Lehman

Ah, the fall. A perfect time to spend weekends looking at the fall foliage, going apple picking... Antique shopping in quaint, little towns... And attending a Philadelphia auction with what may just be a few tokens of Lehman's, um... Fall. It's art collection. Everyone loves a no-reserve sale.

One of our favorite economic data series, the AAR weekly traffic report, was released today, and even as the data moves ever further from the Lehman anniversary when the economy presumably went into a standstill, the October 24th data still demonstrates a healthy -14.8 weekly YoY drop, and a little changed -18% YTD drop compared to the prior week's -18.2%. Interestingly, the AAR is commencing to show not just year over year data, but year over two years (YoTW?) going forward, ala what CNBC is trying to do to deemphasize the drop off in their audiences. Although while CNBC's 2008 spike was beneficial, the AAR will effectively be focusing on the major drop from an "old normal" economy. This kind of unbiased objectivity and benchmarking should raise red flags all around.

Janet Tavakoli with some more great quotes ...

"You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures; and we took that very much into account in managing our credit exposures to Lehman and to AIG, as well as we do with any other financial institution. Given that, what I would tell you is given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results." - David Viniar, Goldman Sachs CFO, September 16, 2008

• Must read, and word of the day is, as always, Collateral: the NY Fed's secret choice to rape America by taking no haircut on AIG toxic crap "Part of a sentence in the document was crossed out. It
  contained a blank space that was intended to show the amount of
  the haircut the banks would take, according to people who saw
  the term sheet. After less than a week of private negotiations
  with the banks, the New York Fed instructed AIG to pay them par,
  or 100 cents on the dollar. The content of its deliberations has
  never been made public." (Bloomberg)
• The great lobby war by the cephalopod continues: Goldman tells SEC dark pools and short sales are the market manipulator equivalent of unicorns and rainbows (Bloomberg)
• Hypocrisy 101: Ken Griffin op-ed - "It is shameful that the citizens of Main Street were forced to “bail out” Wall Street" (FT)
• Goldman mutedly realistic, while Merrill blatantly stupid on housing recovery, Drew Matus must have at least 5 "dramatically affordable" Hamptons' properties lined up in escrow (Bloomberg)
• Lending to companies in Eurozone falls for first time on record (BBC)
• Goldman Conviction Buy Textron reports revenue falls 27%, profit down 98% as business-jet deliveries "plunge" too bad Goldman does not have double secret ultra turbo buy category which these results would prompt an upgrade to (MarketWatch)

Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

Readers who have been concerned with the moral hazard provided by the Fed's monetization of Treasury and Mortgage debt, should be doubly concerned by this Fed action which sent three key messages to Wall Street: i) it made sure that Primary Dealers would generate massive profits on risky assets as the Fed would provide the funding to acquire any and all stocks (keep in mind the cost of funding of the PDCF to primary dealers was negligible); ii) it tipped its hand as to the existence and modus operandi of the rumored "plunge protection team," iii) and it made clear that the much maligned, by none other than Chairman Bernanke, concept of "moral hazard" is the one and only systemically relevant doctrine as long as the Fed's Chairman is in control, and not subject to any auditing auspices. The fact that PDs used over $140 billion of taxpayer money within a few weeks of the program's expansion in September to fund what one can assume were exclusively equity purchases, demonstrates that the American financial system got the message.

Suspicions that the Federal Reserve System might be engaging in the direct purchase of equities in an effort to complement its monetary policy in a near-zero short term rate environment are often met with scoffs and curt dismissal. In this context, it might surprise Zero Hedge readers to learn that in 2004 Chairman Bernanke himself advocated not only the expansion of the Fed's balance sheet generally, but also the direct purchase of equities by the Federal Reserve System. Then again, it may not.

Those who follow the meandering permutations of the Fed's balance sheet must have observed with great irony the proclamation by the NY Fed on October 19th that it is prepared to commence tightening liquidity via reverse repo operations, even as 48 short hours later later the Fed announced a new all time high in bank reserves, which for the first time ever hit a level over $1 trillion. The glaring discrepancy between these two observations has left many wondering not only about the veracity of any statements coming out of the Fed, but to consider what the best trades to front-run the Federal Reserve may be for that time when, whether it likes it or not, the NY Fed is forced (politically or otherwise) to start extracting its pound of flesh from the banking system.

As Zero Hedge pointed out first, yesterday Dick Bove performed what should be a FINRA or SEC punishable act, by first pumping the stock of Wells Fargo live on pumpathon central CNBC, and subsequently downgrading it, causing a major market selloff. Today, Bove tries to backtrack and explains the foolishness of his actions, while telling all those stupid enough to follow his recommendations that he will no longer be providing "immediate earnings commentary" (whatever the hell that is) on air. If his "less than immediate commentary," such as his Buy call on Lehman weeks before the bank filed for bankruptcy, is any indication, perhaps Mr. Bove should consider dropping the "commentary" business period.

On Monday the Federal Reserve held a major reverse repo test, as was announced by the NY Fed and by Zero Hedge. We have subsequently received several unconfirmed reports that the conducted test has been a disaster (we have calls into the Federal Reserve to confirm or deny this, we are eagerly awaiting their reply). Presumably, after conducting various repos last year, a typical transaction would be in the $1 to $5 billion range. At around the time the financial system was being pulledapart, were two separate $50 billion repo transactions on September 18, 2009, a day when as Paul Kanjorski had highlighted earlier in the year the money market system nearly collapsed as a result of Lehman and AIG's failure, and the Reserve Fund breaking the buck. Notable about Monday's reverse repo "test" was that it was quite sizable: in the $100 billion ballpark, on parallel with the biggest liquidity extraction from 2008. The outcome was the discovery that the dealer community does not have the capacity to do reverse transactions of this magnitude. As a result the Fed was forced to go directly to the money market industry, which has been speculated as a key source of excess liquidity withdrawals, another topic we discussed previously.

According to Andrew Ross Sorkin's new book, which is out today, the Treasury department, and Hank Paulson in particular, have some new disclosure issues to discuss next time there is a hearing on matters of the financial crisis. Sorkin points out that in June 2008, at a time when Goldman's Board of Directors was in Moscow for a meeting with Mikhail Gorbachev, then Treasury Secretary Paulson decided to invite the entire BOD to his hotel suite in a meeting that would be "off the record" as it was considered a social event. Among the events discussed were: economic forecasts, the prospects of banks blowing up (like Lehman), as well as previews of his upcoming speech. How this occurred in an uncalendarized meeting where there was material disclosure, boggles the mind.

• 20 reasons why capitalism is now dead (MarketWatch)
• Galleon's traders seek legal advice, share stock tips, update resumes as firms like Dick Bove's Rochdale pulls their money from Galleon (Bloomberg)
• Sarkozy calls dollar move against euro a "disaster," says an exchange rate
  of $1.50 per euro “is a disaster for the European economy and
  manufacturing sector” (Bloomberg)
• PPI down -0.6 on flat expectations: looks like deflationary bonds will be right as always, or at least until the SPARC cores are turned on (Bloomberg and AP)
• New home construction at 590,000 below 610,000 expectation, new apps for building permits down 1.2% (AP)

One of the central tenants of central bank politics is that these venerable institutions must be insulated from political influence and intimidation.  It was not so long ago that the obscure and enigmatic central banker was considered the most adept.  The "independence" of central banks is intended partly to service their unenviable burdens.  In particular, the need to put the breaks on the economy here and there- a decidedly unpopular mandate politically, indeed, one that can topple administrations.  Further, to resist the many calls to spur short-term growth (paid back with interest in later years) via monetary policy.  In this context, and given the recent calls for total transparency (read: total political accountability) of the Federal Reserve System how is one to look at "The Great Moderation?"  In the case of this article, as an opportunity to offer a pair of novel and contrarian theories:

1.  It was the presence of political accountability in monetary policy, not its absence that sewed the seeds of the present crisis.

2.  The natural conclusion can only be that Monetary Policy Institutions require less political accountability, not more.

Janet Tavakol says:

"During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees."

What do you think?

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked." - David Einhorn