will be born You'll watch them as they run Oh its so far the other way my life has gone
I caught a ride into the city every chance I got I wasn't sure there was a name for the life I sought Now I'm a long way gone down the life I got I don't know how I believed some of the things I thought
Rock me on the water Sister will you soothe my fevered brow Rock me on the water, maybe Ill remember Maybe Ill remember how Rock me on the water The wind is with me now So rock me on the water Ill get down to the sea somehow
But you said "morocco" and you made me smile And it hasn't been that easy for a long, long while And looking back into your eyes I saw them really shine Giving me a taste of something fine Something fine
"In camp too, a man might draw the attention of a comrade working next to him to a nice view of the setting sun shining through the tall trees of the Bavarian woods (as in the famous water color by Dürer), the same woods in which we had built an enormous, hidden munitions plant.One evening, when we were already resting on the floor of our hut, dead tired, soup bowls in hand, a fellow prisoner rushed in and asked us to run out to the assembly grounds and see the wonderful sunset.Standing outside we saw sinister clouds glowing in the west and the whole sky alive with clouds of ever-changing shapes and colors, from steel blue to blood red.The desolate grey mud huts provided a sharp contrast, while the puddles on the muddy ground reflected the glowing sky.Then, after minutes of moving silence, one prisoner said to another, 'How beautiful the world could be!'
Groucho Marx to S J Perelman: “From the moment I picked up your book until I put it down, I was convulsed with laughter. Some day I intend reading it.”
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I think that this explains Bernstein’s departure: From Clusterstock:
http://www.businessinsider.com/bofas-bernstein-calls-for-his-own-eventual-layoff-2009-2#comment-49939b104b5437310048fe68
BofA’s Bernstein Calls For His Own Eventual Layoff (BAC)
Dan Colarusso
So let us get this straight. Bank of America stock strategist Rich Bernstein says the Federal government’s bank rescue plan won’t work and that Washington should let the failing ones…well….fail.
That may cause some teeth-gnashing by his boss, Ken Lewis. As Bernstein’s note hit the wires, his corporate master was testifying about his own Girl Scout cookie sales and work with Mother Teresa (at least that’s how our new hero, Rep. Michael Capuano parsed it). Bernstein said the government should increase deposit insurance, seize assets, shut “large” banks and encourage takeovers.
His note also said:
“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable. The latest Treasury program is simply another attempt to stymie the consolidation process.”
— Posted by Don the libertarian Democrat