So instead of a shift away from risk-free assets, we may be seeing a shift between different classes of risk free assets.

TO BE NOTED: From Clusterstock:

"Why The Shift Away From Treasuries May Not Mean What You Think It Does

John Carney|Jun. 10, 2009, 1:27 PM|11

Print

Tags: Economy, Interest Rates, Wall Street, Debt, U.S. Government, Federal Reserve

The debate over what the rise in the Treasury bond yield tells us about the economy is hobbled by the fact that too many of those looking for signals from the credit markets have not fully digested the effect of the implicit guarantee of financial corporate debt.

Here’s the problem. Ordinarily, a shift of assets away from Treasury bonds toward privately-issued bonds signals a growing appetite for risk and yield, which might indicate either inflation fears or hopes or economic recovery. But the huge shift we’re seeing now (see the chart below, and Northern Trust economist Paul Kasriel’s analysis this morning) might signal something else entirely: that the market is pricing in the implicit government guarantee of the debt of financial companies. So instead of a shift away from risk-free assets, we may be seeing a shift between different classes of risk free assets.

This isn’t just a theoretic possibility. It’s something that is actually on the minds of asset managers. As early as January, asset manager Eric Roseman was advocating purchasing the corporate bonds of financial companies on this very basis.

“Even the largest financial services companies or banks are now backstopped by the federal government,” Roseman wrote. “Spreads on these bonds are even wider than non-financial corporate debt and have the implicit guarantee of Uncle Sam since October.”

With this is mind, at least part of Kasriel’s chart can be seen not as an indicator of the growth of risk appetite but as the narrowing of the spread between Treasury bonds and implicitly backed government debt. (In a follow-up post, we'll explain how the implicit guarantee of financial companies may also be corrupting the signals from the broader corporate debt market and the stock market as well.) To put it differently, the market now views all large, complex financial companies as it once viewed Fannie Mae and Freddie Mac.

Me:

Don the libertarian Democrat (URL) said:

Jun. 10, 5:36 PM

"pricing in the implicit government guarantee of the debt of financial companies"

Going back to our debate about Lehman, this is what investors were counting on. Lehman and WaMu frightened investors that these implicit guarantees weren't real. Since then, the govt has been fighting to make these implicit guarantees believable. You're now arguing that they've done that.

older workers going into early retirement at alarming rates -- helping to suck down pension funds down earlier than previously anticipated

TO BE NOTED: From Clusterstock:

"Aging Workers Stage A Run On Their Pensions

Joe Weisenthal|May. 29, 2009, 3:40 PM|6

Print

Tags: Economy, Investing, Unemployment

Have you heard the one about Continental Airlines (CAL) suing some of its own pilots for faking their divorce?

Yeah, it's a good one. It seems 9 pilots lied about getting divorced in order to take advantage of a loophole that allows them access to their retirement pension before they, well, retired. The company got suspicious when it realized that many of the couples were still living together and in some cases got remarried (Not that all this doesn't happen in a legitimate divorce).

But then, given the nervousness surrounding pensions these days, who wouldn't want to jump ahead in line and get access to the cookie jar? Let those who play by the rules wait around watch their pension assets wind up in court.

This dovetails with another story about older workers going into early retirement at alarming rates -- helping to suck down pension funds down earlier than previously anticipated. It's a combination of being laid off and general frustration.

Stories go like this.

LA Times: For Herman Hilton, 66, of Jacksonville, Fla., a lean 6-foot-2 electrician with a bushy gray beard, the decision to lay down his pliers and screwdriver was born of frustration.

For at least the last 10 years, as he wired new buildings, he was looking toward retiring as soon as he hit 66 and qualified for full benefits. And last fall, like millions of other older workers, Hilton put his "golden years" plan on hold when his 401(k) lost more than a third of its value.

Then last month, his life took another unwelcome turn: Hilton's foreman pulled him aside to tell him that he was being laid off. For several weeks, Hilton collected unemployment insurance. But he soon decided to call it quits and file for Social Security.

Once again, you have to ask, why wait around for your benefits? Who knows what could go happen. The US could go broke or do some kind of "default" on Social Security, so it can keep paying China. Yeah, you might not get full benefits for retiring early, but money is money, and with the future of these systems so uncertain, both early retirement and faked divorce may be a good idea."

no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions

TO BE NOTED: From Clusterstock: The photo, of course:

"California Won't Go Broke, Says Merrill Analyst

John Carney|May. 13, 2009, 9:52 AM|11

Print

Tags: Economy, Debt, Politics, U.S. Government, Housing Crisis, Investing

Fears of an imminent default on debt issued by California may be overstated, according to a Merrill Lynch analysts. The state is unlikely to run out of cash and go broke, Merrill muni strategist Phillip Fischer said in a note on May 11th.

Shifted fiscal allocations and delayed spending will help, as will a patchword of federal aid, according to Fischer. Bond prices are begining to reflect a renewed confidence, with yeilds shriking. Bloomberg has been tracking the extra yield that California must offer bond investors on 10 year bonds, compared with top-rated municipal issuers. The spread has narrowed to 121 basis points from 132 basis points on April 3.

We'd say that the market is probably also pricing in the possibility that Barney Frank will get his way and we'll have a federal backstop of muni debt soon enough. Even without a formal backstop, we think it's unlikely that the Obama administration and a Democrat controlled Capitol Hill would not attempt to prevent a California default.

It's another way that we've broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.

You can’t make a borderline-solvent bank healthy by increasing its liabilities, only by decreasing them

From Reuters:

"Felix Salmon

a good kind of contagious

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May 4th, 2009

Wrong blogs are better than bad journalism

Post a comment (1)

Posted by: Felix Salmon

Tags: blogonomics, journalism

In traditional journalism, you publish what you know for sure as quickly as you can while being assiduous about maintaining accuracy at all times. In financial markets, traders run with rumors and gut feelings and outright guesses on a regular basis, on the basis that they’ll change their mind (or, more to the point, their position) if they turn out to be wrong. And one of the reasons why traders like blogs — and why many journalists don’t like blogs — is that blogs tend to me more traderish than traditional journalism: they’ll run with stuff before it’s nailed down, without checking it, in the full knowledge that it might be wrong. How far they go in that direction depends entirely on the blog, which is one reason why blog readers need to be critical readers: you can’t read a blog and simply know, based on the reputation of the parent institution, that you can trust it implicitly.

For instance: this afternoon, a meme took hold in the blogosphere, started by Zero Hedge, and picked up by the likes of Clusterstock, that there had been some kind of unconscionable bullying of Chrysler holdouts by the White House. Wonderfully, the blog entries caused some real reporting from Dealbook, which got on-the-record denials of any such bullying from both sides. The denials don’t mean that negotiations never got heated at any point of course, but they do mean, I think, that the charges of fascism are maybe a bit overblown.

Blogs can also be sloppy: Clusterstock’s Henry Blodget, for instance, in asking for banks’ senior creditors to be part of any recapitalization by converting their debt to equity, says this:

The best way would have been to seize the banks and restructure them. Since Geithner has opted against the route, however, the next best way would be to convert unsecured bank debt to equity, not just the taxpayers’ preferred stock (the taxpayers’ preferred stock should have been senior to all the bondholders, but that’s spilt milk at this point).

But this just makes no sense: if the taxpayers’ preferred stock had been senior to all the bondholders, it wouldn’t have been preferred stock at all: it would have been a liability of the banks, not equity, and would have done no good whatsoever. You can’t make a borderline-solvent bank healthy by increasing its liabilities, only by decreasing them.

While I’m at it, I should also explain why Blodget’s broader argument is also flawed. He writes, of the plan to convert preferred stock to equity:

The banks will still have the same amount of crap assets on their balance sheets, and they’ll have no more capital available to absorb these losses when they hit. The only thing that will change is that the taxpayer will now get hit first as these losses flow through, instead of getting hit second, as is the case now.

But that’s a huge change, because when common stock holders get hit first, the banks can continue to operate quite happily. If a bank ever reaches the point at which its preferred stock holders get hit, on the other hand, it will pretty much automatically get taken over by the FDIC or otherwise cease to exist in its former form. So converting preferred stock to common really does strengthen a bank and make it more likely to be able to survive future asset write-downs.

Still, I’d much rather read inflammatory or even just plain wrong stuff on blogs than have to wade through execrable nonsense like Vanessa O’Connell’s 2,700-word article on discount shopping in the WSJ magazine. She’s great at (under)stating the bleeding obvious:

According to America’s Research Group, shoppers now view 70 percent off as a great sale, versus the 40-to-50-percent discounts of the past. At the 70 percent level, it’s extremely hard for traditional retailers to make a profit.

But more seriously, she’s also great at blithely parroting numbers without any indication of what they mean:

With carefully managed flash sales of top designer names—from Marc Jacobs to Missoni—it has amassed one million members within 18 months of launching, and the company says it’s on track to multiply its annual revenue to about $80 million, up from less than $7 million.

“On track”, of course, can mean anything — or nothing. If the company wants to give the WSJ its sales numbers, it should give the WSJ its sales numbers. If it doesn’t want to give out those numbers, that’s also fine. But if it doesn’t give out its sales numbers, the WSJ shouldn’t treat it as though it has revealed something interesting or important all the same. Especially when the journalist goes on to contradict herself on much less important numbers pertaining to the company later on in the piece:

Once you are invited to join the online sample sales at Gilt Groupe, get ready. To work up excitement, Gilt blasts an 11:50 a.m. email to its massive member list, with images of some of the designer clothes, shoes and accessories that will be offered at the noon sale time. At 11:59 a.m., there are typically somewhere between 30,000 and 50,000 people on the site, waiting for the clock to tick. Most of the merchandise sells out within the hour…

By 11 p.m., more than half of the women’s styles that went on sale at noon are generally sold out.

So, how long does it take for most of the inventory to be sold? One hour, or eleven? Did O’Connell, or her editors, bother to check? It seems not — despite the luxury of long lead times on the magazine.

The problem here, of course, is that because the piece is appearing in a fluffy lifestyle magazine, rather than in the newspaper proper, no one particularly cares about the content — it’s mainly just there to look glossy and help sell watches. Which is never going to be much of an issue on a blog. If you’re reading something on a blog, it’s not because it was commissioned as a high-concept way of filling the feature well, but rather because someone genuinely has something to say and wants to communicate it. You might need to approach with skepticism — but you should do that with all journalism, not just blogs. And if you’re reading critically, you can generally get much more insight from blogs than you can from carefully-circumscribed journalism. They might sometimes be wrong — but at least they’re provocative, interesting, and useful. Which is more than can be said for just about anything in the WSJ magazine.

Journalism can be fantastically good, of course — as can blogging. But when it’s bad, journalism, even in a well-respected publication, can be just painful — more so than just about anything you’re likely to find on a reasonably-respected blog."

Me:

I’m having a hard time figuring out what people are proposing. First of all, from The Economics Of Contempt:

“The whole point of Treasury’s proposed resolution authority is to extend the FDIC’s systemic risk exception to the insolvency regime that governs large bank holding companies (e.g., Citigroup, BofA, JPMorgan, Wells Fargo). If there’s no systemic risk finding, failed bank holding companies will still be handled by the bankruptcy courts. Treasury’s proposal gives the government the same kind of discretion in cases of systemic risk that the FDIC has under the Federal Deposit Insurance Act.”

Here’s the plan:

“March 25, 2009
tg-70

Treasury Proposes Legislation for Resolution Authority

Treasury Secretary Timothy Geithner on Monday called for new legislation granting additional tools to address systemically significant financial institutions that fall outside of the existing resolution regime under the FDIC. A draft bill will be sent to Congress this week and several key features are highlighted below.

The legislative proposal would fill a significant void in the current financial services regulatory structure and is one piece of a comprehensive regulatory reform strategy that will mitigate systemic risk, enhance consumer and investor protection, while eliminating gaps in the regulatory structure. ”

So the govt is moving towards being able to seize the large banks, but they don’t have the power as of yet. That leaves you with various alternatives, one of which is owning more of the stock, and running the company. This would have a few problems, in that we could still lose a lot of money, and foreign investors and companies will consider us owning the bank to be guaranteeing it. As far as I know, there will still be other shareholders, and they will have certain rights. It could also involve us in foreign politics, as in Mexico with Banamex. Still, it might be better than the current plan.

Now, I thought that this is what Stiglitz and Krugman were proposing, as well as anyone who was complaining that we were investing money but not getting control. After reading Blodget and Krugman, it would be nice to have a clear explanation of exactly what they’re proposing. Are they saying that all creditors would becoming shareholders, but we’d control the bank, because we’ll have more shares? How is that done? What exactly is the alternative to what Geithner’s doing?

- Posted by Don the libertarian Democrat

unemployment goes to 14%... well then nearly all all of the major banks will have negative Tangible Common Equity, or put in other way: insolvency

TO BE NOTED: From Clusterstock:

"Everything Hinges On Unemployment

Joe Weisenthal|Apr. 22, 2009, 3:18 PM|7

Print

Tags: Economy, Banks, Credit Cards, Housing Crisis, Recession

Defaults among prime borrowers are really starting to pick up. Why? Cause even solid borrowers can fall behind if they lose their jobs.

Credit card companies see much deeper charge offs than they'd foreseen just a few months ago. Again, unemployment.

While the talking heads insist that unemployment is a "lagging indicator", it's pretty clear that the financial system is highly levered to this numbers, so it's hard to imagine a real turnaround unless the economy stops bleeding jobs.

A new report from FBR analyst Paul Miller says the health of the banking system all depends on this number:

FBR has constructed it own stress test ahead of the planned release of the government's stress test parameters this Friday, April 24. We tested nine commercial banks under coverage, using 10%, 12%, and 14% unemployment rate scenarios. We conclude that, if unemployment peaks at 10%, roughly consistent with the government's stress test, most of the big banks will be able to earn through it.
On the other hand, if unemployment is closer to 12%, which FBR believes is more realistic, their viability without additional capital is more questionable. FBR surveyed 62 buy-side clients and found that 41% expect unemployment to peak between 10% and 11% and that 39% expect unemployment to peak between 11% and 12%.

And if unemployment goes to 14%... well then nearly all all of the major banks will have negative Tangible Common Equity, or put in other way: insolvency.

Obviously this is the number that elected officials look at, since for most people, a good economy means that they and the people they know have jobs. Employed people are less likely to vote out politicians.

But as we've been saying, we expect unemployment to remain exceptionally high even into the "recovery" period, whatever that means. That's because besides the cyclical changes, the economy is also experiencing deep secular shifts resulting in displacement and lag time between jobs, as workers and industries take longer to adopt."

It doesn’t want capital markets to freak out about the stress tests, and so it plans to keep the results quiet.

TO BE NOTED: From Clusterstock:

"Do Banks Have To Disclose The Stress Tests Results?

John Carney|Apr. 17, 2009, 5:48 PM|4

Print

Tags: Wall Street, Tim Geithner, Financial Crisis, Banks, Economy, TARP, Bailout, Federal Reserve, Ben Bernanke

When it comes to the results of the stress-test, the Obama administration believes that darkness is the best disinfectant. It doesn’t want capital markets to freak out about the stress tests, and so it plans to keep the results quiet. We have a feeling the only time we’ll hear that a bank needs to raise new capital is when it actually does.

But that might not be legal. As Marketwatch points out, failing to disclose the results of the stress tests might run afoul of disclosure rules.

Banks… are under pressure to disclose the results of their stress tests to shareholders. Banks are expected to sign capital-assistance documents upon the completion of the stress tests, explaining whether they are seeking out immediate government capital infusions or they plan to spend six months raising capital before re-evaluating.

The signing of those documents could be a material agreement, which means banks must file an 8-K with the Securities and Exchange Commission, explaining what they've agreed to.
"It's a material event," said Gary Roth, partner at Alston & Bird LLP in New York. "When banks are given their results, they would be under a lot of pressure to disclose. When one discloses, it puts pressure on the other banks to disclose."

SEC officials are in discussions with bank regulators about disclosure responsibilities.

"From the Treasury or Fed's perspective, you don't want the disclosures to be too diverse," said Dwight Smith, partner at Alston & Bird LLP in Washington."

bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball

From Clusterstock:

"The AIG Bailout Is Pushing Other Companies Into Bankruptcy

Joe Weisenthal|Apr. 17, 2009, 8:14 AM|8

Print

Tags: Economy, Bankruptcy, Holiday Season, Bailout, AIG, Financial Crisis

This week, mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater both filed for bankruptcy, after failing to persuade bondholders to restructure voluntarily.

Now lawyers involved in these bankruptcy proceedings tell the Financial Times that the credit default swaps are the problem -- mainly, bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball, since the CDS, if the counterparty honors the agreement, makes them whole.

FT: Some creditors, including Citigroup, which held a small exposure to AbitibiBowater, hedged themselves in the CDS market, meaning their economic interest in the deal was different to lenders who had not bought credit insurance, according to people familiar with the matter. Citigroup declined to comment.

Lawyers say CDS holdings were also a factor in the default and filing for Chapter 11 protection of General Growth Properties this week. Restructuring advisers expect many more such cases involving so-called fallen angels, or firms originally investment grade, since CDS was widely sold on such names.

Now just take a wild guess. What firm is most likely to be on the other end of Citi's CDS purchase? AIG maybe?

If it is AIG, it means our bailout is pushing companies into bankruptcy that might otherwise be able to restructure.

Note that this has been alleged before, though previously with GM's ongoing failure to get its bondholders to exchange debt for equity. Now those involved in actual bankruptcies are citing it as a problem."

Me:

Don the libertarian Democrat (URL) said:

Apr. 17, 10:36 AM

"hedged themselves in the CDS market"

This makes sense. They insured themselves against a loss in their bonds. Consequently, they will be paid something either way, and are simply trying to figure out the best deal. What's the problem? Wouldn't you do that? The other creditors took a risk by not buying CDS insurance. What am I missing?

But, but... first regulators are going to publish a paper explaining the stress tests on April 24.

TO BE NOTED: From Clusterstock:

"Let's Just Cancel The Stress Tests

Joe Weisenthal|Apr. 16, 2009, 12:58 PM|3

Print

Tags: Wall Street, Tim Geithner, Financial Crisis, Banks, TARP, Bailout

Is there any good reason to follow through with the stress tests and actually release the results?

Word is, the White House plans to announce its finidings on May 4. But, but... first regulators are going to publish a paper explaining the stress tests on April 24. It's the latest evidence that the whole concept is becoming something of a fiasco for the administration, which is now going to great pains to maintain its credibiliy as a serious test for banks, while not spooking investors.

Of course, we've also been told that all 19 banks have passed. But also that some banks would need more shareholder-diluting capital once the results are released.

It doesn't help that all the banks apparently had blowout quarters, which if they're being totally honest should make you wonder why they need any extra capital at all.

At this point, we don't think anyone would begrudge the administration for doing an about face and admitting that they won't do much good. It's ok. People make mistakes.

Besides, the market can do a fine job distinguishing winners and losers on its own. As an alternative, just make all the banks raise, say, 5% of their market cap in the private sector. The ones that can do it are healthy. The ones that can't will get some extra help from TARP and voila. It'd be a lot more honest, and less political."

protecting insurers -- who are among the big holders of bank debt -- is one of the reasons that we've protected bank bondholders

TO BE NOTED: From Clusterstock:

"Treasury Will Expand TARP To Bail Out Insurers (HIG, LNC, PRU)

Joe Weisenthal|Apr. 7, 2009, 9:41 PM|

Print

Tags: Wall Street, Treasury, Bailout, TARP, Financial Services, Insurance, Financial Crisis, Tim Geithner

HIG Apr 7 2009, 07:38 PM EDT

8.45	Change	% Change
	-0.96	-10.20%

LNC Apr 7 2009, 07:41 PM EDT

6.89	Change	% Change
	+0.51	+7.99%

PRU Apr 7 2009, 06:41 PM EDT

22.10	Change	% Change
	-0.71	-3.11%

Life insurance companies are facing many of the same solvency challenges as banks, and have been trying desperately to get under the TARP. Some, like Hartford Insurance (HIG), have announced acquisitions of thrifts banks in hopes of garnering eligibility.

In fact, Hartford has been nursing its potential acquisition to the tune of $20 million in loans while it finds out whether the move will make it eligible.

Well it looks like they're in luck.

WSJ says the move to allow insurer participation will be announced in the next few days:

How much money would be available to the insurers remains unclear. The Treasury says it has about $130 billion remaining in TARP funds. Life insurers that are bank holding companies have been eligible for TARP for some time, but the Treasury had not yet given the green-light to approve their applications.

Several have applied, including Prudential Financial Inc. (PRU), Hartford Financial Services Group Inc. (HIG) and Lincoln National (LNC) Corp. No decisions have been made yet about which applications will be approved, these people said.

Bear in mind that protecting insurers -- who are among the big holders of bank debt -- is one of the reasons that we've protected bank bondholders so far. Obviously, that alone isn't enough.

Just $130 billion left though. Might take some creativity to stretch it out, since the prospects of getting more from Congress are daunting."

so the idea that the sum of its parts will ever be worth a sliver of what we've pumped in is absurd.

TO BE NOTED: From Clusterstock:

"Lousy Bids For AIG Asset Management Unit (AIG)

Joe Weisenthal|Apr. 7, 2009, 7:05 AM|2

Print

Tags: Wall Street, AIG, Bonus, Financial Crisis, Financial Services, Insurance, Bailout

AIG Apr 7 2009, 10:55 AM EDT

1.07	Change	% Change
	-0.03	-2.74%

It's funny that anyone still talks about AIG (AIG) paying back the taxpayer. The insurer has taken in far more money than its peak market cap, so the idea that the sum of its parts will ever be worth a sliver of what we've pumped in is absurd.

Still, they're still trying to salvage some parts for scraps. And yes, it does look like a firesale.

The Journal reports that bids for the company's asset management unit, which manages about $100 billion, have come in around $400-$800 million. That's far lower than typical valuations for these type of businesses. Normally with that much money in house, it might get bids for $1-$2 billion.

But alas, it's AIG and nobody knows how healthy the business really is, and whether customers are fleeing in droves. But hey, Ed Liddy, don't worry about selling "under market" or whatever. We'll take the $800 million please. That's like $2.50 for everyone in America."

The problem with this kind of thinking, that it's all about replacing lost demand, is that it's a grotesque oversimplification of what an economy is.

TO BE NOTED: From Clusterstock:

"Robert Reich's Dangerously Simplistic Economic View (VIDEO)

Joe Weisenthal|Apr. 3, 2009, 12:39 PM|26

Print

Tags: Economy, Financial Crisis, Stimulus

Larry Kudlow's favorite liberal economist Robert Reich appeared on CNBC, defending the Obama budget and the gigantic debt we're building up (video below).

His argument: There's simply no other way to get the economy going again than for the government to fill in the lost private demand. In other words, since consumers and businesses have stopped spending, the government has to step in, even if it means debt as far as they eye can see.

The problem with this kind of thinking, that it's all about replacing lost demand, is that it's a grotesque oversimplification of what an economy is. The economy isn't just a simple formula that has DEMAND on one end and GROWTH and JOBS coming out.

Robert Higgs at the Independence Institute busted this idea in a recent article. The whole thing is worth a read, but here's the nut:

This way of compressing diverse, economy-wide transactions into single variables has the effect of suppressing recognition of the complex relationships and differences within each of the aggregates. Thus, in this framework, the effect of adding a million dollars of investment spending for teddy-bear inventories is the same as the effect of adding a million dollars of investment spending for digging a new copper mine. Likewise, the effect of adding a million dollars of consumption spending for movie tickets is the same as the effect of adding a million dollars of consumption spending for gasoline. Likewise, the effect of adding a million dollars of government spending for children’s inoculations against polio is the same as the effect of adding a million dollars of government spending for 7.62 mm ammunition. It does not take much thought to conceive of ways in which suppression of the differences within each of the aggregates might cause our thinking about the economy to go seriously awry.

In fact, “the economy” does not produce an undifferentiated mass we call “output.” Instead, the millions of producers who bring forth “aggregate supply” provide an almost infinite variety of specific goods and services that differ in countless ways. Moreover, an immense amount of what goes on in a market economy consists of dealings among producers who supply no “final” goods and services at all, but instead supply raw materials, components, intermediate products, and services to one another. Because these producers are connected in an intricate pattern of relations, which must assume certain proportions if the entire arrangement is to work effectively, critical consequences turn on what in particular gets produced, when, where, and how.

These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative. Without choice, constrained by scarcity, no true economic action takes place. Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy.

Read the whole >

In the end, it's not spending or supply or demand or jobs that define a healthy economy. It's the ability for humans in this complex human network to work together to create value that defines health. No amount of spending or "priming the pump" will do the trick if the network is broken.

• Share:
• 

Richard Bernstein, its chief investment strategist, and David Rosenberg, the chief North American economist, plan to leave the bank within two months.

From the NY Times:

"Analysts at UBS and Bank of America to Leave

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.

There have been many changes in among banking analysts during the recent upheaval in the financial services industry.

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:

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

Naked shorting—selling a stock without first borrowing it—has almost no effect on the price of a stock.

TO BE NOTED: From Clusterstock:

"Naked Shorting Doesn’t Matter

John Carney|Mar. 19, 2009, 10:29 AM|17

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Tags: Wall Street, Lehman Brothers, Legal, Fraud, SEC, Stock Market

The news that almost 33 million shares Lehman Brothers were sold and not delivered to buyers on time in the days before its bankruptcy is sure to revive the old theories that short-sellers somehow manipulated the price of the stock through the practice of “naked shorting.” It shouldn’t. Naked shorting—selling a stock without first borrowing it—has almost no effect on the price of a stock.

This will strike many people as a shocking statement. To many investors, naked shorting seems fraudulent. Indeed, securities regulations treat much naked shorting as a type of fraud. The most vigorous critics of naked shorting sometimes liken it to counterfeiting. But this view seems to be based on a misunderstanding of the mechanics and effects of naked shorting.

The critical view ignores the fact that all short-selling creates a somewhat "artificial" level of selling pressure. Short selling creates sales that are not generated by current holders of stocks who want to sell. Outsiders--short sellers--who do not own the stock are selling it. This has costs for holders of the stock--the stock prices may go down--but benefits for the broader market, especially would-be buyers who get more rational pricing on securities. Crucially, however, nothing really turns on whether this additional selling happens through a traditional short sale or naked shorting.

An academic paper from Christopher Culp and JB Heaton explains the economic equivalence of short-selling and naked shorting:

Recall that with a traditional short sale there is (1) a party owed shares (the former security owner that lent shares to the short seller) that retains the purchase price of the shares as collateral; (2) a party that owes shares (the short seller) who will receive proceeds on delivery of the shares; and (3) a new owner of the shares.

A naked short leads to an almost identical situation. There is (1) a party owed shares, now the NSCC and ultimately the undelivered-to buyer who retains the purchase price of the shares as collateral; (2) a party that owes shares (the short seller) who will receive proceeds on delivery of the shares; and (3) an owner of the shares, now simply the former would-be security owner.

There is nothing economically important about the ultimate identities of the parties who hold otherwise-equivalent economic receivables and obligations. Despite the contentious rhetoric that sustains public debate over naked shorting, there are no especially meaningful economic differences between the two.

If you are really interested in this stuff, we recommend you read the entire paper, which we’ve posted below for your benefit.

Naked Shorting - Free Legal Forms

You're not suggesting that American could end up in a situation like Zimbabwe with totally out-of-control inflation?

From Clusterstock:

"Peter Schiff Slams The Fed's Zimbabwe Economics

Joe Weisenthal|Mar. 19, 2009, 7:39 AM|9

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Tags: Economy, Financial Crisis, Debt, Federal Reserve

Peter Schiff, the EuroPacificCapital chief that's been a fierce bear on the dollar, slammed the latest fed move in an interview with ABC radio in Australia:

STEPHEN LONG: But some reckon that printing money, in effect, will make it a whole lot scarier.

PETER SCHIFF: Well, I don't think it's going to rescue us from anything. I think what we're doing is the equivalent of selling our financial souls to the devil.

STEPHEN LONG: Peter Schiff, the head of Euro Pacific Capital in Connecticut, speaking to me last year when this kind of intervention was first mooted.

PETER SCHIFF: I mean if we think we can solve our problems by creating inflation, we oughta send some of these guys down to Zimbabwe to see how well it's working out for them.

STEPHEN LONG: You're not suggesting that American could end up in a situation like Zimbabwe with totally out-of-control inflation?

PETER SCHIFF: No, no, yes, I am. I'm not only suggesting that, I'm saying that.

Of course, Schiff has had his clients positioned against the dollar for some time, a move that's had limited success given the ongoing flight-to-safety trade. But eventually, the Fed could, in theory, print more than enough to satisfy this demand, prompting a real decline.

One counterpoint, as Hayman Capital has argued, is that ultimately other countries, where the banks have grown to even larger percentages of national GDP, will be forced to print even more.

Meanwhile, here's a good picture of what the dollar collapse looked like when the Fed's move was announced. Straight down.

Me:

Don the libertarian Democrat (URL) said:

Mar. 19, 11:39 AM

This is what happened in Zimbabwe:

http://cato.org/pub_display.php?pub_id=9481

"On the economic front, the situation is dire. The economic crisis that was precipitated by Mr. Mugabe's seizure of commercial farms in 2000 has put four out of five Zimbabweans out of work. The government's tax revenue collapsed as did most of the public services. The Reserve Bank of Zimbabwe was ordered to print money to make up for the budget shortfall, leading to the first hyperinflation of the 21st century."

It should be understood that politics plays a huge part in how crises are dealt with. In Zimbabwe, these actions are a designed policy to keep a despot and his minions in power. If deflation would have worked, he would have done that. Just so we know what's actually going on in Zimbabwe.