Month: May 2009

Financial Innovations Did Not Create Capital

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I’m Not Seeing Capital Growth (Blue Line)

And look over here, all those derivatives? They are not hitting the real world, they are just trading amongst themselves, and generating commissions, but, “it is a revealing indicator that the non financial companies for whom these products were prescribed did not themselves use them.” Imagine that.

One of the alibis presented by those who created the current crisis in the financial system is that this innovation made capital more available, and hence increased economic growth.

So Adam S. Posen and Marc Hinterschweiger take a look at this theory, and they discover that there are no facts to back up this hypothesis:

….

But not every innovative product is safe, let alone productive. Unlike pharmaceuticals, aerospace, and a host of other technical fields, financial innovations have been allowed to proliferate unscrutinized and untested for safety or effectiveness. Yet the negative spillovers on the public at large from faulty financial engineering and toxic products have now been clearly demonstrated to be enormous. In particular, there is some solid evidence that the most recent batch of financial innovations was used in manners inconsistent with their labeling, and not only had terrible side effects, but did not even yield the advertised benefits.

….

Between 2003 and 2008, US gross fixed capital increased by about 25 percent, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300 percent, while derivatives held by the 25 largest US commercial banks rose by 170 percent.

The reality is that people were not aiding capital formation of the “real” economy, they were creating products that would best allow them to feather their own nests.

In other words, this world of innovation was actually an exercise in personal selfishness.

There is a word for this, capitalism, and the same capitalism that creates a hybrid car also gives us the crack dealer and the stock broker, and the crack dealer harms far fewer people.

Terrorist Training Camp Found in Imperial, California

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It appears that the Explorer Scouts are training their members in weapons use and military tactics.

OK, they are not. It’s training for law enforcement, and to my mind, probably very bad training for law enforcement, because, with its emphasis on military style assaults for for things like simulated bus hijackings, it contributes to an increasingly militarized mind set for what should be peace officers.

Additionally, if this were not run by the Explorer Scouts, a Co-Ed division of the Boy Scouts, but instead by the Islamic Community Center of Imperial California (Where the story is reported from), how long would before an ambitious prosecutor would charge them all with running a “terrorist training camp.”

What’s more, he would probably win the case.

Economics Update

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So, initial jobless claims rose 32,000 637,000 (seasonally adjusted) worse than expected, the four-week moving average rose by 6,000 to 630,500, and continuing claims rose by 202,000 to a record 6.56 million.

Meanwhile producer prices rose unexpectedly by 0.3%, indicating that, perhaps, the inflation genie is not as firmly in the bottle as one would hope.

Meanwhile, in real estate, office rents in London have fallen to 1991 levels, as a combination of overbuilding and the implosion of “The City”, the UK Wall Street have driven down rents.

We are seeing the same thing in retail space, with rents falling and concessions increasing, at such high profile locations as Rodeo Drive, 5th Avenue, Bond Street, and the Champs Elysees.

It’s no wonder then, that commercial and multi-residential mortgage loan originations have fallen sharply. (top pic)

Also, the HousingWire has a good picture on the surge in foreclosures that I noted yesterday. (bottom pic)

Neanwhile, energy and the dollar seem to be at odds with each other, with oil up today, it appears on the belief of a recovery, and the dollar also up, on economic insecurity.

Go figure.

Not Enough Bullets: Chrysler/Fiat

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It appears that Fiat may be the employer of record for senior management, and that they will then be “seconded” to Chrysler in order to skirt pay limitations at bailed out firms. (See also here)

In the long run, the real answer is confiscatory taxes at higher levels of remuneration.

Figure bumping the tax rate by 1% at $250K/year and at each $250K break point, with a limit of 85% at income in excess of $13¼ million a year, or 90% at 14½ million a year.

This crap needs to stop. These executives are overpaid by the standards of the world, they will be making more than the Chairman of Fiat, which is taking them over, and they do not deliver value.

The problem is not excessive salaries for senior executives at bailed out firms, it is excessive salaries, period, full stop.

It is theft from the shareholders and the less well remunerated employees, and it is corrosive to society.

Auto Update

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First, let’s be clear that the domestic auto makers problems are not just incompetent management. No one is making money selling cars right now, not even Toyota, which posted its first quarterly loss in 59 years, $7.74 billion in the quarter ending in March, and, as the picture shows, is looking at more losses in the future, while Nissan posted a $2.4 billion loss.

Of course, the sight of GM executives frantically selling stocks as a trading window opened to allow them to sell their stocks without insider trading concerns.

They are also sending terms of sale sheets to the dozen or so bidders for the Saturn brand brand. It’s primarily the sale of a dealer network and brand, rather than a sale of designs or factories.

Meanwhile, across the pond, Fiat is still negotiating a deal to buy GM’s Opel division, and most of this is about how much can be extracted from the German government.

At the nexus of the two failed auto makers, both GM and Chrysler will be cutting dealers, which makes sense, and it’s the urban dealers that will see most of the cuts, which, surprise means that minority owned dealerships will see it landing them.

Same old, same old.

In any case, it now appears that the 2 month bankruptcy is a fiction, with media reports that the bankruptcy will take 2 years, though the sale of assets to the new operating company should be finished well before this.

Meanwhile, Ford, which saw the storm coming, and accumulated cash to weather it, is now looking to sell 300 million shares of common stock in order to fund the Voluntary Employee Beneficiary Association (VEBA) that it negotiated with the UAW.

Finally, we have Ferrari threatening to pull out of Formula One because they do not like the new rules, most particularly the £40 million budget cap, which is intended to make more teams competitive.

More Support for Pelosi’s Version of the Non-Briefing

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Both former Florida Senator Bob Graham, and current Senator Jay “Spine of Jello” Rockefeller have categorically stated that they were not briefed on waterboarding at the time that the CIA docs implied that they were brief on the procedure.

Graham is significant, because of his obsessive record keeping. This guy has been diarying his meals for something like 20 years, so he is not the sort to “forget” what happened at a specific date and time.

Pat Roberts’ (R-KS) silence on this is deafening.

Impeach Timothy Geithner Today

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When he was asked about AIG’s bonus program when it became a scandal, Geithner simply lied about it:

As American International Group chief executive Edward M. Liddy returns to Washington to face Congress today, new details are emerging about how long federal officials were aware of the company’s recent bonus payments to its executives and of how inflammatory the payments could be.

Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy. But the New York Fed did not raise the alarm with the Obama administration until the end of February.

(emphasis mine)

The post does note that, “his [Geithner’s] name is not among those of senior New York Fed officials mentioned in the summaries of phone calls, correspondence and other documents obtained by The Washington Post,” but this makes him either a liar, willfully blind, or unconscionably incompetent.

It is crap like this which has led Edolphus Towns (D-NY-10) to call for supervision of AIG to be removed from the New York Bank of the Federal Reserve and moved to a government agency.

Right now these trustees answer to the NY Fed.

It makes sense. The Federal Reserve in general, and the New York Fed in particular, are textbook cases of “regulatory capture“, and what’s more, they are secretive, and opaque.

It does not help that the New York Fed is owned by the banks it is charged to regulate too.

As to AIG CEO Liddy’s testimony today that AIG would pay back the money in 5 years. That’s just a bald faced lie.

ACLU Challenges Gene Patent

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The ACLU is arguing that Myriad Genetics’ holding a patent on two genes associated with various forms of cancer, BRCA1 and BRCA2, is not a legal use of the patent process.

I got some training in engineering schools on patents, and it was always made clear to us, by our non-lawyer professors, that a patent was for an invention, not a discovery, and it seems to me that these genes are the latter, not the former, but I’m an engineer, not a lawyer, dammit!*

Among other things, they are arguing not just that the patent should not have been granted, and I agree with that, because at its core IP is an infringement on every one’s rights in order to, “To promote the Progress of Science and useful Arts,” as it says int he constitution, and it is clear that by patenting a gene, they are not doing this.

Additionally, the ACLU is saying that the way that Myriad is violating the first amendment:

As the A.C.L.U. explored the restrictions on competition that companies like Myriad had put in place — blocking alternatives to the patented tests, and even the practice of interpreting or comparing gene sequences that involved those genes — the restrictions started to look like not just a question of patent law, Mr. Hansen said, but of the First Amendment’s guarantee of free speech as well.

I’m not sure if that would fly, since, after all, IP has at its core the restrictions of the rights of everyone for a perceived public benefit.

As to the reason as to why the patent examiners approved it?

The decision to allow gene patents was controversial from the start; patents are normally not granted for products of nature or laws of nature. The companies successfully argued that they had done something that made the genes more than nature’s work: they had isolated and purified the DNA, and thus had patented something they had created — even though it corresponded to the sequence of an actual gene.

This is bullsh%$. They are arguing that they can patent a discovery, because it’s hard work.

Here’s hoping that they win, because the current patent regime in the US is hamstringing economic development and innovation in our society, which is the exact opposite of its intended purpose.

*I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

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With all this talk of green shoots, its worth noting that the evidence in the underlying economy does not really indicate much in the way of a recovery, which is why the decline in retail sales in April should come as no surprise.

That’s a big portion of the US economy right there, and what’s not is real estate, which is showing little in the way or recovery either, with foreclosures at a new record in April, though actual repossession of property fell, because the banks are worried about the costs of actually having to take care of the property when they finally assume ownership, along with changes in laws that have drawn out the process in many of the hardest hit states.

The number of foreclosures were up 1% over an already record March, and up 32% year over year.

We also saw a drop in mortgage applications as refinancing slowed with the increase in interest rates.

There is not a whole bunch of economic recovery in the Euro zone either, with industrial output falling more than 20% year over year.

We are seeing some good news on the credit front again though, because LIBOR hit a 2 month low, though in the real world, where it’s lending to real businesses, as opposed to banks, real interest rates, interest minus inflation, are at a 25 year high and it is curtailing all sorts of capital activity.

It also looks like BankUnited may be heading to a headline on Friday Night Bank failures, with a late filing with the SEC saying that they need to raise over $1 billion in capital, because, “the Board of Directors of the Bank entered into a Stipulation and Consent to Prompt Corrective Action Directive (the “PCA Agreements”) with the OTS.” (Office of Thrift Supervision).

In any case, the bad consumer spending figures pushed oil down on demand concerns, and pushed the dollar up as investors fled to safety.

An Unlikely Voice of Reason

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Jesse “The Body” Ventura, on Larry King, of all places.

VENTURA: No, I live in Mexico now, Larry. So I do a lot of reading. I don’t watch much TV. This year’s reading, I covered Bush’s life. I covered Guantanamo and a few other subjects. And I’m very disturbed about it.

I’m bothered over Guantanamo because it seems we have created our own Hanoi Hilton. We can live with that? I have a problem. I will criticize President Obama on this level; it’s a good thing I’m not president because I would prosecute every person that was involved in that torture. I would prosecute the people that did it. I would prosecute the people that ordered it. Because torture is against the law.

KING: You were a Navy SEAL.

VENTURA: That’s right. I was water boarded, so I know — at SERE School, Survival Escape Resistance Evasion. It was a required school you had to go to prior to going into the combat zone, which in my era was Vietnam. All of us had to go there. We were all, in essence — every one of us was water boarded. It is torture.

KING: What was it like?

VENTURA: It’s drowning. It gives you the complete sensation that you are drowning. It is no good, because you — I’ll put it to you this way, you give me a water board, Dick Cheney and one hour, and I’ll have him confess to the Sharon Tate murders.

KING: Even though you know it’s not going to happen — even though before it, you know you’re not going to drown.

VENTURA: You don’t know it. If it’s — if it’s done wrong, you certainly could drown. You could swallow your tongue. You could do a whole bunch of stuff. If it’s it done wrong or — it’s torture, Larry. It’s torture.

Sorry Jesse, but our nation has a big deficit.

When Cheney is up for waterboarding, we are taking bids, starting at $1 million.

I am so (NOT) Shocked: Social Security and the Sky is Falling Edition

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Reductions in employment have reduced receipts for Social Security, which has pushed up the theoretical insolvency date, to 2037, and of course, everyone is running like chickens with their heads cut off trying to figure out how to hand everything to the Wall Streeters who completely f$#@ed the nation as a result.

It is true that Medicare is in trouble, but Social security, not so much.

Friends Don’t Let Friends Pledge to NPR

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There is a documentary out called Outrage about closeted gay politicians, and NPR did a review, and upper management rewrote it to specifically exclude the names to two politicians, Florida Governor Charlie Crist and Senator Larry Craig, from the review, which so outraged the author that he removed his byline from it. (His story had been written with close consultation of his editor)

As Pam Spalding notes, “NPR has no business tossing out the “privacy” card when it couldn’t resist deeming John Edwards’s heterosexual tomcatting newsworthy, underscoring that there were legitimate political reasons for the reporting.”

If I weren’t not giving because of their vociferous opposition to low power local broadcasts, I would not give to them because they have been completely captured by the sensibilities of the “inside the Beltway” crowd.