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Archive for the ‘Markets’ Category

When even Home Depot’s Ken Langone is questioning the reality of this rally (CEO of one of the best performing stocks since the Dow last traded here), you have to be a little concerned. However, it is Duquesne’s Stanley Druckenmiller’s point that with QE4EVA it is impossible to know when this will end but warns that “all the lobsters are in the pot” now as he notes that “if you print enough money, everything is subsidized – bonds, stocks, real estate.” He dismisses the notion of any sell-off in bonds for the same reason as the Fed is buying $85 bn per month (75-80% all off Treasury issuance). The Fed has cancelled all market signals (whether these are to Congress or market participants) and just as we did in the 1970s, we will find out about all the mal-investments sooner or later. “This is a big, big gamble,” he notes, “manipulating the most important price in all of free markets,” that ends one of only two ways, a mal-investment bust (as we saw in 2007-8) or full debt monetization and “off we go into inflation.”

CNBC Video

“The Fed is printing a lot of money. They are forcing people into markets. You shouldn’t be buying securities because you’re forced to buy them by zero rates. you should buy them because you think they’re great value. They’re great value only relative to zero interest rates. they’re not great value on an absolute basis.”

“I don’t know when it’s going to end, but my guess is, it’s going to end very badly; and it’s going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated you get a misallocation of resources and this is going to end in one of two ways – with a malinvestment bust which we got in ’07-’08 (we didn’t get inflation). We got a malinvestment bust because of the bubble that was created in housing. Or it could end with just monetizing the debt and off we go in inflation. So that’s a very binary outcome. they’re both bad.”

“the thought that you can exit from wherever the balance sheet will be at that time, 4 trillion, wherever it is, in an orderly manner the chairman testified that will give the market plenty of warning, do you know what guys like me are going to do when they sell the first bond out of 4 trillion? and don’t think that letting the bonds run off isn’t selling. that debt has to be refinanced. if you do not — if you just let all the bonds run off that is still 4 trillion in selling. and it’s not till they actually sell the first one, it’s till you get the whiff — what do you think –what do you think the markets are going to do when they figure out the exit. look what happened in qe-1 and qe-2 ended which is why i don’t think this sever going to end.”

“We know is that it’s not a real market driven number? and we know the longer you keep it there, the greater the misallocation, and the greater the pain.”

Zero Hedge

Government promises to public employees have created “zero-risk” Wonderlands protected from the market forces of risk and consequence. These islands of privilege are snapping back to join the real economy.

Every government entity that reckoned it was moated from the market economy will be snapped back to “discover” risk and consequence. Let’s lay out the dynamic:

1. Every government can only spend what its economy generates in surplus.

2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.

3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.

4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.

5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.

6. The Federal government and the Federal Reserve have pursued a policy of inflating serial speculative credit-based bubbles.

7. These bubbles inflated assets, profits and taxes, creating the illusion that blow-off speculative tops were “the new normal.”

8. Speculative credit-based bubbles misallocate capital and incentivize malinvestment on a spectacular scale.

9. Once the bubble deflates, the capital is lost or trapped in illiquid malinvestments.

10. As a direct result of the dot-com bubble, Stockton’s tax revenues (general fund) leaped to $139 million in 2001. As a direct consequence of the housing bubble, it jumped to $186 million in 2007.

11. This “new normal” encouraged the belief that the stock market would double or triple every decade into the future, generating 8%+ annual returns for public union employee pension funds.

12. The city government granted employees open-ended guarantees of lifetime healthcare coverage.

13. This meant that there was no limit on the cost of each employee’s benefits.

14. As noted here many times, healthcare costs rise by 7%-10% every year, even as the economy which supports healthcare grows by 2% on average.

15. Healthcare alone will bankrupt the nation, and the bankruptcy of entities that promised open-ended healthcare is merely one manifestation of the coming bankruptcy of the entire sickcare/entitlement Status Quo.

16. Once the stock market reverts to the mean and is revalued to the “new normal” of global recession and low earnings growth, it will decline by 40% or more and yields will remain around 2%.

17. Pension funds earning 2% at best based on expectations of permanent 8% returns cannot sustainably pay the benefits promised.

18. If the city attempts to make up the shortfall annually, the services provided to the citizenry will be gutted. The risk and consequence of malinvestment and favoritism has been offloaded onto the citizens while those protected by the government moat live “risk-free” lives of guaranteed pensions and benefits.

19. The public-employee pension and healthcare benefits were separated from the market economy with this government guarantee: regardless of what happens in the real economy, you will be paid pensions and benefits that have zero exposure to the market economy and private-sector pensions/benefits.

20. In effect, the government has placed its employees and vested interests in a moated “risk-free” zone outside the market economy. The risk that is distributed to all participants in an open market (i.e. a democracy) is transferred to the citizens and taxpayers.

21. Any government that siphons off an increasing share of its taxpayers’ disposable income (to distribute to the privileged few) in return for declining services will eventually be overthrown by the citizenry and taxpayers who must bear the full consequences of the city’s mismanagement of their capital and income.

22. Every city, county and state in the U.S. which has secured a risk-free wonderland for its favored few will “snap back” into the real economy and face the discipline of the credit market and the “discovery” of price and value.

23. Risk cannot be eliminated by government mandate, it can only be transferred to others. No government entity can maintain a “risk-free” fortress outside the market forever. The moat around Wonderland will be drained or filled, regardless of what promises were made.

24. Government has no mechanism to transparently price risk, value and return on investment. The market will “discover” all these and re-set government services and salaries accordingly.

How Stockton went broke

Charles Hugh Smith – Of Two Minds

Submitted by James Bianco of Bianco Research

•    The Wall Street Journal – Fed Proposes Tool to Drain Extra Cash
The Federal Reserve on Monday proposed selling interest-bearing term deposits to banks, a move the U.S. central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis. The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation. Fed Chairman Ben Bernanke has described term deposits as “roughly analogous to the certificates of deposit that banks offer to their customers.” Under the plan, the Fed would issue the term deposits to banks, potentially at several maturities up to one year. That would encourage banks to park reserves at the Fed rather than lending them out, taking money out of the lending stream.The central bank said the proposal “has no implications for monetary policy decisions in the near term.” “The Federal Reserve has addressed the financial market turmoil of the past two years in part by greatly expanding its balance sheet and by supplying an unprecedented volume of reserves to the banking system,” it said. “Term deposits could be part of the Federal Reserve’s tool kit to drain reserves, if necessary, and thus support the implementation of monetary policy.” Michael Feroli, an economist at J.P. Morgan Chase, said “it’s another step forward in the exit-strategy infrastructure, but it’s been well flagged in advance, so it’s not a surprise.” When Fed officials decide to tighten credit, they would likely use the term-deposits program ahead of — or in conjunction with — adjusting their traditional policy lever, the target for the federal funds interest rate at which banks lend to each other overnight. The Fed also said Monday that its balance sheet rose slightly to $2.2 trillion in the week ending Dec. 23. The Fed’s total portfolio of loans and securities has more than doubled since the beginning of the financial crisis. As part of its efforts to fight the downturn, the central bank is buying $1.25 trillion in mortgage-backed securities, a program it says will end in March. The Fed now holds $910.43 billion in mortgage-backed securities, it said Monday.

•    Bloomberg.com – Fed Proposes Term-Deposit Program to Drain Reserves
The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.  The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Fed Chairman Ben S. Bernanke is preparing tools and strategies to shrink or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales. Term deposits may help the central bank “assert operational control over the federal funds rate” once officials decide to lift the overnight bank lending rate from the current range of zero to 0.25 percent, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Excess cash “would be locked up” rather than put downward pressure on the federal funds rate, he said.The Fed won’t begin raising interest rates until the third quarter of 2010, according to the median estimate of 62 economists surveyed by Bloomberg News in the first week of December.

•    The Financial Times – Fed to offer term deposits to banks
The US Federal Reserve plans to offer term deposits to banks as part of its “exit strategy” from the exceptionally loose monetary policy used to fight the recession. In a consultation paper released on Monday the Fed said it planned to change its rules so that it could pay interest on money locked up at the central bank for a defined period. The Fed added that the well-flagged rule change – designed to allow it more influence over the $1,100bn in excess reserves held by banks – was part of “prudent planning. . . and has no implications for monetary policy decisions in the near term”. It is one of a number of measures that has been outlined over the past few months by Ben Bernanke, chairman of the Fed, as an option to drain liquidity from the financial system in a manner that protects the economic recovery while heading off the threat of inflation.

•    The Federal Reserve – Notice of proposed rulemaking; request for public comment.
The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks (”eligible institutions”) could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution’s master account at a Reserve Bank (”master account”) as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board’s Policy on Payment System Risk to address transactions associated with term deposits.

Comment

We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.  The fact is they have no plan and are still throwing everything on the wall to see what sticks. From the November 4 FOMC minutes:

Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee’s strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve’s balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee’s exit strategy more broadly.

The Federal Reserve first hinted at term deposits almost two months ago, although exactly what they were talking about was left vague until now.

Remember that the Federal Reserve has to withdraw over a trillion dollars of excess liquidity.  The easiest way to do this is to sell hundreds of billions of MBS, Treasuries and agencies.   As the bold highlighted passage above implies, they are scared to death of doing this, so they propose complicated schemes to withdraw liquidity like reverse repos and now term deposits.

We have argued that these schemes will not work.  They cannot be done in the sizes necessary or enough to even matter.  The Federal Reserve could possibly drain tens of billions of dollars via these schemes, but collectively that will amount to a rounding error when the goal is to withdraw over a trillion in excess reserves.

The Federal Reserve does not want to admit defeat, so they continue pursuing these strategies that will not make a difference.  We believe they also do it to “look busy” as they are taking measurements and notes as to how to withdraw all the liquidity they have pumped in.  They think this will give the market comfort that someone is on the case and that inflation expectations will not get out of control.  The market is not buying this.  Inflation expectations, s measured by TIPS inflation breakeven rates, are going vertical.

Reinvestment Risk

As to term deposits, the Federal Reserve is proposing an illiquid short term instrument for banks to invest in.  Banks would buy these instruments and “lock up” the excess reserves they now have.  This would have the same effect as draining excess reverses.  The maturities of these instruments would be as long as one year.

It is unclear if there will be a secondary market for these instruments, and if so, how liquid it will be.
Without a secondary market, buyers of these instruments face huge reinvestment risk.  The future course of short term interest rates is arguably to the most uncertain it has been in decades.  Will the Federal Reserve stay near zero until 2012 or will they be forced to raise rates in the first half of 2010?  Given all this uncertainty, who wants to lock up money in something that cannot be sold before maturity?  This is especially true given the Federal Reserve’s statement that the “maximum-allowable rate for each auction of term deposits would be no higher than the general level of short- term interest rates.”

The general level of short-term interest rates is set on known instruments that have generations of history and active secondary markets.  If the Federal Reserve wants to introduce a new, and wholly unknown instrument with an uncertain secondary market and offer no interest rate premium, then we cannot see how this will work beyond a token amount after some arm twisting to get them sold.  The Federal Reserve will have to offer a premium for uncertainty and illiquidy to make this fly in any major way, something they said they will not do.

Complicated Is Simple

The Federal Reserve owns 80% of AIG.  With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices.  That is, when faced with a financial problem, they create complicated tools (like CDS).  When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone.  Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer.  You might even be named TIME’s Person of the Year.

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our ‘intellectual superiors’ and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 – the biggest ever bonus season (forget record bonuses in 2010… in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) – the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math… And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to “drain duration” from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all… none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly “interesting” year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was  $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline… to $1.9 trillion.

And while things are hair-raising in “gross” country (not Bill…at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends “to focus on increasing the average maturity” of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam’s – at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan – the country has plunged into its n^th consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK – well, with the country set to have zero bankers left in a few months, we don’t think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke’s complete lack of preparation from a monetary standpoint (we are surprised the Fed’s $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke’s forced intervention in bond and equity markets. Yet the President’s Working Group is fully aware that when the time comes to hitting the “reverse” button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.

Adam Smith, Charles Darwin and George Washington are not only rolling in their graves, they are dancing the macarena. A new study by the UMich School of Business has found what everyone has known since the crisis began, if not centuries prior: that the biggest, crappiest banks were guaranteed to get more bailout funding the more political ties they had (and more kickbacks they had offered). Is this sufficient to claim that capitalism in its purest sense has been corrupted beyond repair, courtesy of political intervention and constant pandering? Probably not, but it sure makes a damn good argument. In any case, the data is sufficient for all bears to start keeping a track of which banks are increasing their lobbying efforts and funding: those are the ones where the greatest weakness is likely still to be uncovered (if it hasn’t already). And while the political relationship probably is not a big surprise to any realistic readers, another finding of the study makes a solid case for abolition of the “apolitical” Federal Reserve:

A new study by Ross professors Ran Duchin and Denis Sosyura found that
banks with connections to members of congressional finance committees
and banks whose executives served on Federal Reserve boards were more
likely to receive funds from the Troubled Asset Relief Program, the
federal government’s program to purchase assets and equity from
financial institutions to strengthen its financial sector.

The unsupervised Federal Reserve gets to make or break banks, presumably under the gun of its one and only master, Goldman Sachs, which has already destroyed its major historical competitors: Bear Stearns and Lehman Brothers. This is a sufficient condition to not only audit the central bank but to immediately seek its abolition, and also to commence anti-trust proceedings against Goldman Sachs which is not only a monopoly, but by extension has veto power over the very regulatory mechanism that is supposed to keep it “fair and honest.” The system is truly broken.

More findings from the study:

Further, their research shows that TARP investment amounts were
positively related to banks’ political contributions and lobbying
expenditures, and that, overall, the effect of political influence was
strongest for poorly performing banks.

Can someone reminds us what the core premise of capitalism is again, and why we pretend to live in anything other than a hard core socialist society?

One of the professors of the study had this to say:

“Our results show that political connections play an important role in
a firm’s access to capital. The effects of political ties on federal capital investment
are strongest for companies with weaker fundamentals, lower liquidity
and poorer performance — which suggests that political ties shift
capital allocation towards underperforming institutions.”

The US financial system now need a new four letter acronym: everyone knows TBTF. We hereby annoint the Too Blatantly Briby To Fail (TB²TF) category of financial institutions. We posit that in 5 years there will be two banks in the former group: JP Morgan and Goldman Sachs, while every single other bank will make up the latter.

Among the specific data findings:

The researchers used four variables to measure political influence: 1)
seats held by bank executives on the board of directors at any of the
12 Federal Reserve banks or their branches (the Federal Reserve is
involved in the initial review of CPP applications from the majority of
qualified banks); 2) banks with headquarters located in the district of
a U.S. House member serving on the Congressional Committee on Financial
Services or its subcommittees on Financial Institutions and Capital
Markets (which played a major role in the development of TARP and its
amendments); 3) banks’ campaign contributions to congressional
candidates; and 4) banks’ lobbying expenditures.

They found that a board seat at a Federal Reserve Bank was
associated with a 31 percent increase in the likelihood of receiving
CPP funds, while a bank’s connection to a House member on key finance
committees was associated with a 26 percent increase, controlling for
other bank characteristics such as size and various financial
indicators.

The last data point is truly troubling: while it is one thing to pander to corrupt politicians, at least when their transgressions are made public they can and will be booted out. Yet what checks and balances exist to punish current and former Fed staffers who endorse near-bankrupt companies, in self-evident conflict of interest acts, for enhanced survival? As the Fed is accountable to nothing and nobody, save Goldman Sachs, one can argue that Goldman decides the fate of the very core of the US financial system: which firms get the thumbs up and down treatment. This is an unbelievalbe travesty of both the constitutional and the tenets of capitalism and must be rectified immediately. It certainly helps that the president, being a Constitutional law professor, will surely get right on it.

“Our findings also suggest that qualified financial institutions were
more likely to receive an investment from CPP if they were bigger and
had lower earnings and lower capital,” said Duchin, U-M assistant
professor of finance. “This is consistent with an investment strategy
seeking to support systematically important institutions experiencing
financial distress.”

If this study’s finding are confirmed and repeated independently by other research teams, it is safe to say that any pretense America has to being an efficient capitalism system (where those who can no longer compete, disappear) can be used to wipe the nation’s collective backside. Between this, and a choice of US dollars and Treasuries, Cottonelle is starting to see some serious competition.

h/t Geoffrey Batt