Posted on 05/12/2009 3:55:59 AM PDT by Candor7
It's not just what you know, it's who you know. And it's not just who you know, it's who you pay off. As the Center for Public Integrity reports (as cited in last week's Financial Times), the largest US originators of subprime mortgages spent roughly $370 million on lobbying and campaign donations in Washington during the past decade in attempts to stave off tighter regulation of their industry. The study “shows that most of the top 25 originators, most of which are now bankrupt, were either owned or heavily financed by the nation's largest banks, including Citigroup (C), Goldman Sachs (GS), Wells Fargo (WFC), JP Morgan (JPM) and Bank of America (BAC),” who collectively originated $1 trillion in subprime mortgages (almost three quarters of the total) between 2005-2007. That $370 million was money well spent though, given that it was followed, in turn, as the mortgage market imploded, by $700 billion – so far – in troubled asset relief funds – otherwise known as taxpayers' money. Who said crime doesn't pay? That's a return on capital some 1,891 times bigger than the original “investment”. Now that’s leverage. Strangely enough, US politicians have been largely silent about their own complicity in the theft of the century.
GMO's Jeremy Grantham is a little more willing to discuss this obviously uncomfortable truth, and he does so in his latest, excellent quarterly letter. He also touches on the grotesque issues of moral hazard, not to say outright social bias, raised by the partisan attitude of the US administration, and others, toward the (previously deep-pocketed) banking sector:
If a government invests directly, drawing employment from a large pool of the unemployed, and only invests in projects with a high societal return on investment such as hiring workers with well-stocked tool belts to install insulation, or repair bridges and transmission lines.. it seems nearly certain that such a government will never have to regret it. Keeping banks, bankers or even auto workers in business seems, in comparison, far more questionable. So questionable in fact that it must be justified by politics, not economics. We should particularly not allow ourselves to be intimidated by the financial mafia into believing that all of the failing financial companies – or very nearly all – had to be defended at all costs. To take the equivalent dough that was spent on propping up, say, Goldman or related entities like AIG (that were necessary to Goldman‟s well being), as well as the many other incompetent banks and spending it instead on really useful, high return infrastructure and energy conservation and oil and coal replacement projects would seem like a real bargain for society. Yes, we would certainly have had a very painful temporary economic hit from financial and other bankruptcies if we had decided to let them go, but given the proven resilience of economies, it would still have seemed a better long-term bet. But, as I said, this is all just speculative theory and I don‟t have to deal with Congress.
That last observation may not be strictly accurate, inasmuch as all of us working in finance are now braced for more intrusive and poorly thought-out regulation thanks to our cousins in the banks.
To add insult to taxpayer injury, Bloomberg was quick to report that Goldman Sachs was judged to have sufficient capital after the widely leaked Geithner banking stress tests. In practically the same breath, the news service reported that Goldman reaped more than $100 million in trading revenue on a record 34 separate days during the first quarter of 2009. The previous peak was 28 days during Q1 2008. Will US taxpayers be getting back their rightful share of those proceeds, one wonders. But in any case, US banks making good money during the first quarter does not exactly require superhuman ability. As Niels Jensen of Absolute Return Partners points out:
"Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy – courtesy of the US tax payer – a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!"
In any event it is the sudden and somewhat mystifying recovery back to health by the equity markets that is leaving more than a few market-watchers and putatively professional investors scratching their heads. How can a still deteriorating macro economy, an ongoing dearth of banking credit and a dreadful global trade outlook be consistent with a sharp recovery by stocks? There are several answers. One is that the heroic diversion of taxpayers' money toward the banking system has temporarily goosed a capital-sensitive and sentiment-sensitive stock market – this, essentially, is Grantham's view. Another is that professional investors have been sitting on the sidelines for a sufficient length of time that they are scared at the prospect of missing a suddenly fast-moving train, irrespective of where it is headed. Another is that short-covering managers have voted with their feet. Another still is that the financial crisis is nearly over and the global economy is headed for recovery. Anybody who truly believes this last scenario should be sectioned.
A rally built on sand? Relative performance by FTSE sectors, year to date: A glance at the best and worst performing index sectors within the FTSE this year shows that the rally has explicitly favoured the most cyclical and recession-vulnerable stocks: industrial metals; retailers; automobiles and parts; industrial engineers.. But the rising tide has not lifted all boats – defensives like food producers; utilities; tobacco; pharmaceuticals and telecoms stocks have all suffered negative returns. That admittedly reflects just how bombed-out and oversold many cyclical businesses became during the first quarter, but it strongly suggests a relief rally as opposed to a sustainable one. Because as the IMF recently indicated in its World Economic Outlook, recessions triggered by financial crisis are inevitably more severe than regular business cycle recessions, and recoveries are typically slower, impeded by weak private demand and credit and a steady rise in household savings.
There is another reason to fear that the rally's foundations are less than secure, and they come in the form of the dead hand of (inconsistent) government intervention, specifically but not exclusively in the Anglo-Saxon economies. For breathtaking hypocrisy, note for example the scolding issued by President Obama to bond fund managers within the hedge fund community for opposing a government rescue that compromised their duty to their investors:
"While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everyone else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees and their families and communities. I don't stand with those who held out when everybody else is making sacrifices."
Evidently those hedge funds didn’t spend enough on lobbying. As hedge fund manager Cliff Asness of AQR responded:
"Managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their political views. Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. If they give away their clients' money to share the "sacrifice", they are stealing."
And as Bill Gross of Pimco pointedly observed, as Adam Smith's invisible hand comes to resemble more and more the public fist of government, asset values will be negatively affected:
"First comes the haircutting and burden sharing, most recently evidenced by Chrysler and soon to be played out via the stress testing and equity dilution of government ownership of ailing banks. In those footsteps, however, will follow a slower rate of economic growth, not just in the US, but worldwide as heretofore libertarian capitalism is bridled, saddled and taught to trot instead of gallop over the investment plains... the Obama cannon shot will have financial consequences. Do not be deceived by the euphoric sightings of “green shoots” and the claims for new bull markets in a multitude of asset classes. Stable and secure income is still the order of the day."
So a war on terror is followed by a war on free markets, wherein those special interest groups (namely bankers) who bribe politicians most heavily get the greatest protection, while other financiers whose businesses don't involve millions of voters and who never required a penny of taxpayer support get publicly flayed. Those of us watching aghast at the incineration of the public finances in the UK at least have the grain of comfort that the current socialist administration will almost certainly be voted out of office within the next 12 months. Our friends in the US have an altogether longer wait – and many will no doubt be regretting their support for the Big Government they have landed themselves with.
Ping to the Big view on whats happening to our economy.
The economy will not recover in the long run so long as it continues to be nationalized.
.
China's Politbureau tried that and failed, and now are capitalists. Obama wants a 5 year plan foisted on America under the table. Will he pull it off?
And those Chicago Hot Dogs? They will be rationed?
Obama is history. The only reason America is not up in arms is because the MSM is running the screen for Zero.
to stave off tighter regulation of their industry...
Really, Nassim? Was it deregulation or control of the regulations imposed by a political class that runs government? Is TARP the kind of regulation we need? Then he has the gall to pull a class-warfare attack.
If a government invests directly, drawing employment from a large pool of the unemployed, and only invests in projects with a high societal return on investment such as hiring workers with well-stocked tool belts to install insulation, or repair bridges and transmission lines.. it seems nearly certain that such a government will never have to regret it. Keeping banks, bankers or even auto workers in business seems, in comparison, far more questionable.
Ugh, typical Mediterranean Leftist. Smart enough to get it, yet too dumb to recognize when it is right in front of him. How Greek. Nassim, they are one and the same, dummy.
The rest of the piece is so stupid as to not be worth the ink or the electrons. Is he really telling us something we don't know?
Thank you for the ping.
Bump for later reading.
Exactly...why invest into any ‘business’ that has the goobermint running its agendas......goobermint can’t even balance its on budget....mental handicap?
opn=own
That's the very best kind of bull market.
Exactly squared. When the govt politicizes businesses, the only investors that make money are those who are politically connected. The rest of us will get hammered and taxed on that hammering. Why go into a business investment with weasels running the show?
It is a constant source of amazement how easily the American People have been duped by the slick phraseology coming from this administration. They are being led to believe that they actually have a stake in all these “investments” the b@st@rds making in their futures, while their futures are being stolen from them. They think they are actually going to get something back.
They just don’t know what, and that is frightening because we are being enslaved without lifting a finger to save ourselves.
Tiny Tim Geithner, 0b0z0’s tax cheat posing as Treasury Secretary recently said there will no more booms. Thanks to Dixie Chick 2000 for this link.
http://www.rushlimbaugh.com/home/daily/site_051109/content/01125113.guest.html
Geithner: No More Booms
May 11, 2009
Listen To It! WMP | RealPlayer
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BEGIN TRANSCRIPT
RUSH: I have to think that Geithner blew it here. I think that Geithner didn’t want to say this, but he said it. I know he means it. He’s on Charlie Rose last Wednesday night. Charlie Rose says, “But if in fact they pay all the money back, the TARP money back, these banks, you know, what restrictions will exist on their compensation policy at their individual institutions?”
GEITHNER: The president is committed and is working with the leaders of Congress on very comprehensive broad-based financial reform to put in place new rules of the game, more constraints on risk taking to prevent a crisis like this from happening again.
ROSE: When will we see that start to happen?
GEITHNER: Well, we need to get through this crisis. It is very important we get through this crisis and be definitively through it, but we’re hoping to legislate this year.
ROSE: Whatever you can do in terms of regulation and legislation will take place during the next three years?
RUSH: Hang on, listen.
GEITHNER: Yes, within that period of time. Within that period of time. But, again, these things are about preventing the next boom.
ROSE: Yeah.
RUSH: Did you catch that? See, they have said that what they are about is ending the business cycle. They don’t want any more recessions like this. Now, in their mind, what brought about the recession was the boom. They don’t want any more booms. They don’t want any more economic booms! They do not want any more economic growth! They want stagnant, zero-sum game economics. That’s why they’re limiting pay, that’s why they’re going to start putting all kinds of restrictions. There’s probably going to be at some point a wealth tax proposed by this president. Let’s say you’re sitting out there and you’re retired. And let’s say that you are living off your municipal bonds, and you bought your AAA, you got good rated AAA tax-free municipal bonds, and let’s say that those bonds at 4%, 5% tax-free income a year is what you’re living on.
I predict to you that the day is going to come when they’re going to tax wealth, in addition to income, so they can go after really wealthy people who do not have earned income anymore, they’re retired, they’re living off the investment portfolio, which would be capital gains or tax-free municipal bonds or whatever, there will be a wealth tax. There’s going to have to be. They’re in debt, they don’t have any money, and that’s Obama’s aim, sends his Treasury guy out there, “Our objective is to prevent the next boom.” That means no big boom in any sector that might lead to more employment. So, again, these things are about preventing the next boom. There you have it, straight from the Treasury secretary of the Obama administration.
Bill Gross like so many super rich, Gates/Buffet has been for redistribution of wealth for a long time.
bump ....
LOL!
That’s a GOOD one, Gramps!
Those super rich wealth redistributionists are welcome to spread their own dough around to anyone they want. I don’t care if they leave their money to the Salvation Army or their dog!
But, I don’t want them to tell me what to do with mine!
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