No Runny Eggs

Rep. Darrell Issa (R-CA) is running a “Twitter history” contest. The rules are simple – channel Alexander Hamilton and comment on what the Geithner Cabal is doing to the economy, using Hamilton’s own words (Issa suggests the Federalist Papers and Hamilton’s national bank plan of 1791 for starters). The contest does close at 5 pm Eastern.

Since I don’t want to appear to be better than I am, you’re going to have to reply directly to @DarrellIssa on Twitter instead of leaving your quotes here.

Bonds: Treasury prices fell, with the yield on the benchmark 10-year bond rising to 3.71% – it’s highest since mid-November. It stood at 3.51% late Tuesday. Treasury prices and yields move in opposite directions.

Revisions/extensions (6:49 am 5/28/2009, steveegg) – I presume Shoebox ran out of time to explain why a high yield/low price on Treasuries is not exactly a good thing, so you’re left with the economic understudy to do the explaining. The CNNMoney blurb actually does a fair job of at least touching on that:

– The appetite for short-term (specifically in this case, 5-year) notes represents a lessening demand for longer-term notes (which explains the nearly-failed auction of 30-year notes the other week).

– Mortgage rates are tied to the 10-year yield, and rising interest rates could stifle any “recovery” in the housing market.

– The record amounts of debt coming to market could overwhelm it. Indeed, the Federal Reserve already is soaking up a lot of Treasury securities because there just isn’t enough money out there to buy it all.

(H/T – Asian Badger)

Forbes publisher Rich Karlgaard notes something missing from the ingredients that are coming together for economic recovery – CEO confidence. Quoting Rich

The Fed has done its job. (Maybe too well, but that’s another story for another day.) Consumer sentiment and spending have bounced back. The headwinds that remain have less to do with bank stress tests and more to do with CEO mood. The Business Roundtable, which represents big business, reported “record low” CEO confidence in April:

–71% of CEOs plan more layoffs in the next six months.

–Most see declines in capital spending.

–The CEO Economic Outlook Index was negative for the first time.

Why is that so? History provides a guide (again quoting Rich):

In her book The Forgotten Man, Amity Shlaes wrote that the 1937–38 “depression within the Depression” occurred when capital went on strike. President Roosevelt’s willingness to “try anything” (including retroactive taxation, laws against discount pricing and an attempt at packing the Supreme Court) had businesses and their backers so confused over FDR’s rules that they simply withdrew.

This is the risk of President Obama’s willingness to “do what it takes.” Those words sound positive and action-oriented. They really mean “anything can happen.” The tearing up of legal contracts? That can happen. Limits to salary and travel? That can happen. Bullying by the Environmental Protection Agency? That can happen. Nationalization of General Motors and Citigroup? That can happen. Nobody knows for sure what will happen. Government is sorting it out day by day.

There are two things that can happen with a lack of investment from the CEOs and, as Dad29 points out in the comments over at Asian Badger, the corporate bond market, and neither of them are good: increased unemployment as business continue to shed workers, and increased inflation as more money (in this case, caused by an extremely loose Fed bolstered by consumer confidence) chases fewer goods (caused by a lack of capital investment). As they say, those who don’t remember history (or willfully ignore its painful lessons),….

(H/Ts – JammieWearingFool, who has the train-wreck pic of the day, and Ed Morrissey)

The Bureau of Labor Statistics reported that non-farm employment continued to decline in April, this time by 539,000, and that the unemployment rate went up to 8.9%. Both JWF and Ed noted that actually masked couple of troubling items:

– Take out the 72,000-job increase in government payrolls and the drop is actually 611,000.
– Most of that 72,000-job government increase was due to temporary Census jobs.

JWF caught a very telling paragraph in the New York Times’ article:

A year ago, the loss of more than half a million jobs in a single month would have seemed like a disaster for the economy. On Friday, experts were calling it an improvement.

JWF points out that the change in outlook is due to the change of parties in the Oval Office. The only surprising thing is the Times is arrogant enough to all-but-admit that.

But wait, it gets worse. Jim Geraghty notes that the rise in the unemployment rate to 8.9%, at least this early into 2009, wasn’t exactly envisioned by the Treasury Department when they ran their “stress tests” of the top 19 financial institutions. Quoting a CNN story noting this little problem – “To take one example, the adverse scenario envisions the U.S. jobless rate gradually rising from 6.9% at the end of 2008 to 8.9% at the end of 2009.”

I hope you weren’t planning on buying Bank of America stock. Of course, you’ll probably be owning it shortly whether you wanted to or not.

Revisions/extensions (11:05 am 5/8/2009) – For even more depressing news, we go back to Jim from yesterday:

Number of people collecting unemployment benefits the week the stimulus was signed into law: 5.11 million.

Number of people collecting unemployment benefits as of May 2: 6.35 million.

First, sorry I’ve left Steve hung out to dry for the past few weeks.  I don’t want to go into it right now but I’ve been working on a “special project” here in MN for the past few weeks and just haven’t had the time to spend on the blog end.  More on the special project later.

Now, on to our regularly scheduled program.

To my surprise, President Obama has managed to keep his net favorable ratings above the zero level into May.  With the way things were going early in April, I would have bet that he would have dipped below zero by now.  However, not all is good news in the Obama camp.

First, Rasmussen continues to show an eroding net positive rating for the President.  For the past two weeks the net positive, according to Rasmussen Reports, has been bouncing around in the low single digits.  Saturday, the net positive had dropped to just +1.  While the President’s personal popularity remains high there are continuing indications that support for his policies are not.  Which brings me to…

Second, also according to Rasmussen Reports, one of the bluest states around, New Jersey, appears to have an incumbent Democrat Governor who is in real reelection trouble.  Depending upon the poll, current Governor, John Corzine is down by as much 15 points to a potential Republican challenger.  The main issues in the campaign seem all related to the economy in New Jersey.  In fact, Rasmussen makes the statement:

this race could come down to a referendum on the first year of the Obama administration. The economy clearly has hit New Jersey as hard as any other state, with many New York City commuters across the Hudson River being decimated by the financial mess on Wall Street.

I have to say I’m surprised that any Democrat is feeling pressure as a result of Obama’s economic policies.  After all, just last week, President Obama, in his most recent preemption of prime time television in which he answers questions that have as much relevance to the country’s challenges as Simon Cowell does to men’s fashion trends, told us that his economic plans were working.  In fact, he had already identified 150,000 jobs that had been saved or created since the stimulus bill was passed. 

The stimulus bill was signed February 18th, just 10 weeks ago.  With 150,000 jobs already saved or created, that’s 15,000 per week.  At that clip, we’ll see nearly 500,000 more created or saved this year and another 650,000 created or saved prior to next year’s election for a total.  With a total of 1.3 million jobs saved or created by next year’s election, it’s hard to imagine any incumbent being concerned about the President’s economic policy.  1.3 million is a lot of jobs is a lot of jobs!  A lot of jobs; if any of them really exist.  Maybe Corzine should start worrying!

During last years campaign, as Exxon announced record setting profits, than, Senator Barack Obama said:

“No U.S. corporation ever made that much in a quarter,” Obama said. “But while Big Oil is making record profits, you are paying record prices at the pump and our economy is leaving working people behind.”

McCain’s response, Obama said, is to propose a corporate tax plan that would give “$4 billion each year to the oil companies, including $1.2 billion for Exxon Mobil alone” and a gas tax holiday that Obama said would only “pad oil company profits and save you — at best — half a tank of gas” over an entire summer.

This week, Wells Fargo, one of the banks that was forced to accept TARP fund reported record setting profits of $3 Billion.  In regard to this amazing, government supported, excess profit, President Barack Obama said:

zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

Huh, no comment.  Radio silence.

Wells Fargo was forced to take $25 billion from the government.  An amount that its CEO didn’t want.  Barack Obama complained venomously last year, about $4 billion provided to Exxon.  However, $25 billion seems to be just OK. 

If the truth be told, the $4 billion that was “given” to Exxon was really not “given” to Exxon.  The $4 billion were largely accelerated depreciation on drilling assets, a pretty good policy if you want to encourage energy production.  The money “given” to Exxon didn’t cost taxpayers a dime and in fact, if you consider that increased energy production has the effect of lowering energy prices, the taxpayer likely came out ahead. 

On the other hand, the $25 billion dollars Wells Fargo was forced to accept is coming directly from the taxpayers pocket.  If not today, certainly tomorrow in the form of the higher taxes that will be required to pay off the debt that was incurred to put this money into Wells Fargo.

Actually, in the world of Obama, Exxon and Wells Fargo are situations for which identical outcomes are being attempted.  In both cases, Obama’s reaction, or lack of one, is a result of his desire to control the company or industry that the afflicted is in. 

In Exxon’s case, Obama found the profits obscene.  He proposed a windfall tax profit.  He did this not just to enrich the treasury but to cow Exxon and other players in the industry into doing things his way.  This is also a big reason why Obama wants a carbon tax or something similar.  By increasing the costs on the energy companies he knows that energy costs will increase.  There is no “alternative energy” that will do more than light a candle. With no real alternative, consumers will be soon condemning the energy companies just like they have been condemning banks and investment companies who they see as “deserving” the beat down they are getting.

In Wells Fargo’s case, Obama is oblivious to the profits and worse, seems uninterested in recovering the money that the American taxpayers have gone on the hook for.  Obama is uninterested in Welss Fargo’s profit because he has already taken control of this industry and is uninterested in releasing that control.

Yes, President Obama’s actions can cause confusion to those who attempt to view situations from a logical perspective.  Confusion until you remember that all of his actions are after the same end result, control of the enterprise that is in the cross hairs.

Once again, the meat of the commentary will be at Sister Toldjah until the comments time out there. However, there is a warning on the latest Rasmussen poll on capitalism versus socialism that I’ll tease you with here:

The worse news is that those under 30 are almost evenly divided, with 37% saying capitalism is better, 33% saying socialism is better, and 30% unsure of what they think. It is not a coincidence that the radicals of the late 1960s were entering the decision-level positions of the education establishment 30 years ago.

I’ve written several times about the idiocy of not modifying or eliminating the current interpretation of an accounting procedure known as Mark to Market.

In short, “mark to market” means that financial institutions need to recognize the market value of their investments as they change rather than waiting until they dispose of the asset and recognizing a gain or loss.   The purpose for “mark to market” is to reflect the estimated “value” change of the asset, real time, rather than having shareholders or mutual fund holders get surprised (up or down)  in one fell swoop. 

In a “normal” world, mark to market is a good tool.  However, for mark to market to work properly there needs to be a fairly active market for the asset being marked.  If the market for the asset has few trades (thinly traded), it has the possibility of causing “fire sale” pricing for assets that have actual, recoverable value that is much higher.  This latter situation is what is happening to various financial instruments that many of the banks and other financial institutions (Citicorp) hold.  Today, there are many reports that assets like the mortgage backed securities have been written down to as low as 30% of their face value.  This while the actual cash flow performance of those same assets are performing at a level that is close to 90% of face value.

Various government entities, including the FDIC, require that banks have capital of a certain ratio to the loans they have outstanding.  Part of the capital that a bank has is the value of assets that they invest in.  When the assets, like CDOs get written down in a dramatic fashion, the bank or financial institution’s capital is also reduced.  This is part of the reason that financial institutions have been chasing after capital infusions during this meltdown.  Part of the reason that the TARP plan exists is to infuse capital into financial institutions to replace the eroded capital from written down assets.  You can see from the previous paragraph that because of mark to market, it is possible that TARP is having to infuse 50% + more capital than they need to for the capital they are providing to support the CDOs.

Finally, FINALLY, after having first written about this nearly a year ago, it looks like the FASB is going to address and likely modify mark to market.  About dang time!

You may ask, “Shoebox, if this was so obvious, why did it take a whole year to address?”  Good question!  This is yet another example where government’s “good intentions” led to unintended consequences. 

Mark to market as we know it, was created by the Financial Accounting Standards Board (FASB) with FASB 157.  FASB 157 was a direct result of the Enron scandal.  Congress was so incensed by what happened at Enron that they basically told FASB and others that either they fixed the problem or Congress would.  FASB 157 is the result. 

The other result of Enron was that auditing firms became extremely conservative in interpreting FASB rules.  All you have to know is that Arthur Andersen, then one of the largest auditing firms in the world, ceased to exist as a result of Enron and you can see why auditing firms quit “interpreting” and merely “implemented” anything that FASB promulgates.

Let me make one caveat to my advocacy for a change in mark to market.  Many of complained that by eliminating M to M we will not have financial statements that fairly reflect the company’s status.  In some respects that’s accurate.  What I propose is going back to a mark to model for financial purposes but providing information in the financial statement notes that reflect the difference between mark to market and mark to model.  This will give both sides of the argument the information they want/need and will allow knowledgable investors the information they need to make assessments.

The sad part of all of this is that FASB, the FDIC or Congress could have acted on this long ago.  Had they done so, even if only doing so on the capital requirement calculations, some portion of the hullabaloo in the financial industry could have been avoided.  Additionally, some of the financial bailouts could have been avoided or at least mitigated and maybe, just maybe, President Obama would not have had the door thrown wide open to waltz into any company he now chooses and dictate how they should do business.

I hope that FASB does act on Thursday.  If they don’t, expect a nasty reaction from the stock market.  If they do act, as I expect them to, this could provide a significant boost to the viability of several financial institutions.  If that happens, we could see the end of the beginning of this financial downturn.

Senator Judd Gregg, says the US doesn’t have the economic where-with-all to even join the European Union:

“We won’t even be able to get into the EU if we wanted to,” Gregg said this morning on MSNBC, “because our government is so large and so huge.”

The European Union’s Stability and Growth Pact (SGP) adopted in 1997 requires a budget deficit to be less than three percent, and requires a national debt beneath 60 percent of Gross Domestic Product (GDP).

As Gregg further points out, we’re getting dressed down by the French:

“We’ve been lectured by France on the fact that we’re not fiscally responsible right now,” Gregg, the would-be commerce secretary, noted with incredulity.

We’ve also been lectured by the Russians and the Chinese about our excessive borrowing and spending.

With the size of the deficits and borrowing that President Obama is proposing, it’s obvious that we will no longer be an economic super power.  The EU is saying we couldn’t even join a club that includes Western versions of Socialism.  If we can’t join their club, where does it leave us?  I hear Mugabe, Chavez, Castro and Kim Jong-ll are looking for members!

Treasury’s Top Candidate to Run TARP Drops Out .

Damn, is there anyone who wants a Treasury job?

WASHINGTON — The leading candidate to run the Treasury Department’s $700 billion bailout program has withdrawn his name from consideration, according to people familiar with the matter.

Frank Brosens, a hedge-fund manager and big Democratic donor, was considered the top contender to run the Treasury’s Troubled Asset Relief Program. Treasury Secretary Timothy Geithner is now considering several other candidates, including Herb Allison, who currently heads mortgage titan Fannie Mae.

Oh yeah, let’s get the Fannie Mae folks, they’ll do anything!

Mr. Brosens, who campaigned for Mr. Obama, said he withdrew his name for personal reasons, including wanting to remain at his hedge fund, Taconic Capital Advisors. “I very much wanted to find a way to serve,” he said. Among the reasons he cited for withdrawing was the need to commute between Washington and New York, where his son is in school.

Uh huh.  Did he just find out that his son is in school?

Just so you know, if nominated, I will not run.  If elected, I will not serve….just if you were wondering.

What would this article be without the obligatory and obvious video?

During his press conference last evening, when question about the dramatic increases in debt and deficit that his budget shows, President Obama again lashed out with, “I inherited this mess.”

The Washington Post has put together a graph showing deficits under Bush and the proposed deficits under Obama.  As they say, a picture is worth a thousand words:

I think it’s fair to cut Obama some slack on ’09. The deficit in this year was started by President Bush. That said, there was not one decision on the extraordinary monies spend that Obama was not involved with either through direct consultation or via his vote as a Senator. That said, there’s no question that every dollar past ’09 is all Obama, all the time. There is also not doubt that every year of Obama’s projected budget has a higher deficit than ANYTHING President Bush had.

Before you get into “this is a true comparison” or “Bush didn’t show Iraq”, go read the Heritage.org piece. As they say in the commercial, “Prego, it’s all in there!”

This morning, Treasury Secretary Timothy Geithner released his plan for Toxic assets.  Geithner’s latest attempt to solve this problem is called the , Public Private Partnership Investment Program. 

In its simplest form, Geithner’s plan would have the FDIC front a program where investment companies could place their “toxic assets” up for sale in an auction process.  Private entities would be able to bid on the toxic assets and via FDIC guarantees, be able to leverage their money 6:1.  The equity investment required to purchase the assets would be shared equally between the government and the private entity purchasing the toxic asset.  Perhaps this example from Geithner’s document will help clarify how this will work:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Before I dissect the plan can I ask one question?  Is this it?  Is this what we waited two months for?  Is this the plan that Geithner was “uniquely qualified” for to put together?  How could this answer have taken more than about a partial weekend to come up with?

What’s not to like?  Plenty!

First, the FDIC and TARP are carrying nearly 93% of the risk of the asset program.  Obviously, if the assets are purchased at the “right” price, there is upside for these “investments.  However, with the private equity folks having to only pony up 7% and having significant return possibilities with minimal downside, isn’t it more likely that the assets get over priced in the auction rather than under priced?  Isn’t this the same kind of a scenario that lead to the toxic assets in the first place?

Second, I question how much of the debt will be placed up for auction.  Yes, the folks holding them would like to clear their books of them.  However, an auction can get you both less than you have the asset marked at as well as more than the asset is marked at.  This market is still very very thin.  Couple that with the uncertain economic environment and it would seem that there will be few players able and willing to bid on these assets.  Auctions work best when there are lots of bidders and the items being bid on have great transparency as to what’s being bid on.  I don’t see either of those situations occurring with these auctions.

Third, and perhaps most important, as it title states, this program is based on private participation.  OK, admittedly, the private participation is not much more than a way for Geithner to attempt to legitimize the government guaranteeing/buying these assets, but private companies are still required.  If the AIG kerfuffle showed nothing else, it showed that the Democrats have nothing but disdain and contempt for anyone who has made out better than whatever they think is “fair.”  The Democrats have also put private enterprise on notice that whoever uses government money is subject to retroactive “adjustments” if the Democrats think you did better than you ought to have done. 

Geithner’s new program would have private investors leveraging government funds to purchase these assets.  Isn’t that what AIG is/was doing?  If the private investors are able to drive significant returns on the toxic asset program what guarantee is there that Congress, specifically the Democrats, won’t come back afterwords and say “we want more!”  With this as the backdrop, how many private investors do you think will be willing to put their money at risk in another government supported effort?

I’ll say right now that I may be completely wrong about this program.  As I write this, the DOW is up 260+ points on the anticipation of this program.  I suspect however, that this may look a lot like last week’s announcement by the Fed to expand it’s balance sheet by over a trillion dollars, the DOW ran up on the anticipation but sold off the following two days as investors digested the implications and reality of what the Fed had done.

My take?  This is another “swing and a miss” by Geithner.  That makes a strike out on my stat sheet.

Update 3/23 10:44 AM – and if you think the disincentive of working with the government is limited only to AIG because Congress so “carefully crafted” the legislation not to have any unintended consequences, think again!  Read this about what is happening at another “failing bank.”  You can bet most of the other “failing banks” are impacted by the unintended consequences of the AIG bill as well!

That’s the stuff that President Obama’s budget appears to have been made of.

The Congressional Budget Office took a “preliminary analysis” of Obama’s budget and found some, let’s just say, “challenges.”

Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, CBO’s baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. Those projections assume that current laws and policies remain in place. Under that assumption, CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next year—the largest deficits as a share of GDP since 1945. Deficits would shrink to about 2 percent of GDP by 2012 and remain in that vicinity through 2019.

But that’s just the tip of the iceberg:

As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period.

The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).

Oh, if you’re buying the “we’ll raise the tax rate and it will bring in more revenue” canard:

Proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion over the next 10 years.

Every time Obama asks for confirmation of another appointee we hear that his administration hires the “best and brightest.”  If that’s so, they must be coming from the public school systems because the CBO says they aren’t able to do some simple math:

Our estimates of deficits under the President’s budget exceed those anticipated by the Administration by $2.3 trillion over the 2010-2019 period.

Oops!

And that whole “inflation capping at 8.1%” because of the stimulus pixie dust; um, nope!

In this forecast, the unemployment rate peaks at 9.4 percent in late 2009 and early 2010 and remains above 7.0 percent through the end of 2011.

For those of you who learn visually, here is the graph that says it all.  According to the CBO, if we would leave the horrible, awful policies of George Bush in place, we would see the deficit run at about 1/4 to 1/3 the rate compared to enacting the policies of the oh so enlightened Barack Obama:

Yes, President Obama and staff appear to have as much understanding of what it takes to manage long term economics as Lesley Gore did about maintaining long term relationships.