Friday, June 19, 2009

Supplemental Appropriation Act of 2009 Passed Senate

The Senate overwhelmingly (91-5) passed the Supplemental Appropriation Act of 2009 (H.R. 2346) without hardly any objection and without any change. The war funding bill, which has caught some public attention because it includes so-called "cash for clunkers" auto purchase subsidy program ($1 billion) and IMF funding ($7.6 billion additional quota, up to $116 billion loan).

Aside from these and money that actually goes to the U.S. military, there are a whole lot that are going to foreign countries. Middle East and Central Asia get the bulk, but Burma and Mexico also get a nice chunk:

$921,500,000, for worldwide security upgrades, acquisition, and construction as authorized, and shall be made available for secure diplomatic facilities and housing for United States mission staff in Afghanistan and Pakistan, and for mobile mail screening units.
$150,000,000 for ‘Global Health and Child Survival’
$200,000,000 may be made available for cash transfer assistance to the Palestinian Authority
$10,000,000 may be made available for humanitarian assistance in Burma
$242,000,000 shall be available for assistance for Georgia
$30,000,000 may be made available for assistance for the Kyrgyz Republic
$487,500,000 for ‘International Narcotics Control and Law Enforcement'
$390,000,000 for ‘Migration and Refugee Assistance’
$260,000,000 shall be made available for assistance for the Mexican Navy
$150,000,000 shall be made available for assistance for Jordan
$555,000,000, shall be available for grants only for Israel
$260,000,000 shall be made available for grants only for Egypt
$69,000,000 may be made available for assistance for Lebanon
$700,000,000. counterinsurgency activities in Pakistan
$150,000,000 shall be made available to support programs that directly address the needs of Afghan women and girls

The provision that would have blocked the release of the photographs allegedly showing detainee abuse in the US custody had been dropped during the negotiation in the House, which had a much closer vote (226-202).

June 19 New York Fed Open Market Operation

As part of permanent Open Market Operations (OMO), the New York Fed purchased the agency bonds today:

  • Operation type: Outright Agency Coupon Purchase
  • Total Par Amount Accepted: $4,789 million
  • Total Par Amount Submitted: $7,983 million

(Oh how cute. Did you know that the New York Fed uses Twitter?)

6/19/09 Today's Potential Power Transfers To Federal Government

Obama’s Insurance Proposal May Grab Power From States (6/19/09 Bloomberg)

"President Barack Obama’s plan to create a U.S. insurance office after the $182.5 billion bailout of American International Group Inc. may take powers from the states that have overseen the industry for more than 135 years."

Did you know that A.I.G. started in 1919 in Shanghai, selling insurance to the Chinese? It was not even an U.S.-based company until the People's Liberation Army under Chairman Mao started marching toward Shanghai in 1949 and the company moved to New York.

And the president is going to part the ocean, too.

Sean Corcoran's Cape Wind Blog (6/19/09 The Cape and Islands NPR Station)

"I want to mention a White House memorandum released last Friday to the heads of federal departments and agencies because it appears the Obama Administration wants to zone the oceans. The memo indicates that Obama is creating a task force that within 180 days will recommend "a framework for effective coastal and marine spatial planning." What's called The Interagency Ocean Policy Task Force will make recommendations to the president on protecting ocean and Great Lake resources as they experience "growing demands" from "renewable energy, shipping and aquaculture.""

OK, now, Marine Czar?

Let's Pick A Name For Our Current Mess!

Dr. Walter Block at is having a contest to pick a name for the economic crisis we've been in for some time now.

What Shall We Call the Present Economic Crisis: A Contest (6/19/09

"Nomenclature first. Unless and until we know how to refer to the economic debacle of 2009, we cannot make much progress in solving it. We all know what to call the previous episode: The Great Depression. But, what about this present one?"

You can visit the site, take a look at the candidates (there are about 70-80 of them) and send him an email to vote.

The ones that caught my attention were:

  • A Depression We Can Believe In
  • Big Government Depression
  • Fed's Second Depression
  • We-Learned-Nothing-From-The-Great-Depression Depression
But then I like it simpler. So, Greater Depression is my first choice.

(I never, ever, not once, expected that I might be experiencing a Depression in person. Sigh...)

Thursday, June 18, 2009

$1 Billion Makeover of U.S. Diplomatic Missions in Af-Pak

Remember the former president Bush? Remember his extravagant fortress called the U.S. embassy in Baghdad?

We will have another one or two, in case you missed the news. This time in Af-Pak.

US to spend $1 billion on embassy expansions in Pakistan, Afghanistan (5/28/09 Christian Science Monitor)

"The US is embarking on a $1 billion crash program to expand its diplomatic presence in Pakistan and neighboring Afghanistan, another sign that the Obama administration is making a costly, long-term commitment to war-torn South Asia, US officials said Wednesday.

"The White House has asked Congress for – and seems likely to receive – $736 million to build a new US embassy in Islamabad, along with permanent housing for US government civilians and new office space in the Pakistani capital.

"The scale of the projects rivals the giant US Embassy in Baghdad, which was completed last year after construction delays at a cost of $740 million."

In addition, in Peshawar the U.S. government is negotiating to buy up a 5-star hotel to serve as the consulate.

"In Kabul, the US government is negotiating an $87 million purchase of a 30- to 40-acre parcel of land to expand the embassy. The Senate version of the appropriations bill omits all but $10 million of those funds."

You may also recall that President Obama recently appointed Lt. General McChrystal as new Afghan commander. Lt. General McChrystal was a black-op guy in Iraq. The Washington Post article called him and his guys as "manhunters".

Af-Pak is the place to be, it seems. At least that's where the money is going.

Treasury Auctions for Week of June 22, 2009

Treasury Department will auction the following Treasury securities in the week of June 22, 2009. Hang on...

Monday June 22, 2009

  • 13-week bill: $31 billion
  • 26-week bill: $30 billion
Tuesday June 23, 2009

  • 2-year note: $40 billion
Wednesday June 24, 2009

  • 5-year note: $37 billion (up $2 billion from $35 billion last month)
Thursday June 25, 2009

  • 7-year note: $27 billion (up $1 billion from $26 billion last month)

Total for the week: $166 billion

  • Bills: $61 billion
  • Notes: $104 billion

Total SO FAR for the month of June: $341 billion

  • Bills: $276 billion (includes $26 billion 1-year bill)
  • Notes and bonds: $65 billion

If you think that's too much debt, think this gets repeated every single month for the rest of the year, if not longer. On course to annual $2 trillion debt in notes and bonds (it will be about $300 billion more if I include 1-year bill).

FYI, watch out if New York Fed will do any open market operation, particularly days when they auction notes. (

Firing AmeriCorps Inspector General: Political Courage

White House: Firing AmeriCorps IG an act of "political courage"
(6/18/09 Washington Examiner)

"A top White House lawyer called the firing of AmeriCorps inspector general Gerald Walpin an act of "political courage," according to House Republican aides who were in a meeting with the lawyer Wednesday."

This was how Mr. Walpin was fired:

"The law requires the president to give Congress 30 days' notice, plus the cause for the firing of an inspector general. In Walpin's case, the White House called Walpin out of the blue, gave him one hour either to resign or be fired, and only later notified Congress, and then without giving any cause for its action."

And that's supposed to signify "political courage".

And this is what Mr. Walpin was investigating, and probably why he was fired (The Sacramento Bee 6/11/09):

"The inspector general found that Johnson [mayor of Sacramento], a former all-star point guard for the Phoenix Suns, had used AmeriCorps grants to pay volunteers to engage in school-board political activities, run personal errands for Johnson and even wash his car.

"In August 2008, Walpin referred the matter to the local U.S. attorney's office, which said the watchdog's conclusions seemed overstated and did not accurately reflect all the information gathered in the investigation.

"Kevin Hiestand, chairman of the board of St. HOPE Academy, said in a statement it was "about time" Walpin was removed. "Mr. Walpin's allegations were meritless and clearly motivated by matters beyond an honest assessment of our program," he said."

The latest from the Sacramento Bee on the issue: FBI probes obstruction of justice claim by former St. HOPE official (6/18/09)

But no matter. We'd better learn "crimestop" very quickly.

Dems Want Financial Overhaul By Year End

A hasty trade in a panic situation often ends badly. Last year's bank bailout bill could be considered as such an example, at least for taxpayers. But a hasty trade without a panic situation smells strange and contrived. Why the hurry? More importantly, why the trade to begin with?

Democrats to push through banking overhaul quickly
(6/18/09 AP via myway)

"Democratic leaders have committed to enacting by the end of the year the biggest regulatory revision to the U.S. financial system since the 1930s - an undertaking so ambitious it has some lawmakers worried about missteps.

""We have to evaluate it, weigh it, slow it down and make sure we do it right," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee. "Because if we don't, we will pay dearly.""

Oh no kidding, Mr. Shelby. But alas, what could Republicans do? They are outnumbered. Besides, despite overwhelming popular sentiment against it, both Republicans and Democrats voted for the bank bailout plan last year. The stock market crashed right after the passage. I remember Senator Shelby voted no. Thank you Senator for your effort.

What I absolutely do not like about this proposal is this:

"Obama wants to empower the Federal Reserve to oversee the largest and most influential financial firms. He also wants to create a council of federal regulators, chaired by the treasury secretary, to monitor risk across the broader market."

The Federal Reserve, a private entity, and Treasury, both of whom many people have said significantly contributed to the financial crisis if not actually caused it, to "regulate" financial institutions and markets. You could say it takes thieves to catch thieves, and that's the best I can say about it.

The Fed banks are not even listed under the U.S. Government section of the phone book. And we are going to give them more power. Right.

""We regard this as very pro-market," said Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee. "Unless you have investors that are well-protected, you don't have a market.""

If this is not a newspeak, I don't know what is: Stifling regulation from a gigantic bureaucracy is pro-market. Oh, actually I do know. This headline from Bloomberg 2 days ago:

Obama Says ‘Robust’ Growth Will Prevent Tax Increases

Mr. President, it's the other way round: Tax Increase Will Prevent Robust Growth.

In a span of just a few days, we have had

  • Proposal for sweeping major overhaul of the entire domestic and international financial systems that we cannot wait any longer
  • Proposal for sweeping major overhaul of health care system that we cannot wait any longer
  • Most dire warning on climate change urging us to do something very quickly or else
So the "shock and awe" Obama version continues. As long as the opponents are in reactive mode, e.g. Senator Shelby "We have to evaluate it, weigh it, slow it down and make sure we do it right", I am afraid many of such proposals will go through to the great detriment to those who will be forced to foot the bill.

Does anyone remember We Are Out Of Money? Even the president said that not so long ago.

Gold Vending Machine in Germany

Shoppers in Germany will soon be able to buy gold as easily as bars of chocolate after a firm announced plans to install vending machines selling the precious metal across the country.

Gold sold like chocolate from German vending machines (6/17/09, Telegraph)

"TG-Gold-Super-Markt aims to introduce the machines at 500 locations including train stations and airports in Germany.

"The company, based near Stuttgart, hopes to tap into the increasing interest in buying gold following disillusionment in other investments due to the economic downturn.

"Gold prices from the machines – about 30 per cent higher than market prices for the cheapest product – will be updated every few minutes.

"Customers using a prototype "Gold to go" machine at Frankfurt Airport on Tuesday had the choice of purchasing a 1g wafer of gold for €30, a 10g bar for €245, or gold coins."

"Interest in gold has risen during the financial crisis, particularly in Germany, according to GFMS, the London-based precious metals consultancy.

"Retail demand reached an estimated 108 tonnes in 2008, up from 36 tonnes in 2007 and 28 tonnes in 2006."

Interesting idea, but 30% premium is too stiff. Physical gold still commands premium over paper gold, but less than when the financial crisis was at a sheer panic stage (September-October 2008).

Germany has 3,412 tonnes of gold reserve, the second largest in the world after the United States who has 8,133 tonnes (or we so hope). I keep hearing rumors on the Internet that Germany is demanding the return of their gold in US custody...

Wednesday, June 17, 2009

Federal Reserve Telephone Numbers On Yellow Page Business Section?

Not in the Government section but in the Business section in the phone book.

At least that's what the Japanese version of says about Federal Reserve. (Here's the entry.)

So I looked that up on the yellow page phone book (physical book) that I have. There's no entry of "Federal Reserve" under the United States Government section. I don't find it in the Business Section either, but the nearest Federal Reserve is San Fracisco Fed, out of the area.

I checked several online yellow pages. Richmond Fed appeared with Wachovia and Sun Trust.

Can anyone who live in the cities where regional Federal Reserve banks are located check the phone book and let me know? Just curious.

OT: Lake on Mars

University of Colorado team finds definitive evidence for ancient lake on Mars (6/17/09

"A University of Colorado at Boulder research team has discovered the first definitive evidence of shorelines on Mars, an indication of a deep, ancient lake there and a finding with implications for the discovery of past life on the Red Planet.

"Estimated to be more than 3 billion years old, the lake appears to have covered as much as 80 square miles and was up to 1,500 feet deep -- roughly the equivalent of Lake Champlain bordering the United States and Canada, said CU-Boulder Research Associate Gaetano Di Achille, who led the study. The shoreline evidence, found along a broad delta, included a series of alternating ridges and troughs thought to be surviving remnants of beach deposits."

I always thought that the Martian civilization was utterly destroyed when the first probe from Earth was landed on Mars. You see, the Martians were sub-nano-size, and their entire civilization fit right under one of the landing pads of the probe. As they waved flags of welcome to the probe from a neighboring planet, the probe just grew bigger, and bigger, and bigger...

Ron Paul's Reaction to Financial Rregulatory Reform

Ron Paul's take on today's (June 16, 2009) policy speech by Obama on financial regulatory reform on Bloomberg TV. "Not even a good bandaid."

Cause and Effect: Washington to Main Street to Wall Street

The president had finished his speech today about his new proposal (yet another) on the sweeping reform (and another) in the nation's financial institutions.

The prepared text of the speech was already available before the speech (here), so I took a look.

It's basically the same as what was leaked by an anonymous administration official on Tuesday night and reported on this post here.

After the preamble about the administration's favorite topics (energy, education, and heath care, which quickly made me wonder what they've got to do with financial reform), the president starts to talk about financials. And I start having problems right away. I quote:

"It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. "

Is it? Indisputable? Fact? An unraveling of major financial institutions didn't quite occur until after September 2008. The nation's economists tell us that the U.S. went into the economic recession in December 2007. How could an unraveling in September 2008 contribute to a recession started in December 2007?

But more importantly, I think he got the flow mixed up. If I were to craft the last sentence, it would read: "A culture of irresponsibility took root" from Washington to Main Street to Wall Street.

The super easy money policy of the Federal Reserve actually started in the 90's to get out of the mini recession in the early 90's. The Federal Reserve didn't come up with this idea on its own. It was guided by the policies of Washington. It contributed significantly to the sharp rise in all asset prices in the mid to late 90's and to the dot-com bust in 2000. (Read this article written in September 1999. The writer predicted an imminent stock market crash at the time when Dow was high but the global political and economic indicators as he saw them were deteriorating.)

Then this policy was re-instituted anew in 21st century in order to get out of the recession in the wake of the dot-com bust and 9/11.

One of the main focus of Washington for nearly 2 decades has been home ownership. Home ownership was increasingly treated as American Dream, and some kind of "right" of the U.S. residents. President Clinton started it by rewriting the rules for Fannie and Freddie, and then broadened Carter-era Community Reinvestment Act and unveiled his National Homeownership Strategy. "Having your own home is the ultimate expression of optimism," the president said. (See this video from 1994 speech before National Association of Realtors.)

Please watch this video of President Bush back in 2002. He was proposing taxpayer-funded (he spoke so softly when he said the word taxpayer) down payment fund for low income buyers, affordable housing in "certain" neighborhoods (i.e. inner city), "streamlining" the application process so that "fine print" doesn't discourage the buyers (and now Washington is saying the bankers lied), bringing in the real estate industry in, encouraging measures to create a sustained commitment by the private sector. 5.5 million new, minority home owners was Mr. Bush's goal. He challenged the private sector to get after this goal, get focused. $440 billion more capital would be available for minority home owners from Fannie and Freddie, and FHA, who would also quickly securitize the loans made by the banks so that the banks could make more loans.

Is there still any doubt that it all came from Washington?

The government passed a series of legislation to make home ownership "affordable". Now people who wouldn't have qualified for mortgages before or who never thought of owning a home could be the home owners. American Dream. This was the Main Street component of the flow.

Then came the banks. There was clearly a huge demand from the Main Street for mortgages, and the government legislation and various schemes by non-profit organizations put increasing pressure on the banking system to come up with innovation to satisfy this demand. And satisfy they did, with innovation.

They came up with mortgage plans that allowed the borrower a super-low teaser rate, no money down, interest only mortgages. They sold off these mortgages off to Fannie and Freddie who quickly securitized them. Banks securitized the mortgages themselves, too, creating complex bond securities that were supposed to reduce risk by slicing up the mortgages and bundling back together. Prime mortgage slice and sub-prime slice together, but supposedly risk well managed. Investors who wanted more risk and higher return could opt for the lower tranches of mortgage-backed securities.

Then, housing advocate organizations, emboldened by the government measures and pressure, grew more aggressive. Here's an article from October 2007, describing how one such organization, Neighborhood Assistance Corp. of America under Bruce Marks, effectively forced Countrywide (now part of Bank of America) to modify at-risk loans. The very fact that the deal was announced in Washington D.C. shows it was a political issue, not economic or financial.

The hilarious story I heard involved Washington Mutual: a Hispanic man walked in to a WaMu branch, wanted to get a mortgage. The bank gave him the mortgage after reviewing a photograph of him dressed as a mariachi singer.

The housing market, by all indicators, topped in 2006. Smarter investors in real estate, particularly in residential real estate, got out then. But the party continued, on inertia, and people were fooled by continued low-interest and easy access to credit. It's not just Main Street people, but Washington people, too. The policy makers, the Fed officials, they all continued the mantra of "Everything is fine", "Our financial system is sound". Pundits on financial news channels like CNBC openly derided a few people who sounded alarm. (Remember this? These people openly laughed at Peter Schiff and they said Merrill Lynch was ridiculously cheap at $76 and recommended WaMu.)

Washington and its enabler Federal Reserve started it. Main Street and Wall Street followed. Main Street started to buckle first. Two years later, Wall Street collapsed, because the pillars, or the foundation, substrate that supported Wall Street (i.e. Main Street), collapsed. The economists say the current recession started in December 2007. The spectacular collapse of Wall Street didn't happen until September 2008, with a scare of Bear Stearns in March 2008 along the way (which feels like such a trivial event right now, but at that time it felt like the whole world was collapsing).

Who's still standing? Washington.

If the new policy is to be crafted on the assumption, in my mind wrong assumption, that it all started because of Wall Street's greed which dragged Main Street and unwilling Washington into the mess and recession, the policy will not address the core issue (= Washington) at all. I doubt therefore it will achieve the desired result - stable financial system - unless "stable" means "dead" or "near-dead".

The title of the speech says "21st Century Financial Regulatory Reform". Piling more regulation and more bureaucracy doesn't seem to me to be 21st century thing. I cannot help feeling that the speech writer missed the date by nearly a century.

Here's the plan itself, from the Treasury Department special website ( (So that's another new czar right there: Financial Stability Czar.)

The stock market, with 45 minutes to trade, has remained listless. Dow Jones Industrial Average is up 22 points to 8,526, S&P 500 up 1 point to 913, Nasdaq up 17 points to 1,813. Nasdaq's outperformance is not surprising, as it has more companies far less affected by the government regulations and controls.

How Much TARP Has Been Spent So Far?

Goldman Sachs is reported to return the TARP money it received on Wednesday, the first major bank TARP recipient to do so.

On this historic occasion, I thought it would be nice to find out how much TARP money has been spent already, and how the money is accounted for. Also, it would be nice to know what is the maximum amount of TARP money that can be spent.

I simply assumed there's a definite data table somewhere at the Treasury Department site, so I went and looked. There was a table, and here's the link.

According to this table (as of June 16, 2009, the most recent),

  • Capital Purchase Program (for banks): $197,610,325,000
  • Automotive Industry Financing Program: $79,966,778,971
  • Automotive Supplier Program: $6 billion
  • Targeted Investment Program (Citi and Bank of America): $40 billion ($20 bil each)
  • Asset Guarantee Program (Citi): $5 billion
  • Consumer and Business Lending Intiative Program (TALF LLC): $20 billion
  • Systemically Important Failing Institutions (AIG): $69,835,000,000

Total of roughly $418 billion dollars, counted at par.

However, I got too curious and went to take a look at Monthly Treasury Statements at the Treasury Department. TARP is a line item in Treasury's outlays. According to the Statements since October last year, Treasury Department's outlays of TARP is as follows (cumulative):

  • Oct 08: $115 billion
  • Nov 08: $191 billion
  • Dec 08: $242 billion
  • Jan 09: $280 billion
  • Feb 09: $290 billion
  • Mar 09: $293 billion
  • Apr 09: $117 billion (They changed the accounting from cash to net present value to make monthly outlays smaller thus less monthly deficit. The ostensible reason was to account for risk. If it were accounted the same way, it would have been $292 billion)
  • May 09: $135 billion ($310 billion, in old way of accounting)
We have about $108 billion gap... There was $30 billion that went to GM on June 3, so this Statement, covering through May 31, doesn't cover that. So we now have $78 billion gap. So, the same department (Treasury) issuing two different numbers for the same event for two different publications. Talk about transparency.

Actually I have one more guess about the amount. Treasury Department has a special account at the Federal Reserve, and that's $199 billion. If I remember right, that's the residual money for TARP. If that's the case, TARP spent is $700 billion minus $199 billion = $501 billion.

And there is this nagging question of "How much of the $700 billion bailout was for TARP?"

The short answer seems to be, "Who knows?" I give up.

With the super regulatory "council" coming our way with the Federal Reserve at the core, probably we simply should not expect an answer. Any answer.

Tuesday, June 16, 2009

Sweeping Financial Reform - Advance Notice of Wednesday's Announcement

I thought the previous administration had a leaky valve everywhere. I guess all administration have those. This is the latest leak from a senior administration official outlining what Obama will announce on Wednesday.

Obama To Call For Sweeping Financial Reforms Wednesday
(6/16/2009 7:54 PM ET RTT News) [emphasis is mine, my comments in square brackets]

"President Barack Obama will lay out a sweeping series of reforms for the financial sector Wednesday.A senior administration official familiar with the plans, speaking to reporters on condition he not be named, said Tuesday that the damage caused by the recent financial crisis showed the urgent need for action.'

[Don't waste a good crisis.]

"To address those gaps, the administration will first establish a Financial Services Oversight Council, headed by the treasury department to better coordinate the actions of various regulators.

""We will, in addition, place square responsibility and require clear accountability, on the Federal Reserve to serve as the consolidated supervisor at the holding company level of all large interconnected financial firms," he said. "They will be subject … to more exacting supervisory requirements and capital standards at the holding company level.""

[So it is still about "financial" firms, although I suspect the definition is very fluid. Remember last year when SEC banned shorting the "financial" stocks? It included IBM and GE.]

[But what do you mean accountability? The Fed is not accountable to Congress or White House. Are you going to change the Fed's charter? We don't even know what the Fed has on its balance sheet. Are you going to audit the Fed?]

"He added, "We will also require, as a measure of increased transparency, registration of hedge funds and other private pools of capital and we will require the improvement of regulation of money market mutual funds."

[Bye bye dark pools.]

""All credit default swap markets and all over the counter derivatives markets will be subject to appropriate regulation," he said. "We're going to prevent those activities from posing risks to the financial system, promote transparency, prevent market manipulation, fraud and other market abuses and also ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties."

[Ummm, all OTC derivative markets' size is nearly $1,000 trillion. How are you going to regulate that?]

["Unsophisticated parties" like local and state governments? Who decides what's "inappropriate"? Would it be deemed inappropriate only when the local/state governments lose money?]

"The Treasury-led financial council will have the authority under the plan to require reports from any U.S. financial firm to assess whether its activities pose a risk to the system as a whole."The Federal Reserve … will have clear authority over payments, clearings and settlement systems to ensure that no risks arise outside the system of supervision," he said.

"The administration will also call for the creation of a consumer-focused financial regulator to ensure that financial products sold to consumers are appropriate both for households and the system as a whole.

"He added, "This new entity will have broad authority to write rules. … It will be the primary enforcer of consumer protection law across the financial sector so that we can level up the playing field and have standards that apply to every participant in the system."

[And this entity will craft a financial product and force the firms to offer it. See my post.]

"The final part of the plan will be to continue to work on the world stage to make sure regulations in other countries will be stronger in a more globally interconnected world."

[So that was what "supervisory colleges" were all about.]

"Although the plan is ambitious the official said the administration hopes to have the measures passed through Congress quickly, preferably this year, the official said.

""We're going to push forward with legislation," he said. "We're going to work very, very hard to get this done right away." "

Obama Plans Supervisory Colleges For Global Financial Firms?


Source: Reuters

That's all there is at the site. What are "supervisory colleges"??? Global???

Or this:
Source: Fed To Regulate All Large Interconnected Firms (6/16/09 RTT News via INO)

All?? Not just financial firms? Or are they expanding the definition of "financial" firms?

What's going on?

Obama to California: Take A Hike

White House to California: You're On Your Own (6/16/09 CNBC):

"The White House Tuesday dashed hopes that the federal government would help California overcome a mammoth budget crisis that has brought the state dangerously close to an economic meltdown, saying California will have to solve the problem on its own."

The message was delivered by Mr. Press Secretary Robert Gibbs.

""It's obviously not an easy time for the state of California," White House spokesman Robert Gibbs told a briefing when asked if the administration would provide emergency financing for the state.

"We'll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they're going to have to solve," Gibbs said."

The governor and his delegation, as well as California's Senators and Represenatives, must have thought they would be eventually bailed out. Aren't they too big to fail, with 13% of GDP? Also, didn't they vote (60%) for the current president in 2008 election?
After all, AIG got $180 billion, GM will get $50 billion, and they are just private companies. Right?

"It will run out of cash within weeks if it does not balance its books, according to State Controller John Chiang, who estimated last week California was "less than 50 days away from a meltdown of state government.

"Standard & Poor's ratings agency on Monday put $67.1 billion worth of California's debt on alert for a possible ratings cut because the state may run out of cash by the end of July."

California's budget deficit is about $21 billion, with the total budget at $131 billion. Only 8 years ago the budget was below $100 billion. When the current governor took over, the state budget was $104 billion.

Now that California has been officially told to take a hike, it can seriously start cutting the excesses for a change, and that is a good thing in the long run.

The one trick I think California may still have up the sleeve is a threat to cut social welfare programs for the minorities / the poor / (legal and illegal) immigrants / socially disadvantaged (whatever). The administration may respond to that line of pleading.

(What happens if China, Japan, Russia, Brazil start to tell the administration the same thing? "It is obviously not an easy time for the U.S. We will continue to monitor the challenges that the U.S. has, but this budgetary problem unfortunately is one that the U.S. is going to have to solve.")

White House Details Consumer Protection Plan

Another brilliant plan from the best and the brightest.

(Or another prime candidate of "unintended consequence".)

White House Details Consumer Protection Plan
(6/16/09 Washington Post) [emphasis is mine]

"The Obama administration released today details of its plan for a new agency to protect consumers of financial products such as mortgages and credit cards, one of the boldest and most controversial pieces of its blueprint for financial reform.

"The proposed Consumer Financial Protection Agency would have broad powers to regulate the relationship between financial companies and consumers, including writing rules, policing compliance and penalizing delinquent firms. Some of those powers would be taken from other agencies, particularly the Federal Reserve.

"One notable aspect of the proposal would allow the new agency to define a "plain vanilla" product -- such as a 30-year, fixed rate mortgage loan -- and then require firms to offer this basic product."

"The administration has been dribbling out pieces of its financial reform blueprint, with a formal announcement of the entire plan scheduled for tomorrow. The plan would give the Federal Reserve new powers to regulate the largest financial firms, and create a new authority to dismantle firms that fall into trouble. It also would impose new oversight on financial markets for the sale of derivatives and asset-backed securities -- investments made from pieces of loans such as mortgages."

I thought we were going to have a quiet week because we don't have the massive Treasury auctions this week. Wrong. When there's little for Treasury Department to sell, the White House has plenty to sell.

The credit card bill passed by Congress and signed into law the other day is already yielding some great improvement for the consumers - having their card limit lowered so that they don't overspend, having their card cancelled outright so that they don't spend at all, having their APR raised and new "convenience" fees put in place so that they don't need to shell out more money for these banks.

I can't wait to find out what this new agency will do for us.

How will Federal Reserve Pull Back Support?

This is a yesterday's headline from CNBC. I couldn't help laughing when I saw the headline.

As Economy Starts to Recover, Fed Weighs When to Pull Back (6/15/09, CNBC)

"As economy starts to recover..." When? The article says the Federal Reserve thinks it will be the 3rd quarter of this year, hopefully.

"The U.S. economy looks poised for a return to weak growth in the second half of the year and the Federal Reserve is giving careful thought to how to pull back its support when the time is right, Fed officials said Monday."

What is "weak growth"? Can you define that?

Amid the dribbles from the various Fed presidents, this caught my attention:

"Evans [Chicago Fed], a voting member of the Fed's policy panel, said some of the central bank's programs, especially those that provide back-up for short-term loans, will shrink naturally as market conditions improve.

"But he also said a "significant portion" of the Fed's balance sheet will likely not do so, which will force the central bank to develop what is likely to be a multi-pronged exit strategy."

Short-term loans will shrink naturally? Really? The Federal Reserve has been lending out U.S. Treasuries to the borrowers in exchange for whatever assets they can come up with as a collateral. The criteria for the collateral has gotton very loose over time, and the Federal Reserve has refused to discuss who the borrowers are, and what kind of collateral the Fed is getting.

So when the time is right, those borrowing institutions will gladly return the perfectly good Treasuries in exchange for the assets of dubious quality back onto their balance sheets.

Does that make sense?

"A significant portion" of the balance sheet that Mr. Evans refers to must be everything else but the short term loans:

Here are some major items on the asset side of the Fed's balance sheet. I don't think there has been any material change since May.

  • Treasuries marked at face value: $622 billion
  • Agency debt from Fannie and Freddie marked at face value: $84 billion
  • Mortgage-backed securities guaranteed by Fannie and Freddie and Ginnie Mae: $427 billion
  • Assets from various LLCs (Maiden Lane stuff, Bear Stearns, AIG) marked at "fair value" (or you could say mark-to-model, as there is apparently no market for them other than fire sale): $62 billion
Other than Treasuries, it's hard for me to believe that these assets could fetch a good price, or the price that the Fed wants to sell at (which I assume to be very very close to face value).

To remove excess liquidity, instead of reducing the asset side of the balance sheet, the Fed could try not to reduce the liability side, so that they don't need to sell the assets. I think that means excess reserve, which is currently at $816 billion. The Fed could raise reserve requirement for the banks, so that the banks will have to continue to park their money there. Or they could the combination of the two: sell some assets, and raise the reserve requirement.

However, raising the reserve requirement would mean loans that banks could make to businesses and consumers. How would that help the economy recovering weakly?

Any other options? I would like to hear from the Fed soon. If weak growth may be coming in the 3rd quarter, as the Fed says, that's July-August-September. July is less than a half month away.

Another day of quiet selloff in the stock market. The market doesn't seem to believe in "green shoot" all of a sudden. Dow Jones Industrial Average is down another 95 from yesterday, at 8,516. S&P 500 down almost 10, to 913. Nasdaq is down 15 to 1,801.

Monday, June 15, 2009

Paul Krugman’s Advice to the Fed, 2002, from the LRC Blog

Amusing find from's blog site:

Paul Krugman’s Advice to the Fed, 2002 (6/15/09, The LRC Blog)

It has a link to Krugman's article on August 2, 2002. About 2 months later in early October, instead of double-dipping, Nasdaq bottomed. Mr. Greenspan did exactly what Krugman recommended, and here we are, 7 years after.

Budget Deficit in Santa Cruz, CA the Original Surf City

Recession Threatens the Original Surf City (1/19/09, Times):

"With a floundering economy forcing cities nationwide to slash budgets, some municipalities are having to carve out their very souls. A Californian case in point: Santa Cruz. The city is iconic in the history of American surfing. But the city council, faced with a $7 million deficit, voted in December to close the city's surfing museum, the world's first and a mecca for locals and tourists alike since it opened in 1986. And it's not just the surfing musuem. The decision includes shutting down the natural-history museum, a teen center, a community center and a public pool.

"But it was the proposed closure of the surfing museum that sounded the loudest alarms. It immediately unleashed a tidal wave of response from surfers worldwide and sparked an emotional campaign to keep the museum afloat."

The pattern is the same as bigger California. No appreciable reduction in departmental head counts or budgets (most departments show increase), no cuts in entitlement plans, hardly any cuts in salaries and expenses (it's actually an increase there), but let's cut where people actually visit and use.

According to the Santa Cruz city's 2010 proposed budget plan, city will save $135,372 by closing two museums. By closing down a public pool, it will save $205,515. How much is the budget deficit for the city? $6,747,314. So these closures will reduce the deficit by 5%.

The budget plan doesn't say how they are going to fill the deficit, which is 12% of the budget. Their assumption about tax collection on property tax and sale and use tax looks optimistic. They are actually forecasting increased revenues over 2009.

But no matter. Why, me worry? Everybody's gone surfing.

War Bill H.R. 2346 Is Set To Be Approved, After All

Supplemental Appropriations Act of 2009 (H.R. 2346) is set to be approved, after negotiations between House and Senate and the White House resulted in the "compromise".

U.S. Lawmakers to Vote on $106 Billion War Measure
(6/12/09 Bloomberg):

"U.S. lawmakers are set to approve a $106 billion war-spending bill after President Barack Obama said he would use “every legal and administrative remedy available” to block the release of photos of troops abusing detainees."

There goes Freedom of Information, and that was the position of the administration to begin with.

"Lawmakers crafting the war-spending bill also defeated an attempt to remove from it a “cash for clunkers” provision offering as much as $4,500 to those trading in cars for more fuel-efficient models.

"Senator Dick Durbin of Illinois, the chamber’s No. 2 Democrat, estimated the provision would result in 250,000 cars being traded in. It would cost taxpayers $1 billion."

So they managed to put this back in, just like they wanted from the beginning. And this applies only to new car purchase, and as long as the new car's fuel efficiency is better than your old car that's OK. It would cost only $1 billion, and taxpayers are going to pay for it anyway. A chump change.

By the way, Mr. Durbin apparently made some shrewed investment decision back in September 2008 after he was in discussions with Messrs. Paulson and Bernanke (sorry, Dr. Bernanke) along with his Congressional colleagues, before the market started to crash in earnest in late September-early October. On September 19, the day he sold his mutual fund holdings, Dow had a huge up-day; it ended at 11,388. Then he put his money on Berkshire Hathaway by October 2, which shows there is some justice left in the world. (Didn't Martha Stewart have to go to prison for insider trading?)

"The bill also will approve an Obama request for $108 billion in aid, mostly in the form of a line of credit, to the International Monetary Fund to help it deal with the global recession. Lawmakers appropriated $5 billion to secure the aid."

Uh huh. It also happens to come with over $100 billion loan guarantee to IMF.

If IMF thing is in, World Bank thing should be in, too. To fight poverty in the world. Oh I see. It's a war. War against poverty. Only $4 billion. Big deal, right?

What compromise? It sure looks like the administration got everything they wanted. Here's my post when the bill was still in negotiation. The bill will also authorize Treasury Secretary Geithner to instruct IMF to sell part of IMF's gold. China must be laughing and saying "Oh, thank you so much, Timmy". Tim will also get to beat up on various development banks to adopt green gas accounting.

I don't think the U.S. economy will have much chance of surviving, not to mention thriving, under the government like this. Today's stock market agrees with me. It is selling off all day, just quietly selling off.

Treasury International Capital data for April 2009

Treasury Department released today the Treasury International Capital (TIC) data for April 2009. The flow is turning negative again.

"Monthly net TIC flows were negative $53.2 billion. Of this, net foreign private flows were negative $58.4 billion, and net foreign official flows were $5.2 billion."

Since January this year, the net TIC flows are as follows (in billion dollars):

  • January 2009: -144.0
  • February: -90.9
  • March: 25.0
  • April: -53.2

New Role for Caribbean Banking Center - Home of Gitmo Detainees

So, Caribbean Banking Centers, which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama according to the U.S. Treasury Department, may not be just for buying up U.S. Treasuries when no one wants them. One of them, Bermuda, is playing a prominent role outside financial matters.

America's 'Bermuda Solution' angers Britain (6/13/09, Independent):

"Senior aides to President Barack Obama accompanied four Uighur prisoners as they were flown from Guantanamo Bay to the British colony of Bermuda, without the UK being informed, it was revealed yesterday.

"In an escalating diplomatic row over the transfer of the former terrorist suspects, US Secretary of State Hillary Clinton discussed the transfer with British Foreign Secretary David Miliband in what was said to be an uneasy conversation. Privately Whitehall officials accused America of treating Britain, with whom it is supposed to have a "special relationship", with barely disguised contempt.

"The prime minister of Bermuda, Ewart Brown, disclosed that talks regarding the Uighurs had been going on for a full month, with London kept in the dark..."

"The Bermudan premier denied that there had been any financial sweetener from Washington, and said that Bermuda was simply "playing the Good Samaritan" in recognition of its 400-hundred-year-old friendship with the United States."

(Why did he even bother to say that?)

Bermuda is a British colony, and Brits were kept in the dark, and they are furious.

Understandably so. But they should have guessed how the U.K. would be treated under the new administration when Mr. Gordon Brown got a set of DVDs (incompatible in UK) of Hollywood movies as a gift from the U.S., and when their Queen got an iPod with the US president's speeches as the state gift.

Sunday, June 14, 2009

What If It's "Slowing", Not "Quickening"?

What if it is not "quickening", as many people say on TV, on the stock message boards, on chats?

What if it is "slowing" instead? Instead of the current stock market being the equivalent of 1938 because things happen much faster now with all the information technology advance and tighter coupling of nations in the world...,

What if we are going even slower than in 1920's and 30's?

The financial firms continue to deleverage. Indicators that I see on the market indices, especially that of Dow Jones Industrial Average, are flat-lining. Dow ended last week modestly up, but it had amazing 5 consecutive days of ending the day almost exactly where it had started.

Bankers are not lending because they are afraid they won't get the money back; business (especially small to mid size business) is not investing because they don't see future economic growth potential; and individuals are stuck in their underwater houses and unable to move to a better place even if they want to. Everything is stuck. Mobility is lost. Money multiplier is below 1. Not even the fractional reserve banking is working.

Add to these the huge debts that the government is quite willing to incur and increasing tax burden that it is willing to inflict on the productive segment of the economy. Soon there will be nothing left that can breathe in and out, not to mention move a finger.

Let's suppose we are indeed slowing.

1929's stock market top on the closing basis was on September 3, 1929, and Dow Jones Industrial Average was 381.17. A short-term low came on November 13, with Dow at 198.69. That represents 48% correction of the index, and it took 2 months.

The Dow's most recent market top was in the week of October 9, 2007, and Dow was at 14,164.53. A short-term low came on November 20, 2008, with Dow at 7,552.29. That represents 47% correction, and it took 13 months.

For 1929 crash, the bottom came July 9, 1932, with Dow at 41.22, 89% correction from the 1929 top and it took 2 years and 10 months, or 34 months.

If Dow is going to ultimately correct as much as the crash of 1929 did, at the current pace it will take 221 months, or close to 19 years till it hits the ultimate bottom.

(2 months : 13 months = 34 months : x)
(2x = 13 times 34)
(x = 221)

Unfortunately, there's a precedent. Japan's Nikkei. From December 1989's top, it corrected 81% and hit the bottom just recently, in February 2009. (I am sure they hope that was the bottom.)

Japan's problem has also been financial deleveraging after the real estate bubble. (Sound familiar?) Active intervention by the government and the central bank (again, sound familiar?) did nothing but add to the deficit (we will see about this one, but don't hold your breath).

What the @#$% Happened in September-November 2008: Part II

(This is my 200th post for this blog!)

Here's Part II of What the @#$% Happened in September - November 2008, for your Sunday reading. (For Part I, click here.)

Week of September 22, 2008 was all about Paulson/Bernanke's bailout plan and negotiations in Congress and at the White House. Despite telling the Congressional leaders on Thursday September 18 that there would be no market, financial system left unless they do something very quick, Paulson-Bernanke duo (some Wall St. wags called them Hanky Panky and Helicopter Ben) spent the whole week still talking to lawmakers. Paulson's 2-page bailout memo on Friday September 19 would grow to over 100 pages.

As the Congressional hearings dragged on, overwhelming majority of the US taxpayers were against the bailout plan, and many of them even bothered to write to their Representatives and Senators. People heeded the call like this one and/or they even read what was in the bill. The ratio of For and Against letters/emails received by the members of Congress were reported at anything from 10-1 to 1000-1 Against, totally unprecedented (this one, for example: 99-1 against).

With that in mind, let's go to the headlines of Investor's Business Daily front pages. As before, the indices' numbers are those of the day prior to the date; the same goes for the news headlines.

(And here's the Dow Jones Industrial Average chart during that time again, from my other blog, if you need it as a reference. The link opens a new Window.)

September 23, 2008 (Tuesday)
(S&P 500 Index 1,207, Dow Jones Industrial 11,015, Nasdaq 2,178)

  • Congress Demands Conditions, Add-Ons To $700 Bil Rescue; Amid tussle, stocks sink; issues on table include exec pay, homeowner aid.
  • 'Crony' Capitalism Is Root Cause of Fannie And Freddie Troubles
  • Crude Oil Surges As Dollar Dives: Oct. crude vaulted $16,37 to $120.92. The dollar suffered its worst day vs the euro in 7 years amid uncertainty over the proposed gov't rescue.
  • Brokerages, Regulators Rethink Leverage; Goldman and Morgan [Stanley] now commercial banks, accepting Fed's limits.
  • SEC Expands List for Short Ban; 96 more companies were added to 799 companies.
  • Picture of Rep. Barney Frank telling the reporters "The private sector got us into this mess. The government has to get us out of it." [Right.]
September 24, 2008 (Wednesday)
(S&P 1,188, Dow 10,854, Nasdaq 2,153)

  • Paulson, Bernanke Defend Rescue Plan To Skeptical Senate, Lawmakers Want To Tinker
  • Rescue Debate Rattles Stocks: The market slid for a second straight day as debate over the Wall St. rescue plan continued.
  • Good Intentions Paved The Road To Subprime-Stoked Meltdown
  • Buffett Takes Stake In Goldman: Berkshire Hathaway is buying a $5 bil stake in Goldman Sachs, getting warrants to purchase Goldman shares at $115 apiece.
  • T-Mobile Touts 1st Google Phone [A very unfortunate debut, in the middle of financial mess. No one paid attention.]
  • Obama Reins In Spending Plans: Barak Obama said the Wall St. rescue plan will likely force him to postpone or revamp some campaign promises, such as his proposed healthcare overhaul he estimated would cost up to $65 bil a year. [Now that he "won", he seems to completely forgot what he himself once said.]
  • Picture of someone taking picture of the new facade of former Lehman Brothers building, now under Barclay's Capital.
September 25, 2008 (Thursday)
(S&P 1,186, Dow 10,825, Nasdaq 2,155)

  • Rescue Plan Details In Play As Congress Is Pressed To Act; But $700 bil sticker price could be OK'd in pieces; other restrictions weighed
  • McCain Leaves Campaign Trail To Push Rescue Plan Forward
  • How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable [1977 Community Reinvestment Act and pursuant rule change in how Fannie and Freddie's lending practices]
  • Jitters Pop Up In Debt Markets: The 3-month T-bill yield sank 35 basis points to 0.46%, down from 0.96% Friday.
  • N. Korea Nuclear Pact Unravels [yet again]
  • FBI Targets Collapsed Lenders (Fannie Mae, Freddie Mac, Lehman Brothers, and AIG) for potential corporate fraud [Whatever happened to this one?]
September 26, 2008 (Friday)
(S&P 1,209, Dow 11,022, Nasdaq 2,186)

  • Rescue Deal Near, Key Lawmakers Say; A Few Beg To Differ. Dodd: Major Issues Settled. But a high-profile White House meeting with congressional leaders and presidential contenders failed to reach a final agreement. Dodd told CNN the meeting was a disaster. Sen. Richard Shelby, R-Ala said talk of a deal was premature.
  • Banks' Fed Borrowing Surges: Banks borrowed a record $262.34 bil from the Fed's discount window.
  • Congress Pushed Fannie, Freddie In Wrong Direction During 1990s
  • New-Home Sales at 17-Year Low
  • Durable Goods Order Fell 4.5%, 3-year low
  • Jobless Claims Hit 7-Year Peak, to 493,000 [wish it was this low, now.]
  • Picture of President Bush with congressional leaders at the White House. McCain in the near left, at the far right end is Obama.
September 29, 2008 (Monday, issued on September 27 Saturday to report events on September 26, Friday)
(S&P 1,213, Dow 11,143, Nasdaq 2,183)

  • Congress Resumes Rescue Negotiations After GOP Uprising; Bush officials, lawmakers want agreement before markets reopen Monday [meaning before the Asian markets open]. "Negotiations took an unexpected turn Thursday afternoon at a contentious White House meeting in which overwhelming House Republican opposition to Treasury Secretary Henry Paulson's plan became evident." "With polls showing the public opposes the administration's plan by a wide margin, House Speaker Nancy Pelosi wants to make sure that the measure has bipartisan support."
  • JPMorgan Rises On WaMu Deal. Regulators seized the savings and loan, the biggest U.S. bank failure ever.
  • Citi In Talks To Buy Wachovia?
  • 1st Presidential Debate Goes On [Did anyone pay attention to this?]
  • Money Markets Remain Tense. Central banks around the world poured billions into the banking systems to meet the demand for cash.
  • Picture of House Minority Leader John Boehner warning the opponents, "If they thought they were going to roll over me, they are kidding themselves."
The most salient memory from this particular week is that of CNBC. Talking heads after talking heads paraded in front of the TV camera and told the viewers that "We have to do something", that it would be a disaster if we just let the system collapse (as if that's a given). They were all for Paulson's bailout plan of Wall Street. (Well, their livelihood kind of depends on it, doesn't it?) One female personality kept telling us to just imagine what would happen to the stock market if the bailout bill was rejected.

Taxpayers were increasingly skeptical and, I think, afraid. The amount of $700 billion scared them, because it would have to come from their pockets to save rich bankers and government officials who allowed the excess (in leverage, in lending practice) to go on. Why do they have to pick up the tab? Besides, what's in this bailout package that grew from 2 pages to over 100 pages?

I think more people outside Capitol Hill read the actual proposed bill than the members of Congress. And they didn't like what they saw (here, and here).

I skimmed through the draft bill, close to final draft, I think. I was amused by toy arrows and rums, but what I didn't like at all is mentioned in the second link above:

"The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on... That section had expired as of January 1, 2008, and would now be renewed."

and made permanent. What did it have to do with financial bailout?

But the Democrat- controlled Congress and the White House were pushing the bill forward without much debate. The showdown would be next week. That week will be covered in Part III. Stay tuned.