Dead Squirrel

Why I think the top may be in?

The Usual Suspects

Amusing:

The order (L to R): W, Summers, Obinhood, Bazooka, Timmy

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CBO Projected Deficit

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via Perot Charts

Matt Taibbi - GS profit breakdown

Source: The real price of Goldman’s giganto-profits

Goldman Sachs Chairman and CEO Lloyd Blankfein in Washington DC in November 2008 (Chip Somodevilla/Getty)

Equity underwriting boomed during the period as dozens of banks raised money to strengthen capital and repay Troubled Asset Relief Program funds. The business reported record revenue of $736 million.via Article - WSJ.com.

So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.

Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.

Now, the counter to this charge is, well, hey, they made that money fair and square, legally, how can you blame them? They’re just really smart!

Bullshit. One of the most hilarious lies that has been spread about Goldman of late is that, since it repaid its TARP money, it’s now free and clear of any obligation to the government - as if that was the only handout Goldman got in the last year. Goldman last year made your average AFDC mom on food stamps look like an entrepreneur. Here’s a brief list of all the state aid that is hiding behind that $3.44 billion number they announced the other day. In no particular order:

1. The AIG bailout. Goldman might have gone out of business last year if AIG had been allowed to proceed to an ordinary bankruptcy, as AIG owed Goldman about $20 billion at the time it went into a death spiral. Instead, Goldman gets to call upon its former chief, Hank Paulson, who green-lights this massive, $80 billion bailout of AIG (with Lloyd Blankfein in the room), at least $12.9 billion of which went straight to Goldman. Moreover, let’s not forget this: both Goldman and Bank Societe Generale had been tattooing AIG with collateral calls in the period before AIG’s collapse, with Goldman extracting a full $5.9 billion from the company during that time. It was those collateral calls that really killed AIG.

Now, ask yourself: exactly how big would Goldman’s profits be this year, if they had to fill a still-extant $13 billion or even a $20 billion hole on its balance sheet from AIG’s collapse? You think it would still be $3.44 billion? What if Hank Paulson had elected to save Lehman instead of saving AIG/Goldman, how big would Goldman’s profits be then? Is anyone even asking this question?

I keep hearing people say, “Well, so what — it’s only fair that Goldman got paid off for its deals with AIG. After all, AIG was contractually obligated to Goldman. Goldman deserves that money, because it was doing the right thing in buying insurance from AIG in the first place.”

That’s bullshit, too. As Rich Bennett over at the hilarious monkey business blog pointed out to me the other day, Goldman was insane and reckless in making those deals with AIG. Goldman wasn’t removing risk from its books by buying CDS protection from AIG, they were exchanging one kind of risk for another kind of risk, counterparty risk. “If you have too much risk to one entity and they go bust, you’re shit outta luck,” Rich says. “They took AIG for a ride, and when the music stopped, they and their partners were going to be taking up the proverbial tookus.”

So to review: Goldman makes insane bets, runs wild on AIGFP’s house idiot Joe Cassano for a while, sticking him with $20 billion in risk, and when it all went to shit — as it inevitably had to — they drove a big stake through AIG’s heart and got the government to step in and pay them off using our money. How’s that for market capitalism? Just like Adam Smith drew it up, right? They’re just smart guys!

2. TARP. Much discussed, no need to really review here. Goldman got its $10 billion. It paid off its $10 billion. Good for them. However, there’s one thing to note here, and it hasn’t been mentioned really at all in the press. It is continually reported that now that Goldman has repaid its TARP money, it no longer has restrictions on its executive compensation. That’s actually not true. The government still holds warrants from Goldman and other companies that it acquired during the TARP process, and until the banks pay off those warrants (and they’re all already trying to pay them off at below market prices), the Treasury still technically has the authority to prevent lavish bonuses. Not that that will happen, of course, and this is yet another government handout — a firmer government would be hard on Goldman to the end of the process, while this government is doing its matador job and waving through these massive bonuses early on in the repayment schedule.

3. The Temporary Liquidity Guarantee Program. So Goldman last year converts from an investment bank to bank holding company status, which now makes it eligible for a new program that gives commercial banks FDIC backing for unsecured debt. This is not a direct subsidy in the sense of us actually handing over a bunch of money to Goldman, but it’s almost better, in a way. This basically hands over a free AAA rating to the big banks and allows them access to mountains of cheap money, with all of us on the hook if something went wrong. This is the equivalent of telling Exxon it can take crude from the Strategic Petroleum Reserve at below-market rates during an energy crisis and then turn around and sell it on the market at whatever price it wants, and pocket the difference, for the good of God and country. Goldman took full advantage of this deal, issuing $28 billion in FDIC-backed debt after its conversion. Exactly how hard is it for a bank to make a profit when it has unlimited access to virtually free money? It is almost impossible for banks to not make money when their cost of capital sinks this low.

Ask yourself this question: has borrowing money gotten any cheaper for you this year? Did someone from the government walk up to you after you foreclosed on your house or missed payments on your charge card and, as a favor, just because you’re so cool, jack your credit score back up to the 99th percentile and invite you to start all over again? Because that’s what happened to these assholes. They made every bad move you can think of and they not only got a clean credit slate but a vitually ceiling-free spending limit.

4. The Fed Programs. By converting to a bank holding company, Goldman also became eligible for a whole galaxy of new bailout programs administered through the federal reserve like the Term Asset-Backed Securities Loan Facility (TALF); it also became eligible to borrow cheap money from the Fed’s discount window. There is so much to cover here that it would take forever to get to all of it, but the key number to remember here is $2.2 trillion (not billion, trillion). That’s how much the Fed has lent out in assistance since this crisis started and we have no idea how much of it went to Goldman or any other firm, thanks to Ben Bernanke, who refuses to disclose this information. But you can bet that Goldman has taken full advantage of all the various programs designed to relieve the banks of the worthless crap assets they acquired while they were playing roulette the past ten years or so. We just have no idea how much crap they unloaded on the Fed, or how much they borrowed. Would you really bet that it wasn’t much?

5. The TARP Repayment Bonanza. See the story at the top of this piece. As part and parcel of the TARP program, the banks that received money had strict guidelines imposed on them by the state in the area of how they could raise the money to repay. TARP recipients had to issue new equity according to certain parameters, and guess who one of the only major equity underwriters left on Wall Street is? That’s right, Goldman, Sachs. So say International Reckless Dickwad Bank needs to issue $100 million in new stock to pay off TARP; they hire Goldman to do the deal, and since the fee for equity underwriting is 7%, Goldman gets, in essence, a state-mandated $7 million fee. Because so much money was lent out under TARP, the underwriters on Wall Street made a massive bonanza on all the new bank stock. As noted above, Goldman’s equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn’t blown up the universe in the first place? No. You do the math; this is another subsidy.

And that’s just some of the help they’ve gotten. Should we bother to count Goldman’s status as one of just 17 remaining primary dealers in U.S. Treasuries, which naturally did a crisp business last year as the U.S. borrowed its way out of a hole the banks had themselves created? Should we count the ban on short-selling Goldman asked for and got last year? Or how about the seemingly obvious fact that the bank used all of this state assistance and guarantees as a crutch to prop up lots of new risk-taking activity, which was the exact opposite of what was supposed to have been achieved by the bailouts, which were supposed to usher in an new era of austerity and temperance?

As Felix Salmon notes, Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.

Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

There are going to be some people who say that some of this stuff isn’t government subsidy so much as ordinary government contracting. After all, do we criticize Boeing for making airplanes or Electric Boat for making submarines during a war? If we don’t do that, then why should we be pissed about Goldman making a profit underwriting TARP repayment stock issuances, or Treasuries?

The difference is that Boeing and Electric Boat didn’t start the war. But these guys on Wall Street causesd this crisis, and now they’re raking in money on the infrastructure their buddies in government have devised to bail them out. It’s a self-fulfilling cycle — beautiful, in a way, but at the same time sort of uniquely disgusting. That they’re going to get away with it is bad enough — that they’re getting praised for it, for being such smart guys, is damn near intolerable.

Jon Stewart takes on Goldman Sachs

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Pyramid Economy
www.thedailyshow.com
Daily Show Full Episodes Political Humor Joke of the Day

Housing Crisis Overview and Why There is More Pain to Come

Housing Crisis Overview

The Ayatollah at his best

The name Dennis Kneale, the i...t shoud say it.

http://market-ticker.denninger.net/archives/1193-Kneale-You-Asked-For-It.....html

Comforting Lies

Market Sentiment Cycle

Source: http://seekingalpha.com/article/146935-charting-where-we-are-in-the-market-cycle

Regulation Chronicle

Source: WSJ

Rosenberg on this recession

David Rosenberg :

Has a recession ever ended with U.S. payrolls sliding 1.3 million over a three-month span? The answer would be “no”. The June U.S. employment report had deflation thumbprints all over it. You don’t have to take my word for it, have a read of San Francisco Fed President Janet Yellen’s speech on June 30 when she dared to utter the “D” word (see below). And that was before the release of the payroll data, which contained disturbing signs of weakness on many fronts.
The headline U.S. nonfarm figure came in at -467k compared with -350k consensus forecast and the back revisions were negligible (+8k). Also keep in mind that the Birth-Death adjustment showed that miraculously, 185,000 jobs were created by new business formation, which was 20,000 more than a year ago – you really cannot make this stuff up. Be that as it may, at no time in the 1980, 1982, 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure as we did on Friday, not even at the depths of those downturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived.
We saw a market commentator on the front page of today’s NYT stating “It looks shockingly bad compared to last month, but it is better than April when the economy shed 504,000 jobs. The trend is much better than when we started the year”. We can understand the human need to be optimistic at all times, but in the money management business, it is vital to constantly do reality checks. With the global economy coming out of the abyss at the turn of the year, and with credit conditions far better than the total freeze-up back then, why should we still be seeing job declines of between 700k and 800k? Is that the new benchmark for the economy? The reality is that the Lehman collapse was nine months ago and the peak of the fallout was five months ago. Think about that, the economy was in recession for over a year by the time the markets really began to fall apart at the turn of this year, and since the peak of the angst, the economy has still shed over 2½ million jobs, which is more than what was lost in the entire 2001 tech-wreck-downturn.
So while we are no longer experiencing an earthquake, what we are enduring are the aftershocks, not green shoots. There is still up to $5 trillion of consumer and mortgage-related debt that has to come out of the system based on the new and lower level of assets and net worth on the household balance sheet, and companies are adjusting their order books, output schedules and staging requirements to this new paradigm of credit contraction. It should not be lost on anyone that this is the first time since the 1930s depression that the private sector job losses posted in the economic downturn more than wiped out all the gains from the prior expansion.

This is a totally new experience for analysts, economists and strategists, which may be one reason why so many pundits missed calling this cycle for what it is, or perhaps for what it is not, a garden-variety recession, where little rules-of-thumb like the ISM or ECRI can be relied upon to call the turn. This time around, the signpost will come from more esoteric indicators such as home inventories, the savings rate, debt-service ratios, household balance sheet growth, and liquid assets relative to non-liquid assets on commercial bank balance sheets. That is the big picture.

Back to the smaller picture (the data). As always, the devil was in the details in Thursday’s report. In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31.0, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs. The Household Survey showed a 374k job decline, and all centered in full-time jobs. In fact, we have lost a record 9 million full-time jobs this cycle, more than triple what is normal in the context of a post-WWII recession, and the over 2 million pushed onto part-time work (and the number of people now working part-time because they have no other choice due to the weak economy has more than doubled).
This in turn has taken the total hours worked in the private sector down to a new record low of 33.0 hours in June from 33.1 hours in May. In fact, aggregate hours fell so much in June that the decline was equivalent to over an 800k job slice! Just to put the entire labor market picture into a certain perspective; aggregate hours worked, which closely tracks real GDP growth, fell 0.8% in June (that is a 9.2% plunge at an annual rate), which was the steepest decline since March, and not once did a recession ever end with this metric as weak as it was last month.

When we say that deflation has gripped the labor market, we are not exaggerating. Average weekly earnings – the proxy for wage-based income – fell 0.3% in June and have been flat or down in three of the last four months. During this interval, they have deflated at a 1.6% annual rate – versus a +1.8% trend a year ago and +5.2% two years ago.
Moreover, judging by the lingering – indeed, accelerating – weakness in labour demand, these deflationary pressures in the labour market in general and wages in particular can be expected to persist. In addition, the implications for consumer spending once the fiscal stimulus subsides in the second half of the year are clearly negative, with similar implications for corporate profits and the equity market, which are de facto priced in a V-shaped earnings recovery. The average duration of unemployment gapped up by two weeks to 24.5 weeks – both the monthly increase and the level reached new record highs. The number of unemployed people that have been looking for a job with futility for the past six months rose 433k to a new all-time high of 4.4 million. Almost one-in-three of the ranks of the unemployed have been looking for work now for the past six months and still can’t find one. It is remarkable that anyone can be serious about ‘green shoots’ in this labour market backdrop.

When recovery does come, the record number of people that have been pushed into part-time work are going to see their hours go back up, which will be good for them, but not so good for the 100,00 - 150,000 folks that will be entering the labour force looking for work with futility. The unemployment rate is probably going to rise through 2010, which is going to pose a challenge for incumbents seeking re-election in the mid-term voting season. It may also prove to be a challenge for Ben Bernanke’s re-appointment chances this coming February. As we said above, companies have permanently reduced the size of their operations with a knowledge of how much credit is going to be available to them in the future to survive because the financial sector is going to be operating under more supervision and regulation and leverage ratios, which means the funds available to support a given level of GDP is going to be measurably smaller than what we had become accustomed to during the secular credit expansion that really began in the mid-1980s, only to turn parabolic during the ‘ownership society’ era of 2002 to 2007.

What makes this cycle “different” is the permanency of the job losses – many are not coming back. For example, the number of people unemployed who are not on “temporary layoff” rose 172k in June and the tally is 1.2 million over the past three months to total a record 7.9 million. Three-in-every-four workers who were fired over the past year were let go on a permanent, not a temporary, basis. A record 53% of the unemployed today are workers who were displaced permanently – not just temporarily because of the vagaries of the traditional business cycle. That means that these jobs are not going to be coming back that quickly if at all when the economy does in fact begin to make the transition to the next expansion phase. This, in turn, means that any expansion phase is going to be extremely fragile and susceptible to periodic setbacks.
There may well be job growth in the future in health care, infrastructure, energy technology and the like, but we can say with a reasonable amount of certainty that there are a whole lot of jobs in a whole lot sectors where jobs lost this recession are not going to come back. For example, the 580k jobs lost in financial services, the 320k jobs lost in residential construction, the 1.7 million jobs lost in durable goods manufacturing, the 1.1 million jobs lost in the wholesale/retail sector, and the 380k jobs that were lost in the leisure/hospitality industry. That is over four million jobs right there that were shed this cycle that are not likely to stage a comeback even after the recession is over. To show you how big a number four million is, we didn’t create that many jobs in the prior expansion until it reached its fourth birthday towards the tail end of 2005.
The employment-to-population ratio just fell to a 15-year low of 59.5%. For it to go back to where it was at the peak of the last expansion, when there were legitimate cyclical inflation concerns, the economy would have to generate roughly 10 million jobs from where we are today. So watching for inflation in coming years, and we say this with all deference to the Fed’s bloated balance sheet, which two years into this easing cycle has yet to reignite the credit cycle, is going to be akin to watching grass grow. Have fun.

The degree of slack in the labour market is without precedence, and this widening gap between the demand and supply for labour, as we have seen in Japan, is very likely to continue exerting downward pressure on wage rates. With the fiscal deficit at 13% of GDP and public support for continued deficits waning, it is doubtful that the government, which now contributes a record 18% to personal income, can fill the void indefinitely. Did you know that the White House said in January that an $800 billion fiscal package would be enough to bring the unemployment rate down to 7% and that without the stimulus the rate would be 9%. Here we have the ballyhooed stimulus and the official jobless rate is 9.5%. Maybe, just maybe, the government isn’t the answer and today’s WSJ editorial (Tilting at Windmill Jobs) hits the nail on the head on this issue. Fully nine months after the election, this is hardly W’s recession any longer – even if the pace of economic activity is very likely going to look like a continuum of W’s even after the recession part of this post-bubble credit collapse runs its course.

We shudder to think what the consumer spending landscape would look like if the savings rate was still rising to 15-year highs at a time when incomes were falling faster than they already are. After all, here we are, into the 19th month of recession, and consumer spending in the quarter that just finished looked to have contracted fractionally even in the face of massive help from Uncle Sam. The U-6 unemployment rate, which includes all measures of excess capacity in the jobs market, rose again to a new lifetime high in June to 16.5% from 16.4%. Imagine that 1 in 6 Americans are either unemployed or underemployed, to go along with the 1 in 8 Americans that are either in arrears or already in the foreclosure process and the 1 in 10 homes that are still on the market but not selling. Green shoots, indeed.

Source: Gluskin Sheff