Two hours well worth watching:
Thursday, September 30, 2010
Tuesday, September 28, 2010
Left/Right No More
If you see the world in terms of Left & Right, you really aren’t seeing the world at all . . .
Every generation or so, a major secular shift takes place that shakes up the existing paradigm. It happens in industry, finance, literature, sports, manufacturing, technology, entertainment, travel, communication, etc.
I would like to discuss the paradigm shift that is occurring in politics.
For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.
The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual. These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts. Where there is massive concentrations of wealth and influence, there will be abuse of power. The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.
This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.
Consider:
• Many of the regulations that govern energy and banking sector were written by Corporations;
• The biggest influence on legislative votes is often Corporate Lobbying;
• Corporate ability to extend copyright far beyond what original protections amounts to a taking of public works for private corporate usage;
• PAC and campaign finance by Corporations has supplanted individual donations to elections;
• The individuals’ right to seek redress in court has been under attack for decades, limiting their options.
• DRM and content protection undercuts the individual’s ability to use purchased content as they see fit;
• Patent protections are continually weakened. Deep pocketed corporations can usurp inventions almost at will;
• The Supreme Court has ruled that Corporations have Free Speech rights equivalent to people; (So much for original intent!)
None of these are Democrat/Republican conflicts, but rather, are corporate vs. individual issues.
For those of you who are stuck in the old Left/Right debate, you are missing the bigger picture. Consider this about the Bailouts: It was a right-winger who bailed out all of the big banks, Fannie Mae, and AIG in the first place; then his left winger successor continued to pour more money into the fire pit.
What difference did the Left/Right dynamic make? Almost none whatsoever.
How about government spending? The past two presidents are regarded as representative of the Left Right paradigm – yet they each spent excessively, sponsored unfunded tax cuts, plowed money into military adventures and ran enormous deficits. Does Left Right really make a difference when it comes to deficits and fiscal responsibility? (Apparently not).
What does it mean when we can no longer distinguish between the actions of the left and the right? If that dynamic no longer accurately distinguishes what occurs, why are so many of our policy debates framed in Left/Right terms?
In many ways, American society is increasingly less married to this dynamic: Party Affiliation continues to fall, approval of Congress is at record lows, and voter participation hovers at very low rates.
There is some pushback already taking place against the concentration of corporate power: Mainstream corporate media has been increasingly replaced with user created content – YouTube and Blogs are increasingly important to news consumers (especially younger users). Independent voters are an increasingly larger share of the US electorate. And I suspect that much of the pushback against the Elizabeth Warren’s concept of a Financial Consumer Protection Agency plays directly into this Corporate vs. Individual fight.
But the battle lines between the two groups have barely been drawn. I expect this fight will define American politics over the next decade.
Keynes vs Hayek? Friedman vs Krugman? Those are the wrong intellectual debates. Its you vs. Tony Hayward, BP CEO, You vs. Lloyd Blankfein, Goldman Sachs CEO. And you are losing . . .
By Barry Rithholtz
Every generation or so, a major secular shift takes place that shakes up the existing paradigm. It happens in industry, finance, literature, sports, manufacturing, technology, entertainment, travel, communication, etc.
I would like to discuss the paradigm shift that is occurring in politics.
For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.
The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual. These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts. Where there is massive concentrations of wealth and influence, there will be abuse of power. The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.
This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.
Consider:
• Many of the regulations that govern energy and banking sector were written by Corporations;
• The biggest influence on legislative votes is often Corporate Lobbying;
• Corporate ability to extend copyright far beyond what original protections amounts to a taking of public works for private corporate usage;
• PAC and campaign finance by Corporations has supplanted individual donations to elections;
• The individuals’ right to seek redress in court has been under attack for decades, limiting their options.
• DRM and content protection undercuts the individual’s ability to use purchased content as they see fit;
• Patent protections are continually weakened. Deep pocketed corporations can usurp inventions almost at will;
• The Supreme Court has ruled that Corporations have Free Speech rights equivalent to people; (So much for original intent!)
None of these are Democrat/Republican conflicts, but rather, are corporate vs. individual issues.
For those of you who are stuck in the old Left/Right debate, you are missing the bigger picture. Consider this about the Bailouts: It was a right-winger who bailed out all of the big banks, Fannie Mae, and AIG in the first place; then his left winger successor continued to pour more money into the fire pit.
What difference did the Left/Right dynamic make? Almost none whatsoever.
How about government spending? The past two presidents are regarded as representative of the Left Right paradigm – yet they each spent excessively, sponsored unfunded tax cuts, plowed money into military adventures and ran enormous deficits. Does Left Right really make a difference when it comes to deficits and fiscal responsibility? (Apparently not).
What does it mean when we can no longer distinguish between the actions of the left and the right? If that dynamic no longer accurately distinguishes what occurs, why are so many of our policy debates framed in Left/Right terms?
In many ways, American society is increasingly less married to this dynamic: Party Affiliation continues to fall, approval of Congress is at record lows, and voter participation hovers at very low rates.
There is some pushback already taking place against the concentration of corporate power: Mainstream corporate media has been increasingly replaced with user created content – YouTube and Blogs are increasingly important to news consumers (especially younger users). Independent voters are an increasingly larger share of the US electorate. And I suspect that much of the pushback against the Elizabeth Warren’s concept of a Financial Consumer Protection Agency plays directly into this Corporate vs. Individual fight.
But the battle lines between the two groups have barely been drawn. I expect this fight will define American politics over the next decade.
Keynes vs Hayek? Friedman vs Krugman? Those are the wrong intellectual debates. Its you vs. Tony Hayward, BP CEO, You vs. Lloyd Blankfein, Goldman Sachs CEO. And you are losing . . .
By Barry Rithholtz
Thursday, September 23, 2010
Bye Bye Summers
Good Riddance
The good news: Summers is gone Jan 1 (no word yet on Geithner).
The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies.
To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the financial crisis. In addition to believing all of the usual foolishness about efficient markets, he bought into the radical deregulation arguments pushed by the free market absolutists.
Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm–Leach–Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.
Understand that the repeal of Glass Steagall was not a cause of the crisis. But, it allowed the net damage to be far greater and extend far wider than it would have otherwise been. From a libertarian perspective, it was emblematic of the corporate takeover of the legislative process. For a hefty fee (aka campaign donation) you could pretty much write the regulations that covered your own industry. How could that ever go wrong?
Summers oversaw the passage of the even more ruinous Commodities Futures Modernization Act of 2000. The CFMA exempted all financial derivatives from any and all regulatory oversight. The CFMA not made the AIG collapse possible, it made it highly likely. It helped to set up both the Lehman and Bear Stearns’ collapses. The CFMA allowed AIG FP to write over $3 trillion in derivatives, reserving precisely zero dollars in case these insurance policy-like obligations had to be paid out.
Failing upwards: When Obama appointment the Rubin duo of Summers and Geithner, it a perverse reward for a job done poorly. The two were creatures of the banking system, and were unlikely to do anything that threatened the existing order. Even worse, it created a dynamic where the new administration was committed to defending the policies that helped to contribute to the crisis in the first place. Instead of To Hell with the Banks, Save the Banking System, we got the exact reverse. This was Rubin’s lasting gift to the Obama White House: A third term for George W. Bush’s economic policies. When Obama becomes a one-termer, it will be his own fault for following this horrific economic advice.
Summers was incapable of saying, let’s repeal the Glass Steagall Repeal; lets overturn CFMA. Rather than fix what was broken, he stayed committed to the same bad ideas that led to crisis and collapse. Most humans have a hard time saying: “My bad, let’s just reverse the error and start over.” By putting into senior positions the people who helped create the mess, we ended up with a defense of the decision making that proceeded, instead of a fresh approach. Summers was a defender of the status quo. This was not change we could believe in — it was simply more of the same.
The Bush administration gave us the bailouts of Bear Stearns, Fannie & Frediie, AIG, Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, Goldmasn Sachs, et. al. The hope that a new White House would change the course was quickly dashed by the new old Economic team. Obama lacked the will or the understanding or the nerve to break with those Bush policies. That was his ultimate error. Instead of imprinting the failures of the prior administration on his predecessor, instead of making Bush own what he in fact did, Obama wrongly adopted them. Thus, he made the bailouts in large part his own. Huge mistake — and one that was inevitable with Summers large and in charge of White House Economic policy.
The Obama White House correctly forced the insolvent automakers into bankruptcy reorganization. They should have done the same with the insolvent banks and investment firms. That was impossible with the banker’s boys running the White House economic policy: The Rubin/Summers/Geithner team made sure that did not happen.
As Allan Meltzer stated, “Capitalism without failure is like religion without sin—it just doesn’t work.” The change people voted for never appeared, and the Summers led economic team gave us two more years of Bush bailout policies. For that humongous error, his departure is a welcome change.
The good news: Summers is gone Jan 1 (no word yet on Geithner).
The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies.
To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the financial crisis. In addition to believing all of the usual foolishness about efficient markets, he bought into the radical deregulation arguments pushed by the free market absolutists.
Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm–Leach–Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.
Understand that the repeal of Glass Steagall was not a cause of the crisis. But, it allowed the net damage to be far greater and extend far wider than it would have otherwise been. From a libertarian perspective, it was emblematic of the corporate takeover of the legislative process. For a hefty fee (aka campaign donation) you could pretty much write the regulations that covered your own industry. How could that ever go wrong?
Summers oversaw the passage of the even more ruinous Commodities Futures Modernization Act of 2000. The CFMA exempted all financial derivatives from any and all regulatory oversight. The CFMA not made the AIG collapse possible, it made it highly likely. It helped to set up both the Lehman and Bear Stearns’ collapses. The CFMA allowed AIG FP to write over $3 trillion in derivatives, reserving precisely zero dollars in case these insurance policy-like obligations had to be paid out.
Failing upwards: When Obama appointment the Rubin duo of Summers and Geithner, it a perverse reward for a job done poorly. The two were creatures of the banking system, and were unlikely to do anything that threatened the existing order. Even worse, it created a dynamic where the new administration was committed to defending the policies that helped to contribute to the crisis in the first place. Instead of To Hell with the Banks, Save the Banking System, we got the exact reverse. This was Rubin’s lasting gift to the Obama White House: A third term for George W. Bush’s economic policies. When Obama becomes a one-termer, it will be his own fault for following this horrific economic advice.
Summers was incapable of saying, let’s repeal the Glass Steagall Repeal; lets overturn CFMA. Rather than fix what was broken, he stayed committed to the same bad ideas that led to crisis and collapse. Most humans have a hard time saying: “My bad, let’s just reverse the error and start over.” By putting into senior positions the people who helped create the mess, we ended up with a defense of the decision making that proceeded, instead of a fresh approach. Summers was a defender of the status quo. This was not change we could believe in — it was simply more of the same.
The Bush administration gave us the bailouts of Bear Stearns, Fannie & Frediie, AIG, Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, Goldmasn Sachs, et. al. The hope that a new White House would change the course was quickly dashed by the new old Economic team. Obama lacked the will or the understanding or the nerve to break with those Bush policies. That was his ultimate error. Instead of imprinting the failures of the prior administration on his predecessor, instead of making Bush own what he in fact did, Obama wrongly adopted them. Thus, he made the bailouts in large part his own. Huge mistake — and one that was inevitable with Summers large and in charge of White House Economic policy.
The Obama White House correctly forced the insolvent automakers into bankruptcy reorganization. They should have done the same with the insolvent banks and investment firms. That was impossible with the banker’s boys running the White House economic policy: The Rubin/Summers/Geithner team made sure that did not happen.
As Allan Meltzer stated, “Capitalism without failure is like religion without sin—it just doesn’t work.” The change people voted for never appeared, and the Summers led economic team gave us two more years of Bush bailout policies. For that humongous error, his departure is a welcome change.
By Barry Ritholtz - September 22nd, 2010
Monday, September 13, 2010
9/11
By Barry Rithholtz
Each year, I try to avoid writing anything about 9/11. But I had some issues to work through this year, and I find jotting a few notes down helps me.
My personal experience on 9/11 was secondhand. I was in the LI office of the firm where I was Market Strategist. Our HQ and trading desk was in 2 WTC. As events unfolded, I got my head trader on the phone, and he gave me a full play by play of what occurred in real time for about 2 hours. I put all that down on paper, and with his approval, published it the next day: A Personal Recollection From a Day of Horror (September 12th, 2001).
Its actually Bill’s story, I was merely the scribe. I know the day left its mark on him, and he has struggled with what I can’t even imagine.
Even today, nearly a decade later, I find the entire retrospective “event” that occurs each year to be maudlin: The roll call of lost colleagues and friends; the tragedy porn that the media rolls out; I especially detest terror tourism down at the WTC site. The whole thing makes me more angry than sad.
But as a life long New Yorker, I am still frustrated over how the 9/11 event was mishandled — the ignored warnings, the invasion of the wrong country after, the bastardization of what the USA stands for, the lack of accountability for all these major errors of incalculable incompetency. The response was so far beneath what this nation is truly capable of that is still greatly saddens me, even today.
To release those demons, I wrote this on Election Eve 2004:
On September 11th, George W. Bush was presented one of those rare and horrible historical moments. The terrorist attacks united the country and the world around the President: His approval rating skyrocketed to 90%. Even the French Prime Minister announced, “Tonight, we are all Americans.”
The historical opportunity was laid at the feet of the President. With a unified country behind him and a sympathetic world willing to cooperate with him in just about every imaginable way, he could have achieved monumental greatness: He could have asked for great sacrifices from the populace, and they would have willingly made them. At that moment, any reach across the aisle would have been fruitful on a number of vexing issues. A bipartisan approach to any political problem at home – cutting pork out of domestic policies, reforming Social Security, renovating the tax code – could have been accomplished in a bipartisan spirit of strengthening the economy and defending the country. He might have even done something about our education system so, in truth, no child would be left behind.
One would imagine that a man elected under what can be charitably described as “inauspicious circumstances” – with nary a mandate in sight – might have taken the 9/11 tragedy as an opportunity to move to the center, putting aside partisan political differences, and governing “all the people.” To be, in fact, truly a “uniter,” not a “divider.”
Alas, it was not to be.
When people ask why I dislike the presidency of George W. Bush, it was that colossal failure to rise to greatness on that occasion, and indeed, to engage in a series of decisions that — not in retrospect, but at the time — reflected terribly poor judgment.
Unlike many others, I only blame W in small part for ignoring the warning pre-9/11. there were lots of false positive warnings, so claiming he should have recognized how serious that one was is much easier to do in hindsight.
But for the catastrophic series of decisions that he made following 9/11, I hold him 100% accountable.
This is not about partisanship — its about recognizing a terrible tragedy that was compounded through bad judgment and even worse governing.
Indeed, my feelings about 9/11 have morphed from sadness over the tragic loss of loved ones into frustration and beyond. Even now, the anger rises over the unwillingness to hold the past administration accountable for their many sins.
Each year, I try to avoid writing anything about 9/11. But I had some issues to work through this year, and I find jotting a few notes down helps me.
My personal experience on 9/11 was secondhand. I was in the LI office of the firm where I was Market Strategist. Our HQ and trading desk was in 2 WTC. As events unfolded, I got my head trader on the phone, and he gave me a full play by play of what occurred in real time for about 2 hours. I put all that down on paper, and with his approval, published it the next day: A Personal Recollection From a Day of Horror (September 12th, 2001).
Its actually Bill’s story, I was merely the scribe. I know the day left its mark on him, and he has struggled with what I can’t even imagine.
Even today, nearly a decade later, I find the entire retrospective “event” that occurs each year to be maudlin: The roll call of lost colleagues and friends; the tragedy porn that the media rolls out; I especially detest terror tourism down at the WTC site. The whole thing makes me more angry than sad.
But as a life long New Yorker, I am still frustrated over how the 9/11 event was mishandled — the ignored warnings, the invasion of the wrong country after, the bastardization of what the USA stands for, the lack of accountability for all these major errors of incalculable incompetency. The response was so far beneath what this nation is truly capable of that is still greatly saddens me, even today.
To release those demons, I wrote this on Election Eve 2004:
On September 11th, George W. Bush was presented one of those rare and horrible historical moments. The terrorist attacks united the country and the world around the President: His approval rating skyrocketed to 90%. Even the French Prime Minister announced, “Tonight, we are all Americans.”
The historical opportunity was laid at the feet of the President. With a unified country behind him and a sympathetic world willing to cooperate with him in just about every imaginable way, he could have achieved monumental greatness: He could have asked for great sacrifices from the populace, and they would have willingly made them. At that moment, any reach across the aisle would have been fruitful on a number of vexing issues. A bipartisan approach to any political problem at home – cutting pork out of domestic policies, reforming Social Security, renovating the tax code – could have been accomplished in a bipartisan spirit of strengthening the economy and defending the country. He might have even done something about our education system so, in truth, no child would be left behind.
One would imagine that a man elected under what can be charitably described as “inauspicious circumstances” – with nary a mandate in sight – might have taken the 9/11 tragedy as an opportunity to move to the center, putting aside partisan political differences, and governing “all the people.” To be, in fact, truly a “uniter,” not a “divider.”
Alas, it was not to be.
When people ask why I dislike the presidency of George W. Bush, it was that colossal failure to rise to greatness on that occasion, and indeed, to engage in a series of decisions that — not in retrospect, but at the time — reflected terribly poor judgment.
Unlike many others, I only blame W in small part for ignoring the warning pre-9/11. there were lots of false positive warnings, so claiming he should have recognized how serious that one was is much easier to do in hindsight.
But for the catastrophic series of decisions that he made following 9/11, I hold him 100% accountable.
This is not about partisanship — its about recognizing a terrible tragedy that was compounded through bad judgment and even worse governing.
Indeed, my feelings about 9/11 have morphed from sadness over the tragic loss of loved ones into frustration and beyond. Even now, the anger rises over the unwillingness to hold the past administration accountable for their many sins.
Thursday, August 19, 2010
Felix Zulauf
BARRY RITHOLTZ: Tell us about your background…FELIX ZULAUF: I grew up in Switzerland, in a small town, I went to all the school. After college, I decided to go [with] a banking career. I regretted it after a year or two because it was so boring — commercial banking, then I finally hit the investment department. It became more attractive. I asked my bosses why stock prices moved up and down, and from their end — I could very soon tell that they had no clue. So I tried to figure out if there were some other people who knew why the markets were moving. And I found some leading opinion people like Bob Farrell. They were all in the US, there were no opinion leaders in Europe. And I decided that I wanted to learn that business and foresee market moves in big ways.
And then I went step-by-step. I started in the equity stock market department in a Swiss Bank in Zurich. And then I transferred to Paris to a stockbroker for a year. There, I really developed my speculative activity. As a young chap, the owner of the shop gave me a credit of half a million dollars. Which was a dramatic amount for a 23-year-old guy, and I started speculating. Went short on the market in the fall of 1973 and you know what happened thereafter into the end of ‘74. So that year I made the first big money.
What was your actual first employer?
The Swiss Bank Corp. I was there for 2 years. And then I was sent off to Paris and to acquainted more with the French language and see another country and another culture and I didn’t want to go to a bank because I wanted to learn more about the investment business. So I went there, came back after a year, moved then to portfolio management (or what they thought was portfolio management), and then went to the US. So in 1976, or 1977, I stayed in New York, put together a trainee program for myself using all of the concept of Swiss Bank Corp. and I trained with Charlie Maxwell in energy and Bob Farrell in Market Analysis and Ed Hyman in Economics and trading in a shop called Salomon Brothers at that time. So I went through Wall Street and all of those firms and it was like paradise.
I’m still friends with many of those people.
It was fantastic. And then the bank called me back to Switzerland in ‘77. And then I changed horses and joined UBS because I wanted to learn money in a more aggressive way, and Swiss Bank didn’t offer me that job. That was ‘77 — I joined UBS and the mutual funds management department and research. And I ran the US equity funds and global equity funds and a raw materials fund and became a global strategist for the whole UBS group. And later I ran the institutional portfolio management department at UBS and then came 1987. I was very instrumental to push UBS equity allocations to the highest in all of Europe. At that time, 65% equity in balanced accounts was extremely aggressive in European standards. And in ‘87, during the summer, I tried to reduce that because I was also part of the investment committee, and I convinced the committee but general management then vetoed it and that upset me so much that I stopped there and liquidated all equities ahead of what thereafter became the crash of ‘87.
And it didn’t make many friends. By hindsight, I think it was the most difficult thing I ever did because I never got the credit for it. I got the blame because all of my friends and colleagues looked terrible next to me. You know, from a political point of view, it was not a good move. But from a trustee point of view, it was the right move and also from a professional point of view, it was the right view.
Then I decided I needed to join a smaller money management operation where I had more freedom and I joined a subsidiary of Credit Suisse at that time as an executive vice president in charge of the whole investment policy. And then came ‘89. The leading portfolio managers were very successful with Japanese equities and I turned very bearish on Japan and they took it as a personal insult that I turned very bearish on Japan.
At 39,000 and something, and I think it was January of 1990…I turned very bearish and pulled… And it then happened and it made it clear to me that I had to go on my own to manage money the way I thought was right.
Before you launched your firm, you had essentially rotated at some of the biggest banks in Europe and you had come to New York and worked at some of the biggest banks in the city. And the takeaway from all of this is that there are institutional impediments for a money manager and a trustee to operate on behalf of the clients.
So I became an entrepreneur and started a new financial management firm. I was 40 with two small kids and no client so the first six months were very tough because I could not attract any clients…which was very nerve-wracking. But after that, the ball got rolling and I managed individual accounts. i just wanted a limited number of individual accounts that I could manage in my own fashion so I could go long and short but not leverage. Which was basically the ways I ran my own money in earlier times. But later on, I moved away from leverage because too much leverage is where you make the most mistakes.
And did you set this up as a hedge fund or as a managed assets account?
It was managed assets for several years and then it was just too much work with individual accounts. I decided to channel everything into a fund and we launched Zulauf (Europe) Fund, the fund for Europe equities (long short) which became very successful. And later we launched a natural-resource related equities [fund] and later a global macro fund. And then I was very exhausted in the year 2000 because I basically did everything myself. I had a few employees — two portfolio managers and analysts but they left at 5 o’clock in the evening and they went on vacation. And if something went wrong, you know, the old story. Basically, you’re married with the company and you’re married with the markets and you cannot let go.
So at 50, and I have to mention that my father died at age 50. I made enough money so I decided to go slower and wanted to phase out really. I feared that I would kill myself. And then I started to sell my company and sold the majority of it to these two employees and for awhile it worked out very well. I was more the senior advisor and giving my advice and my input but I was not running the day-to-day business. They moved into a direction that was further and further away from my philosophy and that created problems because I had raised basically 90% of the asset. And then we decided to split the company and I took my share — one fund, one small global macro fund and kept the name and they changed their name. And we are totally unrelated these days. And so I have just a small shop where I run a conservative global macro fund and advise some large clients and institutions and family offices.
I have to mention that these times are so fascinating that I don’t want to give up running money but I don’t want to be glued to the screen 24 hours a day. And I am the senior advisor to a newly launched global fund in northern California — 300 North Capital run by a gentleman who is a very successful equity manager. He wanted to go global and macro and he asked me to help as a senior advisor and I will advise him on a weekly basis and, if necessary, on a daily basis. I will give strategic input and be the partner in terms of discussing any of his ideas.
This is a hedge fund.
So it’ll be global macro, and you’re going to be the senior advisor. Long/ short and not a lot of leverage. That’s the approach?
That’s right.
Let’s shift gears and talk a little bit more about global macro and your approach. When you’re doing your day-to-day work, what are you looking for? What is a day in the life of Felix Zulauf when he gets to the office?
Well, I’m a believer in cycles. I strongly believe that an economy — all economies — do not move in linear but in cyclical fashion. And so do financial markets. And my goal is to catch most of the up cycles and most of the down cycles, because assets are priced based on where we are in the cycle. So I do a lot of cyclical work. I do not moon cycle but the classic business cycle. There is the 3-5 year inventory cycle that they teach in basic economic theory, then there is the investment-related cycle which lasts 9 years. And then you have the 18-20 year real estate cycle and etcetera. I try to get a big picture of where the major economies of the world are moving and where the risks and pitfalls will be in the next six to 12 months. That’s my work — to find out where we are in the business cycle. And then I apply classic tools like monetary analysis, I do valuations because capital markets go from one extreme to the other. They never go in between and reverse to where they come from — that’s important to understand.
Once it hits an extreme (like in 2000), it does not go to a new level in the historical range in terms of valuations and then goes back to overvaluation again. It always goes from overvaluations to undervaluations.
Is that true for the housing market in the US?
The housing market has been a linear affair, particularly since the gold standard was abandoned. When you overstay a cycle by these aberrations like two expansive monetary policies, you could a stretch a cycle for a long time. But when you do that and overstay a cycle, you create more excesses and the correction, when it comes, will be happening in a much-altered time frame than normal. And it will be much sharper and much more painful.
Felix, you may be the first person I’ve heard who is blaming the US housing bust on Richard Nixon.
Well, in a way, you’re right. It all started with that [Nixon's taking the US off of the gold standard] but it added. The down cycle is usually here to shake off the weak participants in the system and to correct the successes that have been built up during the up cycle. When you do not let that happen, you take more and more excesses with you, which over the long term and over many cycles will build up to extremes — and that’s where we are now.
Would you say that the ultra low rates that we saw…after the US crash when the US fed took rates down to 1%…so in other words, we never saw the cleansing effects of the 2000 crash, we just kicked the can down the road?
The 2000 excess was really the result of the bailing out and the easy money after the 1980’s long term capital and the Asian Crisis and the Russian default.
So ‘97/ ‘98 begat 2000, which begat the 2003 crash which set up the ‘07/08/09 collapse.
That’s right.
So we end up with these cycles where intervention from the Fed and elsewhere, in an attempt to prevent the pain, just make worse and worse.
Yes, and now, we are at the point where over the last decade, the regulators for the banking industry allowed the banks to reduce their equity capitals step by step, which really was another element creating the boom and the bubble in real estate and other sectors. And now we are here suffering from the fallouts of that bubble bursting…In Europe, it is even worse than in the US. And the problem then comes that the banks have to be bailed out. And bailing out the banks in the system pushed government debts to much higher levels. The question is, what will we do next time when the governments need to be bailed out.
Because the problem is that we are living in a fiction that we can enjoy a relatively high level of prosperity for our average citizens in industrialized countries by going more and more into debt. And Greece, in a way, was a stopping point. The markets said, “There is a limit, we are not financing it any longer.” And then the European Union was changed to a transfer union all of a sudden. Now, the next thing to drop is Spain, where we have a real estate problem that is bigger than in the US. There are more homes for sale in Spain than in all of the USA. And prices have so far only gone down 10 percent because there are no transactions. But once transactions are forced by the banks, because the banks are forced by the government to clean up the situation — then prices will come down 30 to 40 percent and probably end at 50 percent down and then the banking system is bust. And the insurance system is bust. And then the government has to bail them out and the government is bust. And then what?
So I see this problem of over-indedtedness moving from the periphery of our global credit system to the center. The center is the US. And believe me, the US has its own problems. Half of the US states are running deficits that are bigger than Greece.
I think this whole process will run another few years until it reaches the center. And the point is that at some point in time, the Central Banks [will] have to bail out the governments. And maybe on the way to that point, there will be some countries that will default, and then restructure — which would be the right thing to do, actually. But at the present time, Greece should have restructured. They should have claimed default and then the debt should have been restructured. But the problem was that the banks could not take that hit. So bailing out Greece was bailing out the banks.
I do not know what the final outcome will be. I think that historically, when you look at governments that are highly indebted, you have either defaults or you have printing money. I would assume that most of the European countries [aren't party to the latter] because they have the Euro and it is harder to run the printing press than if you had one country and one government that has sovereignty over its own currency. They [the European countries] will probably go towards restructuring. And within the group of sovereign countries (I would include the UK, Japan, and the US probably) — they will probably try to run the printing presses up and go into massive debasement of the currency. This will, of course, create a payoff later on in the currency markets and currency controls.
Do you think that members of the EU are at a disadvantage because they do not have the ability to inflict these loans upon themselves or does it work to their benefit that they’re forced to take unpleasant-tasting medicine to avoid much worse tasting medicine down the road?
Well, I don’t believe that a country like Greece can, through conventional steps, heal its situation. That’s impossible. They have a program to heal deficits…but they will kill themselves by doing it. It will push the economy into a massive deflation. And I do not think that it is politically possible for a long time — people will revolt.
So, in a way…the Euro acts like the gold standard in the 1930’s for the weaker economies. And in the 1930’s, those countries [the weaker nations] came out of the Depression first (that debased and devalued their currency relative to gold). And then they could recover. And I think that will be part of the solution. We have never had a situation like that — all of the major industrialized countries were hitting the fan at the same time, basically. This is a unique situation, and I would be lying if I told that I knew exactly what the outcome would be.
What’s your take on the obsession over every open, every close — especially now that you’re more of a weekly advisor than a daily tethered to the machines?
I’m one of those poor guys who never lives in the present but always lives in the future. In a way, I draw like a sine curve for a cycle. And according to my analysis of the big picture of a monetary factors of market prices and trends and momentum and valuations/ sentiments, I try to place on that sine curve where the economy and the different markets are at the time.
And then, based on that, I read reports and glance through the newspapers and I try to think whether the news today confirms what I think is where the markets are in the cycle. If they do, then [I] go on to the next thing. If they don’t, then I have to check it out and see if this is noise, or an aberration, or a delay, or whatsoever. That’s the way I look at the short term.
How do you avoid the classic investor foible of confirmation bias? Especially with the internet, you can very easily only read the things that agree with you and nothing else?
Every human being tends to be lazy, and tends to like people and opinions that tend to agree with him. My situation is that I really grew up in the whole industry as a maverick. I was never a mainstream guy. I can see best when I can see lonely. And the majority is on the other side. But I reason, I look at them, and I check it [their stance] out. And you know that the markets are horrible. The markets tell you, relatively quickly, when you’re wrong. So I’m very risk-averse. I like to make money, but I hate to lose money. So I’d rather make a little bit less and not lose money. That is something that I learned from my youth on. I wasn’t born with a golden spoon in my mouth, so I had to make my fortune first all through hard work and suffering. And I don’t want to lose it.
I’ve found that some of my bad calls have taught me a lot of lessons. Any in particular stand out for you?
In my younger years in ‘74, when I was bearish on the markets, I turned bearish on Japan and didn’t understand that market for some years. And that was a horrible mistake. It was a mistake by a missed opportunity and not by losing money, but it was a horrible mistake.
And how about more recently?
In March ‘09, I turned bullish for a rally. I saw that in 2 to 4 months it went up 25 to 40 percent and I didn’t expect that rally at the beginning when it started to last that long and go that far. Once it never corrected, I had to go back to my drawing board and do the homework and I sought a bet that was very similar to two previous cases in the history. One was in the US — that was in 1938 — that rally had the same characteristics in terms of fundamentals and in terms of technicals. And the other case was in Japan in 1995, ‘96. Both rallies lasted one full year. Both rallies were eventually fully retraced and that’s what I think will happen here too.
So now, here we are, it’s 2010. What stuff catches your attention? You mentioned before this is a fascinating time to be investing. What makes it so?
We came out of a time when monetary policy worked extremely well for quite some time. It worked well for the economy because when the Fed banks cut interest rates and stimulated the system, you had good growth following through later on with a time lag. You had chemical markets rallying and equity markets and credit markets and commodities and etcetera.
This time is different, because we have such a high level of debt that monetary policy has become very inefficient. And in ‘09, monetary policy alone would not have worked if the Fed and other central banks did not go out and buy, for trillions of dollars and Euros, financial assets in the market directly. Because monetary policy alone did not work. We have basically zero interest around the world in the major industrialized economies and that alone is not working. In a situation where you have too much debt and the private sector begins de-leveraging, monetary policy doesn’t work. It’s similar to the situation in Japan, although the problems there were even more severe. What works is fiscal policy, and fiscal policy gave us this kick in ‘09 and carrying through the economy up to this day. But these fiscal stimulus programs will have run their course very soon. And then we are back to final demand.
So we have three factors moving the market. One was the stimulus demand, the other was the re-stocking of inventory throughout the manufacturing sectors of the world, and the third was financial banks manipulating financial markets up to the point where they got the prices where they wanted them. And I think quantitative easing to that degree is not possible in the current environment without first having a crisis again because you run into political problems. And the same is true for government spending of the size we have seen last year. Because the political framework is such that some people are very concerned with the debt that we are piling up virtually everywhere. And therefore, the markets are now forcing the hand and you see that markets are beginning to break down. The deflationary forces are gaining the upper hand and the western world is really hoping that China will bail us out by buying all the goods that we want to sell.
I just came back from a three-week trip to China and my view is very different. I think China is in the early stage of a decline with economy weakening that will turn into a hard landing.
So you’re in the Jim Chanos camp that looks at China as another boom about to bust.
I’m bearish cyclically. I’m not sure about the secular framework, but it doesn’t matter at this point in time. At this point in time, the cyclical forces in China are bearish, and the biggest problem for the Chinese people are the run-up in home prices over the last 18 months of about 100%. Private sector debt in China is almost the same as in the US relative to the size of the economy. And the people cannot afford housing anymore so the government wants to bring housing prices down. And they will be successful with all of the tightening steps they have undertaken. The problem is — you cannot just hurt housing. The economy is a mechanism that is inter-linked. If you hurt housing, you hurt many other sectors too. I’m very bearish cyclically for the next two years or so. It could be also that we will never see 10 percent growth again. Maybe we will see 4 or 5 percent, that’s possible.
Ten percent growth in China?
That’s over.
By the way, I’ve been sort of critical about the consistent data that we get from China. How seriously do you take the numbers that we see from the Chinese central authorities?
You should take them with a grain of salt. I think they are trying to improve the numbers, I don’t think they are cheating intentionally so. You have to look at some statistics and compare them to other statistics and you see some flaws and you should take those numbers with a grain of salt.
Any areas of the globe that are looking reasonably attractive?
Well, never before has the world economy been as globalized as it is today. I have recently looked at GDP growth and I have looked at the growth of equity markets around the globe. And these are, historically, the highest correlation metrics. That’s why, being bearish on one major economy — you have to bearish on all of the other equity markets as well. They all move together. And being bearish on equities on a cyclical perspective over the next 2 years or so. I’m also bearish on commodities because of what I said about China.
Including gold?
Gold is not a commodity – gold is a currency and it is the only currency without liabilities and cannot be mismanaged by its own central bank….so gold is different. Gold, I think, can get hit here to around $200 on the downside and about a thousand or 1050 in a shakeout. There was recently too much noise in the gold market, but that was another opportunity to buy, because eventually gold is the best store for your savings over the next five years or so.
And let’s talk about the gold standard again. Can we go back to being on the gold standard in the future?
I don’t think we can go to a gold standard again, because if we go to a gold standard, there is not enough gold around to cover all the needs of all the companies to cover their currency. But gold, in one form or another, will play an important role in the next currency system once it is born out of the ashes of the current currency system. Therefore, I do believe that gold will be the best way to move your savings from the old world, that is in short of a final game until it breaks down completely and we have a new system.
So it sounds like you’re looking for something to be replacing the EU, and the US Dollar, and the Chinese system. Are we looking for some brand new restructuring or are we going to still see the old political lines? How does this play out?
I really do not know. I don’t think that our systems are functioning and we need a new generation of politicians who are completely free of the old thinking and Europe will be disintegrating. We will be going through a lot of pain and changes in the coming years and at some point in time, a new generation of politicians will arrive and they will tell the truth and they will tell the people – “We have a problem, it’s going to be painful to fix it, but we have to do it for the sake of our future and our children.”
In the US, we only have politicians who tell people what they want to hear, and very few who say “Here’s some medicine, it’s going to be uncomfortable, but you got to suck it up because the alternative is far worse.”
That is the case everywhere, but I’m hoping that can change. It doesn’t change just by saying things. You get strong leaders only after a period of pain and hardship. You don’t get them in a world of high prosperity.
So do you ultimately see the EU breaking up?
The EU may not break up, but the Euro…will most likely break up. I don’t see how that can survive. You have a currency for economies with completely different economic structures, and one size fits all in terms of monetary policy, and currency policy and fiscal policy just does not work. Because over the long term, the productivity differences are such that you build enormous imbalances and stress and currencies are here to balance imbalances. And if you take that factor – the currency – away, then you have to balance through the real economy adjustments and that’s much more painful.
What else do you think is interesting, what might you look into buying 1,2,3 years from now?
I think equities in the very long term are interesting investments. But we are not at the point where we should buy them long-term yet. We are in a structural bear market that started 10 years ago. I talked about the valuation cycle and we have gone far away already in valuation declines in Europe. We have gone from four times book value to about 1.2 times book value. We will probably go under book value. In the US, book value is 500 in the S&P. Usually, secular bear markets end slightly below book value, so there is still some way to go.
So that sounds like you think we’ll break the March 2009 lows.
I think we’ll see it again in the next 2 years, yes.
Tuesday, August 17, 2010
Third World America
By Janet Tavakoli
Arianna Huffington’s new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:
“Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care—the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties…”
Third World America, P. 77.
Our mediocre grammar school and high school educational system continues its downward slide. The Great Recession is squeezing school budgets. We are failing our children, our most important resource of all.
In 2009, the American Society of Civil Engineers gave the nation’s infrastructure a near failing D rating:
“Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid. Go to the sink, and your tap water may be coming to you through pipes built during the Civil War. Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges. The evidence of decay is all around us.” P. 95.
The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country’s infrastructure.
Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill. GM is among those companies, yet it took almost a half billion dollars in bailout loans. Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.
Banks (not Fannie and Freddie) Crippled the Housing Market
Fannie and Freddie do not make loans. They purchase mortgage loans and earn fees for guaranteeing payments on the loans. According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance. In the first half of 2010, they accounted for around 64% of new issuance. They were forced to pick up the slack and buy more when Wall Street’s private label securitization Ponzi scheme blew up.
Fannie and Freddie are Wall Street’s dumping ground. They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.
Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony “AAA” rated mortgage-backed securities from banks, not counting loans that didn’t meet their stated requirements. Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.
Top subprime lenders included Wells Fargo; Countrywide, purchased by Bank of America; Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase. Most of the rest depended on massive loans from Wall Street. Many of these lenders were sued by states for fraud and paid billions in settlements.
According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).
The above doesn’t even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses. Yet, Arianna notes how America imploded while bankers soared:
“Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how ‘markets have an inherent and inevitable tendency—probably rooted in human nature—to go to excess, both on the upside and the downside.’ This from the man who, as Bill Clinton’s Treasury secretary, was vociferous in opposing the regulation of derivatives—a key factor in the current economic crisis—and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron—a debtor of Citigroup.” P. 150.
Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior “risk wizard” counselor at Citigroup, member of the President’s Advisory Committee for Trade Negotiations, and member of the SEC’s Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.
Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.
Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail
Instead of apologizing for screwing up, the banks demanded the Great Bailout. At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion. Unemployment and the losses are now shockingly worse. What was merely a recession escalated into the Great Recession.
How big are the actual losses? No one knows.
After destroying the value of major banks, banks used their enormous political influence—funded with taxpayer dollars—to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don’t have to recognize losses until they sell the assets.
According to William K Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.
This time Congress gave us the Great Cover-up. Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he’s witnessed this third-world corruption before, and this time it’s in English.
Banks Stall the Recovery and Prolong the Great Recession
Unemployment marched upward, delinquencies soared, and banks stalled foreclosures. The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.
Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars. Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans. The markets aren’t recovering, because banks own colossal chunks of mystery-meat assets.
It’s a black hole of debt. If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery. When Japan did this, it stalled its economy for twenty years, and it still hasn’t recovered.
Voters Must Demand the Solution
Voters must demand that Congress uncovers and publicized facts and prosecutes the financial system’s massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.
Congress completely failed in genuine regulation and enforcement. It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more. It will have to break-up the Too Big to Fail financial institutions.
CEOs of our Systemically Dangerous Institutions (SDI’s) fail to manage them, because no one is capable of doing it. Like a morbidly obese junk food addict, banks won’t even get on a scale. Our banks refuse to properly measure (account for) the problem.
Third World America, elegantly summarizes the way forward. Arianna Huffington names the culprits and gives a roadmap for solutions. The rest is up to us. We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other. Citizens must demand a clean-up of corruption and a foundation for healthy growth.
Third World America will be published September 7 and is available here
Arianna Huffington’s new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:
“Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care—the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties…”
Third World America, P. 77.
Our mediocre grammar school and high school educational system continues its downward slide. The Great Recession is squeezing school budgets. We are failing our children, our most important resource of all.
In 2009, the American Society of Civil Engineers gave the nation’s infrastructure a near failing D rating:
“Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid. Go to the sink, and your tap water may be coming to you through pipes built during the Civil War. Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges. The evidence of decay is all around us.” P. 95.
The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country’s infrastructure.
Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill. GM is among those companies, yet it took almost a half billion dollars in bailout loans. Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.
Banks (not Fannie and Freddie) Crippled the Housing Market
Fannie and Freddie do not make loans. They purchase mortgage loans and earn fees for guaranteeing payments on the loans. According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance. In the first half of 2010, they accounted for around 64% of new issuance. They were forced to pick up the slack and buy more when Wall Street’s private label securitization Ponzi scheme blew up.
Fannie and Freddie are Wall Street’s dumping ground. They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.
Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony “AAA” rated mortgage-backed securities from banks, not counting loans that didn’t meet their stated requirements. Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.
Top subprime lenders included Wells Fargo; Countrywide, purchased by Bank of America; Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase. Most of the rest depended on massive loans from Wall Street. Many of these lenders were sued by states for fraud and paid billions in settlements.
According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).
The above doesn’t even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses. Yet, Arianna notes how America imploded while bankers soared:
“Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how ‘markets have an inherent and inevitable tendency—probably rooted in human nature—to go to excess, both on the upside and the downside.’ This from the man who, as Bill Clinton’s Treasury secretary, was vociferous in opposing the regulation of derivatives—a key factor in the current economic crisis—and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron—a debtor of Citigroup.” P. 150.
Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior “risk wizard” counselor at Citigroup, member of the President’s Advisory Committee for Trade Negotiations, and member of the SEC’s Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.
Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.
Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail
Instead of apologizing for screwing up, the banks demanded the Great Bailout. At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion. Unemployment and the losses are now shockingly worse. What was merely a recession escalated into the Great Recession.
How big are the actual losses? No one knows.
After destroying the value of major banks, banks used their enormous political influence—funded with taxpayer dollars—to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don’t have to recognize losses until they sell the assets.
According to William K Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.
This time Congress gave us the Great Cover-up. Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he’s witnessed this third-world corruption before, and this time it’s in English.
Banks Stall the Recovery and Prolong the Great Recession
Unemployment marched upward, delinquencies soared, and banks stalled foreclosures. The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.
Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars. Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans. The markets aren’t recovering, because banks own colossal chunks of mystery-meat assets.
It’s a black hole of debt. If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery. When Japan did this, it stalled its economy for twenty years, and it still hasn’t recovered.
Voters Must Demand the Solution
Voters must demand that Congress uncovers and publicized facts and prosecutes the financial system’s massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.
Congress completely failed in genuine regulation and enforcement. It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more. It will have to break-up the Too Big to Fail financial institutions.
CEOs of our Systemically Dangerous Institutions (SDI’s) fail to manage them, because no one is capable of doing it. Like a morbidly obese junk food addict, banks won’t even get on a scale. Our banks refuse to properly measure (account for) the problem.
Third World America, elegantly summarizes the way forward. Arianna Huffington names the culprits and gives a roadmap for solutions. The rest is up to us. We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other. Citizens must demand a clean-up of corruption and a foundation for healthy growth.
Third World America will be published September 7 and is available here
Saturday, August 14, 2010
Inflating or Deflating
By Frederick Sheehan
The incessant debate of whether the economy is inflating or deflating suffers from a vocabulary problem. This is as it must be since some (Federal Reserve Chairman Ben S. Bernanke) discuss deflation as falling prices of stuff while others concentrate on the debt deflation of an overleveraged economy. The latter is what matters.
This debate often fails to address the important question of “what does it matter to me?” What matters most is the changing relationship of prices. For a worker who pays $3 instead of $2 for eggs, “inflation” is his greatest worry. If, at the same time, the worker receives a 20% pay cut, there may be many causes, and it is at least symptomatic of “deflation.”
The “inflation” and “deflation” debates (at least, in the major media) are of limited interest when they take an either/or approach. In fact – back to “what does it matter to me?” – both conditions are present and moving towards a chaotic conclusion. This should be expected when the Main Street economy is appended to a financial economy, which by its nature (and high-frequency trading) is more unstable than a production economy. Since money-printing is still ascendant, more violent changes in price relationships are certain.
The Bernanke, Geithner, and Summers economy (that is, the economy of the United States) is following the historical script to hyperinflation, total war or social disintegration. In War and Peace, Tolstoy describes the prelude, those halcyon days in Old Moscow: “in those brightly colored rooms – with the music, flowers, dances, the Emperor, and tables set for eighty … The mirrors on the landing reflected ladies in white, pale-blue and pink dresses, with diamonds and pearls … In the first hall were the nobility and gentry in their uniforms … In the noblemen’s hall was an incessant movement and buzz of voices.”
The atmosphere was about to change, as some knew but many chose to ignore: “On the arrival of the news of Austerlitz, Moscow had been bewildered. At that time the Russians were so used to victories that on receiving the news of defeat some would simply not believe it, while others sought some extraordinary explanation of so strange an event.” Chairman Bernanke chose (circa 2004) to believe such odd-ball theories as “the great moderation” and “the global savings glut,” both extraordinarily inept descriptions of a world about to turn over.
Today, still ignorant of the debt deflation that plagues the deleveraging economy, Bernanke gabs before senators of a fanciful world, akin to a shell-shocked survivor raving before the Muscovite cognoscenti of the great Russian victory at Austerlitz. The beautiful people find this reconstruction most pleasing, so choose to trust it. (This is also a simplified version of how the most (not best) educated Americans – who dominate government, the media, think tanks, Wall Street, universities and wherever else they bray – came to ignore Alan Greenspan’s grave deficiencies and to deify him.)
The best families in Moscow held the most possessions and prestige, so they, as is true of their current-day American counterparts, were the least likely to acknowledge Russian weaknesses. Respected Muscovites of title and pedigree were trusted by many of lower rank, and understandably so. Since princes and counts had the most to lose if Napoleon invaded Moscow, and, the aristocrats were privy to insider information from the very top, surely it was wise to follow their bettors’ example.
Alas, those who were surest of their own invincibility were the least prepared for Napoleon’s invasion. Tolstoy wrote of simultaneous inflations and deflations, vast redistributions of wealth, sometimes accumulated over generations, lost in a matter of hours: “Prices that day indicated the state of affairs. The price of weapons, of gold, of carts and horses kept rising, but the value of paper money and city articles kept falling … Peasant horses [ed. note: a humble breed] were fetching five hundred rubles each [ed. note: a life savings] and furniture, mirrors and bronzes were being given away for nothing.”
Not to be neglected are the recriminations. Said the Countess Rostov: “Listen to me Count, you have managed affairs so that we are getting nothing for the house…. You said yourself that we have a hundred thousand rubles worth of things in the house…. Look at the Lopukhins opposite, they cleared out everything two days ago. That’s what other people do. It’s only we who are such fools.” Live and learn, Countess. That’s what happens when you marry the decaying order.
Currently, inflation is present in the money supply, price of gold, and the U.S. stock and bond markets. These are old themes here, so will be held in abeyance to discuss an acute deflationary threat. That is income. It is falling and prices are rising.
David Rosenberg, economist at Gluskin, Sheff, an investment advisory firm in Canada, calculates that “private incomes” (non-government jobs and transfers) in the United States have fallen from $8.7 trillion in the third quarter of 2008 to $8.2 trillion in April 2010. Americans lived beyond their incomes for years. The main source of overconsumption was consumer credit which fell at an annualized rate of 3.75% in the second quarter of 2010. This demonstrates ingenuity on the consumers’ part given that “the big six issuers have trimmed total credit available to their customers by 25 percent, partly by shrinking credit lines and not renewing expired cards,” according to an analyst at Credit Suisse.
Again, there were other sources of spending for the consumer, such as home equity withdrawal (HEW). In 2005, homeowners cashed out over $800 billion of HEW. In the second quarter of 2010, this fell to $8 billion. It was hardly worth filling out the forms.
The government has plugged some holes such as its army of make-work census takers. (It cost the government $15 to count each head in 2000 and $25 per scalp in 2010. This is the Information Age?) President Obama intends to extend make-work to the far abroad, or, at least he did on June 30, 2010, when he told an audience in Racine, Wisconsin: “When you look at a place like Afghanistan, or you look at a place like Iraq, so many of our military personnel are having to engage in work that really should be civilian. So what I’m trying to say is, don’t put all the burden on the military. Make sure that we’ve got a civilian expeditionary force that when we go out into some village somewhere…. let’s make sure that we are giving them the support that they need in order for us to be successful on our mission.” [Italics added.] Who said government workers have no imagination?
Over 40 million Americans used food stamps in May 2010, more than one-eighth of the population. According to Bill King (The King Report), U.S. government anti-poverty spending has risen 89% since 2000 – from $342 billion to $647 billion. This includes such programs as Medicaid grants, food assistance, housing vouchers, and child nutrition programs. Unemployment benefits have been extended several times in the past two years, to 99 weeks at present. The Labor Department estimates that 1.4 million workers have been unemployed for at least that amount of time. Nearly 46% of the country’s 14.6 million unemployed have been without a job for more than six months. Despite the fevered attempts to put money into hands of Americans, there were more house foreclosures in the second quarter of 2010 – 269,962 – than ever before. That was a 38% rise from the second quarter of 2009.
This has the feeling of a dyke about to burst. The government’s finger is forestalling the flood with Federal Reserve mortgage security purchases and government agencies that now issue over 90% of home mortgages. This does not put beer on the table which is a reason to think the housing market is going to topple again.
It is rare for beer sales to decline, yet, as described in the May 28, 2010, issue of Grant’s Interest Rate Observer: “In the 10 years to 2007, American beer shipments rose by an average of 1% a year. They rose by even less than 1% in 2008 and fell by 2% – a virtual collapse in beer terms – in 2009.” (There has been a drift to wine and spirits, but an attempt to find comparable sales data was unavailing.) In another land with stagnant incomes, or, at least where the sun seems to be perpetually setting – Japan – “Spending by Japanese businessmen on beer and sake is at an eight-year low as tighter household budgets squeeze their entertainment expenses. Salarymen go out drinking on average 2.9 times a month, spending about 4,190 yen ($46) each time, a 19% decline from a year earlier.” (Bloomberg, June 10, 2010). Cigarette sales are also falling in the United States, and, in Europe, cell phone usage dropped 4% in the first half of 2009. These trends indicate that “necessities” may be defined down as well as up.
Reduced circumstances will grow more acute as prices continue to rise. The U.S. government contends prices are not rising. Count Rostov could do a better job. Almost anyone who pays health insurance premiums (health costs are 16% of the economy but only 4% of the consumer price index); tuitions (Harvard’s are increasing 4% this year); utilities (“The Los Angeles Department of Water and Power is planning to boost the electricity bills of its customers by 37% over the next four years as part of its effort to cover steadily rising costs.” – L.A. Times, March 26, 2010); and cable bills (“Your cable bill is going up this year — and next year, and the year after that — with no end in sight.” CNN – January 9, 2010); and who buy food and gas are falling behind in relation to the nation’s income.
A food study might be most illuminating, but the reader will be spared such a discourse. It is worth remembering though, that food and energy are not priced in the United States. Brazil, which is booming, sends this reminder from a member of our happy Global Village: “Brazil is running out of beer cans and farmers are leaving crops in the field as surging demand and Chinese-like growth leads to shortages in Latin America’s biggest economy. Cia de Bebidas das Americas, the region’s largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted. Acucar Guarani SA, the country’s third-biggest sugar producer by market value, left 10% of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February.” (Bloomberg, June 8, 2010)
On August 3, 2010, Chairman Ben Bernanke told an audience in Charleston, South Carolina: “[R]ising demand from households and businesses should help sustain growth,” and consumer spending “seems likely to pick up in coming quarters from its recent modest pace.” Well, consumers will be spending more on sugar, beer cans, and cell phones (if they still use them) and Simple Ben’s money printing will ensure a chaotic, and impoverished, finish. The Countess Rostov should mop the floor with him.
The incessant debate of whether the economy is inflating or deflating suffers from a vocabulary problem. This is as it must be since some (Federal Reserve Chairman Ben S. Bernanke) discuss deflation as falling prices of stuff while others concentrate on the debt deflation of an overleveraged economy. The latter is what matters.
This debate often fails to address the important question of “what does it matter to me?” What matters most is the changing relationship of prices. For a worker who pays $3 instead of $2 for eggs, “inflation” is his greatest worry. If, at the same time, the worker receives a 20% pay cut, there may be many causes, and it is at least symptomatic of “deflation.”
The “inflation” and “deflation” debates (at least, in the major media) are of limited interest when they take an either/or approach. In fact – back to “what does it matter to me?” – both conditions are present and moving towards a chaotic conclusion. This should be expected when the Main Street economy is appended to a financial economy, which by its nature (and high-frequency trading) is more unstable than a production economy. Since money-printing is still ascendant, more violent changes in price relationships are certain.
The Bernanke, Geithner, and Summers economy (that is, the economy of the United States) is following the historical script to hyperinflation, total war or social disintegration. In War and Peace, Tolstoy describes the prelude, those halcyon days in Old Moscow: “in those brightly colored rooms – with the music, flowers, dances, the Emperor, and tables set for eighty … The mirrors on the landing reflected ladies in white, pale-blue and pink dresses, with diamonds and pearls … In the first hall were the nobility and gentry in their uniforms … In the noblemen’s hall was an incessant movement and buzz of voices.”
The atmosphere was about to change, as some knew but many chose to ignore: “On the arrival of the news of Austerlitz, Moscow had been bewildered. At that time the Russians were so used to victories that on receiving the news of defeat some would simply not believe it, while others sought some extraordinary explanation of so strange an event.” Chairman Bernanke chose (circa 2004) to believe such odd-ball theories as “the great moderation” and “the global savings glut,” both extraordinarily inept descriptions of a world about to turn over.
Today, still ignorant of the debt deflation that plagues the deleveraging economy, Bernanke gabs before senators of a fanciful world, akin to a shell-shocked survivor raving before the Muscovite cognoscenti of the great Russian victory at Austerlitz. The beautiful people find this reconstruction most pleasing, so choose to trust it. (This is also a simplified version of how the most (not best) educated Americans – who dominate government, the media, think tanks, Wall Street, universities and wherever else they bray – came to ignore Alan Greenspan’s grave deficiencies and to deify him.)
The best families in Moscow held the most possessions and prestige, so they, as is true of their current-day American counterparts, were the least likely to acknowledge Russian weaknesses. Respected Muscovites of title and pedigree were trusted by many of lower rank, and understandably so. Since princes and counts had the most to lose if Napoleon invaded Moscow, and, the aristocrats were privy to insider information from the very top, surely it was wise to follow their bettors’ example.
Alas, those who were surest of their own invincibility were the least prepared for Napoleon’s invasion. Tolstoy wrote of simultaneous inflations and deflations, vast redistributions of wealth, sometimes accumulated over generations, lost in a matter of hours: “Prices that day indicated the state of affairs. The price of weapons, of gold, of carts and horses kept rising, but the value of paper money and city articles kept falling … Peasant horses [ed. note: a humble breed] were fetching five hundred rubles each [ed. note: a life savings] and furniture, mirrors and bronzes were being given away for nothing.”
Not to be neglected are the recriminations. Said the Countess Rostov: “Listen to me Count, you have managed affairs so that we are getting nothing for the house…. You said yourself that we have a hundred thousand rubles worth of things in the house…. Look at the Lopukhins opposite, they cleared out everything two days ago. That’s what other people do. It’s only we who are such fools.” Live and learn, Countess. That’s what happens when you marry the decaying order.
Currently, inflation is present in the money supply, price of gold, and the U.S. stock and bond markets. These are old themes here, so will be held in abeyance to discuss an acute deflationary threat. That is income. It is falling and prices are rising.
David Rosenberg, economist at Gluskin, Sheff, an investment advisory firm in Canada, calculates that “private incomes” (non-government jobs and transfers) in the United States have fallen from $8.7 trillion in the third quarter of 2008 to $8.2 trillion in April 2010. Americans lived beyond their incomes for years. The main source of overconsumption was consumer credit which fell at an annualized rate of 3.75% in the second quarter of 2010. This demonstrates ingenuity on the consumers’ part given that “the big six issuers have trimmed total credit available to their customers by 25 percent, partly by shrinking credit lines and not renewing expired cards,” according to an analyst at Credit Suisse.
Again, there were other sources of spending for the consumer, such as home equity withdrawal (HEW). In 2005, homeowners cashed out over $800 billion of HEW. In the second quarter of 2010, this fell to $8 billion. It was hardly worth filling out the forms.
The government has plugged some holes such as its army of make-work census takers. (It cost the government $15 to count each head in 2000 and $25 per scalp in 2010. This is the Information Age?) President Obama intends to extend make-work to the far abroad, or, at least he did on June 30, 2010, when he told an audience in Racine, Wisconsin: “When you look at a place like Afghanistan, or you look at a place like Iraq, so many of our military personnel are having to engage in work that really should be civilian. So what I’m trying to say is, don’t put all the burden on the military. Make sure that we’ve got a civilian expeditionary force that when we go out into some village somewhere…. let’s make sure that we are giving them the support that they need in order for us to be successful on our mission.” [Italics added.] Who said government workers have no imagination?
Over 40 million Americans used food stamps in May 2010, more than one-eighth of the population. According to Bill King (The King Report), U.S. government anti-poverty spending has risen 89% since 2000 – from $342 billion to $647 billion. This includes such programs as Medicaid grants, food assistance, housing vouchers, and child nutrition programs. Unemployment benefits have been extended several times in the past two years, to 99 weeks at present. The Labor Department estimates that 1.4 million workers have been unemployed for at least that amount of time. Nearly 46% of the country’s 14.6 million unemployed have been without a job for more than six months. Despite the fevered attempts to put money into hands of Americans, there were more house foreclosures in the second quarter of 2010 – 269,962 – than ever before. That was a 38% rise from the second quarter of 2009.
This has the feeling of a dyke about to burst. The government’s finger is forestalling the flood with Federal Reserve mortgage security purchases and government agencies that now issue over 90% of home mortgages. This does not put beer on the table which is a reason to think the housing market is going to topple again.
It is rare for beer sales to decline, yet, as described in the May 28, 2010, issue of Grant’s Interest Rate Observer: “In the 10 years to 2007, American beer shipments rose by an average of 1% a year. They rose by even less than 1% in 2008 and fell by 2% – a virtual collapse in beer terms – in 2009.” (There has been a drift to wine and spirits, but an attempt to find comparable sales data was unavailing.) In another land with stagnant incomes, or, at least where the sun seems to be perpetually setting – Japan – “Spending by Japanese businessmen on beer and sake is at an eight-year low as tighter household budgets squeeze their entertainment expenses. Salarymen go out drinking on average 2.9 times a month, spending about 4,190 yen ($46) each time, a 19% decline from a year earlier.” (Bloomberg, June 10, 2010). Cigarette sales are also falling in the United States, and, in Europe, cell phone usage dropped 4% in the first half of 2009. These trends indicate that “necessities” may be defined down as well as up.
Reduced circumstances will grow more acute as prices continue to rise. The U.S. government contends prices are not rising. Count Rostov could do a better job. Almost anyone who pays health insurance premiums (health costs are 16% of the economy but only 4% of the consumer price index); tuitions (Harvard’s are increasing 4% this year); utilities (“The Los Angeles Department of Water and Power is planning to boost the electricity bills of its customers by 37% over the next four years as part of its effort to cover steadily rising costs.” – L.A. Times, March 26, 2010); and cable bills (“Your cable bill is going up this year — and next year, and the year after that — with no end in sight.” CNN – January 9, 2010); and who buy food and gas are falling behind in relation to the nation’s income.
A food study might be most illuminating, but the reader will be spared such a discourse. It is worth remembering though, that food and energy are not priced in the United States. Brazil, which is booming, sends this reminder from a member of our happy Global Village: “Brazil is running out of beer cans and farmers are leaving crops in the field as surging demand and Chinese-like growth leads to shortages in Latin America’s biggest economy. Cia de Bebidas das Americas, the region’s largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted. Acucar Guarani SA, the country’s third-biggest sugar producer by market value, left 10% of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February.” (Bloomberg, June 8, 2010)
On August 3, 2010, Chairman Ben Bernanke told an audience in Charleston, South Carolina: “[R]ising demand from households and businesses should help sustain growth,” and consumer spending “seems likely to pick up in coming quarters from its recent modest pace.” Well, consumers will be spending more on sugar, beer cans, and cell phones (if they still use them) and Simple Ben’s money printing will ensure a chaotic, and impoverished, finish. The Countess Rostov should mop the floor with him.
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