AS ADVERTISED

Big Danny was on the front page of the Journal's business section today just as advertised.  The "most Powerful Man in Banking" was the title.  Ya gotta wonder.  Big Danny never spent a minute of his life working for or in a bank.  In fact, there is no secret as to the fact that taking his marching orders from Crazy Lizzy Warren he pretty much hates banks...well, not all banks, just the ones he doesn't like or who he thinks are too big.

How does he reach these conclusions?

"Nonaya business.  He's Big Danny Tarullo the chief of supervision for the Federal Reserve."

"Whoa!  How did he get that title?"

"Shutupayouface.  He's Big Danny."

"But isn't there a process where...

"Yeah, but he's Big Danny."

"So you mean he just assumed the position?"

"You might say that but it wouldn't be a healthy thing to do."

Danny was a law professor which means he has a fine legal and academic understanding of the operations of the Federal Reserve and of banking.  Which means he doesn't know a damn thing. And therein is the problem.   With the exception of Stanley Fisher there is no one...or very few left...in our Federal Reserve system who knows the business of central banking and in the place which is the point of the spear for the business, the New York Fed, we are rapidly approaching the point where we must ask for the last person leaving to turn off the lights.  Tom Baxter is about to retire as General Counsel.   With his departure there is but Billy the Dud and only memories of what was one of the great financial institutions in the history of finance.

Tarullo and his ilk have no appreciation nor understanding of the business of central banks nor there function.  The present management is little better than a collection of social and political scientists who come to their jobs every days fully convinced that their purpose is to install their particular beliefs on a variety of issues and to try to figure out how best to use the institution to achieve those goals.  They are very smart and very good at so doing but along the way the very fabric of the business of finance in this country (and abroad if the truth be known) is being forever changed through crushing regulation which directs businesses in which a bank can participate and those in which they cannot by simply removing all profitability from the exercise.  As a result we find ourselves faced with "stress tests" supposedly designed to determine how an institution will react to a manufactured set of economic conditions.  We have another one coming in a month.  The last go-round cost the big institutions an estimated $500 million in order to prepare.  I wonder if that capital could have been put to better use.  At best they are an academic exercise created by academics leading to academic conclusions supposedly giving institutions an opportunity to plan for adverse times.  To once again quote Mike Tyson: "Everybody's got a plan until you get hit in the mouth."

Some things are quite clear, however.  Big Danny don't like no international stuff so he don't like Citigroup which if one gets down to it is the only remaining truly international financial entity in the United States.  Why doesn't he like it?  Simple.  He doesn't understand it.  Danny is a simple man or simple likes and dislikes.

Danny don't like complexity and he don't like big.  Why?  One person can't manage it.  Of course did he ever ask himself why must the management be left to one person?  Jamie Dimond knows damn well he can't manage all of J.P Morgan but he knows he has to be responsible for its management.  It is the responsibility that gets him the big bucks...and his choice of managers.  Big Danny doesn't understand that.  He never managed anything.

I think you can see where this is going.  The greatest threat to today's financial institutions is not internal; it is the very entities that are in place to keep them safe...their regulators.  The political influence and sheer incompetence in many cases on the part of the Tarullos of the world is what keeps me up at night.  Autocrats enraptured by their own sense of importance and emboldened by complete belief in their beliefs!  Many years ago whilst serving some time in London I became reasonably close to a very senior official at the Bank of England.  More than once had received a call beginning with, "Charlie, do come 'round this afternoon would you?  Something I want to talk to you about."  My friend knew damn well what it was about which he wished to talk but he never missed the opportunity to run it past a few practitioners he trusted just to be sure.  Same thing used to happen at the NY Fed.  Today?  I doubt it.   They were both very, very good.  But the Old Lady was special.  After five there was always a bottle of Bolly or a special single malt that would turn up.  Regulator?  What regulator?  And his picture never made the paper.

I THINK I GOT IT RIGHT

Certainly, there was nothing reported today to make me think otherwise.  What I still can't figure out is why the popular press and the talking heads got caught by surprise when about 5 minutes of thought would have identified the scenario.  Despite what others would have you believe, banking is about people...just like most events in the world.  Why would a very wealthy guy (an assumption) agree to the Chairmanship of Citigroup having been called out of retirement without the thought that he was planning to make it into his own image?  To fail in the attempt?  And why did no one investigate his background and past actions and not come to the conclusion that it was altogether likely that the course being steered by the bank's then-present management was about to change?  I am constantly surprised by the lack of acumen demonstrated by those who present themselves as experts in the world of finance.  It's about the people folks; it's always about the people.  Know them first and then look at the numbers.  And in that vein, watch to see if the new management is successful in retaining the key people needed to make this change in direction work.  I'm betting that it will and frankly that will be good for the industry.  Maybe with the success of Citi the rest of the industry will "'stop doing the stupid things" as Mr. O'Neill is fond of saying.

The cops and the Feds in New York today announced the arrest of some guy for Bangladesh who was planning on blowing up the New York Fed in a sting operation undertaken by the NYPD.  Idiot.  All he had to do was watch Ben and his boys do the job for him over the next few months with the enthusiastic support of Billy the Dud on Liberty Street.  CPI was up 0.6% last month, the second consecutive such monthly rise.  That puts consumer costs in the 10%+ annual range which is beginning to look a lot like Argentina.  Ah, you say, but the core rate is only 0.1%, and to that I reply an old guy like me on a fixed income says, "Core, schmore.  I gotta eat."  What the policies of this central bank have done to the elderly in this country is surely a crime.   O'Neill for Fed Chairman?  A "stop doing the stupid things" monetary policy?  Not a bad idea.

Meanwhile, across the pond, the big shot  two day event starts tomorrow, and Frankie H. has already announced that it will ratify all that has been agreed on the bonding of Euroland over the summer and plan the implementation of the same by year end.  Forgive me, but I seemed to have missed part of that and are therefore in no position to comment.  What will probably occur is Greece getting a few more Euros to get them into next year, Spain will jaw-bone on what they will NOT have to do to get a bail-out and Angie will continue to talk nice-nice and say nothing allowing the ECB to set the agenda.  Kinda like "leading from behind?"  In advance of the pow-wow, market commentators have waxed poetic at the decline of bond yields across the southern tier.  Nothing like a put to the ECB to put steel in the spines of investors.  I'm beginning to wonder: is the Citigroup affair the last thing I will ever get right?  I think I'm going to head out and buy a bottle of whiskey on such a scary thought.  By the by, is whiskey part of the CPI or part of the core?  Anyone have the answer?

A DAY LATE

Last week and into the weekend I did some mental qrm wrestling with myself over whether I should comment on the remarkable events centering around our central bank and in particular the Federal reserve Bank of New York that seemingly had defied comment for over three days. By yesterday I had pretty much convinced myself that my reactions were probably incorrect and that I shouldn't write about them, which, coming late in the day meant that I didn't write about anything at all.  I was wrong.

What had set me off in the first place was a remarkable series of comments made on Friday by the President of the New York Fed, William Dudley, in regard to the state of the real estate  market, it's present effect on the economy and what further steps might be taken to imprve the situation.  As you probably know (and should if you don't), Mr. Dudley is a former senior economist at Goldman Sachs who was, in his time, the leading "Fed Watcher" on the street.  To say he was/is an academic economist is to understate the case--not that there is anything wrong in that mind you but then again there nothing right about it either.  His knowing more about the Fed than anyone else is what got him his present job..along with a little help from about a score of well-connected friends from Goldman not the least of which was the oft-mentioned Bobby Rubin.

What kept me from writing about Mr. Dudley's comments was my releutance to criticize the Fed which has been long since I can remember an institution commanding the highest regard in world-wide circles for it's independence and lack of political traits.  No more.  For Billy the Dud's comments which went straight into the political maw were incorporated into a larger presentation having the imprimatur of Mr. bernanke himself, delivered to Congress and calling for new action on the housing market to include new lending, the leasing of foreclosed property by the Feds, subsidized servicing and a slew of other proposale which supposedly would aid the economy in the belief that the housing market was central to the weak economic figures.  That's what I was going to write about and chose not to.  Today, the leading article in the Wall Street Journal did and I urge the reading of the same to appreciate their take on the matter which, incidently is not too far from my own.  Scooped again.

That is not what troubles me the most, however.  What is, is what makes fact of the guy running the most important Reserve bank in the country and indeed, the world to be so damn dumb as to politicize his institution to the degree in which he did in this an election year?  Why would you want to make your institution an assuredly campaign issue limiting, therefor, whatever influence it has or should have in what are certain to be grave national and international issues of the coming year.  The great thing is we have had is an independent central bank but that only lasts until people think the independence is still there and Billy the Dud has taken a huge step in changing that view.  What makes these guys believe that doing their own job is not enough and being unable to resist trying to do someone elses job as well is beyond me.  Hubris?  Probably but you have to be really dumb as well for in the effort there is no consideration that one is destroying the raison d'etre for one's self.  We can lose Billy the Dud as we know him; we can't lose the Fed as we have known it.


                                                         ----------------------------------------



My Really Smart Friend, Larry, called today.

"Seen the new ECB rules on eligible paper/"

"No."

"Better take a look."

"And pray tell for what am I looking?"

"It's like pnorography.  You'll know it when you find it."

So I went looking and he was right.  It is pornographic.  If you think things were crazy bad over in Euroland, we haven't begun to scratch the surface of the levels to which these guys will go to fix the unfixable.  Tomorrow

WHILE WE WERE AWAY...

We're back and I wonder why. The grandkids were great, I sat through an original middle school play and survived (I thought I would never have to do that again) we have a glorious spring-like day and now I have to comment on the latest monstrous piece of political stupidity put forth by Chris the Crook which, if enacted, will pretty much end the finance business. I never though one could root for Barney Frank but these are strange times.

I hate to say it but I think I hit this one right on the head announcing some weeks back that what Chris the Crook would produce is a populist pill of rubbish as his parting shot to the American people. It is worse. In addition to being unworkable and foolish in conception it completely politicizes the regulatory process by requiring that the president of the New York Fed, the body which has prime responsibility for the really heavy lifting, be a political appointment of the President. Any semblance of international cooperation will be lost as it is New York that has the prime responsibility of dealing internationally and no independent central bank will have any desire to deal with a political hack in the first instance except on a very well-defined basis. Then too, it would appear that the government would be involved in every aspect of oversight and regulation with political appointees serving in tandem with the Federal reserve at every level which is a guarantee of failure in all roles undertaken. Some much seems wrong with this thing that it's difficult to be fully expressive unless all 2000 pages are reviewed, but one should keep in mind that which is not covered, to wit, Fanny and Fredie. Remember dear reader, these two swill dispensers hold over 5 TRILLION at risk with estimates of impaired assets standing around 20%. That's 1 TRILLION in potential losses to the taxpayers. And nary a mention: whatuowiththat, Chris? So far, it is madness but not enough is known to comment further. I'm trying to plow through this thing so I'll have more to say in the coming days.

Moving right along, I remain impressed with the Euros and the manner in which they continue to perform this marvelous gavotte which while denying any agreement amongst the member states to bail out Greece the assurance that, if needed, a bailout will be available remains firmly planted in the mind of the financial market. Sounds very French to me. They have always been good at that. There is a BIG chunk of refinancing due in a bit over a month's time but the success of Greece's foray in the Eurobond market two weeks ago has taken the edge off a bit. The stakes are too high for a calamity unless one is caused by a totally unforeseen event, so I remain convinced that one will not occur. If I had any money--which I do not--I would be long the "on the run" Greek Euros with a yield of around 6 1/2% Like the currency as well as what is happening on our side of the pond is hardly cause for optimism what with the very real possibility for a full blown constitutional crisis over this House health care vote looming this week-end. For their part, the Greeks are behaving rather well although for how long remains the real question. Just long enough is, I suspect, the answer.

More tomorrow. It's 60 degrees. Me and the Mutt are going for a walk

...AND ON THE SEVENTH DAY

God rested. But he got bored and he said to himself, "Ah, let me fool around with this creation stuff and make a few things that re a bit different. And so he made aardvarks, and marsupials and all sorts of weird, one-of-a-kind animals. He also fooled around with humans, making a sub-species that looked like regular humans but were considerably less intelligent--stupid really--just for amusement. Today, we call this sub-species Congressmen.

They were on full display today as the Townes committee interviewed The Suit. By the by, have you noticed that Mr. Townes looks exactly like Howdy Doody? Honest to God I was looking for Buffalo Bob Smith to pop up behind this guy. SURPRISE! Look, I pull this string and his mouth moves! Intellectually, Mr. Townes is one of the stars so it is no surprise that The Suit put on a terrific show. When he's on, he's on and give him a bunch of straight men like this and brother, he was ON!

The subject was the AIG situation and it became immediately apparent that having received 250,000 subpoenaed not one congressperson had read more than a page. My son, who works within the Beltway hit it right on the head:

"Dad, all these people do is raise money for reelection. They have 20+ staffers and do what the staffers tell them to do." He should know; he was a staffer.

As you know I think the NY Fed could have done better with the AIG situation. I think that the inability of the Fed to guarantee the AIG obligations as it would have been illegal for them to do so should have led them to a market based effort involving making a market in the CDOs central to the issue. I do not know whether this was considered but having failed to adopt that approach the Fed really had little leverage against the banks. What did come out today that was not generally well known was that the rating agencies informed the Fed right in the middle of the mess that they were about to downgrade AIG which, had it occurred, would have created an event of default not only as to the CDOs but as to the insurance business as well. AIG was not the only insurance company involved in this business. The reaction of the market would have been catastrophic. I don't like Mr. Geithner; I don't think he should have been appointed to his present position but then he got it right. Had any of these so-called law makers had been asked to make a decision such as that the people in New York were asked to make I suspect they would have soiled themselves. They are disgraceful and they are liars as well. Practically every one of them accused the Fed of hiding the fact that the banks were being paid 100 cents on the dollar. Crap. I cursory reading of the Times and the Journal would show that the full payout had been reported for days. EVERYONE knew except these clowns.

The Suit also said something that should have sent chills down the spine of every one of these fools but of course they missed it. Speaking to the point as to who was watching the store Geithner said that the insurance commissioners in probably 30 states had no idea in what businesses the companies they oversaw were involved. No reaction. None. Zip. Nada. And this is the financial oversight committee of the Congress of the United States. We're doomed.

20-20 HINDSIGHT

By now, some of you might have the impression that I don't always agree with The Suit. I can see how that might have happened but every once in a while even I can commiserate with the guy. He was up on the Hill yesterday and got his bum handed to him over the AIG bailout of last year. Seems as though, following the report of some inspector general there are so many of those) some of the Hill types seem to have gotten the impression that maybe the latest anti-Christ, Goldman Sachs and friends, got too good a deal when the got paid 100 cents on the dollar by the Fed for their AIG exposure. Ok, they did, s*** happens and The Suit was running the New York Fed while auditioning for his present job so that means he has to carry the can for this one. Unfortunately, this could be a real problem for Our Hero because both sides of the aisle hate the AIG situation, the GOP believes that his little income tax "misunderstanding" should have disqualified him for the job and most everybody is coming to the belief that there is more than a bit of arrogant little snot around this guy's personality. He got big-time testy yesterday during the questioning knowing full well he's not the flavor of the week.

Now I am on record in stating that this was perhaps not the NY Fed's best moment. Before bailing everybody and his brother out of that mess I thought they might have tried a bit of market action like putting a bid behind the paper on which AIG had issued CDSs and then getting inside quickly to avoid the shorts who were falling off buildings but they didn't. And I suspect that this is the reason.

I'm sure you also remember me having stated that a lot of the history of past crises was rewritten last year. Many had seen this before going back to the first real systemic risk of our business lifetimes in 1982 with the Latin American debt crisis. At that point in time most of the major banks in the U.S. were technically broke but the crisis was resolved with a lot of hard work over time. It was a bank crisis, and while terrible in its effect, not everything ground to a halt. Last year, there were two major differences. The first I would call the financial equivalent of Moore's Law and the second the complete grinding to a halt of all mechanisms of credit extension world wide. There was no credit available to anyone as all depositors and liability holders ran to save havens and because of the technological advances that had occurred since 1982 it happened in the blink of an eye. Unlike 1982 when months were spent to resolve the situation a good friend who was involved in the events of last year told me that, "the time we had was measured by a clock's second hand." In this scenario, I am prepared to give The Suit a pass: it perhaps wasn't pretty but what had to be done was done. Frankly, if he were to be forced out, I would shed no tears (except that I shudder to think of the replacement) but if it occurred over this, it would be a bum rap.

While all of this is going on it's going to be difficult for the Treasury to get up to speed on the two bills relating to governance pushed by Messrs. Dodd and Frank. They had best do so as these two monstrosities have in them the capacity to do more damage to our financial system that 10 AIGs. On top of that, The Leader's trip has proven to be a train wreck and there is some serious backing and filling that needs to get done as every single approach on the international front was kaboshed. Enough there to keep a boy out of trouble for some time.

MUCH ADO......

There was once a memo written by a bright, young vice president in the bank where once I worked concerning a dinner held with the bank's management and the management of a very important borrowing client. It went exactly like this (the names have been changed to protect the innocent):

"John Smith, Chairman, Joseph Jones, President, Harry James, Senior Vice President and the undersigned had dinner last evening with Peter Black, Chairman, Mitchell Green, Chief Financial Officer, Casey Jones, Treasurer and Barry Light, Director of Banking relationships, all of Widgett Corporation. Nothing of importance was discussed."

Our Chairman instructed that the memo be removed from the files and almost removed the author from the institution. He left on his own some months later.

To a breathless gathering of media and analysts, details of the "stress test" were today revealed at the New York Fed. Nothing of importance was discussed.

Have a nice weekend. Spring has come to the Mid West. THAT is important.