naked capitalism

Wish I’d written it. From Jesse:

We believe that the stimulus is too backend loaded and unimaginative to affect anything sooner. Adding liquidity to the banks is as useful as filling the tank of a car wrapped around a telephone pole. Who are the banks going to lend to? And increased spending on health care, with the highest and least efficient per capita cost in the world, is like giving the driver of that car a bottle of vodka to ease their pain.

Acid oceans ‘need urgent action‘ BBC. We wrote about this in 2007.

Deadly heatwave causes havoc across south-eastern Australia Telegraph

Tidal-powered datacenters: A sea of opportunity? InfoWorld

“Bad bank” may be put on hold: report Reuters versus US set for ‘big bang’ financial clean-up Financial Times. Not necessarily contradictory, but released in close proximity with a big difference in tone.

The Bailout Game, Comic relief.

Feds allege plot to destroy Fannie Mae data Associated Press (hat tip reader Tom)

Give Back The Bonuses James Ledbetter, The Big Money

Citigroup under fire over baseball sponsorship Guardian (hat tip reader Ed)

How I Learned to Stop Worrying and Love the TARP Calculated Risk. You need to see this.

It’s Theirs and They’re Not Apologizing New York Times

The credit crunch according to Soros Financial Times

Japan’s Economy – No End in Sight? Japan Economy Watch. A reader chided me for not pointing out how world class awful the Friday factory production release was out of Japan, and other economic updates from the Land of the Rising Sun have been less than stellar. This post gives an excellent and longer ranging overview.

Zimbabwe Dumps Currency Paul Kedrosky

US-China currency war eclipses Davos, and threatens the world Ambrose Evans-Pritchard, Telegraph

Slowdown in lending threatens new squeeze on companies Independent

Layoffs: The new problem? Macroblog

Antidote du jour:

Today, Senator Claire McCaskill of Missouri introduced legislation that would limit salary, bonus, and stock options for executives as financial firm recipients of bailout funds be limited to the President’s level of pay, currently $400,000.

McCaskill’s proposal is likely to go all of nowhere. She is not a member of the Finance or Appropriations committee, so her proposal is more a shot across the bow than a serious initiative. And given that “executive” is generally defined as the five most highly paid corporate officers, the ones whose remuneration is listed in the proxy statement, it covers only a trivial number of employees.

But her bill is getting a lot of media coverage, which means it could serve as a starting point for negotiations. It has become a benchmark as far as the public is concerned.

So how reasonable is it? The problem is that too few people in the industry have any memory of what bad times were like, and the last few years were so grotesquely rich (in terms of pay, not risk adjusted performance) as to have distorted industry participants’ sense of reality. The pretext for the largess was that the really good people would decamp to hedge funds, so pay had to be ratcheted up to those levels (John Whitehead, former co-chairman of Goldman, dismissed that idea when the bubble was at its peak).

Bear in mind: the bonuses paid in 2008 in New York, when all the big domestic players and most of the large foreign firms (who constitute the bulk of employment) were on government life support, were the roughly the same as in 2004, which was a good but not stellar year. I’m not certain of the headcount differences then versus now; with the loss of Bear, Lehman, and a lot of headcount cuts industry-wide, I doubt that employment is much above 2004 levels.

Since people are generally not too open about pay (and tend to exaggerate to boot), I have only a couple of datapoints, but I think they are germane. Anyone with relevant info from the last downturn is encouraged to speak up.

The dot bomb bust was bad on Wall Street. To give an idea: I went to see a friend in the search business in 2002 to get his insights about a company he knew. He had two neat stacks of unopened letters on a credenza behind his desk, each roughly 2 feet high. I asked about them. He explained he was getting an enormous amount of letters from job-seekers (and mind you, his was a very small firm). He didn’t bother opening them, since he knew or could find plenty of good people and employers preferred to hire the employed over the unemployed. The letters were from unknown quantities and there was no reason for him to try to weed through them.

So why did he keep them? In case someone connected called him to ask him if he had received the resume of his good buddy. Then he would dig through the pile and give it a (usually obligatory) look.

One of the hard hit businesses was mergers and acquisitions. Keep in mind that M&A is a fee business; the professionals do have overhead (salaries, travel, secretarial, computers and software, access to databases) but they don’t use capital and they require less infrastructure than trading operations (which have trading stations, data feeds, lots of software and valuation modes, risk management, sales forces, back office). Now admittedly, in boom cycles (the late 1980s and the last few years) Wall Street messes up this nice model and decides to try to gain a leg up in M&A by risking its balance sheet (committing to lend to fund deals). That always leads to ruin. But that gets reined in during bad times, so let’s think of the traditional, high wits, low overhead version of the business.

I’d welcome any other inputs, but the people I knew in M&A (senior MDs running what had been high profit industry groups, so the top of the food chain in that business) were cut back to $400,000. And they were unhappy but not disappointed, if you can appreciate the distinction. They of course hated that they had to keep trying to do business when there was no business to be had. Tilling a field during a drought is not pleasant. But they were grateful to still have a job, to not have been demoted, and knew intellectually that their pay was fair in light of current conditions.

Assume 3% inflation. Compound $400,000 forward to 2009. You get roughly $500,000.

M&A is a talent business. You need pretty highly developed skills to master the technical aspects and be credible with CEOs. The top people can and do set up or join boutiques (although some recent ones overlarded with talent, like Perella Weinberg, haven’t done as well as the older boutiques, like Greenhill & Company).

Traders will argue that level is too low, that if they make $30 million for someone, they deserve a bigger cut.

No dice, Unless you are willing to pay back your share of losses, I don’t accept the logic that you are entitled to a asymmetrical pay deal. You may have been lucky enough to extract that, but what you can get in good times (or from chumps) and what you deserve in a more abstract sense are two different things. You are playing with other people’s money, and that carries with it substantial responsibilities (or at least it should, but management heretofore has been complicit in pretending that it doesn’t).

Warren Buffet, in his reinsurance business, had a simple formula: his execs got a pool of 15% of the profits on deals written 5 years earlier, ex any losses on the same pool. Five years was long enough for the vast majority of deals to prove themselves out.

I could see a variant of that formula for traders. Say you do make $30 million in profits in year one. You get a salary and only 1/10 of your cut that year in cash. The rest is deferred. Any losses in years 2-5 get deducted (the deferred portion can be invested in a high or low risk manner at the choosing of the trader, so there would be some income on the deferred amount) Any remainder is paid out.

Now that would take some tweaking (t creates an incentive for a trader having a super year to change firms, for instance), and there may be better ways to achieve the same end, but you get the drift: you can’t have people who take serious risks with capital enjoying “head’s I win, tails you lose” arrangements. Either they rewards have to be reined in substantially so they have less reason to take big gambles, or they need to share more in the downside.

The threat to contain pay is serious enough that Wall Street may have to find a way to deny its reflexes and exercise restraint. This is going to make for some interesting theater.

Reader Tim C pointed us to a post on Tim Price’s blog, “The Price of Everything,” which provides astute financial and sometimes social commentary. Below is an excerpt:

Dear Western banking establishment,

I notice that your unauthorised credit facility from international lenders of last resort now totals approximately $10 trillion. As a taxpayer and therefore your largest shareholder I would be grateful if you could repay this facility at your earliest convenience. I have charged you an additional £30 for this letter and a monthly unauthorised overdraft fee of £28. If you do not repay this facility shortly I will have no choice but to become further massively impoverished along with legions of fellow taxpayers for multiple generations to come.

I would also be grateful if the strategists and economists who work for you could abstain from publishing their unsolicited opinions about resolving the banking crisis within the financial media. I am sure you will agree that hearing from the same strategists who worked for the architects of such widespread financial destruction is likely to irritate those of us who were not actually complicit in the extraordinary and venal credit boom of the last several decades. There is an expression that if you’re not part of the solution, you’re part of the problem. Those of your employees who were the public face of the problem are, I think you will agree, unlikely to represent the solution, unless perhaps they are fired – en masse, from a giant howitzer, into an area where they can do no further harm. Alaska, perhaps. I would further suggest that the high profile commentators who work for you and who have implicitly played their part in marketing and then amplifying this catastrophe might consider quietly entering another field with superior ethics and enhanced value to society at large: perhaps as piano players in brothels. This note has been copied to the letters editors of The Financial Times and The Wall Street Journal (which I understand is shortly to be renamed simply The Journal on the basis that Wall Street no longer actually exists – as was noted this week by Messrs Wen Jiabao and Vladimir Putin at Davos. Don’t worry about not being there – you weren’t missed).

Since the start of the year is always a time for slimming and working off the excesses of the festive period, I wonder whether your industry would consider operating along similar lines. Just as there is no real need to have 18 different coffee bars all touting their wares along my High Street, there is probably no real need to have 18 different banks, not all of which are subsidiaries of Santander, clogging the High Street and busily not wanting to extend me back any of my own money so generously lent to them.

I would also be interested in your views as to the wisdom and efficacy of the monstrous pile of credit being shovelled at you and your peers by governments when it was overmuch credit creation that precipitated this crisis. I do not, of course, expect anything other than a self-interested response. But you may find the following observations pertinent. If they seem acutely relevant today it is because they were written in the early 1930s, by one Garet Garrett (and a grateful hat tip to M. Gandon):

“The general shape of this universal delusion [that is, credit] may be indicated by three of its familiar features.. First, the idea that the panacea for debt is credit.. The burden of Europe’s private debt to this country now is greater than the burden of her war debt; and the war debt, with arrears of interest, is greater than it was the day the peace was signed.. Debt was the economic terror of the world when the war ended. How to pay it was the colossal problem. Yet you will hardly find a nation, state, city, town or region that has not multiplied its debt since the war. The aggregate of this increase is prodigious, and a very high proportion of it represents recourse to credit to avoid payment of debt.

“Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life. If they cannot immediately afford them.. nevertheless people are entitled to them, and credit must provide them.. Result: Probably one half of all government, national and civic, in the area of western civilization is either bankrupt or in acute distress from having over-borrowed according to this doctrine.. Now as credit fails and the standards of living tend to fall from the planes on which credit for a while sustained them, there is political dismay.. When [people] have been living on credit beyond their means the debt overtakes them. If they tax themselves to pay it, that means going back a little. If they repudiate their debt, that is the end of their credit. In this dilemma the ideal solution, so recommended even to the creditor, is more credit, more debt.

“Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.”

The post continues here. Enjoy!

Floating rubbish dump ‘bigger than US’ News.com.au (hat tip reader Nivethan). It is also breaking down and getting into the food chain.

Hidden Bonuses Enrich Government Contractors at Taxpayer Cost Bloomberg. Bonuses for non-performance are endemic in America (hat tip reader Larry)

Vive la Révolution! Pension Pulse

Stimulus Pork Econospeak

Global Worries Over U.S. Stimulus Spending New York Times

Steep drop in world wheat crop forecast Financial Times

The Game Changer George Soros, Financial Times (hat tip reader Don). A very good piece, particularly his discussion of credit default swaps and why he thinks they are toxic and should be severely limited.

So, when does the contrition start? Larry Elliot, Guardian. Apparently, it hasn’t at Davos.

The tenuous relationship of venture capital and innovation Masayuki Hirukawa and Masako Ueda, VoxEU

Antidote du jour:

Now naive folks like me subscribe to the fantasy that a reputable newspaper maintains a church/state separation between its editorial pages and its news section. And then we have the Wall Street Journal as a telling counterexample.

Last week, the Journal ran a op-ed piece by one Peter Schiff, a rather vocal libertaran and goldbug whose claim to fame is that he foresaw the economic downturn. He also runs a broker-dealer called Euro Pacific Capital.

A mere three days later , blogger Michael Shedlock in “Peter Schiff Was Wrong,” savages Schiff on his frequent claims to having made good trend forecasts and positioning his clients “accordingly.”

Shedlock examines Schiff’s investment thesis, marshals considerable evidence to show that most of the key elements were way off. Shedlock also provides a screenshot of a Schiff account statement (scary) and reports from selected investors in managed accounts of horrific losses in the last two years (60% to 70% range), a stark contrast to his alleged foresight about the developing crisis. (I must note that the first 3/4 of Shedlock’s post is factual and pointed, Shedlock has an overly long section at the close touting his firm’s results, which undermines the solid work that precedes it).

So what do we see today? A Wall Street Journal article rationalizing, as best it can, Schiff’s performance: “Right Forecast by Schiff, Wrong Plan?” Although the second sentence is punchy (“The bust-up he didn’t foresee was the one that made mincemeat of investors who took his advice in 2008″) and the article does make clear that most Schiff accounts underperformed the S&P 500 handsomely in 2008, there is too much stuff like this:

Such losses came as something of a surprise. Mr. Schiff’s prescient call for the collapse of the U.S. housing market and the weakening of the financial system helped him gain fame as an economic guru and savvy investor who promised shelter from the financial storm.

This verges on pandering. Schiff as an economic guru? Please.

In fairness, the article does contain specific, and quite negative information about Schiff’s 2008 results, and suggests that investors taken with the the aggressive promotion of Schiff’s message, piled into his firm at the worst possible moment.

Even though the article does tell both sides of the story, there is too much real estate devoted to Schiff’s defense. I counted 13 neutral or Schiff friendly paragraphs versus 7 unfavorable. By virtue of contrast, see the article on storied investor Bill Miller’s fall from grace, with a record 15 years of outperformance followed by 58% losses in 2008. Even with a very long backstory of his rise, which is legitimately postive, the article is close to even on favorable/neutral paragraphs versus unfavorable, and the negative ones are often very cutting.

Any media outlet that didn’t have an existing editorial relationship would have taken the same fact set and played up the angle that Schiff does not live up to his PR and delivered dreadful returns at what should have been his moment.

Now I cannot blame the reporters given the genesis of this article. A hot potato landed in their laps and they dealt with it as best they could (and who knows how much of the softening came in the editing process).

If nothing else, the existence of this article, even though it makes no reference to the Shedlock post, was clearly prompted by it, and is thus a backhanded acknowledgment of his reach.

Goldman, in a research note discussed at CNBC, says the total tab for the US bank rescue operation could run as high as $4 trillion:

The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a “bad bank” that buys up souring assets.

The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

“Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset,”…

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.

New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.

Given the acute need the perps have for more dough, “informal conversations with people in the industry” are the functional equivalent of lobbying.

Now admittedly, Nouriel Roubini, who is both bearish and so far, quite accurate in calling the trajectory of the crisis, pegs total securities and loan losses at $3.6 trillion. But he has only $1.9 trillion of that with US firms, and his totals include unsecuritized loans, and appear to include commercial real estate loans, which the Goldman note excluded.

I’d love to know how anyone can defend a number more than twice as grim as Roubini’s.

And even if one were to believe the Goldman figure, there is a practical problem: no way, no how is that much money going to be spent. We will limp along with a Japan style partial remedies. The US public will not stomach that level of spending on banksters in the absence of substantial spending for individuals hurt by the crisis. So you’d need to add a few extra trillion to come up with a remedy that looked fair, or at least not grossly skewed.

And we have a second set of possible issues with the Obama plans in the making, at least if the reports swirling around are remotely accurate.

A sketch of a plan has been circulating (I have seen this in print, and for the life of me, cannot track down a link) with $100 billion of TARP funds used to provide the equity for a “bad bank” that would buy dodgy paper, with another, say, $900 billion in loans from the Fed to give the new entity a $1 trillion+ balance sheet. Bloomberg tells us that the FDIC is likely to be put in charge. Reader Steve, who worked at the FDIC, isn’t keen about the idea:

Anyway, the notion that FDIC should manage the thing is more than a little questionable, because FDIC has no experience managing sophisticated instruments (let alone derivatives), and the experienced credit hands have been gone from FDIC for years. I was told about a year ago that FDIC’s bank liquidation group, which had numbered about 7,000 in 1992, was all of 200 people. So I expect that FDIC `management’ will simply mean more business for Blackrock, GS, and Pimco, who will be `supervised’ by a collection of sleepy FDIC functionaries. No doubt they will do `Sheila mods’ while trading more complex government-owned assets as test cases for their own portfolios. To be blunt, FDIC and other regulators do not have the expertise to examine banks with sophisticated portfolios, let alone manage those portfolios themselves.

Of the billions in assets acquired by FDIC over the last year — and most of those are simple credits — how much has FDIC managed to sell? Seems to be zero; the only thing FDIC understands about liquidation these days is selling to private equity while retaining the quasi-totality of the risk.

Another element of the plan that has been mentioned sans much elaboration is that the bad bank would do loan mods.One theory we have heard is:

The bad bank hires laid-off mortgage brokers to refinance each homeowner with a mortgage that’s been sliced and diced into exotic securities now sitting on the bad bank balance sheet. This is not feasible without owning a huge chunk of toxic assets, because claims on sliced-and-diced mortgages are spread all around the global banking system. Appraisals will be waived in situations of negative equity, and principal will be written down. This may include the homeowner granting the lender some sort of future ‘property appreciation right’ in exchange for a principal write-down.

Readers are welcome to correct me, but if I understand mortgage securitizations, this will not work (legally) in a significant portion of cases, one where the offering documents restricted loan mods. Note that there are three general types: no restrictions on mods, mods permitted up to a certain % of the pool, and no restrictions. Servicers do not appear to have done much in the way of bona fide mods (a payment catchup plan would not be what most readers would define as a mod, yet services include them in their reported level of mods), and it remains an open question as to whether the real issue is lack of incentives, given that some pools have no restrictions on mods (they get paid for the work involved in foreclosures, they do not get paid to mod).

So why won’t this ducky plan work? Wellie, my understanding is that for those deals that have mod restrictions, to lift them requires the consent of at least a majority (in some cases 2/3 or 3/4) of the holders of EVERY TRANCHE in the deal.

US banks hold mainly what was once AAA paper due to its favorable risk weighting under bank capital regulations. The equity tranche usually stayed with packager, which in many cases was an investment bank. So the aggregator bank might wind up able to get a high enough percentage of those tranches.

But the intermediate tranches went to a whole host of players, and for subprime securitization, a lot went into CDOs. And from 2006 onward, most CDOs were sold overseas, often to not very sophisticated players (think German Landesbanken).

Now we’ll see if this sort of “we can mod the loans because we’ll own the securities” is part of the official plan. And if it is, one has to question either the competence or the intentions of the plan’s architects.

A firestorm of criticism was unleashed from Washington at bonus-reaping-while-Wall-Street-burns bankers, with President Obama deigning to join in the fray. The tone was unusually heated:

President Barack Obama fed a swelling populist revolt against Wall Street bonuses, calling it “shameful” that banks doled out $18.4 billion as taxpayers bail out companies and the U.S. remains mired in a recession.

The bonuses are “the height of irresponsibility,” Obama said today before meeting Treasury Secretary Timothy Geithner and Vice President Joe Biden at the White House. Firms need to “show some restraint and show some discipline,” Obama said.

And the funniest, or most pathetic, depending on your point of view, was this:

The president joined politicians such as Senator Christopher Dodd, who today called for using “every possible legal means to get the money back.” The bonus pool for 2008 by New York City financial companies was the sixth-largest ever amid record losses in the securities industry,…

“I’m going to be urging — in fact not urging, demanding — that the Treasury Department figures out some way to get the money back,” Dodd said. “This is unacceptable.”

Now this blogger is as irate about the payment of largely unwarranted bonuses as anyone. In any other industry, firms losing money on a survival-threatening scale would have eliminated them or targeted them far more selectively, well, save for the auto industry, which serves to prove the point.

However, the Congressional hyperventilating is a shameless diversionary tactic. Let us turn to philosopher Rodney Dangerfield:

If you steal $1000 from a convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and called bad names for ten minutes.

The tongue lashing might go on a little longer this time, but the general observation holds.

If Congress wants to assign blame, it might start by looking in the mirror. It has made a ritual of occasionally getting exercised about executive pay, calling some hearings and trying to make high fliers squirm, and then proceeded to do nothing, That makes it abundantly clear that they intended to do nothing, giving the perps to continue as before.

For those who claim that big pay is needed to motivate and reward superior CEO performance, there is ample evidence to the contrary. Studies have found that companies with the highest paid CEOs tend to underperform (one theory is that the high pay is a symptom of weak corporate governance). Similarly, Jim Collins, in his book Good to Great, found that the companies that produce consistent, long-lived superior results were without exception lead by modest and not terribly well remunerated executives.

And trying to shift blame for the TARP-funding-bonuses fiasco solely to the admittedly badly behaved but completely predictable Wall Street firms is absurd. Congressmen signed off on comp restrictions that were known at the time to be toothless, mere window dressing, so they could say they had gotten concessions from Treasury on that point. As we remarked back in September, when Treasury had the temerity to have a private briefing for members of the Securities Industry and Financial Markets Association, and not the broader public:

The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes. More detail on that point, but I don’t need more detail to get the drift of the gist.

And of course, the bill’s provisions pertained only to top officers, not to the highly paid rank and file, who received the lion’s share of the bonuses.

That rather basic point in missed by commentators. Back to the Bloomberg article:

Treasury has the authority under legislation that created the TARP to issue regulations that “claw back” excessive executive compensation, said Larry Hamermesh, a corporate law professor at Widener University in Wilmington, Delaware.

“It was pretty clear from TARP I that the secretary of the Treasury was supposed to establish a provision for executive clawback,” Hamermesh said in a phone interview. “How the secretary has implemented that isn’t clear.”

The Treasury could require companies that request additional funds to repay excessive bonuses as a condition of the further financing, Hamermesh said.

Really? The TARP defines “executives” as “one of the top 5 executives of a public company, whose compensatoni is required to be disclosed pursuant to the Securites Exchange Act of 1934….and any non-public party counterparts.” So it apples to a teeny fraction of the bonus recipients in the limelight.

And even then, the clawback had little reach:

a provision for the recovery by the fnancial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate

Mind you, this language originated inthe 110 page intermediate version of the TARP legislation, the one presented to the House in September in which Dodd played a major role.

No one has said that these firms misrpresented 2008 performance. They said they had dreadful years and paid bonuses anyhow.

And some of the high profile examples are beyond any reach. John Thain gave up his 2008 bonus already; his $15 some odd signing bonus was pre-TARP, so he does not appear to have gotten any TARP funds. Thain hired Thomas Kraus from Goldman to be global head of sales and trading with a guaranteed bonus of $39 million. Peter Kraus, another Goldman recruit, who joined as of September, had a clause triggered by the Bank of America acquisition that leads to a $25 million payout.

Lawyers and comp experts are welcome to chime in, but I do not know of a legal theory by which the bonuses could be clawed back. The only ones I can think of are embezzlement and fraudulent conveyance, neither of which applies (OK, maybe a very clever attorney could devise a theory that the entire bonus process 2006-2008 at big public investment banks was a conspiracy to embezzle, but it would take a ton of discovery and would be seen as striking at the heart of capitalism, such as it is, and so would go nowhere). Fraudulent conveyance in simple terms allows creditors of a bankrupt firm to challenge and recoup certain payments made shortly prior to bankruptcy. Since none of the TARP recipients are bankrupt (the whole point of TARP was to avoid bankruptcy filings) that’s a non-starter.

The best the chumps powers that be can hope for is a few ritual disgorgements. For those who aspire to a life in the public eye, that might make sense. But Dick Grasso, whose pay by any standards was grotesque (as was his self importance, claiming responsibility for getting the NYSE running post 9/11 when firefighters and Verizon technicians, many of whom ruined their lungs, played a far bigger role) still won a pitched battle with Eliot Spitzer (who had a legal theory that I thought had considerable merit: that the comp was inconsistent with the NYSE’s status as a not for profit). So if anyone decided to put up a battle, it is hard to see how they could be compelled to return the money.

Put it another way: if Congress is unwilling to find a way to intervene in securitization agreements to facilitate mortgage mods, a far more important problem, both politically and practically, they are most certainly not going to meddle here.

Be careful what you wish for. The SEC regulated investment banks, and look what happened to that industry, Similarly, Madoff was registered, had a written roadmap from Harry Markopolos in terms of the issues that merited investigation, and did nothing.

Without a serious change in priorities (and likely an upgrade in staff skills) at the SEC (and financial regulators generally), moves to expand regulatory umbrella are mere window-dressing.

From Bloomberg:

The Hedge Fund Transparency Act, sponsored by Senator Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, would require hedge funds to register with the SEC, file an annual disclosure form, comply with SEC record-keeping standards and cooperate with SEC investigations.

You get a long list of links because I found interesting stuff, but none of it really suited to further commentary by yours truly.

Playboy’s playmates may be lonely at Super Bowl XLIII Bloomberg (hat tip reader Ed)

Life after the apocalypse Guardian

twitter.com/alaistairdarling (hat tip reader Tim)

Shire horses on the ‘brink of extinction’ experts warn Telegraph

Global Warming Is Irreversible, Study Says NPR

Japan faces up to the prospect of ‘peak fish’ Financial Times

U.S. Draft Law Would Ban Most Credit-Default Swaps Bloomberg

What Red Ink? Wall Street Paid Hefty Bonuses New York Times

Read Dean, Areddy and Ng on the management of China’s reserves during the crisis Brad Setser. Brad gives the economics take, while China slams U.S. profligacy by Ed Harrison focuses on the political theater (we had noted earlier that while Americans assumed Asia would be pragmatic, commentators were warning that they were much more likely to view the situation as a morality tale and act accordingly).

An Ideological Turf War Mark Thoma

A Letter to the Comptroller of the Currency American Society of Appraisers (hat tip reader Scott) As he reads it, and this seems correct to me, bank regulators are trying to eliminate requirements for written appraisals in connections with cramdowns and refinancings on government backed loans, which are now the bulk of the market.

I Just Don’t Get It Roger Ehrenberg. A man after my own heart

Losing Harvard’s Billions The Big Money (hat tip Felix Salmon)

Messing around with credit Models and Agents. A good critique of the “let’s help housing by making mortgage yields artificially low” plan.

Antidote du jour (hat tip reader Jim):

I am the first to say that I do not understand the whims of the market, but today we saw a pretty schizophrenic display. Attention in the US focused on the Fed’s Open Market Committee statement. Earlier this week, not much was expected, since the Fed is somewhat constrained by fact that the Obama team has not come forth with plan for the banking industry. But then rumors started circulating that the Fed would commit to buying long-dated Treasuries to lower interest rates (30 year bond rates had risen nearly a percent from their lows last month, and of more immediate concern to the Fed, fixed mortgages rates, which had blipped down, had risen as well).

The 30 year bond rose prior to the announcement, as did gold (not necessarily contradictory, if you are buying gold out of a worry about the long-term health of fiat currencies). Similarly, stocks gapped up at open, since if the Fed engineers lower rates, that would help housing, banks, and make equities look more attractive relative to bonds.

The key section of the Fed statement was weaker than what was hoped for.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

So the Fed reaffirmed its commitment to buying mortgage paper in size, and said it would buy Treasuries IF it would help “private markets”. That is as clear as mud.

Now there has been an assumption among most observers that the reason that the Fed is contemplating buying Treasuries is to drive rates down. Bernanke has discussed this idea in papers and presentations on deflation before he became the Fed chair. However, as Fedwatcher Tim Duy points out, it might be worth reading what the Fed actually said, since these statements are crafted carefully:

Conventional wisdom has that any Fed action to purchase longer-term Treasuries would be done with the intent of holding interest rates low, thereby stimulating economic activity. That, however, is not the implication of this sentence. Instead, the Fed views Treasury purchases only as a mechanism to support effective functioning of credit markets, which suggest that the Fed is not worried about controlling the level of longer term interest rates, but the spread between Treasuries and other assets.

This also suggests that the Fed is not particularly interested in expanding the balance sheet further via Treasury purchases. They may be willing to, but I am not sure how Treasury purchases will improve market functioning. To date, improving credit market efficiency has meant purchasing or holding as collateral risky assets, or even safe assets that the market currently shuns, not riskless Treasuries. What factors would cause a reversal of that position?

Moreover, one should also question the willingness of the Fed to fight against rising interest rates if those rising rates were the result of a shift to riskier assets and credit spreads fell to more normal levels. Presumably, this would correspond to a loosening of credit conditions, which in and of itself would be stimulative even if rates edged upward.

This distinction, and the Fed’s apparent reluctance to balloon its balance sheet unduly is telling. Some commentators (most notably John Hempton) have argued that Bernanke NEEDS to have the appearance of being reckless, that the debt deflation vortex is so powerful that he needs to do something to jolt consumers who are not at the end of their rope to spend more. Thus, while helicopter drops of cash may be out, letting the Fed balance sheet grow in the next year to, say $5 to $7 trillion would certainly focus the mind.

However, this may all be moot. If mortgage rates continue to rise despite the Fed’s efforts to contain them by lowering spreads, then the Fed will presumably buy Treasuries. But it is odd that the statement (in effect) renounced the approach that Bernanke advocated in his academic work, of driving down long Treasury interest rates to combat deflation.

Maybe bond market investors are better readers, or are simply more skeptical. 30 year Treasuries promptly retreated, as did gold, while stocks faded a wee bit from pre-announcement levels and averages continued upwards to the close. Financials in particular showed big gains. Technicians would stress that the market broke through an important resistance level, and if you are of that school of thinking, you would expect some follow through.

The FOMC annoucement overshadoved (at least in the US) other economic news. An EIA report showing a bigger than expected increase in inventories was shrugged. off. And perhaps more telling, the outlook is becoming sufficiently grim that international economic agencies are slashing their forecasts (mind you, they are about as likely as the sell side to tell you that things will be bad).

Last night, we reported that the International Institute of Finance was calling for a global GDP contraction for 2009. The IMF today, while not going as far as the IIF, got about as downbeat as one could expect them to be, predicting a marked contraction in advanced economies. From the Financial Times:

[T]he International Monetary Fund increased its estimate of credit losses on US-based assets from $1,400bn to $2,200bn. It also said world output, measured at market exchange rates, would fall in 2009 for the first time since the second world war. Weighted by purchasing power, growth would be very slightly positive.

The new growth forecasts mark a huge revision – down by more than 1.5 percentage points – from the IMF’s previous forecast for the year in spite of the inclusion of the fiscal stimulus efforts by governments into its predictions for the first time. Advanced economies, the IMF predicted, would contract 2 per cent in 2009 with the UK hit hardest.

In Geneva, the International Labour Organization said the global recession would lead to a “dramatic increase” in unemployment this year, which would certainly lead to 18m-30m additional unemployed and more than 50m “if the situation continues to deteriorate”.

Nassim Nicholas Taleb of Black Swan fame predicts that a stock market decline of 20% would take down a lot of private equity firms along with it. Note that Nouriel Roubini predicted a fall of that level when stocks were a tad lower than today.

The grim view is confirmed by a BCG study that said that many P/E firms could fail as their portfolio companies defaulted.

If this were to come to pass, it’s a no-brainer to think the firm’s principals would be in the dole queue for bailout money.

From Bloomberg:

Private-equity firms may follow banks into failure should U.S. stocks extend their worst rout since the Great Depression, said Nassim Nicholas Taleb, author of the best- selling finance book “The Black Swan.”…

The Standard & Poor’s 500 Index has dropped 4.7 percent this year following a 38 percent plunge in 2008 that was the worst in 71 years. Blackstone Group LP, manager of the world’s largest buyout fund, fell 78 percent since the end of 2007.

“Banks are being bailed out, and private-equity firms are going to go next,” Taleb said in an interview with Bloomberg Radio. “These people in a bull market look like geniuses. And now they don’t look that intelligent, and it’s going to get a lot worse for them. If the S&P goes down 20 percent from here, what will happen to private equity firms? They’re all under water.”

As many as 40 of the biggest 100 buyout firms may collapse by 2011 as their debt-strapped assets default, according to a 2008 report by Boston Consulting Group Inc., which didn’t identify the firms in its study.

The Moose Elizabeth Bishop. A departure from our regular programming (hat tip reader Megan)

Emperor penguins face extinction BBC

Every Man an Island, Part 1 and Part 2 Byte Size Biology

Recycling ‘could be adding to global warming’ Telegraph

The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner Institutional Risk Analyst. This is an important piece, if you haven’t read it yet.

Treasury plan isn’t working, MPs say Telegraph

Senate Provision Would Let Buyout Firms Defer Taxes on Canceled Debt Wall Street Journal. So where’s my bailout?

It’s the Economy, Girlfriend New York Times. On the “Dating a Banker Anonymous” support group. More than a bit cringe-making.

AIG Said to Offer $1 Billion in Retention Payments to Employees Bloomberg

Treasury forces Citi to cancel jet order Financial Times. Yes, they did not have the good sense to do it on their own.

A measure remodelled Financial Times. A good piece on proposals to change the GDP (and best yet, to get away from the idea of a single measure). However, it still has some whoppers like ” it is clear about what it includes and excludes, is based on objective prices thrown up by free markets and is comparable across countries.” Huh? He has clearly never heard of the US’s massive hedonic adjustments (applied since 1987) and “owner imputed rent.” Um, “imputed” means it is NOT an observed, or market number, but a guesstimate.

What is a non-performing loan? John Hempton

Inflation(ists) vs. Deflation(ists) – Part II Cassandra

Antidote du jour (hat tip reader Buzz):

The forecast for a global international contraction by the Institute of International Finance is significant because it is the first to project negative growth for 2009. That may seem unexceptional to some readers. However, the IMF is forecasting growth of 1.5% for 2009, which it actually sees as a serious recessionary level. Why? Emerging economies generally sport higher growth rates than advanced economies. so a 2.0% ish growth rate is seen as tantamount to stagnation. And official bodies often lag rather than lead conventional wisdom. Negative worldwide growth is thus a grim prediction.

From the Telegraph:

The Institute of International Finance, the global organisation of major banks, predicted an almost unprecedented collapse in world economic growth and capital flows.

It became the first major global institution to forecast a full-scale global contraction in 2009, predicting that the economy would shrink by 1.1pc.

IIF chief economist Philip Suttle said: “This is the worst period since the interwar years…”

He also expects rich economies to contract by 2.1pc – the worst peacetime output since the 1930s.

Private flows of capital into the emerging world are set nearly to dry up in the next year, the IIF predicted, dropping from $928.6bn in 2007 down to $465.8bn in 2008 and then to $165.3bn the following year.

As a result the current account deficits in emerging Europe will more than treble in the coming year, from $30bn in 2008 to $117bn next year…Asia is likely to suffer a worse downturn than during the Asian financial crisis, the report indicated.

The IIF was meeting ahead of the World Economic Forum in Davos, and Mr Rhodes warned that the growing concern this year was the rise in protectionism. He said: “There is a tremendous need to keep trade lines open. If you start seeing – with everything else we’re talking about – the reduction of trade lines on top of that, then you really have a problem.”

This comment by Jeffrey Sachs in the Financial Times is broader than its title suggests. It says that the US should not run willy-nilly into enacting massive spending plans in haste. Sachs makes two core points: a lot of compromises are being made that will render big chunks of the plan ineffective and/or wasteful, and that the focus is strictly on Doing Something, Now, and the intermediate term effects are given nary a thought. If the plan merely reduces the amplitude of the downturn (likely) at the cost of hamstrung future performance, have we really come out ahead?

Obama’s willingness to compromise is serving him badly here. The Reagan Administration fought hard for what it wanted, and got about 75% (of course, the easy 75%, the tax cuts and defense spending, but not other budget cuts). Obama is willing to settle for less, and was too quick to offer the tax cuts as a compromise, which has merely emboldened the Republicans to seek even more, targeted to the affluent. Today, the Senate Appropriations Committee added $70 billion to the stimulus package in the form of alternative minimum tax relief, which will aid households earning from $100,000 to $500,000.

That is most decidedly NOT stimulus. The experience of the Bush tax rebate, which was spread across more income brackets, was that (according to a detailed analysis by Gary Shilling) over 80% was saved. A similar outcome is a given with higher income cohorts.

Admittedly, Sachs is a controversial figure. He devised the shock therapy approach used by the IMF for hyperinflation and transition from controlled economies, and later in the Asian crisis. The approach has vocal opponents (and many of the loudest are the ones who lived through it). Some of Sachs’ neoliberal/cold water Yankee mindset comes through in this piece. But Sachs more recently has argued for targeted aid for the poorest nations, contending that they are in a poverty trap, and assistance to get them to a higher level of agricultural productivity could give them the boost they need to overcome chronic deprivation.

Whether you agree with all of Sachs’ argument, his caution about undue haste is well founded and is consistent with the worries of other macroeconomists such as Willem Buiter.

From the Financial Times

:

The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package.

We are told that we have to rush without thinking lest the entire economy collapse. This is belied by recent events. The spring 2008 stimulus package of $100bn (€76bn, £71bn) in tax rebates was rushed into effect in a similar way and we now know it had little stimulus effect. The rebates were largely saved or used to pay down credit card debt, rather than spent. The $700bn troubled asset relief programme bail-out was also rushed into effect and its results have been notoriously poor.

The Tarp has not revived the banks or their lending, but it has supported a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions. Some of those transfers – as in the case of Merrill Lynch using its government-financed sale to Bank of America to enable $4bn in bonuses last month – are beyond egregious. Yet the US is now inured to corruption and in such a rush that even billions of dollars of public funds shovelled into Merrill’s private pockets in broad daylight barely merited a day’s news cycle.

The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. First it was former US Federal Reserve chairman Alan Greenspan’s bubble, then Wall Street’s, and now – in the third act – it will be Washington’s.

The White House and Congress have stated an amount – $825bn to be spent mostly over two years – on top of a deficit that is already projected to reach $1,186bn in fiscal year 2009 without the stimulus package. Many of the details of allocating the $825bn are being left to Congress with the aim of reaching a bipartisan consensus. The result is shaping up to be an astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders.

What we need is a medium-term fiscal framework, one that lays out an anticipated schedule of taxes and spending consistent with the needs of the economy and government functions. Rather than soundbites about ending pork-barrel projects or scouring the budget for waste, or about the relative multipliers of tax cuts versus spending increases (both of which depend on expectations about the future, a point mostly overlooked in the debate), we should be reflecting on certain basic fiscal facts, the most important of which is that the US government faces huge and potentially debilitating structural deficits as far as the eye can see.

In rough numbers, the US federal tax system collects about 18 per cent of gross national product, while the total of just five categories of public spending – Social Security (retirement and disability), health (Medicare, Medicaid), veterans’ benefits, defence and homeland security and interest payments – eat up about 18 per cent of GNP. Yet government has more to do – for example, providing the justice system; help for the poor and unemployed; science and technology research; energy systems, transport and other infrastructure; diplomacy and international aid; natural hazards mitigation; training; and the future costs of financial clean-up. Let us add in the fact that state and local governments are broke and need increased federal transfers, and that America’s ageing population, broken healthcare system and growing underclass all require increased fiscal attention. We currently pay for all of this, if we do so at all, by borrowing from China and from the future.

If the present stimulus package is adopted without a medium-term plan, it will go the way of the earlier stimulus package and the Tarp, yet also put the US into a fiscal straitjacket that could paralyse public sector action in critical areas for a decade or more to come. This is especially true if we allow further tax cuts during a time of fiscal haemorrhage, or give into “bipartisan” demands to make the Bush tax cuts permanent, even for the rich, as seems increasingly likely.

There are many valuable things proposed in President Barack Obama’s spending plans – such as the sums to be spent on energy, healthcare and education – but these should be incorporated into medium-term strategies rather than a grab bag of hasty short-run spending. The tax cuts that he is likely to approve in the stimulus package, and the extension of Bush-era tax cuts if that comes to pass, could close the door to these longer-term programmes; haphazard spending on these vital programmes could do the same.

Perhaps Mr Obama should reflect on the fact that the Clinton-era boom began in 1993 with tax rises and a congressional rejection of a fiscal stimulus package. This time, there is certainly a cyclical case for deficit- financed public spending, but accompanied by phased-in tax increases to provide proper financing of crucial government functions in the medium term.