Archive for April 25th, 2010
We Need A Government That Isn’t Funded By Wall Street
(This guest post appeared at the author’s blog.)
Washington’s relationship with Wall Street is growing more schizophrenic by the day. On the one hand, Congress is trying to show how tough it can be on the financial sector by enacting a law ostensibly designed to prevent another near-meltdown and taxpayer-supported bail-out. As the mid-term election looms, a staggering number of Americans remain unemployed or underemployed, and most Americans blame Wall Street (whose top bankers are raking in almost as much money as they did before the crisis). The lawsuit launched by the Securities and Exchange Commission against Goldman Sachs for alleged fraud only confirms the view held by many that the economic game is rigged.
On the other hand, both parties are going to Wall Street seeking campaign donations to fund critically important television advertising in the months ahead. After all, the Street is where the money is, and TV ads demand huge amounts of it. In recent years, the financial industry has become the second-biggest source of campaign contributions in America – just behind the healthcare industry.
Even as Congress debates legislation to tame it, Wall Street is conducting a bidding war between the parties for its continued beneficence. More than 60 per cent of the $34m given by the financial industry to fund the 2010 elections has so far gone to Democrats, but since January the Street has switched its allegiance to the Republican camp. In the first quarter of this year, Citigroup, Goldman, JPMorgan Chase and Morgan Stanley donated twice as much to Republicans as to Democrats.
It is hard to bite the hands that feed you, especially when you are competing for food. The finance reform bill emerging from Senate Democrats takes a hard line in many respects – requiring that most derivatives be traded on open exchanges where buyers can see what they are getting and sellers have adequate capital, establishing an agency to protect unwary consumers from predatory lending, and giving the government authority to wind down the activities of banks that get themselves into trouble. Democrats point to these and other features as evidence of their willingness to be strict with the Street, despite their dependence on its generosity.
But the American public has no independent means of judging how tough the bill really is. Most people do not understand the intricacies of finance, and still do not know exactly what Wall Street did to bring the economy to the brink. The dependence of both parties on the financial industry for political support inevitably feeds suspicions that the bill is not nearly tough enough. Why, for example, are so-called “customised” derivatives exempted from the exchanges? Does this not create a big loophole? Why does the bill not limit the size of banks so none can again become “too big to fail”? Why is the Glass-Steagall Act – which once separated commercial from investment banking – not being fully restored? Why does the bill not separate investment banking from the private banking and wealth management activities that got Goldman into trouble?
It does not help that in recent months both parties have held at least three-dozen fundraising events with Wall Street bankers and their lobbyists. Harry Reid, the Democratic Senate majority leader, has trekked to Wall Street cup in hand, while in February and March the National Republican Senatorial Campaign Committee invited financial industry executives to pony up $10,000 each for the chance to confer with Republican senators.
Tight connections between Washington and Wall Street are nothing new, of course, especially when it comes to Goldman. Hank Paulson ran the bank before becoming George W. Bush’s Treasury secretary. Robert Rubin followed the same trajectory under Bill Clinton, then returned to Wall Street to head Citigroup’s executive committee. Dick Gephardt, the former Democratic House leader, lobbies for Goldman. Some 250 former members of Congress are now lobbying on behalf of the financial industry. President Barack Obama himself received nearly $15m from Wall Street during his 2008 campaign, of which almost $1m came from Goldman employees and their families.
But politicians cannot continue to have it both ways. Given the Street’s excesses, Washington’s continued financial dependence on it is eroding trust in government. The distrust has already helped spawn the so-called “Tea Party movement” of disaffected Republicans. Many Democrats and Independents are no less cynical.
If Washington knew what was good for it and the nation, it would sever its financial connections with the Street. Better yet, it would enact legislation seeking to limit the impact of private and corporate money in politics. That goal is made more difficult to achieve by the grotesque recent Supreme Court decision (Citizens United vs. Federal Election Commission) holding that corporations, including financial firms, have the right to spend unlimited amounts on political campaigns. But there are ways around this, such as more generous public funding for candidates that choose not to take private contributions. Hopefully as well, the president will nominate Supreme Court justices who understand the importance of public trust in democratic institutions, and the difference between companies and people.
Don’t miss: 8 Banks That Lobbied The Hell Out Of Washington
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Nielsen Preps For $21 Billion IPO
From the FT:Nielsen, the world’s largest TV and consumer measurement company, will begin auditioning bankers next month for one of the largest US initial public offerings in recent years.
Nielsen’s private equity owners hope the offering, expected this year, will value the company’s equity and debt at up to $21bn, according to people familiar with their plans.
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See Also:
- Nielsen Business Media President Greg Farrar Quits
- Will Apple Launch An App Store For The Mac?
- Crashing Markets Delay FriendFinder’s Porn IPO
The Week Ahead
The key economic stories this week will be house prices, the FOMC meeting and the “advance estimate” for Q1 GDP to be released on Friday.
On Monday the LoanPerformance house price index (for February) will probably be released. Also on Monday, the Census Bureau report on Housing Vacancies and Homeownership for Q1 will be released at 10 AM. Although noisy quarter-to-quarter, this report has been showing a declining homeownership rate. The vacancy rates for homeowners and renters have probably peaked, but both will still be near record levels.
On Tuesday the February Case-Shiller Home Price Index will be released at 9 AM by S&P. This will be confused by the recent S&P release cautioning about the seasonal adjustment. Also on Tuesday the Conference Board will release consumer confidence at 10 AM, and Fed Chairman Bernanke, budget director Peter Orszag, and others will speak at President Obama’s debt-reduction commission.
The Federal Open Market Committee (FOMC) is meeting on Tuesday and Wednesday, and the FOMC statement will be released on Wednesday at around 2:15 PM . Although there will be no change to the Fed Funds rate, or to the “extended period” language, there might be a few minor changes to the statement – perhaps a little more upbeat on the economy, maybe some discussion of eventual asset sales to appease a few hawkish members (not going to happen any time soon), and perhaps a comment on disinflation or the weak housing market.
On Thursday the closely watched initial weekly unemployment claims will be released. The consensus is for a decline to 446K this week from 456K last week. Also on Thursday (or earlier in the week) the ATA Truck Tonnage Index for March will be released.
And on Friday, the Advance Q1 GDP report will be released by the BEA at 8:30 AM. The consensus is for an annualized increase of 3.4%. Also on Friday, the Chicago Purchasing Managers Index for April, and the March Restaurant Performance index will be released. And of course the FDIC will probably be busy Friday afternoon …
And a summary of last week:
The Census Bureau reported New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 411 thousand. This was an increase from the revised rate of 324 thousand in February (revised from 308 thousand).
Click on graphs for larger image in new window.
The first graph shows monthly new home sales (NSA – Not Seasonally Adjusted).
Note the Red columns for 2010. In March 2010, 38 thousand new homes were sold (NSA).
The record low for March was 31 thousand in 2009.
Months of supply declined to 6.7 in March from 8.6 in February. This is significantly below the all time record of 12.4 months of supply set in January 2009, but still higher than normal.
New home sales are counted when the contract is signed, so this pickup in activity is probably related to the tax credit. Note that that a few thousand extra sales NSA in March can make a huge difference in the SAAR.
The NAR reported: Existing-Home Sales Rise
Existing-home sales … rose 6.8 percent to a seasonally adjusted annual rate of 5.35 million units in March.
This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.
Sales in March 2010 (5.35 million SAAR) were 6.8% higher than last month, and were 16.1% higher than March 2009 (4.61 million SAAR).
Note: existing home sales are counted at closing, so even though contracts must be signed in April to qualify for the tax credit, buyers have until June 30th to close.
This graph shows the year-over-year change in reported existing home inventory and months-of-supply.
The YoY inventory has been decreasing for the last 20 months. However the YoY decline is getting smaller – only 1.8% in March.
This slow decline in the inventory is especially concerning with the large reported inventory and 8.0 months of supply in March – well above normal.
This graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010).
Sales (NSA) in March 2010 were 19.6% higher than in March 2009, and also higher than in March 2008.
We will probably see an increase in sales in May and June – perhaps to the levels of 2006 or 2007 – because of the tax credit, however I expect to see existing home sales below last year in the 2nd half of this year.
From the AIA: Billings Index Inches Up in March
Note: This index is a leading indicator for Commercial Real Estate (CRE) investment.
This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.
The Department of Transportation (DOT) reported that vehicle miles driven declined year-over-year in February.
This graph shows the percent change from the same month of the previous year as reported by the DOT.
Miles driven in February 2010 were down -2.9% compared to February 2009.
The Moody’s/REAL All Property Type Aggregate Index declined 2.6% in February. This is a repeat sales measure of commercial real estate prices.
CRE prices only go back to December 2000.
The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).
Commercial real estate values are now down 25.8% over the last year, and down 41.8% from the peak in August 2007.
Senate panel: Ratings agencies rolled over for Wall Street
Best wishes to all.
This post is reprinted from Calculated Risk.
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The Juiciest Goldman Email Details (GS)
By now you know that the Senate has come down hard on Goldman. This weekend they released a number of the firm’s internal emails and said about Goldman:
“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.”
What we found is not nearly so damning.
Here’s the gist of what we picked up from the 100 pages of emails and documents released by Goldman and published on the New York Times:
- Goldman got in on the short side circa February 2007. pg. 76 and pg. 69
- It was still “ramping up” in CDOs as of November 2006. It slowed in December pg. 76 and closed positions in Q1’07 pg. 69.
- From March to August 2007, its position changed from net-long $0.1 billion on March 15 to net-short $0.1 billion on August 31. It decreased the number of funds allocated to the subprime mortgage business by $5 billion pg. 59
- In August 2007, Goldman urgently unwound a number of positions. Its risk of losing money on portfolios was climbing and COO Gary Cohn wrote in an email August 15, “there is no room for debate – we must get down now.” pg. 75
- By November 2007, Goldman’s net exposure to the subprime mortgage business was half that of Merrill Lynch and nearly 1/5 of Citi’s. pg. 74
The third bullet point might be the most interesting because it shows Goldman did not lean substantially towards taking one position on subprime mortgages. Its $5 billion exit from the subprime business was a much stronger move than its short position.
For more on Goldman’s emails, take a look at the one that quotes the “intellectual masturbation” of creating a CDO, the real Fabulous Fab email, and an email Tourre sent his ex-girlfriend. Clearly there are a lot of eye-openers in here, and more could come, but from our scan so far the SEC seems to have overemphasized some of the details.
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Don’t Extend China’s Recent Growth As Your Forecast, China Already Peaked And Will Now Collapse
If you’re ready to dissect a full take-down of the Chinese economic and political model, well here it is, from the author Gordon G. Chang. (Who will have an upcoming book, The Coming Collapse of China).
The main thrust of his argument is that China has already peaked.
Thus those who predict China’s ascendancy as a global superpower are predicting far too much based on the country’s recent performance.
They also fail to realize that China got a bit lucky:
So will ours be the Chinese century? Probably not. China has just about reached high tide, and will soon begin a long painful process of falling back. The most recent period of China’s fast growth began with Deng’s Southern Tour in early 1992, the event that signaled the restarting of reforms after the 1989 Tiananmen Square massacre. Fortunately for the Communist Party of China, this event coincided with the beginning of an era wherein political barriers to trade were falling and globalization was kicking into high gear, which set the table for a period of tremendous wealth generation.
It worked before, but now times are changing:
China’s economic model, which allowed the Chinese to take maximum advantage of boom times, is particularly ill suited to current global conditions. About 38 percent of the country’s economy is attributable to exports—some say the figure is higher—but global demand at this moment is slumping. (Last March, the normally optimistic World Bank said the global economy would contract in 2009 for the first time since World War II and that global trade would decline the most it had in eighty years.) Globalization, which looked like an inevitable trend in early 2008, is now obviously going into reverse as economies are delinking from each other. So China is now held hostage to events far beyond the country’s borders.
While we take issue with the idea that globalization is heading in reverse, at the very least the point about China facing some serious economic adjustment challenges holds. Globalization will continue and world trade will grow at a multiple of global GDP growth, as it has for decades. Yet it’ll be far less driven by U.S. consumption than before.
Anyhow, Mr. Chang predicts a Chinese recession followed by stagnation. I think few would argue against the notion of a recession happening at some point. What makes Mr. Chang’s assertion unique is that he predicts economic stagnation afterward, rather than continued robust growth.
But the economy could fail before stagnation eventually sets in. Prime Minister Wen Jiabao, to fund his stimulus plan, has forced state banks to create the greatest surge of lending in history. One state manager, Lin Zuoming of Aviation Industry Corporation of China, publicly complained last April that central government officials forced him to borrow the equivalent of $49.2 billion from twelve Chinese banks, saying he did not know what to do with all the cash.
Moreover, after listing China’s many economic challenges, many of which readers of this site are now well aware of (Asset bubble risks, bad loans in the banking system, overcapacity in many industries, employment challenges, etc), he describes the unsustainable nature of China’s political system with razor sharp succinctness.
Worse yet, even if the Communist Party could solve each of these specific problems in short order, it would still face one insurmountable challenge. The economic growth and progress of the last three decades, which makes so many observers believe in the inevitability of China’s rise, is actually a dagger pointed at the heart of the country’s one-party state.
Change, in general, is tough for reforming regimes. As Tocqueville noted, it was rising prosperity that created dissatisfaction in eighteenth-century France and paved the way for revolution. These same trends played out more recently in Thailand, South Korea, and Chinese-dominated Taiwan. And they are at work right now in China itself.
Senior Beijing officials now face the dilemma of all reform-minded authoritarians: the economic progress that legitimates their leadership endangers their continued control.
He ends with this anecdote, hinting that a political revolution might be sooner than many expect.
I was in a dingy walk-up in my dad’s hometown, Rugao. It’s a backwater town in Jiangsu Province. I was trying to talk to a group of residents, some young and a few elderly, about the Olympics. Nobody wanted to discuss the Games, which were dismissed as just another government-staged event. All they wanted to hear was news from the American campaign trail. They wanted to hear about John McCain and Barack Obama. They wanted to hear about the workings of democracy.
We have a feeling that Mr. Chang’s long-term forecast is overly bearish. China will become an enormous superpower (While the U.S. will remain one as well, and could easily remain economically larger through 2050 thanks to excellent demographic trends)
We’re more of the view right now that China could have an extremely tough adjustment period within the coming five years, perhaps involving a GDP recession and political turmoil, before then growing further. Yet at the same time, we find Mr. Chang’s essay compelling. If you have some time, read the entire thing here.
(Via Abnormal Returns)
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