Fin/Inv

This is pretty amazing:

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Volcker’s Advice

To the Editor:

Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

The writer is retired chairman of Citigroup.
NYT Letters to the Editor, October 22, 2009

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Hat tip Real Time Economics

Houston, we have a problem. We are bankrupt.

That is the finding of Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA, Retired Partner at Fitts Roberts.

Cover Letter

October 22, 2009
Name, Title and Address [see list below]
Subject: Finances of the City of Houston
Dear : [see list below]

Enclosed is our partial analysis of the very serious financial situation at the City of Houston. We would be derelict if we failed to share this financial analysis with you. This financial heads up will assist you in meeting your fiduciary responsibilities to Houston voters, taxpayers, readers, viewers or investors---as the case may be.

We feel a public discussion of the City’s financial situation is necessary and firmly believe that addressing the City’s financial condition is in the best interest of the Houston economy and Houston taxpayers. We believe the sooner the City of Houston addresses the financial shortfall the better.

Please bear in mind that the Houston City elections are on November 3, 2009, with early voting having commenced on October 19, 2009. Recent history has shown a large portion of voting occurs during early voting.

We trust that the attached article is of significant assistance to you.
We may be reached at boblemer@sbcglobal.net.

The above was sent to:

City of Houston---Incumbent Mayor, City Controller, and City Council Members
City of Houston—Non-Incumbent City Candidates
Greater Houston Partnership---Board Members
Houston Chronicle---Editorial Board Members
Houston TV Stations---CEOs
Houston Business Journal---Editor
Houston Community Newspapers-Editor
Houston Press-Editor
Municipal Bond Rating Agencies---CEOs
Wall Street Journal---Editor
Barron’s-Editor
Investor’s Business Daily-Editor
USA Today-Editor
Texas Monthly---Executive Editor
Deloitte & Touche LLP---Houston and New York

Executive Summary

City of Houston
Disturbing Financial Facts---October 2009
By: Bob Lemer, Aubrey M. Farb and Tom Roberts

The City of Houston is financially broke and it appears that the mayor who takes office in January 2010 may have to captain the City through bankruptcy procedures.
The City’s unrestricted assets were $1.2 billion short of the already recorded
corresponding liabilities these assets were needed to pay as of fiscal year end June 30, 2008,according to the City’s latest publicly available audited Comprehensive Annual Financial Report (CAFR). The $1.2 billion shortfall was a result of operating losses totaling $1.5 billion for fiscal years 2004-2008, applying the full accrual basis of accounting used in the private sector.

Apparently the City has no idea as to what has transpired financially since June 30, 2008 or will transpire this fiscal year ending June 30, 2010, on the full accrual basis of accounting. But even on the modified accrual basis of accounting (essentially cash basis) followed by the City and all other municipalities, the $236.8 million fund balance in the City’s general fund as of July 1, 2009 (the beginning of this current fiscal year) would not exist except for the City having deposited the proceeds of pension obligation bonds into the City’s general fund instead of depositing them in their legally required immediate destination, the pension plans’ bank accounts.

The City is in this dangerous financial position because its total spending since fiscal year 2003 has greatly outstripped its total revenues in that period. And the rate of growth in the City’s total revenues since 2003 has, in turn, greatly outstripped the City’s rate of growth in population plus inflation.

Thus the City’s problems are a result of greatly overspending and not a result of
insufficient revenues. All of this occurred before the current severe recession. Now the City has the added burden of the recession.

The City is in a real financial dilemma, because now its two principal sources of general fund revenues are in trouble---sales taxes and property taxes. Sales tax revenues already are dropping significantly and property tax revenues will commence dropping at an even more rapid rate after the next annual appraisal and assessment process. And the City will have to go to the voters for any contemplated rate increases in either the sales tax rate or the portion of the property tax rate allocable to operations.

It appears to us that there may be no viable alternative to bankruptcy proceedings and thereby positioning the City to regain control over its overspending, through addressing structural spending problems such as overstaffing and overly generous employee benefits.

Pension Plans and Government Salaries To Blame

According to the report, pension plans and government salaries are at the heart of the matter. Here are a few select details.

Detailed Findings and Observations

1. The City incurred operating losses (“Change In Net Assets”) totaling approximately $1.5 billion for the five fiscal years ended 6/30/08--- per the latest (fiscal year 2008) publicly available audited Comprehensive Annual Financial Report (CAFR), page 199:

In Thousands
a. (312,790)
b. (531,465)
c. (131,893)
d. (221,452)
e. (281,556)
TOTAL (1,479,156) ---or--- $1.5 BILLION

2. The City’s deficiency in unrestricted assets [“Unrestricted (deficit)”] was $1.2 BILLION ($1,174,429 thousands) at June 30, 2008--- per 2008 CAFR, page 15. In other words, the City’s unrestricted assets were approximately $1.2 billion less than the already recorded liabilities that they will be required to satisfy.

3. The $1.2 billion deficiency in unrestricted assets as of June 30, 2008 (which was created essentially during fiscal years 2004-2008-see item 1) was basically financed, per page 15 of the 2008 CAFR, by:
(a) the $347,728,000 collateralized note payable to the municipal employees’
pension trust;
(b) the $643,413,000 combined accrued liabilities to the employees’ pension
trusts (municipal-$285,462,000, police officers’-$318,567,000, and firefighters’-$39,384,000);
(c) the $219,755,000 pension obligation bonds payable;
(d) the $272,941,000 accrued liability for other post employment benefits-----less, per pages 17 and 74 of the 2003 CAFR,
(d) the $54,395,000 net accrued liabilities to the employees’ pension trusts at June 30, 2003 (municipal-$92,386,000, police officers’-$19,221,000, and firefighters’-asset of $57,212,000).

4. Thus, as of June 30, 2008, the City’s elected officials essentially had transferred financial ownership of the City from the taxpayers to the City’s employees, about 43.7% of who do not live in the City, according to documentation we have received from the City’s human resources department. Very troubling, 63.3% of first responders (police officers and firefighters) do not live in the City, versus just 30.0% of civilian employees, according to the City’s human resources department.

5. The City’s deficiency in unrestricted assets is so severe that in their yet to be completed audit for fiscal year 2009 the City’s independent auditors apparently will have to address the audit reporting issue as to whether the City was a “going concern” as of June 30, 2009.

6. Apparently the City has no idea yet as to what its operating loss (“change in net assets”) was for the fiscal year just ended June 30, 2009 or what its deficiency in unrestricted assets was at June 30, 2009, and has no idea as to what is in store fiscally for fiscal year 2010. That is because the City does not keep its books on the full accrual basis of accounting (fully accruing its assets and liabilities) but once a year, via the audited Comprehensive Annual Financial Report (CAFR). And the CAFR cannot be completed until the (nearly always very substantial) annual audit adjustments are booked.

....

17. For example, Exhibit B demonstrates how it was possible for the City to actually show an audited surplus of $19,891,000 from operations in the general fund (which is the focus of the annual budget and the MFOR) for fiscal year 2008 when, in reality, the City had an audited Citywide operations deficit of $281,556,000 for fiscal year 2008.

18. Exhibit B is difficult to comprehend for a person not trained in governmental accounting, even for a CPA. But the two most significant reasons for the difference between the $19,891,000 general fund surplus from 2008 operations and the $281,556,000 deficit from 2008 Citywide operations are: (a) the ever-growing accrued liabilities to employees for pension plans and other post retirement benefits; and (b) the commenced practice of financing current pension plan expenses with backend loaded pension obligation long-term bonds.

19. Once one understands Exhibit B, or at least items 18(a) and 18(b), it becomes obvious that the City’s fiscal 2010 general fund budget is an illusion, for two reasons. First, it is calculated on the modified accrual basis of accounting (essentially cash basis) and therefore ignores the ever-growing and enormous accrued liabilities for employee pensions and other post retirement benefits. Secondly, it is dependent upon continued payment of some of the pension expenses with issuance of long-term backend loaded pension obligation bonds.

23. At June 30, 2008 (date of the City’s last audited financial statements), the City’s total Citywide debt per capita of $5,338 was over twice the $2,528 debt per capita of the now bankrupt State of California.

Inquiring minds may wish to download the entire Lemer/Farb/Roberts assessment of City of Houston Finances document from Scribd.

I agree with the findings of Bob Lemer, Aubrey M. Farb, and Tom Roberts. Any attempts to balance this on the backs of taxpayers is not viable. Houston should declare bankruptcy and seek to null and void the contracts of city workers including police and fireman.

California Is Bankrupt Too

Interesting, I note in point 23 that the authors of this report have concluded California is bankrupt. Of course I agree with that assessment as well. Unfortunately there is no provisions for states to declare bankruptcy.

What About Oregon?

Inquiring minds are reading Climbing PERS expenses face Oregon pension board, agency budget writers.

The cost of Oregon's Public Employees Retirement System is about to skyrocket to budget-busting levels.

As a result of PERS' $17 billion investment loss in 2008, every state agency, municipality and school district that participates in the system is staring at an average 50 percent increase in the base rates PERS charges to fund their employees' retirement benefits in 2011 and 2012.

That's not a doomsday scenario. Unless the pension fund's board changes its rate-setting rules, or its investment portfolio generates a 26 percent return in 2009, these rate increases are guaranteed. What does that mean to you? Fewer teachers, cops and firefighters. Less of every service that government provides. Higher fees and taxes. Perhaps all of the above.

The base rate that public agencies pay to support employees' retirement benefits could double in the next five years, according to the PERS actuary, Mercer Inc. If rates reach that level, the retirement system will gobble one quarter of every tax dollar that goes into a public agency to support payrolls.

Oregon isn't alone.

Public pensions nationwide are in crisis mode, and state Treasurer Ben Westlund points out that Oregon's pension system is still better funded than most. PERS officials also note that a major recovery in the stock market could alleviate, or even eliminate, the pain. Indeed, the system's investment portfolio has already bounced back 14 percent this year.

But here's the rub: Even if the pension system's investments return an average 10.5 percent annually for the next three years - their historical average - PERS rates will still increase to 21 percent of payroll in July 2013, according to Mercer's modeling.

If, in a slower growth scenario, investment returns are closer to their 10-year average of 4.5 percent, all bets are off. PERS' executive director, Paul Cleary, recently told the citizens board that oversees investment of the $50 billion pension fund that if 4.5 percent is the new normal, "our business model doesn't work."

Pension System Busted Country Wide

It is highly likely that nearly every pension plan in the country is busted. The solution is for every city and municipality in a predicament to "pull a Vallejo" and declare bankruptcy. Please see Judge Rules Vallejo Can Void Union Contracts for details.

Deficiencies cannot be met on the backs of taxpayers. Enough is enough. It's time to end every massively underfunded public defined benefit plan in the country, by force if necessary (bankruptcy), unless unions agree to major concessions that would make the plans viable without raising taxes one cent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Submitted by Nic Lenoir of ICAP

It was interesting to see the bears all come out of their caves today after the move yesterday. What's even more interesting is that non-bears joined the negative talk, with Bill Gross calling basically for a 30% sell-off in equities and arguing housing was overvalued by 50% from 2007 highs (by the way if the latter is true, the stock market should then correct by a lot more than 30%, more like 75%), and GS and BOAML came out with bearish outlooks on housing. Given upbeat equity predictions by the latter two firms (helps to have replaced Rosenberg with a bull!) it's all the more intriguing.

What we see on the charts, is that EURUSD looks like it has completed a very clean impulse from the highs, and while that means there is more weakness to come, we should probably retrace towards 1.4925/1.4950 (careful, the 76.4% at 1.4994 is always a worry, but if we are trully bearish the aforementionned range should do it) before we resume the sell off. 1.4620/1.4660 remains the target zone we should test and a break there would confirm a much more significant break of the uptrend.

As mentionned yesterday Gold was on a short-term basis around support levels, and we still think that we need to retrace towards 1,052 or consolidate further here before moving lower. Silver seems like it is bound to test 15.75/16, before 14.2 which is the support of the channel. Ultimately the big support is 12. But make no mistake, while correlations are not necessarily a great indicator between Silver and Gold, it is hard to imagine in the current environment to have Silver test 14.2 without taking any prisoners on the way down and have Gold not retest 986.

Just like we observed on EURUSD and Gold, short-term equities are a bit oversold. We brought it up yesterday, and despite making new lows today we look for now as we might close above the lows of yesterday. Divergence of short-term momentum indicators is there, and we would expect to at least try to test 1,070.50 over the next 48 hours for the S&P future. A break there would mean we should see 1,085/1,089 in theory. Anything above that would mean we are going for the resistance at 1,106 but that is not our favored case. We think short-term we test either 1,070.50 or 1,085/1,089. After that we would like to see the 1,038 support being challenged and possibly broken which would confirm a move to test at least 875. Dax is confirming our conviction that short term we will face a bounce. We have a little bit more downside possibly to 5,570 but after that we risk a retracement higher. 1,070.50 should correspond to 5,740 in theory. What bothers me is the great resemblance with the last 2 weeks of September for the Dax index as highlighted by the 30-minute chart. Also, the daily chart confirms we are close to support. On the daily chart for S&P we have an interesting turn of the second derivative for the MACD, but the RSI is pretty much on support. Both are not incompatible, as the MACD has a bit more latency and indicates if anything we will see more weakness after the bounce.

We were a touch early favoring an end of the sell-off in Treasuries on Monday morning as a few stops pushed the market lower, bt ultimately we have well recovered. 118-13 on the 10Y future is the level that will make all the difference. Auction today was well subscribed. As we discussed previously, the recent back-up in rates is likely to have made Treasuries more attractive for real money accounts, and the worries surrounding EURUSD and equity weakness probably also bring a bid in the market.

Good luck trading,

Nic

=
By Spencer,

The issue of a jobless recovery is getting a lot of attention recently.

I've found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.

Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.

But real GDP growth also slowed over this period. As a consequence, the ratio of real GDP growth to productivity growth fell from 68% in the early strong productivity to 50% in the weak productivity era before rebounding to over 80% in the most recent era. Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. Currently, a percentage point increase in real GDP growth now generates under a 0.2 percentage point increase in hours worked versus 0.3 in the pre-1974 era and 0.5 percentage points in the low productivity era.



But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.

If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.


This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor's share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor's but it was around a long term or secular flat trend. But since the early 1980s labor's share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor's share.



If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.


additional chart in response to comments.

Noch vor drei Jahren belegte Deutschland einen fuenften Platz im Vergleich der Gleichberechtigung der Frauen weltweit. Seitdem ist Deutschland auf den siebenten (2007), elften (2008) und nun zwoelften Rang abgerutscht.

An interesting trade idea out of Merrill Lynch's RateLab, courtesy of Harley Bassman

 

No matter where they sit on the political spectrum, politicians and voters can generally agree that the key to economic growth is in small business. Throughout their campaigns last year, both Barack Obama and John McCain drove home this point all the time. With politicians seemingly in agreement on the importance of small businesses to the economy, it is ironic...

Quite a few interesting reads today:

• New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers (Bloomberg)

• Bill in works to let U.S. dissolve failing firms (WAPO)

• Grantham: Just Desserts and Markets Being Silly Again (GMO)

• Rumors of Credit Crisis’s Death Are Overdone (Hussman)

• IRS to rich tax cheats: Be afraid. Be very afraid (CNN/Money)

• Goldman Sees U.S. Housing ‘False Bottom,’ Merrill Sees ‘Treat’ (Bloomberg)

• Simon Johnson: The home-buyer tax credit: Throwing good money after bad (WAPO)

• 10 things Google has taught us (Fortune)

• The (free) Prints & Photographs Online Catalog (PPOC)

• Mac vs. Windows 7: Four new videos (Brainstorm Tech)

What are you reading?

Here is more on the housing tax credit debate ...

First, from Reuters: Democrats Agree to Extend Home-Buyer Tax Credit: Dodd

"We're close, we're close but I can't get into any details until it's a done deal," said Republican Senator Johnny Isakson.
...
Dodd and Isakson want to extend the credit through June of next year and broaden it to anyone buying a primary residence, not just first-time buyers.

I've heard reports that the "phase out" proposal is off the table, and the tax credit will run through April (backers of course will then try to extend it again). The latest report is the credit would be expanded with higher income limits, and would include certain move-up buyers (those who have lived in their current home for some number of years - perhaps five or more).

The details are changing constantly ...

The S&P 500 is down about 3% since October 19th, as the bull market charge higher has taken at least a breather over the past week or so. As shown in the table at right, the Materials sector is down the most since 10/19 with a decline of 5.68%, followed by Financials (-4.50%), Industrials (-4.15%), and Consumer Discretionary (-3.50%). Technology...

Here’s a little Berk style puzzler for you rats (from Mole):

First up - does this wave pattern/fractal look familiar to you? Secondly, what is it?

4:10pm EDT: Here’s the (shocking) answer:

Does this mean the same thing will happen this time again? Absolutely not! Fractals form everywhere and I wanted to demonstrate this to the rest of you guys. This is in part the issue I have with T.K.’s 1938 analogy - here is a very similar pattern and it resolves completely different.

Food for thought indeed.

On the Zero side of things I have been warning subs about a slowly developing divergence on the Lite. They don’t always play out but they have kept us out of big trouble in the past. For the record: I am short this market but I’m only about 15% exposed with December puts I intend to hold through any developing spike - they’ll get sold ITM or will expire worthless.

Program Trading Update:

geronimo/ES (old): -7.75
geronimo/ES (new): -5.75

We are officially in a drawdown cycle, which is why Eric and I worked all evening yesterday to finalize a version with 30% smaller stops. This new version of Geronimo has only been tested internally today and we plan to put it into production tomorrow morning. However, as we are still experiencing empty alerts on both versions we are now pushing hard to either upgrade to NinjaTrader 7 or to shift over to MultiCharts. It’s become clear that this empty alert bug won’t be easily fixed and I’m sure that the subs are sick of seeing them - even though we emailed the full trade info right away (allowing subs potentially to get better entries - sometimes it works in our favor). But I am rapidly losing patience with NinjaTrader and if v.7 doesn’t fix this problem we will switch over to MultiCharts. Eric and I have been running it for weeks now and it’s extremely stable - we are currently finishing up the notification module in C++ which is a recode of what I did in NinjaTrader. More info on all this forthcoming shortly.

Cheers,

Mole

If anyone wants to know why CNBC anchors are so pale and nervous these days, look no further. As Comcast CEO Brian Roberts considers what to keep and what to, well, cut, post his digestion of NBC Universal (assuming deal rumors are true naturally) his eyes likely cast casual nervous glances at Nielsen reports of CNBC viewership. Yet his nervousness is quite minor compared to what actual employees must be feeling after Nielsen reported a 50% plunge in CNBC vierwership in October year over year. Specifically, CNBC has experienced a massive 52% decline in overall viewers during business day hours (5 am - 7 pm), and a not much better 49% drop in its demo (25-54) in the month of October as compared to last year. Specific shows that are likely to follow the fate of Dennis Kneale's recently cancelled 8pm gobbledygook are likely the Kudlow Report and Mad Money, which are down 59% and 56%, respectively.

While one can speculate about the causes of the drop (call it readers who can read between the propganda teleprompter lines), one thing the drop does explain is why CNBC has had to recently resort to advertising products for incontinence among other bodily malfunctions.

As always, Zero Hedge wishes the network a speedy recovery and a return to what it does best: reporting the news, without bias, without propaganda, and without an agenda. Once that happens CNBC and its new/old owners may be surprised how quickly its rating will return to normal.

 

It appears the computers are so used to low volume daily drifts higher that they literally are unable to handle i) spikes in volume and ii) sharp downward moves. Today, NYSE's Euronext subsidiary was so inundated with massive selling volume in ING that it decided to take a cigarette break and shut down trading in the company altogether.

Bloomberg reports:

More than 99 million shares in the biggest Dutch financial- services company changed hands before a computer problem halted the stock at 4:30 p.m. in Amsterdam, according to data compiled by Bloomberg. Volume was almost six times the daily average for the last six months, the data show.

Trading jumped in Amsterdam-based ING after it agreed yesterday to sell its insurance units and raise 7.5 billion euros in a rights issue to secure European Union approval for a government bailout. The stock tumbled 6.1 percent to 8.98 euros in Europe after plunging 18 percent yesterday in trading that exceeded 91 million shares.

“Investors are paying the exchange to be able to deliver seamless uninterrupted trading even at the worst possible time,” said Mamoun Tazi, European exchange analyst at MF Global Ltd. “This is a demanding time in the market.”

However, this will never be an issue in America where nobody trades on open exchanges anymore, as all the trading is executed on Goldman's SIGMA X (ok, we exaggerate... a little), and also there will never be any more trading spikes since computers now are in charge of all the volume. This is the case, of course, unless there is some devious scheme by one group of computers to short circuit another group of computers and send them an exorbitant amount of shares for churning purposes (there is no other reason to trade these days).

And while Duncan Niederauer is busy these days, spending most of his time in Washington lobbying with the big boys to make sure the NYSE has at least a few more quarters of revenue generation, he may want to take a closer look at replacing some of the 386 SX chips that seem to run the bulk of the exchange's European infrastructure:

The malfunction is the latest to affect Euronext this year. Its owner, NYSE Euronext, had to delay the start of trading on its stock markets in Paris, Amsterdam, Brussels and Lisbon by about 45 minutes on April 20 because of a technical problem with the new trading system.

“We will do everything possible to prevent this from happening in the market,” said Alice Jentink, an NYSE Euronext spokeswoman.

In the meantime, we are eagerly awaiting the NYSE's release of dark pool trading volume so we can supplant our VWAP chart with what the real stock trading picture has been over the past 6 months where it seems nobody trades away from dark venue any more.

By George Washington of Washington’s Blog.

I have repeatedly pointed out that big banks are not more efficient than smaller banks.

For example, I previously noted that an article in Fortune concluded:

The largest banks often don’t show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

“They actually experience diseconomies of scale,” [Celent analyst Bart] Narter wrote of the biggest banks. “There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size.”

Now, James Kwak has done some sleuthing and discovered that even Fed economists don’t buy the bigger-is-more-efficient argument. Kwak points out that New York Fed economist Kevin J. Stiroh found that most of the increase in efficiency during part of the time in which banks were consolidating was due to the increased use of information technologies:

His main explanation for the productivity growth is not consolidation, but information technology: “The finding of steady productivity growth, in particular, is important since it is consistent with the idea that the massive investment in new technology is working to improve the performance of the banking industry.” This is not proven in this paper, but Stiroh went on to write a bunch of other papers on the link between information technology and productivity. For example, this paper (on the entire economy, not just banking) concludes:

“IT-producing and IT-using industries account for virtually all of the productivity revival that is attributable to the direct contributions from specific industries, while industries that are relatively isolated from the IT revolution essentially made no contribution to the U.S. productivity revival. Thus, the U.S. productivity revival seems to be fundamentally linked to IT.”

Stiroh also wrote a paper on banks in Switzerland, concluding:

“We find evidence of economies of scale for small and mid-size banks, but little evidence that significant scale economies remain for the very largest banks. Finally, evidence on scope economies is weak for the largest banks that are involved in a wide variety of activities. These results suggest few obvious benefits from the trend toward larger universal banks.”

The kicker is that Stiroh is the main source cited by those claiming that bigger banks produce greater efficiencies.

The bottom line is that there is absolutely no reason not to break up the too big to fails.

Robert Waldmann

Sen. Joe Lieberman (I-Conn.) said Tuesday that he’d back a GOP filibuster of Senate Majority Leader Harry Reid’s health care reform bill.


Lieberman, who caucuses with Democrats and is positioning himself as a fiscal hawk on the issue, said he opposes any health care bill that includes a government-run insurance program — even if it includes a provision allowing states to opt out of the program, as Reid has said the Senate bill will.

Sorry for the link to Manu Raju at Politico who thinks that to support increased spending and deficits makes one a fiscal hawk.

Recently, a Lieberman aid publicly said he would vote for cloture. This is a stab in the back. I may be abusing my angrybear password, but I think readers might be interested in this link

http://lieberman.senate.gov/contact/index.cfm?regarding=issue

update: Some actual economic news for AngryBears. Lieberman climbs Mt Aetna

update 2: If it's not too much bother, could people who e-mail Liberman copy their e-mail and post it as a comment here. Trying not to clog angrybear comment threads.

For those who think Lieberman is a puppet of the insurance industry I say



And to those who think that they can claim to be fiscal hawks while demanding that more public money be sent to the insurance companies I recall Gary Larson's warning as posted on Doug Elmendorf's office door 20 years ago.

When it comes to both the Fed and Treasury, fixing the banks is the number one job, reports CNBC’s Steve Liesman. Nouriel Roubini, of RGEMonitor.com, shares his insight

Airtime: Mon. Oct. 26 2009 | 8:36 AM ET

I'm bearish, but I'm not insane. When things get somewhat oversold, I like to have at least a partial balance to my positions.

Lately, DIG has been my favorite. It has worked its way down to a really nice neckline. It's very liquid and behaves itself pretty well technically. I'm long 17,000 DIG just to even things out in case we push higher. After all, the US dollar's run has been pretty strong lately.

Just headlines for now... but in light of the presumably good Case-Shiller data ealier, this is just confirmation that even the allegedly good data today is unsustainable:

• ( NAW ) 10/27 02:31PM YALE'S SHILLER: RECENT U.S. HOME PRICE GAINS MAY NOT BE SUSTAINABLE-REUTERS TELEVISION
• 10/27 02:45PM US home price gains may not be sustainable-Shiller NEW YORK, Oct 27 (Reuters) - The gains in U.S. home prices in recent months may not be sustainable and increases in some areas of the country look like they are in "bubble territory,"

h/t Joel

Here are some comments worth reading for an understanding of the office and industrial CRE space from the Liberty Property Trust conference call. (ht Brian) Note: Liberty Property Trust owns both office and industrial properties.

LRY: During the third quarter we sold $63 million in operating properties at a 9.5% cap rate.

With respect to dispositions for 2009 through the end of the third quarter, we have sold $145 million in assets. We think the total for the year will be approximately $175 million. We see less activity for us in the sales area in 2010. We anticipate sales activity in 2010 to be in the 75 to $125 million range. The cap rate on these sales will be in the 9 to 11% range.

And the final item to discuss, the most significant, what do we expect for the same-store group of properties which represent over 90% of our revenue? For the first six months of 2009, rents for renewal and replacement leases increased by 2.8%. For the third quarter they decreased by 13.9%. We expect this third quarter experience to repeat itself for the balance of 2009 and for 2010. We are projecting that rents for 2010 will decrease by 10 to 15% on a straightline basis.
emphasis added

That is worth reading twice. Rents fell off a cliff in Q3, and the are projecting a significant decline over the next year. Combine that with double digit cap rates - and that means a serious decline in property values. UPDATE: the decline in rents in Q3 was in the pipeline: "[F]rom our perspective, what this quarter is showing is the effect of leases signed this year finally commencing and you seeing what's happening to the rents. So what you're seeing today is the effect of the decline in the rents over the over the first three quarters of the year."

LRY: In the second quarter we reported a pickup in [leasing] activity, more prospects and more tenants willing to make decisions, decisions which include taking advantage of real estate markets or advantageous rates. This trend continued in the third quarter where we signed leases for 3.5 million square feet of new, renewal and development pipeline space and 207 transactions. While there are deals in the market, there is clearly a bifurcation among landlords between the haves and the have-notes in terms of capital. Prospects and brokers are more concerned about a landlord's ability to deliver on its promises.

Although the troubled tenant phenomenon has significantly abated, leasing space is very much a deal by deal balancing act. The reality of the market is that the downward rental pressure is the norm, and most leases today are being signed at 10 to 15% below expiring rates. Pressure is more acute on new leases than on renewals. Concessions are primarily free rent and lower base rent. And tenant improvements are lower on renewals than replacement leases, but overall credit drives tenant improvement dollars. On the whole, market demand is well below that of a year ago. Most tenants are renewing and are either staying the same size or downsizing of the very few are expanding. In our markets, the average size of a new office and industrial lease is smaller by about 13%. In spite of weaker demand and lower rents, 85% of the renewals, and 90% of new leases contained contractual rent bumps, of 2% to 3% per year.

And from the Q&A:

Analyst: Can you talk about what you might be looking for in terms of acquisitions from either by asset or market or return expectation?

LRY: We've been following this fairly closely in a variety of ways, and it's pretty clear to us that what's happening to us in the market right now, is that the lending world, the banks, are dealing with an inflow of troubled real estate loans. What they're dealing with most immediately are condo projects, hotel projects, and a smattering of retail. There has been limited amount of office and industrial product that has kind of gotten into the -- all the way into the distress category and where the banks are taking it over. We think, though, that that might happen, that some product might get to that point and get recycled. Candidly I think the same lag effect with distress on these properties. These lenders are only gearing up sort of right now. There was one that somebody we talked to had 10 people in a workout unit and now they're up to 100. So they're kind of getting their arms around it.

In their view, lenders are dealing with condos, hotels and some retail. Those are the most overbuilt areas of commercial real estate.

Analyst: I just want to hear more on what's driving your viewpoint that industrial will rebound quicker than office.

LRY: The industrial space is going to respond to somewhat better consumer confidence. It's going to respond to increased trade activity. It's going to respond to any degree of stabilization in the housing market generally. So as the economy gets better, it's the easiest thing you can do, and you can do it very quickly, is put material back on racks in the warehouse and build up inventories. It takes employment increases to begin to put new seats -- new bodies in seats in offices. And given that the September job number still was a negative 263,000, that is to say we have yet to see a positive monthly job number, it just feels like that, that hiring aspect is a ways off, and once it starts, and we talked a little bit about this in some prior calls we think there is some amount of shadow space in the market, that is really manifesting itself in, you know, sort of every fifth desk in an office building is empty because of hiring freezes and job cuts over the last year and a half. So even when companies begin to hire we think they're going to first fill that desk before they need new space. And I think -- I think you really see the evidence of that, that is the shadow space, when you look at the average size of an office renewal in the markets we're in, I'm not talking about Liberty's performance, I'm talking about what is happening in the markets, and the average size of leases is down, which I think represents the fact that as leases expire and people come into the market, even to renew or to take a new space or taking less space than they had. Hence, the very significant absorption numbers we've seen in office. I think the way this plays out, materials back on racks in warehouses, I think that is why we're seeing some activity in the flex space. Because again that can be a smaller distribution play in a market. It can also be more of a tech company or a bio-tech kind of company, but that the classic office worker will be the last piece of this puzzle to come back into focus.

Analyst: What sort of job growth assumptions are in your occupancy target for next year. We're still bleeding jobs. If we have zero net jobs in the US next year do you think you hit your occupancy target?

LRY: Let me first talk about the job assumption number and then the question about the occupancy. Our opinion on this is that unfortunately we're going to see pretty timid job numbers. I think it's even conceivable that we have one or two more months of job losses. Our guess earlier this year was that we might hit 8 million jobs lost and we're at 7.3 so far, and jobs might not go positive until the beginning of next year, and I think you're going to see modest job numbers. You know, the kind of numbers that, you know, don't even keep up with population growth. So and as I said, and this is important in our thinking, we do believe that there is some amount of shadow space out there, that will eat up demand even when it begins to happen, so I think there's a quarter or two of lag in the office even when the job numbers get better before you start seeing it turn into positive absorption. So all of that net is we're assuming -- we're not looking for job growth to significantly affect our occupancy next year. We're looking at this plus or minus 1%, as a number that is consistent with where we see the world.

Here are three common problems that I've observed among experienced, talented traders who are struggling to get to that ever-beckoning next level of performance:

1) Position Sizing - They don't take their largest risk when they have their greatest feel for the market and conviction about direction. Very high confidence trades may be sized relatively small; lower confidence trades are sized too large (often to make money back from earlier losses). They are taking their biggest cuts at the plate when the ball is out of their strike zones;

2) Execution - They wait for markets to go up before they buy and to go down before they sell. As a result, they get in at prices that leave them unusually subject to pullbacks. Many times, particularly if the trades are sized large (see above), the heat will take them out of good trades. In short, they're not patient about getting into positions; they chase moves, fearful that they'll miss a profit opportunity;

3) Rigidity - They don't adapt to changing markets. They look for big moves in markets with declining volatility; they trade breakouts when signs point to range conditions. They set stops and profit targets in ways that don't adapt to shifting volatility. They expect the market to accommodate what they're doing rather than vice versa.

How much money you make is a function of what you trade and how you trade it. Many traders will switch what they trade (markets, stocks, time frames), only to continue making the same mistakes outlined above. Getting into good risk/reward trades and then maximizing the risk/reward while the positions are on is a major driver of long-term trading success.
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Whether it is a function of the Recency Bias, or mere ignorance, this infographic suggests Swine Flu worries are wildly overblown:

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via Information is Beautiful

When the Fourth branch of government speaks, you should listen... and buy stocks here at your peril.

 

Bill Gross Nov 09 comment -

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I have repeatedly pointed out that big banks are not more efficient than smaller banks.

For example, I previously noted that an article in Fortune concluded:

The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

"They actually experience diseconomies of scale," [Celent analyst Bart] Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."

Now, James Kwak has done some sleuthing and discovered that even Fed economists don't buy the bigger-is-more-efficient argument. Kwak points out that New York Fed economist Kevin J. Stiroh found that most of the increase in efficiency during part of the time in which banks were consolidating was due to the increased use of information technologies:

His main explanation for the productivity growth is not consolidation, but information technology: “The finding of steady productivity growth, in particular, is important since it is consistent with the idea that the massive investment in new technology is working to improve the performance of the banking industry.” This is not proven in this paper, but Stiroh went on to write a bunch of other papers on the link between information technology and productivity. For example, this paper (on the entire economy, not just banking) concludes:

“IT-producing and IT-using industries account for virtually all of the productivity revival that is attributable to the direct contributions from specific industries, while industries that are relatively isolated from the IT revolution essentially made no contribution to the U.S. productivity revival. Thus, the U.S. productivity revival seems to be fundamentally linked to IT.”

Stiroh also wrote a paper on banks in Switzerland, concluding:

“We find evidence of economies of scale for small and mid-size banks, but little evidence that significant scale economies remain for the very largest banks. Finally, evidence on scope economies is weak for the largest banks that are involved in a wide variety of activities. These results suggest few obvious benefits from the trend toward larger universal banks.”

The kicker is that Stiroh is the main source cited by those claiming that bigger banks produce greater efficiencies.

The bottom line is that there is absolutely no reason not to break up the too big to fails.

Berk here:

And here is why.  Fractal update… Nothing has changed… Be careful here.

And a little bit of Gann…

And a little more Gann…

While I do admit that this drop has been steep, on no news, and pretty good for my account, I STILL don’t feel it.  However, I’d like to bring light to a list of individual equities that I had mentioned earlier in the month.  X (-8.5%), MDR (-1.66%) , FWLT (-3.61%), NIHD (-1.93%), DTG (-16.83%), and MTN (-2.81%).  CE (+8.82%) rallied on their earnings, but I grabbed a few 25puts on this guy.  Just a reason why some of us prefer individual equities to the market as a whole [$SPX -0.02% ; $NDX -1.13$].  If you are looking to beat the performance of the market, there is no better way.

Wow, I should not be surprised, but this is a stunner nevertheless.

It had generally been assumed that the AIG payouts of 100% on credit swaps (when the insurer was under water and bankrupt companies do not satisfy their obligations in full) was the result of some gap in oversight plus traders at AIG exercising discretion (they were unhappy about bonus rows and had reason to curry favor with dealers, who were potential employers).

The article makes clear that AIG had been negotiating to settle on the swaps prior to getting aid from the government, and was seeking a 40% discount. The Fed might not have gotten that much of a discount, but there was clearly no need to pay out at par.

This massive backdoor subsidy to the likes of Goldman, DeutscheBank was authorized by Geithner while he was at the New York Fed.

From Bloomberg:

[Elias} Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar....

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations....

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III...

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made.....

“In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” [Donn] Vickrey [of financial research firm Gradient Analytics Inc.] says…..

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

As Vickrey indicates, the fact that this was a backdoor rescue means the Fed is acting as an extra budgetary vehicle of the Treasury. This is a violation of the Constitution and shows how patently false the Fed’s claims of independence are.

Update. Some readers have argued “The government was backstopping AIG, ergo it had to honor all contracts.” That argument is rubbish; AIG under Fed supervision stiffed other creditors. From a reader by e-mail:

Liddy sent a letter to Congress which gave a summary the losses at AIG. As I remember it it only 53% of the losses covered by the Fed resulted from activity at AIGFP. Of the 43% realized at the insurance subs a substantial fraction were losses on GIAs with state pension plans-including Californis and Virgina. The losses were in to the billions. Was the Fed suppose to pay 40 cents on the dollar to state pension funds while paying off foreign banks in full?

Now I know the argument goes something like “these were regulated subsidiaries, AIG FP was at the parent level.” Again, I don’t buy it. Creditors in distress who have not declared BK frequently renegotiate their obligations. As readers know well, even credit card issuers will lower the amount due by overextended individuals, and the Fed clearly had more clout here that a mere individual versus has with, say, BofA. The real issue is that the Fed BY DESIGN bailed out banks, including foreign banks, through a device not authorized by Congress.