Niall Ferguson: If The Obama Administration Listens To Paul Krugman It Would Lead To An Imminent Debt CrisisSubmitted by Tyler Durden on 07/06/2010 11:16 -0500
In an interview with Bloomberg TV's Erik Shatzker, Niall Ferguson picks up where Reinhart and Rogoff leave off. The historian discusses the bond vigilantes, "Bond vigilantes are a bit like the people short selling investment banks a couple of years ago. You start with Bear Stearns and Lehman Brothers, you don't get to Goldman Sachs until quite late in the game. In a way the sovereign debtors of the western world are pretty much in that position today. And we are working down the list, starting with Greece, moving on to Spain and Portugal, the UK dodged the bullet by implementing some preemptive measures. Sooner or later the bond vigilantes will get to the US, I don't think it will be this year, but in the absence of any political will to address this problem, this is simply an inevitability." As to why it is inevitable, Ferguson observes the case of the UK which was the only one to manage to grow its way out of massive debt load: "Britain after 1815 had two big advantages, it had the only the industrial revolution at that point that was going on in the word and had the world's biggest empire. I don't see anyone in that happy position today." The outlook: "Is it going to be inflation or is it going to be default. Right now there is no sign of inflation. We have monetary contraction at an alarming rate, and zero inflation in terms of core CPI, so the option of inflating this debt away doesn't seem to be there right now. What you are left with is therefore default. And I think it is a fair bet that US will default at least on the unfunded liabilities of Social Security and Medicare at some point in the foreseeable future. What the Greeks discovered you are fine until you are not fine with the bond market and if you have a non-credible fiscal strategy of borrowing a $1 tillion a year for the rest of time, never ever again running a balanced budget, at some point the markets are going to get spooked, and I think that point is nearer than Paul Krugman believes. Nothing would spook the markets more than for Paul Krugman's advice to be accepted by the Obama administration. That might well be the trigger."
One of last year's key pieces of financial reporting was Jon Hilsenrath's disclosure that then-Goldman Sachs and FRBNY director Stephen Friedman was in possession of Goldman Sachs shares while holding inside information that the Fed was willing to bailout Goldman et al forever and ever, even as a waiver to allow Friedman to buy was still in process with no formal outcome, and the Goldman/FRBNY director was loading up on even more shares. As the WSJ's Hilsenrath and Kate Kelly reported, "while it was weighing the request, Mr. Friedman bought 37,300 more
Goldman shares in December. They’ve since risen $1.7 million in value." Not a shabby profit for someone who knew the system would never put him at risk of having to disgorge ill-obtained profits while in a position so conflicted, even a Chrysler-addled supreme court justice would have no problem figuring out just how blatant the systemic abuse was. Sure enough, the reporting was of sufficiently high caliber that it garnered a finalist place in this year's Gerald Loeb Awards (and seeing how ARS' "Too Big To Fail" chronology-of-events-from-the-perspective-of-Wall Street won a Loeb, it tells all you all you need to know about this particular award, and we'll leave it at that). Yet going through some of the recently made public e-mails produced on behalf of Stephen Friedman, we had a few questions as to the full independence of the WSJ when it comes to "editorial" suggestions from the Federal Reserve Board Of New York. As the below email from Fed EVP of the Communications Group, ala media liaison, Calvin Mitchell to the WSJ's Kate Kelly demonstrates, and as the final product confirms, the Fed was quite instrumental in what quotes, tangents, implications, and story lines the WSJ was allowed and not allowed to use and pursue in framing the problem of not only Friedman's conflict of interest, but that of the FRBNY board of directors itself. And seeing how Kelly and Hilsenrath caved in to every FRBNY editorial demand, one wonders just what the (s)quid-pro-quo for this particular form of alleged media capture may have been.
Sentiment in the crude oil market has been quite pessimistic lately with NYMEX front month dropping 8% in one week to $72/b. However, over the coming months, oil price should push higher reflecting the changing global demand/supply pattern resulted from some new development in the sector.
Texas AG Candidate Sues Goldman et al For Causing "Recession, Unemployment" And Everything Else That's BadSubmitted by Tyler Durden on 07/04/2010 11:19 -0500
Yesterday, NY's pension fund sued BP for having the temerity to see its shares drop. Today, the Democratic candidate for Texas AG has filed a Legal Complaint and Legal Brief against Goldman Sachs et literally al for "causing financial crisis and physical harms; recession; unemployment;
home and wealth loss; forced cutbacks in a wide variety of critical
areas, including medical care, social services, and environmental
protection" and pretty much everything that is bad in the world. Tomorrow, one million Americans file a class action lawsuit against E-Trade for experiencing a downday.
What's driving bond yields to their lowest level since April '09? Could it just be an ominous 1930s echo...
The economic mood at 200 West has officially downshifted. In a report by Jan Hatzius, the Goldman chief economist warns that "the second half slowdown has begun." Hatzius says: "This is consistent with our long-standing forecast of materially slower growth of just 1½% (annualized) in the second half of 2010." And while the contraction has been obvious to all those without a metric ton of wool in front of their eyes, the two indicators that have broken Goldman's will were this week's NFP and ISM reports. And not only that, but Hatzius is now firmly in the Krugman camp, blaring an even louder warning that should the government cut off the fiscal subsidy spigot "there is some downside risk to our forecast of a gradual reacceleration in 2011 (to about 3% on a Q4/Q4 basis)." In other words, not only will H2 GDP officially suck, but since Goldman has now officially jumped on the Keynesian gravy train, and as Goldman has rapidly become the best contrarian indicator in the world (we can't wait for David Kostin to realize that endless economic stimulus, GDP and corporate profits are, gasp, related), it likely means that Obama will not allow for even $1 dollar of extra unemployment subsidies or state bailouts just to spite Goldman.
Making money as the sell side turns on itself...
Goldman's David Viniar is currently being grilled in the second day of the FCIC's hearings by Brooksley Born, who is asking the smartest questions of the CFO we have ever heard on TV. The webcast can be seen here. The main question being hammered again and again is why and how did Goldman profit twice on AIG, first by being bailed out by taxpayers, when the firm received a par payout on its collateral exposure with the insurer, and secondly, and much more importantly, how and why the firm made a profit of $1.2 billion by buying and selling CDS on the insurer, which comports with Lloyd Blankfein's previous statement that the firm was fully insured against an AIG collapse. This is a topic Zero Hedge has covered since March of 2009. Much more important at this point is the tangent of the circumstances surrounding the AIG CDS sale: we harken back to our post from January 2010, titled "Did Goldman Sell Its $2.5 Billion AIG CDS While In Possession Of Material, Non-Public Information?" in which we speculated that not only did Goldman receive an unfair second profit via the CDS, but that in fact it sold this insurance while potentially in possession of material non-public information. Now that this topic has finally surfaced to the broader population, we would like to once again bring attention to it, and we hope Brooksley Born has a chance to follow up on it.
The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?Submitted by Reggie Middleton on 07/01/2010 05:32 -0500
Many people have asked me how SRS and REITs share prices can defy gravity the way they have given the abysmal state of commercial real estate (CRE). Well my opinion is that the equity and the debt markets have allowed agent and principal manipulation to the extent that it materially distorts and interferes with the market pricing mechanism.
Some bad news for Uncle Warren. In a note by Barclays' Jay Gelb, the insurance analyst evaluates the impact of FinReg on that "other" company and concludes that as a result of Berkshire having $62 billion in notional derivative exposure, the additional collateral requirement contemplated in the current version of Financial Reform (don't worry, the corrupt idiots in Congress will strip it before all is said and done), which amounts to 10% of notional, or 100% of option proceeds, would result in $6-8 billion in collateral posting requirements imposed on "America's Company." Even for Buffett, this is not purely chump change.
Today at 9:00 am the FCIC will have yet another great diversion session, in which the man responsible for losing half a trillion on behalf of AIG shareholders (and forcing US taxpayers in the biggest involuntary bailout in history), Joe Cassano, will be chided for a few hours, then promptly released back on his way. Goldman will be there too for some reason. Here are some observations in advance of this hearing.
This is the fourth and final part of my major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics. For those of you who have stuck with me for this series, thanks!
“We will have a financial crisis again — it’s just a question of the frequency,” said the economist Kenneth Rogoff, who, with Carmen M. Reinhart, wrote a terrific book titled “This Time Is Different: Eight Centuries of Financial Folly.” The title says it all. We’ve been through this before and will go through it again.
Russ Feingold Votes With His Conscience, Against The "Regulation" Farce, And Denies Passage Of The Frank-Dodd Fin-Reg Mutant Love ChildSubmitted by Tyler Durden on 06/28/2010 21:46 -0500
In 1999, only 8 senators voted Nay on the Glass Steagall-repealing proposition S.900, better known as the Gramm Leach Bliley, that nearly destroyed the financial system as we know it and elevated moral hazard to the pedestal of supreme American communist-capitalism. Out of the 100 corrupt statesmen 11 years ago, these are the only 8 people who deserve to be in the Senate currently (where, oddly, we find such Yay-voters as Carl Levin who recently was browbeating Goldman Sachs for doing precisely what his legislation allowed it to do). One of the 8 was Senator Russ Feingold. Tonight, the Senator once again has the guts to stand up against the latest and greatest failure of a "reform" bill - the mutated and malevolent Frank-Dodd love child known as the Fin Reg "reform" which is nothing but a farce with lipstick on it. Reuters reports that Feingold "said on Monday that he will not vote to advance the
financial-reform bill." With this decision the senator is denying "his fellow Democrats the 60th vote they
need to clear a final hurdle in Congress."
"My test for the financial regulatory reform bill
is whether it will prevent another crisis," Feingold said in a prepared
statement. The bill "fails that test and for that reason I will not
vote to advance it."
Senator, we salute you for standing up for what is right.
Fin Reg has now passed, and Goldman's Richard Ramsden is not happy: "Based on these changes, we now forecast that the large banks could see a 13% hit to normalized earnings while the regional banks could see a 5% reduction in normalized earnings. Ultimately, we believe that some of the increased regulatory and legal burdens will be passed on to customers either in the form of annual fees or higher spreads on lending. As an example, conforming mortgage rates are currently 90bps above MBS yields vs. a historical average of 20bps. This implies that banks are not passing on the full benefit of low rates and the Fed MBS purchase program because on the other side they are concerned about losses such as GSE repurchase requests. Hence, we believe the impact that we have estimated on normalized earnings could prove to be too high over time." Good work Congress - mortgage rates are about to go up. How's that whole shooting yourself in the foot thing working out so far?