FedUpUSA

Archive for the ‘WSJ’ Category

It was just a matter of time before the administration’s covert plan of rewarding bank execs for massive failure by allowing them to load up their balance sheets with record risk once again, while paying out historic bonuses, blew up in Larry Summers’ face. Today’s attempt by the government to not only allow the failed Citi management team to pay itself an infinite amount of money more than it deserves for destroying one of America’s landmark companies (why the hell is Vikram Pandit still in charge of the Titanic?) but to pretend that it “generated” another taxpayer win by selling off its shares at a profit, was aborted after hours, when Citi could barely find enough interest to sell $17 billion at the embarrassingly low price of $3.15, below that government’s cost basis. This will preclude Obama from making a TV appearance tomorrow of how the US taxpayer made even more money by backstopping Moral Hazard. What the US taxpayer however did do, is funnel money straight out of its pocket, into that of Vikram’s worthless lackeys. We somehow doubt this will make the teleprompter of whatever it is Obama will be praising in his TeeVeethon tomorrow.

More from the WSJ:

The U.S. government reversed plans to begin reducing its trimming its 34% stake in Citigroup Inc. (C) after investors balked at buying the bank’s shares, according to people familiar with the situation.

Citigroup was nearing completion late Wednesday on the sale of about $17 billion of newly issued shares. But the offering encountered such a lukewarm response that Treasury Department officials decided to hold off on selling any of its shares until next year, these people said.

At the expected sale price of $3.15 a share, the U.S. government would have suffered a loss of 10 cents per share on its 7.7 billion-share stake in Citigroup, or about $770 million.

Treasury officials also agreed not to sell the government’s shares for at least 90 days. The 90-day lockup is a significant concession because the government previously could sell its Citigroup shares whenever it wanted.

Citigroup said Wednesday evening that it plans to go forward with repaying the financial lifelines it got under the Troubled Asset Relief Program. That includes unwinding a deal in which the government shields Citigroup from most losses on $301 billion of assets held by the company.

As Citigroup gauged interest in its huge offering, announced Monday, some investors said they were willing to buy shares only if the company extracted an agreement from the Treasury Department to hold off on any future stock sales for at least 90 days, according to people familiar with the matter.

The government now plans to unload its Citigroup stock gradually over the next 12 months, people familiar with the situation said. That is a major shift from the Treasury Department’s announcement Monday that it planned to dispose of the shares over six to 12 months.

Is this merely one of the ever increasing cracks in the economic team’s bailout plan, which as all investors are fully aware are completely unsustainable in the long run, yet sufficiently plausible over the next 90 or so days (until QE presumably ends) that one more day of buying by various algos may be warranted. Perhaps the 90 days will end up being a far too optimistic expectation.

I spoke with some friends who are Greek and also in the shipping
business. They hate the problems that Greece is facing. The 12.7%
budget deficit is the highest in the EU and is not sustainable. Efforts
to cut government expenses have caused a political backlash against PM
Papandreou. The only available solution is to raise taxes and crack
down on tax evaders.

The Shippers are largely untaxed on their global operations. Their
status is ‘protected’ under the constitution. Taxing the shippers would
go a long way toward closing the budget gap. The changes in tax laws
will not come easy. There is no certainty of the outcome. The sense
that I got from these discussions was that there is a short window open
for Greece to come up with a plan to cut its deficit to approximately
9%. I asked for both a ”good” and a “bad” news scenario. Although the
responses to the question I asked are speculation, they have
interesting implications.

“If Greece is able to restructure its tax code and install a
plan to reduce its deficits to 8% of GDP, then China will invest Euro
25 billion in Greek bonds.”

The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ.
I think it was one of those well placed rumors. If this were to happen,
it would be of significance. It would establish that China is assuming
a role as some form of ‘lender of last resort’. The bilateral trade
conditions that would be attached to a deal of this magnitude would
re-raise the issue of China’s trade hegemony and economic muscle. For
me, the most significant aspect of this is that it would represent yet
another significant diversion of China’s investable funds away from the
US.

If this were to happen, the $40 billion under discussion would not
impact the supply demand equation for US debt. But the direction of
this would be significant. The US desperately needs China to
significantly increase their holdings of US IOU’s in the coming years.
They are under no obligation to do so. What if they were to take a
stance with the US similar to Greece? We would get a headline that
looked like:

Of course we are not going to see a headline like that anytime soon,
but the developments in Greece are a possible first step in that
direction. If China bails out Greece in 2010 it is a game changer from
a number of perspectives.

“If Greece is unable to address its budget deficit the Chinese
will not invest and financial conditions for the country will
deteriorate quickly. One consequence would be that Greece would be
forced to separate from the Euro.”

This is not a high probability outcome. However, talk of  it would have
a very significant impact on the FX markets. The people who I spoke
with made an interesting observation, “Switzerland
is very much integrated with the EU and the Euro, but they have
maintained their own currency. If Greece had its own currency it could
adjust it to achieve a trade advantage that would address the
fundamental imbalances.” (Same argument as “the weak dollar is good
for the USA”). These same people point to the fact that the Swiss
National Bank has been intervening in the currency market to weaken the
Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”

Consider where this could go. If there is talk of this happening, it
would raise the same issue for Spain and Italy who are suffering from
their association with they Euro. This could lead in the direction of a
two-tiered Euro. One would be strong. The other weak. The implications
for the dollar would be significant in both the short and long term. It
could be the source of instability as the process unfolds.

The Greece story has already gotten the money moving. It is a story
that could take us in some surprising directions. I got the sense that
there was a short fuse on this. The next three months may put some
powerful forces into play.

Is there anything behind the Chinese/Greece connection? I think so. I
always assume there is something to it when you get statements like the
following. Asked whether Greece is negotiating with China to sell
bonds, a government spokesman said:

“It may be true, and if it is true, we do not want to comment. But even if it isn’t true we wouldn’t want to comment.”

From The Daily Capitalist

As my readers know, every so often I really get fed up with what comes out of Washington (Our Nation’s Capital) and feel the need to vent. My recent irritation is a letter Christina Romer, the president of Obama’s Council of Economic Advisers, published in the Wall Street Journal.

The letter is an apologia for the economic policies she and Summers and Geithner have been recommending to the president. She seems like such a nice lady, and she’s the wife of economist David Romer. Both were econ professors at Berkeley and both studied economics at MIT. But …

Here are some excerpts from her letter, with my comments:

Within a month of taking office, the administration had announced its Financial Stability Plan and signed the American Recovery and Reinvestment Act. The Recovery Act helped stem the decline in spending caused by consumers and businesses reeling from the fall in asset prices and the drying up of credit. Real GDP, which had fallen at a 6.4% annual rate in the first quarter of 2009, began to grow again just two quarters later. …

She seriously believes this. But she has a slight problem with the cause and effect, post hoc ergo propter hoc*, thingie. That is, there is no evidence, theoretical or empirical, that the Recovery Act did anything positive or lasting. Even assuming Keynesian stimulus works, the government hadn’t spent enough money to make it work according to the Keynesian formula. At least that’s what Paul Krugman said. Whatever, no one has ever offered any proof that such stimulus works.

And, as far as I know, PCE (consumer spending) is still very low, asset prices are still declining, and credit is worse.

We’ve already seen from the Recovery Act that spending on infrastructure—everything from roads and bridges to schools and municipal buildings—is an effective way to put people back to work while creating lasting investments that raise future productivity. …

Yadda, yadda, yadda. Again more spending on things the government wants, not the things that the market wants. The jobs are already fizzling. See this excellent article in the WSJ, ironically published on the same day as Mrs. Romer’s piece. The gist is that when the government money ends, the jobs dry up.

Subsequently the president pushed for the Cash for Clunkers program that was successful in boosting demand and job creation. …

All this did was to junk a bunch of good cars, fill the pockets of auto dealers, and appease the UAW. Auto sales are already declining again. It just accelerated future sales of people who would have bought cars anyway.

[A]bout a month ago the president announced the latest in a series of measures to encourage banks to lend to small businesses. …

As we all know credit is still shrinking, not growing. They have tried every trick in the Keynesian book to loosen credit but to no avail. I’m sure this new legislation will be different.

[I]n early November the president signed into law a measure that would provide relief and spur job creation by adding additional weeks of unemployment insurance, cutting taxes for businesses, and expanding and extending the home-buyer tax credit. …

That must have worked really fast, because unemployment, according to the Bureau of Labor Statistics, dropped from 10.2% to 10% in November. Wow, that’s great legislation. But, as we all know, Things Are Not What They Seem. As David Rosenberg pointed out in one of his reports, the government stats look funny because they are so different from what ADP reported. 

Despite these positive developments, the job market remains very weak. … American businesses appear hesitant to hire, and are producing more with fewer workers. …

Didn’t she just say that things are getting better?

Tomorrow [the President] will convene a meeting of business and labor leaders, small-business owners, economists and community representatives to discuss our ideas and solicit others for accelerating hiring. … [W]e need to harness the private sector, bringing large and small firms in off the sidelines to boost job creation. …

This is the part that really upset me. First, this is a typical political move. “Let’s all get together and come up with some great ideas!” No offense to the community organizers out there, but getting a bunch of people in a room like this gets nowhere. The best thing they could do is cancel all meetings, and get the hell out of the way.

But what really got me was the “harness the private sector” comment. I hope she didn’t mean it in the way I’m thinking, but if she didn’t then it’s even worse because she doesn’t realize the implications of her policies. When government gets together with business and labor to create policies for political benefit, it is called fascism, or national socialism. The words she used were rather telling: a “harness” is not something I would want to be in. You know who has the whip.

While the words seem innocent, it is all about losing our freedoms. Here’s the conclusion from a piece I wrote about the takeover of GM (in homage to Ayn Rand):

Sometimes it’s hard to see what is happening in front of your eyes. It seems rather benign and logical when you read about it, but it’s not. Nationalizing GM is just good old fashioned fascism–just like what happened in Italy in the 1920s and ‘30s … And now us. If you think I’m exaggerating, it’s probably because you think everything the government does is OK because we’re having a crisis. As Wesley Mouch said in Atlas Shrugged, “We’ve got to act!” That’s how we are losing our freedom, by a thousand cuts.

*Since that event followed this one, that event must have been caused by this one.