TARP's Barney Blagojevichs

WSJ, Jan. 22 & 24th:

"Political Interference Seen in Bank Bailout Decisions"

and

"Politicians Asked Feds to Prop Up Ailing Bank " ‏

Some of this is legitimate constituent servicing but much or most of it is,and eventually all will become, a "blagojeviching" of banking. How are 535+ Barney Fifes and/or Barney Blagojevichs, and Treasury, going to better allocate capital among thousands of banks and tens of thousands of corporations on a part-time basis than would full-time capital markets? Kashkari isn't that smart; no one person is.

Why these capital injections have failed, and will continue to fail, is very simple. While $1 of capital can leveraged-up into $10 of loans it can only be leveraged-down into $1 of assets. In other words, when assets fall by $1 it consumes $1 of capital; dollar for dollar erosion. Therefore capital injections are futile until the asset spiral stops; something the feds have made no serious effort to do.

The spiral has gone beyond residential mortgages and "shadow banks" (although 'collateral is still a contagion'). The problem has gone mainstream & global and thus has becomemuch harder to stop. It's being compounded by govts' missteps: banking nationalization, direct (e.g., FDIC gtys) & indirect crowding out, a larger uncertainty premium as govts have arbitrarily rewritten, abandoned, or broken all the rules. For example, their mishandling of the GSEs resulting in small- & middle-sized banks losing billions of assets, and capital, when Fannie & Freddie's preferred & common shares were wiped out by Treasury (yet another self-inflicted wound). So now they too are in line for bailout money.

But, thank you Mr. Paulson for proving correct my analysis that "notching"credit ratings for capital structure rank was woefully inaccurate -- standard practice was to rate an issuer's subordinated debt one notch lower than senior, for example from Aa2 to Aa3, and another notch for preferred shares (e.g., Aa3 to A1). Historically, recoveries or loss-given-default(LGD) are dictated by rank, not rating. Recoveries in GSEs and other financials were far less than even my historical capital structure analysis would have estimated (although financials never recover as much as non-fin'ls).

JRB

1/26/09

"Operation Twist" -- the Fed & Treasury's sequal to a failure

Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds

2009-01-26 00:01:01.2 GMT By Rich MillerJan. 26 (Bloomberg)

How can they even contemplate another "Operation Twist" when the PSBR will zoom in the trillions this year and next?! Buy long bonds with one hand, sell trillions of new bonds with the other? It just gets worse & worse.

"Operation Twist" was an infamous experiment in the 1960's to change the shape of, "twist", the Treasury yield curve. By all accounts it was a total flop, but some are trying to rehabilitate its reputation. (That no one has attempted a repeat in 40+ years tells you something about its actual success.)

PSBR: "public sector borrowing rate" a UK term but quite useful.

JRB

1/26/09

Why TARP's capital injections don't (can't) work

The idea behind putting (forcing) capital into banks is to help (make) them lend: $1 of new capital can be leveraged-up to make $10 of new loans. But, the reason it's not working is, that $1 of new capital can be "leveraged down" by only $1. In other words, if you put $1 in and existing assets fall in value by $1, you're done, you've spent your dollar and have nothing to show for it. The bank is still there, at least capital hasn't fallen further, but it can't lend, it can't lever-up. Give them another dollar, and the smart bankers will hold on to it for the next round of write-downs.

Until the asset spiral is broken putting money into banks is just micturating into the wind.

JRB

1/23/09

Geithner calls the Chinese currency "manipulators"

Geithner calling the Chinese "manipulators" is a pretty dumb thing for a debt-junkie to tell his supplier, publicly, to his "face". They won't dump Treasurys, they'll just sit back at auction -- like Lou Reed's lyric, "I'm waiting on my man / $26 in my hand [or: '$26 trillion out of hand'] / he's never early, he's always late / first thing you learn is that you always gotta wait". Geithner will learn to wait; the Chinese are patient. They have already shifted to shorter maturities (reported earlier this week).

Mr. Market is repricing the curve for the Chinese, but also for the massive global glut of government borrowing. We can't all be debtors at the same time. OECD countries and many of BRICs have demographic curves that are coming due soon too. (China's demographics are surprisingly old-world.)

JRB

1/23/09

Citigroup, Bank of America ‘Nationalized’ as U.S. Calls Shots

Citigroup, Bank of America ‘Nationalized’ as U.S. Calls Shots

Bloomberg News, 1/23/09

As I said a few months ago the feds nationalized the banks, but failed to stop the Panic, and in the process destroyed the U.S. (and global) financial system. That prediction continues to unfold. What we have is worse than nationalization in that the feds, but especially Congress, can mismanage without accountability. That too is unfolding: yesterday's WSJ reported that Barney Frank directed TARP funds to his home-town bank, and today, Obama weighed in on compensation. Next, they'll start directing to whom banks will lend, or not lend.

The entire regulatory structure must be replaced in order to have any credibility, but that's not likely to happen -- not constructively, anyway, not by this crew. We've gone beyond 'collateral is the contagion' (which is still there) but the MTM spiral has only paused, not abated.

JRB

1/23/09

Neo-Keynesianism will fail, is failing.

Keynes, Keynesian, Keynesianism ... an awkward progression. Anyway, to the extent there's a rhyme & reason to the Paulson/Bernanke-Geithner/Cox response to the ongoing economic crisis, it's been Keynesian. (It's debatable whether John Maynard was himself "Keynesian".)

The fallacy or error is, fiscal policy has been Keynesian ever since 1930-something with only a brief & partial supply-side interruption (8 years of Reagan minus Tip "Reagan's budget is 'dead on arrival'" O'Neil). Unlike the 1930's, state & local & federal governments are already leveraged to the hilt, long before the current crisis. Governments, just like banks, hedge funds, SIV's, or any other borrower, must eventually pay-off their debts. Or be perceived to have that ability. But, as I wrote before, that perception must be grounded on fact & analysis, something the U.S. govt has not been subject to in the past but is becoming subject to now. Today's WSJ observed the Chinese are shortening maturities, possibly (probably) due to credit concerns. The Keynesian solution will not work if & when no one wants to lend the money to create the deficit-spending "solution". Today, that 'someone' is Red China, Japan, or OPEC, each with their own problems and not to be mollified by the notion we can print more dollars as they are nondollar investors.

Geithner, et al, are "generals fighting the last war", the Great Depression. While many of the problems are the same or similar, the solution cannot be the same as we are starting from the point of maximum Kenyesian intervention.

I haven't entirely developed this analysis: this post is more planting the 'germ' of an idea. The old nostrums won't work but I need to translate that gut-feel into analysis. (Whether or not and when I can further elucidate it are other questions.) I think we'll see 10%+ unemployment. Whether we see the -10% decline in GDP that, unofficially, defines a "depression" (as opposed to recession) is another matter. But I think & fear that policymakers are pushing us further over the cliff, not pulling us back, and at the same time increasing its height. They've "doubled-down" on Citibank & BofA, and the UK continues to paint itself into a complete nationalization corner.

JRB

1/21/09

Aphorisms & Observations

Dear Senator Dirksen (RIP): Trillion is the new billion. (1/21/09: I thought this was original but googled to be sure: it appeared in the WSJ which I always read, so it must have been subliminal; anyway, it should be another order of magnitude greater.)

"Damnation!" No, just a couple of states will do. (~1970)

Television is to news as bumperstickers are to philosophy.

"You can lead a horse to water but you can't make him drink." But a jack-ass will not be led; he'd sooner perish from thirst. (~1998)

"Mother Nature favors the hidden flaw" (one of Murphy's Laws) but human nature seeks it out. (~2005)

Of the 'Three C's of Credit' we've given-up 'character' for 'correlation' -- and that matters! (regarding CDOs, 2005)

Constant-proportion debt obligations (CPDO) are leveraged credit gamma. (2005)

My "safe harbor" statement: When the wind & water rise high enough, no harbor is safe. (2003)

Republicans have failed to govern. Democrats will not fail to rule.

After the 2006 elections I said that while the Republicans have failed to govern the Democrats will not fail to rule. We are seeing even more of that now.

JRB

1/13/09

Will Paulson throw a TARP on pornography?

Hustler's Larry Flynt and Girls Gone Wild CEO Joe Francis Ask for Government Bailout of the Adult Entertainment Industry

The $13 Billion Industry Is In No Fear Of Collapse, But Why Take Chances?

LOS ANGELES, Jan. 7 /PRNewswire

The sad thing is, Henry Paulson may not realize it's a joke. (I think it's a joke ... I hope it's a joke ... Paulson bailed out Cerberus so I wouldn't put it past him ... ) Maybe some day Mr. Francis will make a video called "Feds Gone Wild". That'll be rated quadruple-X!

JRB

1/8/09