“Too Big To Fail” … Fails
Is the Treasury's rescue of Fannie Mae and Freddie Mac unfair to private shareholders? Yup. And they deserve it.
S&P filed a declaration of McGraw yesterday in federal court in Santa Ana, California, as part of a request to force the U.S. to hand over potential evidence the company says will support its claim that the government filed a fraud lawsuit against it last year in retaliation for its downgrade of the U.S. debt two years earlier. In his court statement, McGraw said Geithner called him on Aug. 8, 2011, after S&P was the only credit ratings company to downgrade the U.S. debt. Geithner, McGraw said, told him that S&P would be held accountable for the downgrade. Government officials have said the downgrade was based on an error by S&P. “S&P’s conduct would be looked at very carefully,” Geithner told McGraw according to the filing. “Such behavior would not occur, he said, without a response from the government."
We wish we could say we didn't warn Boeing's machinists about the key trend taking place in the US economy under the Obama "recovery" but unfortunately we did. Three years ago, to be specific, when we wrote: "Charting America's Transformation To A Part-Time Worker Society" and followed it up with "A "Quality Assessment" Of US Jobs Reveals The Ugliest Picture Yet" in which we explained that while the propaganda machine was fixated on numeric, quantitative, job additions every month, what has subversively going on, was the constant deterioration in the quality of jobs - and specifically the declining wages - available to those Americans who had not rotated outside of the labor force permanently (currently at a record 91.5 million). We say "alas" because it once again took several years before our cautions to be felt by the broader population, in this case the Boeing machinist union struggling to extract a wage increase from its employer: Boeing, whose stock keeps hitting new record highs with every passing day.
So over the weekend, the world learned that Tiny Turbo Tax Timmy Geithner had accepted a job with private equity giant firm Warburg Pincus. The news was about as much of a surprise as a lie popping out of Barack Obama’s mouth every time he opens it. Nevertheless, the move is particularly hilarious in light of a profile article of Geithner in New York magazine from January of this year, in which the king of cronyism tried to distance himself from Wall Street. Here’s the money-shot paragraph from the piece...
Over three years after current Warburg Pincus Managing Director and former US Treasury Secretary Tim Geithner welcomed everyone to the recovery, here is where we stand: "According to Markit, optimism is improving among developed economies while emerging markets still show low levels of confidence. Subdued expectations about future activity have led to restrained hiring plans. On net, only 14% of companies worldwide expect to add employees." And just in the U.S. this number is 19%. Per the WSJ: "Companies continue to fret about further disruptions from unresolved fiscal issues, and are still particularly cautious about committing to hiring in this uncertain environment," says Chris Williamson, Markit’s chief economist. That is all.
When Tim Geithner announced his departure from the US Treasury in January, the only question was how long would it take the former NY Fed head to get a job with the only industry that he cared about as either a Fed or Treasury official: Wall Street. Tim did his best to diffuse such speculation with amusing stories about writing books, which were accentuated by his refusal to join the Fed chairmanship race. Why not? After all there was nobody that Wall Street would benefit more from as the head of the Fed than TurboTax Tim. Today, less than a year after his exit from public service, the answer has presented itself - Tim Geithner is joining private equity titan Warburg Pincus, his first private sector job in decades since working for Henry Kissinger early in his career.
Shockingly from Government to Wall Street...
A few years back Chairman Bernanke was asked by a financial reporter how confident he was that the Fed could easily start the process of withdrawing from the accommodation of “unorthodox” monetary policy. Some might argue (ourselves included) that the answer 'should' be something like “very confident” or “We feel we have the right tools and the right people to manage that process”. Instead the answer given was “100%”. At last week's press conference, Chairman Bernanke, in CitiFX Technicals' view, looked like the “cat that got the cheese", despite the more downbeat message he was giving? Why? Because he got his way. In their “conspiracy theory” interpretation it is likely that Janet Yellen’s nomination will indeed be announced in the near future and that tapering is now firmly back off the table despite the guidance given in recent months to the contrary. Bonds seem to agree (so far).
It had become clear that the President's own political base in the Senate were not going to support Mr. Summer's ascendancy. The eye of the Press will now turn to Mr. Kohn, Ms. Yellen, who does not seem to have the support of Mr. Obama, and the long, though interesting shot, of Stanley Fischer. Mr. Obama appears to be easing into a lame duck presidency far earlier than once thought and the reality of Obamacare will hit Main Street on October 1 which may tip the scales further out of his control. It may not be either the best of times or the worst of times but very volatile times that mark this week.
UPDATE: *GEITHNER STILL DOESN'T WANT TO BE CONSIDERED FOR FED CHIEF: WSJ
The next chairman's main job is going to be deciding how soon and how aggressively to pull back on Fed programs; and as none other than Fed whisperer John Hilsenrath notes, Larry Summers' withdrawal increases the likelihood of continuity in central-bank policy for the next few years - meaning any Fed wind-down of its easy-money programs will be slow and gradual. Of course he posits Yellen and Kohn as potential front-runners but throws Tim Geithner and Roger Ferguson back into the mix. Business-as-usual is back and the doves are in control - all the Fed needs now is bigger deficits to enable it to keep the pumps primed...
A month ago we reported that US fast food workers in several US cities, namely New York City, Chicago, St. Louis, Detroit, Milwaukee, Kansas City, Mo., and Flint, Mich., walked out Monday in a one-day strike demanding a doubling of their pay. Not unexpectedly, even though the president himself has been a strong proponent of rising the minimum wage, the corporations balked and the strikers achieved nothing and just in case there is some confusion, there is a lot of minimum skills, minimum wage applicants (not to mention robots) out there which translates into two words for the strikers: no leverage. However, these concepts may be foreign to a fast-food labor force that probably just wants a day out in the nice weather and to take a break from hard work for a change.
'Larry Summers for Fed Chair' proponents are working hard to reverse his generally poor reputation and seem to have gained some ground. They’ve tempted even Fed skeptics with reports that Summers doesn’t believe much in quantitative easing. But his supporters are also making claims that don’t stand up to the facts. Call us old-fashioned, but we think we should be wary of power-hungry egotists whose personal philosophy is to obscure the truth.
Based on media reports over the past few weeks, there are two clear front-runners in the competition to be named Ben Bernanke’s successor as Fed chairman. Current Vice Chair Janet Yellen sits in one corner, former Treasury Secretary and National Economic Council (NEC) Director Larry Summers in the other corner, and pundits are actively placing their bets. Yellen is "soft-spoken, even-tempered, 100% mainstream academic economist who boils the world down to simplistic concepts," so similarities between Bernanke and Yellen are far stronger than the differences. A hand off from one to the other would be about as eventful as a rainy day in Seattle. Compared to Yellen, Summers has a longer history as a heavyweight policymaker but as Charles Ferguson wrote, “rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy." And that’s what it seems to be coming down to: a choice between a yawn and a hiss. Why not appoint someone with a track record of getting things right, you ask? Well, that would require a culture of accountability in the White House. Does anyone remember when we last had that?
Federal Reserve Chairman Bernanke's term expires January 31, 2014. While his continuation as Fed chair cannot be ruled out, he has given no public indications that he plans to seek another term and most market participants - as well as many members of Congress in last week's Humphrey-Hawkins hearings - seem to believe he will retire from public service early next year. As Goldman notes, the announcement of the next Chair of the Federal Reserve seems most likely to come in October, though nominations for Fed Chair have been announced as early as five months before the current term expires and as late as less than a month before expiration. There does not appear to be much risk to the Senate's ultimate confirmation of whomever the President chooses, though the Fed nominations have become more politically controversial over the last few years, which is likely to lengthen the confirmation process. Following previous confirmations, financial market volatility has typically increased slightly, though whether this occurs following the upcoming transition will of course depend on who is nominated.