New York State

"It Is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended at a time when we are clearly coming off the poorest quarter for earnings... There is this pervasive view that the U.S. economy is in better shape because a 2.2% sliver of GDP called the housing market is showing nascent signs of recovery. What about the 70% called the consumer?...Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years - underscoring how tight the backdrop is... Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels." - David Rosenberg

And I thought securitization ment they where going to keep the loan docs in a safe place in some bank vault some where...

A little over a year since the day that the world first learned about robosigning and the broader problem of fraudclosure, which is merely the functional equivalent of infinite rehypothecation of an underlying asset between a daisy-chain of lien holders, we get the first legal incursion into this farce. From Bloomberg we learn that:

• BANK OF AMERICA, WELLS FARGO, JPMORGAN SUED BY NEW YORK OVER MERS
• NY AG SUIT CITES FRAUDULENT FORECLOSURE FILINGS

In other words, kiss that foreclosure settlement goodbye. In the meantime, the  electronic momos keep taking BAC ever higher even as this news confirms that the bank is about to suffer a multi-billion impairment shortly.

Bloomberg's Trish Regan (yes, she is no longer at CNBC), has just announced that the bank which earlier announced it is shutting down its catastrophic prop trading desk (at which point shreholders let out a sigh of relief), has proceeded with slashing banker pay by 30% for overall comp and some bonuses by as much as 70%. This follows earlier announcements by Bank of America and Morgan Stanley which earlier said they would limit cash bonuses to $150K for senior positions. At the end of the day, the biggest losers are secondary, non-financial New York jobs (supposedly there are some: rat exterminators; strippers; limo drivers; food spitters also known as waiters?) as each banker jobs indirectly supports up to 3 downstream jobs. In other words between layoffs and comp cutting, the immediate impact will likely be to leave New York City, which is the farthest point on the economic procyclical receiving end, with hundreds of thousands of layoffs. Which incidentally, to the bizarro crazy scientists at the BLS, means that initial claims are about to go negative (with the traditional upward revision in the following week).

• Europe’s $39T Pension Threat Grows as Economy Sputters (Bloomberg)
• Monti Warns of Italy Protests as He Meets Merkel (Bloomberg)
• Bernanke Doubling Down on Housing Bet Asks Government to Help: Mortgages (Bloomberg)
• Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash (Bloomberg)
• Europe Fears Rising Greek Cost (WSJ)
• ECB’s Nowotny Sees Risk of Mild Recession in Euro Region (Bloomberg)
• Republican Senators Criticize Fed Recommendations on Housing (Bloomberg)
• Spanish Banks Try to Build Their Way Out of Home Glut (WSJ)
• Europe Stocks Fluctuate After German Auction (Bloomberg)

Just out from Reuters:

• FORMER NEW YORK STATE COMPTROLLER HEVESI SENTENCED TO 1 TO 4 YEARS IN PRISON FOR PENSION KICKBACK ROLE

In the meantime, Steve Rattner continues to be a distinguished CNBC contributor, and most certainly is not sentenced to 1-4 years in prison.

David Paterson speaks on CNBC. Not good news for New York inhabitants, or NY CDS shorts. Or not... NY State CDS hit an all time wide of 357 bps in December. They are now around 140. Any escalation of NY's fiscal crisis may simply imply more and more taxpayer bailouts. Swaption time.

And somehow declaring that a bankrupt state is, gasp, bankrupt is expected to be surprising? At least that is the read of Bloomberg's piece highlighting that the idiots over at Moody's may cut New York's Aa3 rating. What next: a $10 trillion deficit financed exclusively with new debt may force an upgrade of America's AAA rating? Quote Moody's: "The next three months will be critical to the state's credit rating. The rating and outlook reflect the state's current-year projected gap of approximately $3 billion and the deteriorating liquidity in the state's General Fund, and also reflects our expectation that legislature will enact solutions to the budget gap and that revenue collections based on bonus payouts will exceed the state's conservative projections. If there is no action taken by the state to close the gap, or if action is taken but is largely-one-time in nature (therefore increasing the structural imbalance in the outyears), and revenue collections in January are close to or below state projections, the state's situation at that time would likely not be consistent with a Aa3 rating and stable outlook." Which is why NY State comptroller's earlier released report "New York State’s Cash Flow Crunch" will likely do little to improve Moody's skepticism that New York can escape the fiscal abyss so well shown by Arnold to be inescapable. "[B]borrowing to address the State’s deficit would be irresponsible, incurring additional costs and adding to the State’s already high debt burden. As more time goes by without meaningful effort to address the State’s budget problem, the cost of inaction will grow and the consequences will be significantly more severe." So sooner or later New York will also likely end up bankrupt, but at least Goldman et al. have massive NOL carryforwards that will prevent them from paying any state taxes for a considerable amount of time. That and one-way private jet tickets to any non-extradition venue of their choosing.

It may come as a surprise to many that even the dumbest of the dumb money, the New York State Common Retirement System, which according to its most recent 13F had about $44 billion in total equity assets (Calpers was a distant second at $29 billion) did not participate practically at all in the last quarter's run up, and in fact of its top 30 positions, except for one notable addition, the fund was a net seller. Ironically, and true to its definition of dumb money, the fund added 7 million shares of Bank Of America: probably the very same shares that John Paulson was selling to whoever was dumb enough to bid them at that price.

The surrealities of a "healthy" economy never end. The latest indication of the new banrkupt normal is New York State itself. A new report by NY state comptroller Thomas DiNapoli entitled "Highway Robbery: State's ailing road and bridges robbed; State siphoned money to pay for operations and debt service" tells you all you need to know about just how prosperous the ailing economy really is. According to DiNapoli, "only one-third of the money in the Highway and Bridge Trust Fund has actually been used to pay for highways and bridges. The rest has been siphoned off to pay for debt service on back-door borrowing and to fund operational costs for the DMV and the state Department of Transportation." Is that lack of stolen pocket change Mr. DiNapoli can believe in? Apparently not - Mr. DiNapoli's words: "I think outrage and anger is certainly appropriate; we need to channel that into thoughtful public policy." Yet anger is so September 2008. Welcome to the Xanax highs of the new credit bubble.

The fallout from the recent investigations by the Attorney General into the New York Pension Fund system will be the likely topic of numerous analyses for months to come as details of more impropriety are uncovered. In the meantime, we would like to highlight to our readers some of the more recent recipients of New York State's generosity, which in acting as a Fund of Funds for New Yorkers, continues investing capital in numerous Private Equity and Hedge Fund firms, as well as directing real estate investments.

New York State is quickly becoming the next California, as tax revenues drop 36% from 2008 levels, and a dejected governor expressing his frustration with policy measures that continue to not bear fruit. As a reminder the state most reliant on the financial sector, is struggling with a $2.1 billion budget deficit that is still looming despite tax increases, federal aid and spending cuts.

A new monthly report released by the New York State Comptroller indicates that the tax collection weakness in Empire State continues. For the April-July quarter total tax revenue was $11.5 billion, $52 million below projection, and, more significantly, $3.6 billion below amount collected in the prior year period. For the Year To Date period, receipts, including transfers from other funds, through July 2009 of $15.7 billion were $190.9 million below Financial Plan projections released by DOB on July 30 and $4.8 billion lower than last year for the same period.

In the wake of the Madoff scandal, it is only a matter of time before the Fund of Funds industry disappears, as investor anger grows at the glaring failure of Fund of Funds' primary responsibility - due diligence. Fund of Funds are currently perceived as worthless middle men between hedge funds and investors, pocketing 1% management fees and 10% incentive fees for arguably doing no work whatsoever.