AS PREDICTED

The WSJ had as its lead story today the fall-out from the thug Lawsky's actions against Standard Chartered and it wasn't pretty reading.  The Brits are screaming mad as well they should be and talks of retaliation are in the air.  I would rather not be the CEO of a non-American bank these days as I would have no idea to whom to listen and in what manner the game is being played.  There are far too many regulators and many are not professionals but rather political thugs looking to score quick points.  In the not-too-distant-future look for legislation placing the regulation of all foreign banks in the hands of the Feds or the Federal Reserve.  This being an election year and Cuomo and Lawsky being Democrats the Administration will give this one a pass but no matter which party wins in November, international pressures--and not just from Europe--will bring about the change in governance of which I am speaking.  The State of New York, having been run for years by political hacks may have just killed the goose with the bright, shiny egg.

Now remember my writing at one point that if you wish to learn the intentions of this Administration simply read the New York Times on a daily basis where you will find in addition to "All the News That's Fit To Print' (in accordance with our political philosophy) what to expect from Washington.  This morning, once again shilling for the Administration, the NYT let it be known that Mr. Corzine will probably skate on any criminal prosecution for his role in the MF Global disaster.  No kidding.  After having this thing slow-walked by his former partner, now regulator, Gary Gensler, treated to the astonishing--or so it would appear--actions of the Federal prosecutors who did not grant immunity to the company's treasury official who authorized the transfers without even asking for a proffer and not even being questioned in regard to his 10-K statements, Johnny-boy is happily trading his family money seemingly without a care in the world.

To say this stinks is an understatement but let us remember that Corzine was the no.1 fund raiser for The Leader and was the odds-on favorite to succeed The Suit in the second Obama administration if there is to be one.  Probably the only good thing to come out of this may be the realization that the piece of garbage known as Sarbanes/Oxley isn't worth the paper on which it is printed.  Keep in mind that if one signs a 10-K it makes no difference if a material misstatement of fact is deliberate or accidental; sign it and you're toast.  It's a joke, can it and while one is at it perhaps the repeal of Dodd/Frank can be accomplished as well.  This dual act of contrition may mark the finest moment in financial regulation since...hold on, I'll have to back to you tomorrow on that.  Then again, the research may take a long time.

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.


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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

WHERE ANGELS FEAR....

to tread. There were similar stories today in both the New York Times and the Wall Street Journal regarding the discussions/disagreements within the Fed as to the institution's supervisory role. The upshot was that there are a lot of people inside the place that feel it wasn't good enough in the past and it's not good enough today. Further, the role of the regional institutions within the system is under active discussion as is direction from Washington.

It's an interesting story and one I must confess to which I haven't paid too much attention primarily because I have this view that unless you are deep within an institution it's almost impossible to get a true read on situations like this. I have other biases as well. At the conclusion of the WSJ story it was revealed that DUSTOFF and his guy Dan Tarullo, a recent appointed board member and ex-Clintonista, ex-Law Professor (about whom I know zilch) have tapped Fed economist Patrick Parkinson to run bank supervision in D.C.

Now I know things have changed quite a bit since I grew old but I can't help but wonder if appointing an economist to run supervision is a step forward or a stroll over a cliff. I can't help but recall to mind FDR's famous comment on why he appointed Joe Kennedy as the head of the newly-created SEC: "It takes a crook to catch a crook." I'm sure Mr. parkinson is a brilliant guy and I'm certain in the manner of calculating capital adequacy he is probably without peer but my question is has he ever been in the business because (see above) if you're not in it and worse, if you never have been you may really have a problem separating the good guys from the bad guy; they don't wear white or black hats any more. But I just don't know enough about it, so I'm going to try to find out. Read the articles, sick with me and I'll be back tomorrow.

SCOOPED THEM AGAIN

You might take a look at the leading article in the Wall Street Journal today. What it does is to explore in greater detail the point I made yesterday that the real shocker in yesterday's testimony was the revelation that it was the threat of the downgrade of AIG by the rating agencies was the catalyst for the final decision on the payout on the banks.

Loyal reader Mark C. has called me a jerk for my comments of yesterday but I would simply reply that the views of the insurance commissioner of the State of New York, Eric Dinallo seems to be in direct opposition to those of Messrs Paulson/Geithner as to the state of affairs at AIG during the time in question. Mark also claims I'm part of the Geithner/Paulson cabal and are being fed what amounts to lies.

Sorry Marc, but I haven't spoken to Mr. Geithner in a hell of a long time and I have never met Mr. Paulson. As for whose correct as to the state of affairs, my bet would be with the Treasury and the New York Fed a opposed to the political hacks in the insurance commissioner's office. Remember, it was that office that oversaw the firing of Mr. Greenberg on trumped up charges brought by Eliot Spitzer and the hiring of the jerk that replaced him. Mark should also keep in mind that fear is all-controlling. The nicities of corporate attachments don't mean a thing in an environment then-faced. I don't like what happened any more than Marc does but I don't think these guys had any good options. Nice to know I'm loved, wanted and read. Thanks Marc.

FIRST THINGS FIRST

I was going to comment on the 60 billion dollar misunderstanding in the Gulf but I though I would clean up a few things first and save that piece of lunacy for another day.

Wonderful leading article in the Wall Street Journal today highlighting a rather unfortunate piece of scholarship written in 2002 by the newly minted Nobel laureate joe Stiglitz (who is reported to be even more arrogant that Larry "double down for Harvard" Summers if that is possible) and the Orszag brothers in re the risk of Fanny and Freddie. It was spectacularly wrong of course but to cast judgement with the benefit of hindsight is not a good nor gentlemanly thing to do. The article points out that the writers acknowledged that "the extremely rare events located in the tail of a distribution are often quite difficult to analyze accurately." Might I point out (as I have previously) that another Nobel laureate was also spectacularly wrong in 1997 in the LTCM debacle and there too, the tail of distribution proved difficult to analyze accurately. What is most remarkable to me is that these three chuckle-heads didn't learn a damn thing from the chuckle-heads who went before them, wouldn't recognize systemic risk if it bit them in the ass and are now all in favor of a moronic plan to let a mob of politically appointed hacks figure it out for the rest of us. As events have proven, it is not easy to identify risk even if you have been doing it all of your professional life; it is impossible if you are new to the game. I've been saying this for months now; thank you WSJ for agreeing.

Skip a paragraph and the final article in today's Journal concerns the agreement by the management of AIG to bury the hatchet in regard to Hank Greenberg and, in fact, choose to use Mr. Greenberg as a resource in trying to put Humpty Dumpty together again. Hopefully, this is the end of the sad tale begun by the odious Eliot Spitzer and followed by the only slightly less so Andrew Cuomo. As loyal reader Paul points out in his comment to last week's post, AIG probably never represented a systemic risk except for the fact that the handling of that mess by the FED & Co.--in one of their rare missteps--made it such. I suspect that a hugh pile of excrement can be pilled up outside The Suit's door for this one but of course we can never be sure. Now Mr. Greenberg isn't a miracle worker but he's a hell of a smart guy and just mean enough that I suspect he will WILL himself to stay around long enough to fix his creation. Best of luck to him and the good Lord willing, the political thug Cuomo will keep the hell out of it. Thanks again for agreeing---well, that may be a bit of an overstatement--WSJ.

Finally,...I simply can't resist. WHAT THE HELL ARE YOU THINKING ABOUT, TIGER WOODS?!!!!

We will deal with the Gulf tomorrow.

I'D RATHER BE LUCKY

Having promised to do the really hard part which is to key the discussion on Our Hero's financial stabilization plan, I got side-tracked in talking about the Detroit debacle when low and behold, here comes not only the Wall Street Journal AND the New York Times to help me out in the form of a leading article and a learned piece from a Nobel laureate. Patience is indeed a virtue and good things come to he who waits. The Times is usually easy to dismiss so let us begin with Prof. Joseph Stiglitz.

I don't get it about these Nobel guys. How the dickens can you be that smart in one area and be so woefully uninformed is seemingly all others, especially when your success and fame has been a result of painstaking research. Yet, both Stiglitz and the new rock star of the op-ed page, Paul Krugman. I think they get in each other' head. Today, Stiglitz, parroting Krugman proclaims that nationalization of banks would be preferable to Our Hero's plan because the FDIC has taken control of failing banks before. "It has even nationalized large institutions like Continental Illinois...and Washington Mutual." Memo to Messrs. Stiglitz and Krugman: you haven't a clue. The FDIC has NO BOD EE to handle anything like the institutions in question. Dirty little secret: when the FDIC wants to get into a bank THEY HIRE AN OUTSIDE FIRM TO DO IT FOR THEM. THEY OUTSOURCE THEIR WORK JUST LIKE THE MILITARY WITH BLACKWATER. Got it guys? Con Ill and WaMu were a walk in the park...especially Con Ill. Con Ill failed because, limited by Illinois banking laws they were highly dependent on short term funding and failed when they lost their liquidity as a result of correspondent banks (many Japanese) pulling their lines. Lost liquidity. Now where have we heard that before? Restore the liquidity, allow some time and bingo, a new bank!

Aside from his preferred solution, Prof Stiglitz is not a bad read in as much it points out quite clearly that one of the terrible features of Our Hero's plan is that if it doesn't work the taxpayer foots almost all the bill. Then again, in for a Penny in for a Pound is what I say. Then again, there are a lot of Pounds...

The Journal has an extremely interesting take on the evolving tale. As I understand the plan in its present form, the Treasury is proposing to assist in the creation of a pool of "toxic assets" selected by participating institutions to be made available for sale by way of auction to selected "fund managers" chosen by Treasury under a set of guidelines proposed by Treasury. These guidelines go to the size and experience of the managers based on the amount of similar assets in their portfolios. From the get-go this is certain to severely limit the number of firms who could qualify as managers. Treasury, in what it refers to as a "partnership" with the managers would share in an equal amount of "equity" with the managers and make available debt geared to approximately 7x the equity to the managers to enable them to purchase the assets from the banks. This debt would be of a non-recourse basis: i.e. the Treasury--you Mr. & Mrs. taxpayer--will get it repaid ONLY from the assets purchased; the manager is not on the hook in any way save for its equity contribution. It appears that Our Hero has read somewhere that Wall Street is governed by fear and greed and this structure is designed in his mind to appeal to the greed part. Big pay-off if things go right for little risk. He is probably correct. From the standpoint of the participating institutions, if all this works they get this bad stuff off their books, are able to recapitalize and head off into the sunlight ready to make available massive amounts of new credit which will reinvigorate the economy, which will...well, you get the idea. A triumph of the market.

Of course, there is always some smart-ass that starts asking questions. If the object is to create a market for these thing as Treasury so states, why restrict the pool of potential purchasers to a hand-picked few, asks the WSJ? Wouldn't one wish to have as many potential purchasers as possible out there to obtain as much competition as possible on the bid side? I fair question I think. Oh, isn't this Washington and doesn't politics rule Washington and if so wouldn't politics play a (big) role in the choice of a limited number of managers--or to put it another was, it's the transparency thing. If you answered that question in the negative, stop reading. You're hopeless. Another thing also comes to mind: How are these assets to be priced and who gets involved? One assumes that we are in the midst of the famous stress test after which the Treasury and the Fed will know precisely what these institutions have and the value of the same (the Fed is added because you always need some poor slob to blame if things go wrong). And to add to the list of sure things, the Cubs will win the World Series.

You see, the institutions have already had their brains beaten in by being forced to mark these assets down with the resulting loss in capital. Having taken the medicine, if there is a chance that they might recoup some of those losses as the assets mature and pay off they are going to be loath to surrender the upside. Consequently, their offer price might result in a considerable spread from the managers' bid...remember, these guys are not the Little Sisters of the Poor. What happens? Well, in a real market, one side would say, "Nothing done," and move on. But is there a real market? I think not. What troubles me and I am sure more than a few of the participating banks is that this will be a government mandated and managed transaction. To work, there must be a bid and I can easily see The Leader with his crack team beside him announcing to the American People, "It is not our intention to run the banks, but bold new steps must be taken and in that spirit, Messrs Jones, Smith and Brown have resigned as CEOs and I have asked My Secretary of the Treasury..." There will be an offer that the managers can lift gang, bank on it. More on this tomorrow and oh, hey, isn't this G20 thing a kick!