Market Talk

Over at The Big Picture, Barry Ritholtz does a big “what if” on the 2008 financial crisis, positing an alternate-universe timeline in which the banks were bailed out. It reads like one of those Star Trek episodes where Kirk and Spock find themselves in a universe where Edith Keeler never died and everything is different.

Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history);  3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

I won’t spoil the fun for you, head over there and read the whole thing, it’s well worth it. If you’re a corporate bond-holder or creditor or counterparty, you’ll be glad Ritholtz wasn’t part of the White House cabinet. If you’re a taxpayer, you’ll wish he had been.

Incidentally, doing this little thought experiment, putting the two time lines side-by-side, reveals the one huge difference between what should have been and what was that led to our current reality: in Ritholtz’s experiment, there is no kleptocracy, no corrupted political machine being crudely wielded by the private sector for its own benefit. No string pulling.

All the bailouts, all the intervention was done in the name of the people, but make no mistake, it was done to save private players from the consequences of their own bad decisions. People innately understand this, but have no way to “fix” it. What’s done is done. That’s led to a lot of lingering hostility, which isn’t likely to go anywhere until somebody figures out how to focus it. Which, come to think of it, I believe the tea party is doing pretty well right now.

Just when I thought I could not possibly get more outraged by anything I hear about government bailouts, I read this from the Times:

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Societe Generale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

Um, excuse me? Am I to understand that the U.S. government, which was about to hand over nearly $200 billion to AIG, forced it to agree not to sue any of the banks it owed money to, even if it should it later find out that any of them committed, oh, you know, fraud? Is that what my government brokered?

This is the kind of agreement that, say, a corporation might make one sign when they’re letting you go, but giving you a little severance package, know what I mean? Why in the world would the U.S. government, which was about to fork over an almost unheard of amount of taxpayer money, want to force to AIG to give up any legal chance to recoup any of that money? It would make sense if it was the banks forcing that issue, but for the government to…

A-ha! A-ha!

“Another way to read this requirement is that the Fed and Treasury were opposed to having fraud at the banks exposed, period,” Yves Smith writes at naked capitalism. “That is a very troubling stance for bank regulators to take.”

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- Treasury’s Geithner and rest of Obama administration seem intent on praising financial bailouts for preventing the banking system from collapsing. But the government interventions weren’t ideal and involved some costly tradeoffs that need addressing, Economist’s Free Exchange blog says. “Geithner has put out the fire, but that’s not the end of the job.”

- Now that health-care reform has passed, it’s time for the reform ball to keep rolling and the White House to put an emphasis on reforming Wall Street and the banking sector, Barry Ritholtz notes.

- Stocks sidestep health care reform, showing the stock market may be ambivalent toward health-care reform, after all. “If Obamacare is such a disaster for the economy, where’s the market reaction,” Paul Krugman says.

- China officials foreseeing “a record trade deficit” for March would undercut the US’s argument that the renminbi is undervalued, Yves Smith writes at naked capitalism. “If true, this may bear out the contention that domestic inflation is running at a high level. The effect, of repricing goods upwards in renminbi terms, would have the effect of making prices less competitive globally.”

- “Remember the scene in Goodfellas when Joe Pesci says, ‘One dog goes one way, the other dog goes the other way, and this guy’s sayin’, ‘Whadda want from me?’” Todd Harrison writes at Minyanville. “That’s what’s emerging in Europe; Germany is pointing to an IMF-package to aid Greece and France prefers a broader European solution.”

- There are about five times as many people looking for jobs as there are openings, but that problem won’t last forever, at least according to a new study from Northestern University. Study argues there will be more jobs than people to fill them by 2018, WSJ’s Real Time Economics blog notes.

- Maybe Citi (C) CEO Vikram Pandit deserves some credit. That’s the message Chairman Richard Parsons has for all the cynics out there.

- “Mr. Bernanke needs to face some unpleasant realities,” former IMF chief economist Simon Johnson says. “The cherished independence of the Fed is now called into question – and losing this could end up being a huge consequence of the irresponsible behavior and effective blackmail exercised by megabanks – who still say, implicitly, ‘bail us all out, personally and generously, or the world economy will suffer.’”

- What’s in store now that the House’s historic health care legislation has finally passed? “Today’s vote confirms our hope that we can have both strength and competence in Washington. It is an audacious hope, but we have no choice,” Robert Reich says.

- Cinderellas, buzzer beaters and busted brackets – what a weekend at the Big Dance.

Can anybody here add?

I haven’t posted much the past two days because I was working on an “Ahead of the Tape” column for the paper, which came out today, “U.S. Borrowing Costs Stay Stable. For Now.” Here’s a taste:

The budget report isn’t a market mover, one reason it gets released during market hours. In the short run, investors are more or less “comfortable” with large deficits, says Dan Greenhaus, Miller Tabak’s chief economic strategist.

Long term, though, is different. “The lack of a credible plan to reduce the deficit as a percentage of GDP will eventually weigh on investors’ minds, which could have implications for currency and debt markets,” Mr. Greenhaus says.

Erasing the deficit seems intractable, because much of it—like health care and Social Security—is mandated. Military spending isn’t, but isn’t likely to come down amid two wars. The next-biggest government outlay is interest on the debt. And that’s where the debt markets get, well, interested.

Low interest rates don’t just help the housing market. The government’s managed to actually pay out less in interest while the total amount of debt has risen with all these historically low rates. The real fear, of course, is that the bond vigilantes will start making the government pay up for its largesse.

Our colleague Deborah Blumberg touched on this in a story in Monday’s Journal. There’s an auction of 10-year bonds today at 1 p.m. ET, and keep an eye on how that one plays out. If you start seeing yields on auctioned debt higher than the debt trading in the secondary market, it will raise some eyebrows.

Congress takes another look at the AIG bailout.

Bloomberg is out with an ire-raising breakdown of the AIG bailout and its aftermath, especially the details that emerged from the notorious “Schedule A” list of AIG’s counterparties to its credit default swaps, a document the government fought for more than a year to keep suppressed.

If you haven’t kept up on this little topic, and feel like raising your blood pressure for masochistic some reason, read the whole thing. But, curiously, Schedule A was inserted into the public record in January by Rep. Darrell Issa during the January Congressional hearings on the bailout (here’s a Reuters story on it from late January, which includes a link to the document itself; print it out if you want a true piece of Americana scandaloso.)

It’s curious that Bloomberg published its story now, though, when the documents have been in the public realm for some time. But it does show that rancor over the bailout isn’t going away, Yves Smith notes at naked capitalism. And the bailout still needs to be more fully addressed.

A further investigation of Goldman, SocGen, Deutsche Bank, the major AIG counterparties, is long overdue. Having wrestled with the data in the public domain, we can only conclude it is impossible at this juncture to understand the motives of the major players, which is essential to determining how much of this disaster was due to incompetence versus nefarious intent.

Now some may complain that people will continue to harp about AIG regardless, but that’s a spurious argument. Its rescue was a huge taxpayer commitment, done in great haste, and much of the background and the critical decisions remain in the dark. Sus looking details, like the decision to pay the counterparties at 100% of notional value of the CDS, were investigated by SIGTARP and criticized roundly in its report.

Note to Fed: if you want the media to stop worrying at the AIG bone, disclose all information that will give insight into the roles and objectives of the major AIG counterparties, including details of the Abacus deals. And if this step does not provide answers, it’s time for SIGTARP and the Financial Crisis Inquiry Commission to demand information from the counterparties themselves.

If Paul Volcker is a winner for his role in influencing President Obama’s proposed bank plans, is Tim Geithner the biggest loser?

It’s certainly hard to ignore Geithner’s role (or lack thereof) in Obama’s press conference yesterday. The President began his speech by thanking Volcker and Bill Donaldson for their advice and influence regarding his new bank regulations, even calling the new policy “The Volcker Rule.”

“That in itself is shocking,” Henry Blodget writes at Clusterstock, as Volcker, a former Fed chairman, is now just an advisor to Obama whereas Geithner is Treasury Secretary.

Even the lineup on stage at yesterday’s press conference was astounding. Volcker stood right by Obama’s side, followed by Barney Frank and then a distant Geithner, who may as well have been caddy-cornered on the side of the stage.

“At the very least, yesterday’s press conference seemed designed to tell America that Tim Geithner has been marginalized, that Obama is now (finally) committed to change,” Blodget says.

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Treasury’s inability to sell any Citi stock has put the shares in quite a bind.

Institutions are reluctant to hold Citi — only 20% of the shares were held by them, Citi said recently — and analysts blamed investor fear that the US, as a large shareholder, could act capriciously. Selling 5% of Citi’s shares by Treasury yesterday would’ve reduced that fear, and for technical reasons allowed index funds to own more.

Now those benefits are delayed. Institutions dislike government ownership and are reluctant to buy; the government won’t sell unless the price goes up.

Citi’s secondary offering shows the big difference that long-term fundamental investors and short-term speculators have on the sustainability of a company’s stock price, Reuters blogger Felix Salmon says.

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Citigroup (C) shares fall as the government decides against trimming its 34% stake in the banking behemoth. Abrupt decision comes after the pricing of a recent secondary offering comes 10 cents below what the Treasury Department originally paid for Citi shares, meaning taxpayers would’ve lost money on the deal. WSJ has the details:

The embarrassing reversal came two days after the Treasury said it planned to sell as much as $5 billion of stock in the New York company, as part of Citigroup’s plan to pay back $20 billion in taxpayer aid the troubled bank received last year.

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects and had already spent heavily on shares of rival banks this week.

As a result, Citigroup had to sell its stock at a discounted price of $3.15 a share. That’s 10 cents below what the Treasury paid for each of its 7.7 billion shares.

Market observers expressed skepticism earlier this week when Citi said it would repay TARP, suggesting the bank was wrong-headed in rushing to pay back taxpayers and risked demoralizing investors. But Citi has argued that being a bailout recipient has hindered its ability to lure top talent.

“Earlier this week, when Citi announced its plan to repay TARP, we characterized it as a mixed blessing and noted that we were disappointed that the plan began with capital raising to repay the TARP preferreds and ended with the sale of government shares rather than the other way around,” analysts at Oppenheimer said. “In retrospect, we had no idea of our gift for understatement.”

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You're doing a heck of a job, Geity.

Treasury Secretary Tim Geithner has his supporters, of course. First off, there’s the President. I’m sure, too, that his wife is very supportive of his efforts to restore fix the nation’s economy. Then, there’s, well, there’s…New York Times columnist David Brooks.

Brooks, generally a conservative voice in the paper, came out in support of what’s Geithner’s accomplished so far:

The evidence of the past eight months suggests that Geithner was mostly right and his critics were mostly wrong. The financial sector is in much better shape than it was then. TARP money is being repaid, and the debate now is what to do with the billions that were never needed. It now seems clear that nationalization would have been an unnecessary mistake — potentially expensive and dangerously disruptive.

Accept for a moment that most of that is true, the banks aren’t dangerously listing anymore, that the crisis is over and we’re on the road to recovery. What, exactly, did the Treasury Secretary contribute to that?

I’m serious. Somebody please tell me. Offhand, I can think of the “stress tests” and the PPIP, the Public-Private Investment Program. The first was no more than a thorough white-washing, and the second was just an awful idea that has yet to gain any appreciable traction.

So, somebody, anybody, please point out something specific the Treasury Secretary has done to make things better. Because I certainly couldn’t find anything in Brooks’s hyperbolic column.

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We've come a long way. Now don't try manipulating us!

Financial bloggers have gained a loyal readership and considerable clout during the crisis of the past year. Their prominent role in shaping opinions came into particularly sharp view at a recent meeting.

A group of eight financial bloggers met in Washington on Nov. 2 with senior Treasury officials, including Secretary Tim Geithner. Treasury officials said they organized the two-hour meeting because they recognize the increasing influence financial bloggers have on public opinion and feel it is better to embrace rather than ignore their critics.

The gathering, the first of its kind, represented a milestone in the rise to prominence of the blogosphere. It shows that bloggers are being taken seriously by decision makers, and that kind of access could enhance their credibility among a wider group of readers.

The bloggers in attendance welcomed the opportunity to meet with Treasury officials. However, some expressed concern that their current readers could lose faith if they think the bloggers’ views have been compromised. One blogger admitted after the meeting that he felt sympathetic toward the same policy makers he often criticizes and worried he wouldn’t be as tough on them in the future.

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