TOO OLD TO CRY

Laughter is the only alternative

I got a call this morning from a former colleague who still working (makes too much money to quit).

"Anybody send you the Goldman response?"

"To the op ed in the Times by the guy that quit?  No."

"Well, Master Smith is described as a relatively low-level employee who had 'issues.'"

"Was he?  He made himself to sound a good deal more grand."

"Not according to Goldman and they came up with the proof.  He apparently never made more than $700,000 a year in his career."

Only in the Fairy Coo-Coo land that is Wall Street and Goldman Sachs can one making 700k be considered low-level.  Even more unbelievable is that Goldman thinks that this revelation is going to engender sympathy for the firm.  Finally, it never enters into their minds that some poor schnook scraping by at 700k might sent a message to their client base: "SEVEN HUNDRED THOUSAND and they think he's low level?"  What the hell is a Managing Director or a Partner make off me?!"  You could cry but you're too old.  You can only laugh and marvel at the insensitivity and haplessness of a guy like Blankfein who is worth half a billion dollars at least and wonder how the hell did he make that?    Which gives even more credibility to Mr. Smith's account.  And as for Mr. Smith?  Going to be tough getting a job on the Street.  What he did was a no-no, but what the final yuk in this entire affair is,  to whom the heck did he think this was going to come as a revelation?  The walking dead of the past 15 years?  

And then there's the Fed.  If there has ever been more money spent on a purely academic exercise by a bunch of over-educated pin heads I have yet to see it.  On thing I missed yesterday--and it was egregious on my part--was the apparent lack of concern...or even understanding...as to the unintended consequences of such a bland presentation of irrelevant data could have had if the times had been different.  Six months or a year ago with the market sentiment that had existed at that time, we lose a bank.  It is just that simple except that if the bank were to be Citibank it's not simple at all.  Fortunately the times are different (although that is debatable) and certainly the sentiment is different as marked by the recovery of C in the Dow today.  This central bank has nary a clue when it comes to markets; at least the policy folks in D.C. share in that ignorance.  The only good thing about this is that Mr. Bernake's salary is limited to $180,000 a year by law.  Imagine if he were paid as a low-level employee of Goldman and was ripping the taxpayer for $500,000+?  There would be at no age where I wouldn't shed a tear.

FED FOLLIES

The Republican leadership of the sent a letter to Mr. Bernanke the other day "encouraging" him not to become involved in the political process by...well...by doing anything they didn't like such as doing his job.  Trust the Republican leadership to do or say something stupid when the clear alternative is to do or say nothing at all, but it did highlight a problem that deserves some discussion which is what is the job of the Federal Reserve.

Unlike it's counterparts, the Fed has two jobs, the first being to maintain price stability which is another way of saying "protect against inflation," and the second, within the parameters of the first, to promote full employment...however that might be defined.  Job 1 is, for a central banker with a broad monetary mandate, easy.  Bring interest rates up to 20% as Paul Volker did in 1981 and you kill any inflation that's hanging around stone cold dead.  You also kill heavily indebted countries like Mexico stone cold dead, but that's another story.  Job 2 on the other hand is a lot more difficult.

I, for one, think it's a really bad idea for a central bank to be saddled with the second chore particularly if one supports and appreciates the independence of a central bank.  Indeed, it is damn near impossible.  Even more unsettling, again at least to me, is that it enables politicians to do what they do best; pass the buck and avoid the hard decisions that sometimes must be made.  In support of this thesis I offer up our situation today.  The managing of an economy--indeed, if economies especially one the size of the United States--can be managed at all is an uniquely political event requiring advice and support from monetary authorities, but to be frank it is not a task that fits their skill set.  And so Mr. Bernanke & Co. finds itself in an awful position in attempting to fill this second role being assured of only one thing; half the country is going to be hopping mad at whatever step they take to fulfill their role.

It gets worse.  Recognizing that folks might wise up to the quandry, our old friend Barney Frank has just introduced legislation to fully politicize the Fed Open Market Committee by removing the voting rights of the four regional governors (who rotate among the twelve) and replacing them with political hacks to overtly do the bidding of the politicians.  Now Barney is a slug but he's not stupid.  Barney knows that this is his party's last shot and he also knows that unless this economy can be immediately stimulated, 2012 could be a very bad year for his party.  The future is now.  The long term effects of such a ploicy change are of no concern.  It is madness, of course, but madness for a reason about which Barney chooses to have no clue.

The OMC held its usual two day meeting yesterday and today.  It was widely expected that they would enter into a "twist" operation which, briefly explained, is an attempt to influence the longer end of the curve as opposed to what central banks usually do, confining themselves to the very shot end.  That is precisely what the Fed did but in a somewhat unexpected manner.  The amount in question was $400 billion but it was a steralized move the Fed announcing that it would sell short maturities and with the proceeds buy the long end of the curve beginning at 32% of 8-10 year and finishing with 29% of 20-30 year maturities.  Net monetary change: zero.  The Fed acted to perform under it's second mandate and did nothing.  Oh yes, they did take everybody out of the auction for the long bonds (where nobody wanted to be in the first place) as the amount just happened to match the Treasury's announced intention and it will knock down medium term rates (read mortgage rates) which will not help refinancing one bit as the problem is not interest rate but valuations.  What the Fed did will have no real effect on anything, so its madness.   But..................

Mr. Bernanke did his job and in so doing he told the politicians that the Fed was done and the rest was up to them.  I also believe that Mr. Bernanke has finally resolved himself to the fact that there is nothing he can do; that the problem is not monetary but structural; that he doesn't do structural and is trying to tell the jerks on the Hill and in the White House in a truly gentlemanly way, to get off his back.  There's only one problem to that admirable approach:  there's nobody out there smart enough to understand what just happened.  "Tis' madness, yet there's method in it."  Bravo.

THOUGHTS FOR THE WEEKEND

Despite the fact that our guy can't do a quadruple Sowchow, toe loop or tonguestand, my wife tells me we won men's (?) figure skating and the Russians are pissed because their guy can jump. When does the baseball season start? I can't take much more.

Anyway, yesterday just before the sun set, the Fed raised the discount rate, you know, the rate at which banks can borrow from the Fed's discount window which usually occurs only when all other sources of funding are unavailable. Now the Fed never does this at the end of the trading day and rarely does it in the middle of a cycle, so why yesterday afternoon? The only answer I can come up with is that this Fed, forever attuned to the politics around them was afraid that any action of this nature might roil the markets in a very sensitive period. Or, to put it in a somewhat more skeptical light, somebody on the street just might get the bright idea that this stock market recovery is entirely the result of a sea of liquidity and run for the exit at the slightest sign of tightening. Memo to Ben: didn't happen. Just try to do your job please.

Now that's not to say that there is real joy in the recovery theater. There isn't. Markets are still liquidity driven, but when you have a gazillion dollars of excess reserves sloshing around in the Reserve banks, liquidity is not an issue. These guys are even making money on this stuff now. So what happens next?

The boys in the coffee shop here in the fly-over zone still don't like what they see and we all remain a touch concerned when the main street banks start trying to collect on the construction loans and the commercial real estate that's out there. As the Sage of 161st and River Ave. put it, "It ain's over til it's over," and I don't think it's over. Just something to think about over the weekend. By the by, if anybody knows what the hell is the difference between a Sowchow and a Lutz, let me know will you?

Governance and Risk next week.

ABOVE THE FOLD

The positioning of a news story is usually a good indicator as to its importance. With respect to the New York Time"Above The Fold" always indicated that the story was important(the paper being folded in the middle for newsstand presentation). less known is what the positioning as to the right or left above the fold means with everybody knowing that right column, above the fold is reserved for THE story of the day...but the left? Ah, that's an important story but over the years regular readers have figured out that the Times didn't have to work quite as hard for that one. That position is usual a spot for an important leak; a tale the pols want run up the flag pole to see who salutes. So it was today.

The Times released a story indicating that the administration had reached the decision that it would be the Treasury that would be the overseer of systemic risk...or something like that. What was suggested that the Secretary of the Treasury would chair the effort with the Chairman of the Federal Reserve serving as vice-chair. What that means of course is anybody's guess but that's about as far as the discussion got. Interesting enough, what was NOT said was that there was broad, general agreement to this policy decision either within the administration or within Congress...or at least that's the way I read it.

Now we all know that Helicopter Ben had pretty much caved on everything to insure his re-confirmation but what is less widely know is that there has been a hell of a push-back not only in the D.C. Fed but in the reserve banks as well. And rightfully so I might add. On top of this it is the systemic risk issue that has gotten everyone's knickers in a twist around the world (although no one has a better handle on what they are talking about than we do) but that is coupled with a concern that Uncle hasn't really gotten its act together especially on the political level. Nobody wants to deal with this Treasury which is generally considered to be disorganized and in some areas quite inept. On a issue such as this where a full and in depth understanding of all things international, not the least of which is the payments system, few consider the Treasury to be the peer of the Fed. But as is becoming more and more clear, everything in this administration is political and to a great extent everything is being run by the policy boys who in matters such as this are precisely the people you DON'T want running things.

I've said before that I haven't a clue what is a systemic risk institution except that it undoubtably one that is BIG in size and BIG in functions. It is one that is too big to fail but as Volker the Great has put it if you're too big to fail, you're too big. Consequently, at some point somebody is going to come to reach the startling conclusion that everybody is talking in circles and the answer is not in the appointment of some mess of poor schnooks who are given all the responsibility but none of the authority to prevent what is probably unpreventable by those not endowed with the foresight and wisdom of the Deity and to focus more clearly on governance of the institutions themselves for as much as we may hate to admit it I suspect we have reached to point--for a variety of reasons--where regulation and regulatory infrastructure have reached their limits. More on that in the days to come.

THE BLOGGER'S BUDDY

He did it again! Krugman is simply a joy for somebody like me. After a weekend of terrific football, where you're all worn out and hung over, comes this jackass to lighten your life and give you something to write about. Today, he gave a luke-warm thumbs-up to Ben Bernanke calling him a "superb research economist"--takes one to know one. But he's too complacent says Paul, as he was before the crisis, and it was his complacency that caused the same. Seems that Paul thinks Ben didn't speak out on sub-prime lending. Ah, Paul. The origin of sub-prime was always Fanny and Freddie and the Fed had been speaking out against their policies for years--you and your boys just didn't listen. Now the problem is too much complacency about under-employment. It seems that Ben is going to have to adopt policies to create jobs.

How the hell a central banker is supposed to do that Paulie doesn't tell us...which of course begs the question entirely as to whether that is a central banker's job at all. What it does do, however, is avoid the difficult conclusion that The Leader's administration, for the first year at least, has been more or less a disaster on the job and fiscal front which is the real purpose of the piece. Krugman concludes that Bernanke should be reappointed nevertheless because a successor would face too hard a battle in congress. He right there. What he's really saying is that if Ben stays around we can blame him forever...just like george Bush

BETTY GRABLE

Talk about legs! The story was continued today in a manner that defies description and comprehension. Just when folks were beginning to get their arms around The Leader's statement of yesterday to which he has now attached Volker's name, it seemed that every Dumbo...eh...Democrat legislator jumped up to announce that they were not about to support Ben Bernanke's reappointment. Immediately, the leadership announced that they weren't sure they had the votes and delayed the confrontation until next week. Most folks had already concluded that The Suit was toast but the destruction of the administration's entire financial team had never been given serious credence except for a few viewers on the fringe. Reality then struck.

You gotta feel sorry for ol' Helicopter Ben. One should never trust a politician especially this present layer of pond scum that inhabits D.C. but having compromised every principal he had he rightfully might have expected better treatment than this. Didn't happen. The Leader, having decided that rank populism is the way out for him led by bashing anything that looks financial, dragged members of his party into that self-dug septic tank and the hell with anything or anybody that was in the way. It may be self-delusion on my part but I think that the public is warming to the idea that one can rely on nothing this guy says and that this administration is in the first phase of a death spiral from which they may not emerge. The stock market tanked again and I wouldn't be surprised to see a major correction beginning next week and unless there's somebody around to restore confidence the whispers of "double-dip" may become shouts. Not good.

If this wasn't enough, up pops Barney Baby announcing that he's about to end Fanny and Freddie's lives and replace them with something else. Once again The Suit was no where to be seen. And while this was going on The Leader was out in Ohio, tie-less talking to the working man. If he was Mexican I think he'd be wearing a leather jacket and screaming, "COMPADRES" at all and sundry that faced him. What a schtick!

Look, I'm not hoping for doomsday to arrive but this administration makes one yearn for the good old days of Jimmy Carter. Gang, unless somebody comes into touch with reality we could be in real trouble. Whether The Leader and Tall Paul have it right by the banks is rapidly becoming immaterial in an administration that is living in fairy coo-coo land. ... --- ... if anybody still remembers Morse Code.

Tough weekend coming up. Colts vs. the J E T S JETS! JETS! JETS! I'm torn

WHAT A DIFFERENCE A DAY MAKES

Boy, was I wrong when I said not much was going on. Today exploded with action on the regulatory front all of which stank.
First, The Leader and his boys let it drop that they were trying to figure out ways to insure that the American Taxpayer gets all of his money from TARP back. Of course they couldn't give a damn about the taxpayer but here presented itself another way to lay a tax on the banks which they believe no one in the country cares about anyway. These guys are like Willie Sutton , who wen asked why he robbed banks replied,"Because that's where the money is." Actually, they are worse than Willie; he didn't lie about his reasons.

Anyway, what we have seen is that almost all the "banks" have repaid their TARP funds, with interest and with an additional healthy return generated for the USG by way of the sale of the warrants that were part of the deal. But it would appear that there might be a few problems along the way because if one remembers, a whole bunch of taxpayer money went to GM (now owned by the Gov.), GMAC, Chrysler, Chrysler Financial and AIG. That aint comin' back soon. Then of course there is the little matter of Fanny and Freddie, the makers of the feast about whom we have spoken ad nauseam over the months. So why tax the banks for the decision to bail out this bunch? Think Willie Sutton. Actually, if the actions of the Government were to be viewed from the prospectus of Cui Bono, why not tax the United Auto Workers? How far do you think that idea would get? Or better yet, is there a way to garnish the salaries of Congress? Just a little midwest populist jibe there, don't take me seriously. I'm a little past my "use by" date, but in my lifetime I have never seen a more venial, useless bunch than has been put together by The Leader and his handlers. These guys are the worst.

Well, let me rethink that. Came today Shelia ("Poo") Bair, head of the FDIC with another idea. With a split vote, the FDIC is now proposing a tiered level of deposit insurance to be paid by banks based upon the perception of risk that SOMEBODY will determine exists on the banks' balance sheets. To put it another way, she is proposing to tax liabilities (she claims it's not a tax) according to some credit determination made by SOMEBODY (you see, she doesn't have nearly the talent in house) at some point for some non-defined period of time. This is a Bair of very little brain. When questioned about this on TV this morning she was unable to come close to explaining her theory behind this. Nor has she apparently considered the fact that the cost of this hair brained scheme will be passed right through to the consumer depositors in the form of either lower interest payments, additional fees, reductions of service or all of the above including a few other delicious charges all of which will be blamed on the FDIC. Nor has she considered the fact that the two biggest risk takers, Goldie and Morgan Stanley have little if any consumer deposits but as bank holding companies they now come under the FDIC umbrella and the implied protection that that brings. If there is a X rated version of "Dumb and Dumber," she should be the star.

Finally, it now appears that Helicopter Ben may well be back in trouble as to his re-confirmation. He deserves it, the jerk, and on top of it all he is now in a nasty little open-air brawl with John Taylor, now of Stanford over the "Taylor Rule" which the good prof feels Mr. Bernanke has deliberately mis-catorgorized. Academics at each other's throats!! Hide the Children! I could care less if the Chairman gets himself into this little brawls except that it does no good for his institution in these times. Somebody had better start standing up for the only group of people who actually know what the hell is going on out there otherwise we are heading for a real mess if not catastrophy .

...BACK HOME AGAIN...

Sorry, gang, I know it's been a long time. But the thing I discovered since I have been doing this is that there is a rhythm to this blog thing. One can't pull a Bernanke and parachute in and out; you have to stick with it otherwise you are just spouting disjointed rubbish. Well, there is now a new year in which to get jointed so let us begin

Since we went away, Harry the Crook and his mob in the Senate have passed something that may be a health care bill by bribing everybody except the tea lady in the Senate dining room. Come to think of it, she may have gotten her piece of the action as well. I'm old, who cares, but our kids are going to have a hell of a time. Regulatory action continues in mindless pace, the Dollar has resumed it's march into the toilet, Paul Krugman gets dumb and dumber and Congress in a remarkable piece of indolence removed all of the funding fetters on Fanny and Freddie in the dead of night on Christmas eve no less when everyone was paying attention to the health bill.

You might remember we have been saying that the beginning of the mortgage crisis was the Fair Housing Act that mandated (forced?) financial institutions to lend to what previously had been considered less than credit worthy borrowers thereby creating the first sub-prime loans in the mortgage business. In the forefront of this activity was of course Fan and Fred and they remained so until the Great Crash. They are still there with a TRILLION AND A HALF of crap on their books and God only knows how much in contingent liabilities in the form of guarantees for you see, both institutions have consistently lied about the nature their exposure and have been covered in their deceptions by a more than willing Congress led by Barney and Chris the Crook. By the terms of the TARP, Treasury support was limited to 400 billion, but now no more. As of Christmas eve, the support is now UNLIMITED and will be unknown because as can only happen in Washington and support extended will not be counted in the budget.

Now this rip-off of the U.S. taxpayer would be bad enough but it gets worse in a policy sense. Remember we talked about the actions of the Fed in supporting the issuance of Agency paper? Guess what's going to happen. Sometime early this year the Fed will proclaim that this activity will no longer be needed and begin withdrawing from the purchasing of the same. HUZZAH! will proclaim the market! The Fed is tightening, things are looking good. Uh, no. The Fed will simply be replaced by the unfettered Treasury, Fan and Fred will continue to lend to crap and renegotiate existing crap, Fan and Fred's portfolios will advance towards a possible loss of a trillion dollars of taxpayer money, the housing market will not stabilize and the deficit will grow by leaps and bounds but that fact will not be recognized as all of this will occur off-budget. If they can hold the thing together until Nov 7, 2012, The Leader might get re-elected; if not...a true Louis XIV moment. You have to hand it to this bunch; we have never seen anything like this in our history as a nation. Chutzpah? They invented it.

While all of this was going on, Helicopter Ben, keenly aware that a vote on his future was rapidly approaching, threw his organization (and his colleagues) on its/their swords and took all the blame for the past few years in the form of poor regulatory oversight. Where do we get such...men? It's not that he's stupid, or ill-informed, or lacking in vision. It's just that he's...small. He REALLY likes HIS job. I find it quite extraordinary that so many pundits can write (correctly, I might add) at how Wall Street and American business lost their sense of mission and purpose; how the public trust was forgotten when staring them right in the fact is the greatest total abandonment of the public interest by the members of the Congress of the United States and many of the employees of the same government. Shocking. Perhaps it is simply too hard to really try to understand; perhaps we have been so caught up in "immediacy" that depth of understanding has been abandoned; perhaps--dare I say it--we have forgotten how to think. We deserve better.

_________________________________

You might remember me writing about my friend Joe, the son of my friend, Dick. Joe lost his battle jut before Christmas, with lung disease that required him to receive a double lung transplant. Joe wasn't much on formal religion, but he was a hell of a good guy, a great financial technician and a wonderful friend. If you have a moment, say a little prayer for Joe. As the man said, "it can't hurt."

MUCH ABU ABOUT NOTHING

Ok, really cheesy as my daughter-in -law would say. But this thing in the Gulf is a real kick. Right out of Arabian Nights.

Once upon a time there were two Sheiks who were cousins from the marriage of convenience of two families why the heck back when. One sheik wound up growing up and eventually becoming the ruler of a sheikdom which has more oil and gas than any 10 square mile place on the face of the earth, The other guy, though just a hop, skip and a jump away would up with sand. Sheik #2 was a fun-loving guy, however--none of that stay away from booze stuff for him (three wives were ok and a bit on the side worked)--and he had big ideas. You see, he figured out that there was in fact a sucker born every minute and when you couple that revelation with the fact of many of those suckers had access to more money that they ever dreamed possible, you could have more fun than a herd of camels...assuming camels have fun which given the way they look and smell is hard to believe.

#2 was a pretty shrewd guy when it came to politics as well and he also figured out than unless you lived in the neighborhood he and the other sheiks looked pretty much alike to those people who were known as bankers and investors and who had all this money, but more importantly they also believed that the mutual interests of he and his cousin and all the other sheiks in the area were the same and when it came down to the good and dirty it would be all for one and one for all.

He was also a pretty good salesman. Now a while back I had wise old banker say to me, "Charlie, one day you're going to meet a guy who will tell you he can put 2 pounds of crap into a 1 pound bag and if you believe him, you are going to have 2 pounds of crap all over your boots." #2 was that guy, and sure enough, a lot of people believed him, and to be honest he probably believed himself. Anyway, he talked these bankers and investors (let's call them yield whores...oh hell, whores will do) into lending his little plot of land (called Dubai by the way) more money that Allah ever had to build a dream world to include a snow-ski jump in a place where the average temperature is about 92F. on the theory that build it and they will come. And come they did, fueled by the most incredible increase in world-wide liquidity anyone had ever seen and they kept coming until...the money stopped in far off places like New York and London and Zurich.

At this stage the whores had a problem 'cause Bernie Madoff had nothing on #2 and his boys. This was a Ponzi scheme to end all Ponzi schemes 'cause if the people stopped coming to fill up all the space #2 had built there was Zip there to service what the whores had lent. At first, there was little worry because the conventional wisdom was that the entire region was interconnected and the guys with the REAL assets wouldn't dare let one of their own collapse. Problem was no one took account of human nature, and as I keep saying in the end it is all about people, and in this case the other people--especially #1--had been quietly seething at the antics of # 2, so when a few of the whores asked #1 and his boys whether they were standing behind #2, jolly good show, brothers in arms, blood is blood and all of that, turns out #1 said, "Think again."

Horror and disbelief. One shakes one head and asks one's self, "Will they never learn?" The answer is apparently not. The good news for The Suit and Helicopter Ben is this one isn't on their watch; it is very much a European banking problem with the Brits having a substantial part of the action. But as we have all learned, oceans do not protect us from actions in some far away place and the repercussions of this in Europe may well affect us at some later date. Do I believe that this will be the case. Actually, no. Folks who know a lot more about this than I say it's really #1 trying to teach #2 a lesson and that some accommodation will be reached. Me, I'm more of a cynic. I suspect the fact that #1 and his buddies have all of their PRIVATE money with the folks who are the creditors of #2 may influence them to be of some assistance before bad things begin to happen to them. Then again, it's the Middle East. Inshalla.

CHANGING PLANS

This is going to be quite short. I was going to continue our discussion on the re-regulation of the financial system but today's events intervened. Rep. Darrell Issa, Rep. of Ca issued a statement today to the effect that the Fed and its Chairman, Mr. Bernanke used undue pressure against our buddy Ken to force him to complete the acquisition of Merrill Lynch and then covered up their actions as well as the information concerning the true state of affairs at Merrill for a number of weeks. On the face of it, this is a serious charge and one which certainly got a good deal of press for Rep. Issa.

Speculation was immediate as to what motivated Rep. Issa to come out so publicly at this time just before the on-going hearings of the committee on which he sits is scheduled to continue tomorrow. The speculation has taken two directions: one is that it is the opening salvo in an attempt to unseat Mr. Bernanke which, to me at least, seems a bit foolish coming from a Republican as the next logical choice would be Larry Summers who one would think would be anathema to the GOP. The other, in which I put more credence, is that it is an opening salvo against the Fed who, at this stage at least has emerged as the clear winner in the great regulatory raffle. By denigrating the role of the Fed during the crisis, this would appear to reopen the discussion of who does what to whom going forward. Of course it also puts a serious hurt on Brother Ben to the point that if he is to be replaced the independence of the institution is brought into even greater question. And that, I promise, will be the subject of tomorrow's discussion. As for my opinion on the entire mess, I think they scared the livin' hell out of our buddy Ken. Given what they believed to be the severity of the situation I probably wodda done the same. Don't make me a bad person either. We'll be watchin' things for ya.

FED WATCHING

A unanimous report from Dr. Ben & Cie today in Washington today that varied little from the March statement. There policy is to continue to create all the money in the world to buy all the bonds in the world with the slight modification being that they may not do it quite as quickly as they had previously indicated. The stock market liked that and held on to its gains of the day but closed well off the highs. The market anticipates cheap money with a permanent bid in the market. The Administration must have liked that because the short term effect is to keep interest rates low (the whisper target is 3.00% for the 10 year note), which helps mortgages, credit cards (after they beat the crap out of the card companies), and the stock market. Bankers like it because their effective cost is a shade up from zero, and the media likes it because it is desperate to report a win for the administration.

Perhaps you ascertain a lack of enthusiasm in my reporting...good call. A scenario that troubles me: In theory I suppose, the Fed can never run out of money. My problem is two-fold. Politicians have begun to realize this and the natural reaction of any politician in finding an unlimited supply of money will be to spend it. The projected deficit for this fiscal year is 2 TRILLION dollars under economic assumptions that only The Leader and his associates believe (there is some question about that). 11-5 it winds up bigger than that. Fold # 2 is that in the history of the world power and influence has never gravitated to debtor countries; it moves towards the source of capital, or to put it another way, money talks, B.S. walks. At some point the Fed is going to be the ONLY purchaser of our debt, and that sports fans is when the music stops.

A couple of things will happen none of which are any good. The dollar is going to get hammered--I'm surprised it's held up so well so far. We are on a trend to debase our currency to a point never before seen. Good for export industries but we are a nation that consumes vast amounts of energy a great deal of which is imported. Our balance trade will never be in balance. Forget about The Leader's energy plan: fossil fuel will remain our primary source of energy for the foreseeable future--your lifetime--and there is NO provision in any plan I have seen to expand domestic sources of fossil fuel and not a word about the cleanest energy source of all, nuclear power. Fossil fuels are priced in dollars; it is no where written that they will always be priced in dollars. As the purchasing power of the dollars received by energy exporter decreases it is certain that a new basis for payment will arise. We can't print that, it ain't ours. We have to buy it or....yep, that's right, borrow it. And what happens when you can't print the stuff you have borrowed come repayment time? How fast can you think Third World?

Another thing that must happen eventually. Inflation. There's no getting around that and maybe at the end of the day that's what The Leader and his boys have in mind. If you can't repay it, inflate the hell out of it and reduce its value and keep on printing! Of course there may be some downside to that plan. How quickly can you think Reduction in Quality of Life and Rise in Cost of Living?

If my simpleton economic theory is correct, influence in the world is no doubt going to shift to a new breed of "have" nations while we become part of the "have nots." From our economic dominance came our overwhelming military dominance but this will surely slip in my scenario and be replaced, very probably under current conditions, by nations who hardly share our values. Are we prepared to live under a Pax Asia or worse?

Can my very pessimistic trend be reversed? One of the reasons the Fed seemed to be saying they wish to go a bit more slowly is that there may be a bit of insecurity as to how well can they control this thing. If things are looking to get ugly, can they turn on a dime? And if they do what will be the result. Certainly, today's concern is deflation but history has show that inflation can rise its ugly head in the blink of an eye and stagflation in the current scenario is also a distinct possibility. But keep in mind, this is ONLY a scenario. I'm sure many of you have one as well. As for me TIPS are looking even better and better...does anyone know how to short the Curve?


Well, our boy Ken survived an apparently very close vote at the B of A board meeting today as did the present board. Just what it was he survived they will not say, but he aint goin' home jest yet. And now, an apology. I made a grievous error yesterday in stating that PIMCO had voted 22,000,000 shares against Ken. PIMCO did not, CALPERS did. It is a mistake I never should have made and hope never to make again. MEA CULPA.

CAN I MARRY YOU?

It was quite a show from the get-go. Our Hero appeared before The Congressional Oversight Panel ("COP") up on the Hill today armed with pages of testimony on various bail-outs and fix-it projects. He was rolling right along in bureaucratic other-speak when the Chairperson of the gathering, Elizabeth Warren of the Harvard Law School told him to shut up. Well, she wasn't that blunt but she did tell him to finish up because she was a lot more interested in his answers to the questions that were about to be posed Twice. If available, Ms. Warren I will marry you. There's a couple of problems but we can work them out. If only more things in D.C. were run like this. Of course, Our Hero proceeded to give few satisfactory answers to anything and in fact did admit that he had no idea how to extract the government from its position in AIG much to the feigned surprise of all on the panel. One could actually say that Mr. Geithner had a very shaky grasp of all he discussed leading to the assumption that he may not really be Da Man after all. Methinks we might have an order-taker on our hands and not the executive chef of the repast. Unfortunately, the head cook, whomsoever that may be, appears to be unable to boil water at this stage. Tough cooking the meal when you haven't a clue as to the menu. Anyway, let us continue with our Fed-spec.

Since suggested in this space some weeks ago, there seems to be a full consensus emerging that Mr Bernanke has indeed gone over to the dark side and taken the entire staff (at least the D.C. staff) into the collaboratory mode with this administration as opposed to the normal role of independence in a manner not heretofore seen in recent memory. "Why the concern," one might ask and a valid question it is. To begin, there are now no checks on what is clearly the most radically expansionist fiscal plan in the history of the world. Secondly, while one can argue that there may be an intellectual communion between the Fed and the Administration, one has to be concerned that in the duality of the Fed's mandate--monetary stability and economic stability--the latter has completely overwhelmed the former with adoption of the view that we can fix any inflationary problems that emerge at a later date with the tools available. Thirdly, one must also question how great is the concern on Mr. Bernake's part that the reported oft-mentioned promises to Mr Summers that he would become the next Fed Chair and his desire to prevent that from happening has influenced his actions.

So, what one may argue, if this is the right approach. Perhaps, but in the process if any of the foregoing is correct--or if all are correct--the confidence and trust in the institution as an independent contributor and, indeed arbiter, of economic policy in this country may be irretrievably lost; which, IMHO is an enormous and frightening event.

Another consideration. The Leader is constantly speaking of how this country must constantly seek international cooperation in all matters. Fair enough, but there will be many instances in the near and distant future, as in the past, where it will become necessary for the major central banks in the world to cooperate with one another. It is quite one thing for a central bank to cooperate with another of its ilk; it is quite another thing to cooperate with the arm of a political regime whose interests may not be the same or which may be in conflict with one's home country, or in the case of the EU, a group of countries. The history of the Bank of England up until very recent times is a prime example of such a relationship. This is a difficult thing for those who stand as casual observers to this interplay to understand, but it is very real and very important. Already, one can notice the friction that has been on clear display over the past few months (not just with the present administration) between the Federal Reserve and it's European counterparts even with Mr. Bernake at the helm. I shutter to think of Mr. Summers, whose personality is, shall we say, off-putting at times, being viewed in any light other than as
a politician.

Finally, Monetary policy is not, in my experience as an observer, something that often turns on a dime especially if the people involved in setting such policy may be forced to admit that hey were wrong at a previous moment. As I said at least a month ago, we have seen this movie before. It was called The Seventies. It was ugly. The remake is shaping up to be a real horror. Keep the kiddies at home if this doesn't get stopped.


In this posting on Central Banks there must unfortunately be A Last Post. Eddie George, former Governor of the Bank of England died the other day. I didn't know Mr. George well at all but the times we met I liked him. It was under his watch that the Old Lady became independent of the Treasury but also lost a good deal of its regulatory oversight to the newly created FSA. Mr. George opposed that. He was correct to do so. Flights of Angels Mr. George.

SAY WHAT?

Ok, where were we? Oh yes, we were just speculating on how long in will take the administration to ram Our Hero's plan down the throats of a bunch of cowed banks when all of a sudden, HEEEEEEERRREE COMES FASB! By a 3-2 vote, FASB agreed to a somewhat different approach to the accounting treatment banks could employ on troubled assets, recognizing for the first time, in public at least, that there might be a problem out there with the market to which things were supposed to be marked. I have read the release a couple of times and frankly it just goes to prove than accountants are simply actuaries with a sense of humor...albeit a dim one. For the life of me, I can't translate the statement into any known spoken language but that is ok. You see, the important thing is that it purports to condone a different treatment and thus ends the insanity under which we have been laboring for the past two years. The other thing it does, if the industry is prepared to stand up on its hind legs, is to kill Our Hero's plan stone, cold dead.

You see further see, if financial institutions are now given some latitude as to the manner at at what level they can value their portfolios and more importantly eliminate or greatly slow the velocity of asset degradation on their balance sheets leading to additional capital impairment, they are going to be even less willing to participate in any action at fire sale prices that eliminates any up-side recovery. Not surprisingly, the FDIC leapt in the conversation this morning with the statement that it might be willing to allow participating institutions to share in any profits obtained by the managing institutions. Lord. Cannot some Knight rid me of the meddlesome woman? Besides being irksome the statement may reveal, however, that the administration is not prepared to give up without a fight as non-participation will certainly reduce the leverage Treasury has over the financial industry. One for the good guys.

There is a troublesome part to the announcement. FASB is prepared to announce the new approach to be retroactive to the close of the 4th quarter of 2008. We all need but look at the events of the last few years to realize that bankers may not be the sharpest set of knives in the drawer at least in the realm of strategic thinking. Many in this mob have an attention span slightly less as long as that of my dog (she's a very smart dog) and possess a trader's mentality which often leads them to do something incredibly stupid if given the opportunity. I have a real fear that a few of these bozos may well seize upon this outbreak of sanity and attempt to MARK-UP in value assets on their balance sheets and book the transactions as a profit. To do this would create a $*&^-storm that would dwarf all others up to this point and wreck whatever benefit might be achieved in the future. Take what you have been given: we are going back to the future where banking once again is a subjective industry, where time and sound credit can cure most ills and where the maniacal cries for nationalization and over-regulation will slowly fade. What we need is time and an upward sloping yield curve. Forever has it been such.

Now in this regard, loyal readers will remember what I said a few days ago about the Fed's actions as of late. Gentle Ben, having taken the central bank over to the dark side of the political swamp, is busily gearing to replace the Chinese on the long end of the Curve. To the extent this occurs, one result could be the artificially lowering of medium to long term rates and the flattening of the curve--not a good thing for Mrs. Banker's little boys and girls. The IQ results we find in the scores of commercial and investment bankers occasionally bubble up in the personnel folders of Central Bankers as well. But, for the time being, we have a shot to get out of this mess in the old fashioned way; managing risk and earning money. Let's hope we don't screw it up.

One further point. I have never thought that the Senate of the United States was as collectively dumb as the House, but I may have been wrong. In a move so colossally stupid so as to defy explanation, the Senate voted today to require the Federal Reserve to release the identities of all institutions to whom they have provided assistance. If unchanged, the language could include borrowings from the discount window. Never has the Fed made that information public and it's release could damage the reputation of any institution to whom the facility was made available and discourage many institutions from using the facility thereby exacerbating an already touchy situation. Keep thinking confidence and trust gang. That's what this business is all about.

Tomorrow the G20. Initially, it appears little harm was done...yet. But the IMF? Tune in

..."THIS DEAR, DEAR, LAND: IS NOW LEASED OUT...

I suppose I should have expected this. When Ben Bernanke was nominated for the Chairmanship of the Federal Reserve, the nomination got a big thumbs up from Paul Krugman. Oh well, one academic from Princeton having nice things to say about another. Wrong. Central Bankers used to be thought of as exterminators and the cockroach they hunted remorselessly was inflation. Oh sure, our Fed as opposed to the Europeans always had the other job of helping out the economy through monetary action but even in this, the institution was fiercely independent and, while not ignorant of the political process, tended to chart it's own course. No longer. Whether on pure ideological grounds, a true concern as to the state of the economy, panic or merely an attempt to protect a second term from the long shadow of Larry Summers (unless Our Hero Tim gets thrown off the bus) Mr. Bernanke has become a full partner in the politics of the Obama Administration. The remarkable action of the Fed yesterday in announcing their intention to purchase mortgage related debt and newly issued Treasury securities in initial amounts of up to a trillion dollars marks a sea change in activity. In the past the Fed has purchased Treasuries and has always operated in the repo marrket, but yesterday's announcement, specific to longer dated issues, was more than surprising. The reaction was not surprising; the dollar tanked and yield on medium to long term issues sank, bringing the rate on new 30 year mortgages to below 5.00% in some areas. Great result, said many pundits, but of course there is the risk of a bit more inflation down the road explained away by the Fed statement today that if that were to be the case, they could always reverse the process. Somehow, this is beginning to feel like 1974, but there is another, even greater concern on my part as to what may be an additional major reason for this approach.

Do we remember Our Hero Tim's friends, the Chinese's reaction at the unfortunate statement during his congressional hearings on currency manipulation? They were not amused. Despite every indication that he was simply reading what was put in front of him (he's done only that since being confirmed) the Chinese remain unamused. More importantly, their confidence in the financial stability of this country seems also to be coming into question especially in their statements of the past few weeks. Most importantly, their holdings of U.S. debts which at this point total over $1.5 trillion have changed not only in their make-up but in their maturity profile. By the end of this year, the Chinese will be on track to hold $1 trillion of our debt that has an average maturity of approximately 300 days. If the mortgage on my house was in the form of a demand note, I wouldn't sleep well.

I have the very uncomfortable feeling that the Chinese have indicated that would not be buyers of our debt as in the past. I have the uncomfortable feeling that the Chinese view the purchasing power of the dollar as sharply deteriorating over the relatively near term. I would not be the least bit surprised if the Chinese would soon indicate that they would not be interested in any purchase of medium term U.S. dollar denominated securities that did not contain a hedge against inflation--think TIPS gang. I'm pretty sure we have a problem. With a now-projected deficit of $1.5 Trillion (Congressional Budget Office as of today) which is probably a couple of hundred billion too low but who cares anymore, can we expect the Fed to finance this alone or must they inevitably give up the and lose the impending with the Chinese and if so, can Japan be far behind? I can envision no scenario in which inflationary pressures do not merely tick up but head skyward in the fiscal environment this administration has created, I can also see no way that they can possibly achieve the 25% rise in GDP they assume which will be needed to reach their deficit target by 2013...wait that's not quite right...they can if the rise is all inflation. As I said it's really beginning to feel like the seventies. Then again, Tall Paul is still lurking but Reagan is gone. I HOPE I DON'T DIE PRONOUNCING IT.

Addendum. Our Hero has yet to come up with his banking solution. Sadly, given what has occurred in Congress the past few days he may never get the chance. But we must be thankful for one thing: Congress has demonstrated that when you pay peanuts, you get monkeys. Do you think they groom each other?

Back to the banks next week. A good weekend.

..I HOPE YOU GOT YOUR S--- TOGETHER...

This is going to be pretty short. When, between visits to the Mayflower Hotel, Bad Boy Eliot scared the AIG Board into getting rid of Hank Greenberg and installed Messr. Sullivan & Co., there was a Bad Moon Risin'. No one at the time saw it. Whoever was supposed to be watching didn't notice that the new management had "doubled down" on products, the risk of which they clearly did not understand, with the result that we see today. Mr. Bernanke rightly expressed his rage at what had occurred and revealed his feelings on 60 minutes last Sunday. But talk about doubling down!

The Chairman has just placed the biggest bet the world has ever seen. He has monetized the debt of the United States. Now I'm a long way from being the brightest guy in the world and I know that the Fed has a hell of a lot more info than I do, but there is no immediate understanding of this move that comes to mind. Forgive me but I'm going to sit and think about this one for another day before waxing poetic. But I've lived a reasonably long life and the last time I was involved in an environment like this the folks around me were speaking Spanish. More tomorrow.

A WALK IN THE SUN

One of the greatest WW II movies (later ripped off to a fair thee well by Saving Private Ryan) was the magnificently casted film "A Walk in the Sun." In it is the classically cynical American G.I. brilliantly played by Richard Conte whose showcase line was, "Nobody Dies." Watching The Chairman on Sixty Minutes last night I continually returned to that line; "Nobody Dies." The Chairman was remarkably upbeat; one could almost see the green shoots emerging from beneath his feet in the form of the rebirth of the American economy which will hide the blood from all vision. Nobody dies.

Conte; "I am going to cut that farmhouse in half."

Loader: "If the ammo holds out."

Conte; "It had better hold out."

The Fed's ammo had better hold out as it became clear that the U.S. is going to find itself pretty much alone after the results of the G20 meeting this past weekend are tabulated. Not only are the Europeans not on the same page as the U.S. it would appear that they are not on the same page with one another. There are the Richard Contes among us who always questioned whether a group of nations whose constant efforts over the past 900 years or so were directed to the destruction of each other, could at some point come together in a political union that might force one or two of them to take a bullet to help out historical enemies. The answer seems to be not yet and to continue along the WW II theme, to take a bullet for good old Uncle was probably always A Bridge Too Far. Yet, fair try by our Hero, Tim and the reaction was at least civil. The Brits appear to be on our side (more or less--no difference there) and the Volk had made it quite clear that Ms. Merkel was to be on a short leash. The Euros tend to get a touch nervous when the Germans get stroppy. There is always the thought that in the back of the closet hangs Grandpa's fetching gray uniform. Oh well.

The Chairman did say one remarkable thing, however; he took zero off the table and bank equity investors reacting by bidding up bank shares today as though nobody would die. I think they are right but it is now clearly on the shoulders of the Fed to grasp the reins of the restructuring of the system whose future well-being the Chairman essentially guaranteed. To me, that is the best development we have witnessed in weeks because if the Fed with the resources at its disposal leads, the outcome may well be better than feared should the politics-first Treasury have grasped the mandate.

Surely, there will be a tremendous effort on the part of Congress to interfere with the restructuring of the system and it might well be argued that with the taxpayers' monies at risk the politicians should certainly be involved. They will certainly wish to create legislation that will increase oversight and control of the financial system. Nothing can be done to stop that effort and indeed, in some area more and certainly better regulation is needed. I always seem to get in trouble when I state that give me any new regulation and with 3 bright MBAs and a really good lawyer I can get around it in 72 hours if the price is right. I don't mean by breaking laws; I simply mean that in my 30 years in the business I have never seen a bullet-proof piece of legislation yet. We will not solve the problems we have uncovered by allowing Congress to convince us that it has the answers; it does not. More critically, if the upcoming legislative sessions are to be conducted in the confrontational, adversarial environment we witness today, what will result will be a disaster. Sadly, there aren't five legislators in either body that have any clue of what the business we call banking entails in the modern era. It is also critically important that before the politicians get to the point of working their craft that the crisis management approach of dealing with our banking sector give way to a reasoned understanding of where the problems lie and clear, understandable and reasoned cures be put in place and that those be clearly disseminated to the public. This is extremely important for as a result of ignorance, fanciful and dangerous solutions have gained traction for which there was no reason. "Nationalize the Banks" has been one of the greatest calls, supported by a whole host of those who should know better, the latest being former Secretary of the Treasury, James Baker. "We don't want zombie banks like Japan." We don't want to lose a generation!"" Dumb and dumber. Think about the role played by Japanese banks c.1990 and the role played by our institutions today. Compare the two and the role played by the MOF. More later this week and remember, "Nobody Dies."