I was in Los Angeles for a few days last week, as chance had it, marveling at the odd disposition of things there.  I’ve been there many times over the years, but you forget how overwhelmingly weird it is. Altogether the LA metro area has the ambience of a garage the size of Rhode Island where someone happened to leave the engine running.  To say that LA is all about cars is kind of like saying the Pacific Ocean is all about water.  But one forgets the supernatural scale of the freeways, the tsunamis of vehicles, the cosmic despair of the traffic jams.  The vistas of present-day LA make the Blade Runner vision of things look quaint in comparison.

You motor out of the LAX airport – personally, I love the name “LAX” because it so beautifully describes the collective ethos of the place – and you discover quickly that the taxi cab’s windows are not that dirty, it’s the air itself colored brown like miso soup.  Going north on the 405 freeway, you see the looming Moloch of the downtown skyline through the brown miso soup. And you begin to understand why the products of the film industry are so fixated on the theme of machine apocalypse.  Downtown LA looks like just such a gigantic machine as the FX crews would dream up, as if a day will come when those gleaming mirrored office towers will pull themselves out of the ground from their roots and begin lumbering, crunch crunch crunch, north toward the Hollywood Hills seeking to exterminate the vile humanity responsible for making the place what it is.

I happened to be camping out briefly in West Hollywood, in a scene-ster hotel where tiny bubbles of show biz mega-success wafted around amidst a background odor of failure, and an impossibly thin line was drawn between being pampered and being asked to go die in the gutter, please.  The place is not without a certain decorum. I couldn’t help but imagine how lovely Hollywood must have been in, say, 1923, when 92 percent of all the hopeless crapola now on the ground there had not yet been built, when there were no freeways, and fewer cars than currently found in Lincoln, Nebraska, you could go out to the Pacific Ocean on a “Big Red” streetcar, and on a clear day you could see from La Cienga out to Mount Wilson, and the movie “industry” was like a college theater department. What a fabulous giggle it must have all been – apart from poor Fatty Arbuckle – in that romantic desert at the edge of the world.

The whole “Dream Factory” myth has become such an awful cliché, but what remains interesting now is how it utterly infected every other organ, byway, and lost corner of American life, to the degree that the life of this nation became little more than a “narrative,” a story-board, a montage of wishes superimposed over the harsher mandates of reality.  Hollywood now is a mere cartoon of what Wall Street and Washington have turned into.  We’re a civilization of fluff now, riding on a river of toxic sludge.

I found Hollywood utterly exhausting.  On morning walks down in the buzzard flats below Sunset Boulevard you almost never saw a human being outside the protective carapace of a car.  I think I was the only person who ever walked down Melrose Avenue this calendar year.  There were a lot of fresh store vacancies in the endless one-story strips, as if the retailers had just packed up and left Dodge under the cover of night.  There were obvious, if lame, attempts to pedestrianize the major surface boulevards with fancy crossing pavements, but traffic flowed on them at sixty off the rush hours, and you felt like a marmot in a buffalo stampede out there.  For solace, I listened to Bruce Molsky sing “I Ride an Old Paint” on the iPod.  The fiddle part is lovely.

The city of Los Angeles, indeed the whole state of California, seems exhausted too. Apocalypse is probably such a rich theme out there precisely because everything about that particular way of life seems to be nearing its end – whether it’s the fiscal fiasco or the water supply, or the aerospace economy, or the music industry, or the once-great university system, or the Happy Motoring fantasy of cruising for burgers in what Tom Waits called the dark, warm narcotic American night.  I went to the movies there one hot afternoon – Tarantino’s latest, Inglourius Basterds, a completely crazy but enjoyable revenge romp against Hitler & Co. – and before the feature, they showed a “trailer” for Roland Emmerich’s forthcoming apocalyptathon. 2012, in which virtually every global landmark from the Vatican to the White House is destroyed, and mankind’s last hope is John Cusack riding a spaceship to worlds unknown….  If that isn’t shooting your wad as a movie-maker, I’m not sure what is.  Maybe next time out, Roland will step back and make a movie about a puppy.

I had my fill of apocalypse by the time I left the place, only to find myself back in a real nation really dissolving into a puddle of goo.  In the strange new ether of the Web, a consensus grows that we’re in for a rocky autumn, as if the signal event will be something like a hurricane of shoes dropping – bank failures galore, repudiation of US debt instruments by America’s former patrons, foreclosures to the farthest horizon, jobs and incomes terminated, and all the good intentions of the folks in charge coming to naught in the face of historic forces.  We’re off to that kind of a start as I write this, with the Dow dropping eighty points and the news that Disney Inc (NYSE:DIS) has just paid four billion for the rights to the Marvel Comics (NYSE:MVL) posse – Spiderman and his homeys.  As if America needs more childish fantasy.

Regards,
James Howard Kunstler

Source: Cars, Wishes and the Apocalypse

However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

Here are a few:

1. The FDIC’s Deposit Insurance Fund is now promising to insure $6.2 trillion in deposits with just $10.4 billion in reserves. Expect to see another “special assessment” cutting a few billion dollars out of bank earnings later this year.

2. Credit card losses are at a record: 9.95%

3. 416 banks, or 5% of the nation’s banks, are on the ‘problem’ list.

4. FDIC-insured banks are sitting on $332 billion in loans more than 90 days past due, up from $290 billion in the first quarter.

5. Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

In this new report, the FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in the Aug. 14 alert. The new figures – the moves from December 2008 to June 2009 – are highlighted in the dotted lines at the far right of this chart:

You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.

Source: More Pain Ahead for US Banks

For starters, Guaranty Financial of Texas went belly up late Friday and secured a spot in the history books. With $13 billion in “assets,” the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history.

Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. We’re surprised on two fronts here: 1) That a bank from Spain — strapped with double-digit unemployment and a wretched housing bust — wants to bring their euros to I.O.U.S.A. 2) That BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Lone Star State. That could be an interesting trend to watch.

Three other banks failed along side Guaranty: CapitalSouth, First Coweta and ebank. That brings the yearly total to 81.

This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up:

The DIF does have a source of income — it taxes member banks a significant “insurance fee.” But we have to think that the DIF is still in bad shape, perhaps even empty… and that the FDIC will soon be hitting up someone (Tim Geithner, Joe Taxpayer and/or U.S. banks) to refill their coffer.

The FDIC will provide their second-quarter report tomorrow, which among other things will include a look into the DIF and their infamous bank “problem list”… could get ugly. We’ll keep you up to speed.

“Recent bank failures remind us of the problem loans festering on small and regional bank balance sheets,” writes Dan Amoss, “and that many of them are marking loans at fantasy levels. The secondary market value for some of the worst loans, like construction loans, is 20 or 30 cents on the dollar.

“There’s a backlog of at least a few hundred insolvent banks that need to be shut down and sold into stronger hands. Bank stock bulls are ignoring the credit losses yet to be recognized, so there are lots of shorting opportunities in the sector. Many banks will not be able to “earn their way out” of their credit losses.

“The problem is, there aren’t many strong buyers with lots of capital out there. Those that are, like private equity groups, are buying only after the FDIC agrees to eat most of the credit losses, and the buyer is gifted with the remaining shell — the profit-making engine of spread lending.

“It’s understandable that the FDIC doesn’t want much publicity about the Deposit Insurance Fund; it wants to maintain the public’s confidence that it can ‘insure’ all deposits with just a few basis points of capital reserves and skimpy premium income. The fund is clearly not adequate to cover the bank failures still in the pipeline, so we’ll see another ‘special assessment’ imposed on all other banks, which will ultimately be passed on to depositors via lower interest rates.”

Critical banking analysis has been one of the hallmarks of Dan’s Strategic Short Report. His brand of scrutiny gave readers 162% gains betting against Allied Capital (NYSE:ALD), 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. Today is the last day we are offering his latest financial short play for just $1. Capture this truly rare opportunity by clicking here… midnight tonight, the deal’s off.

Source: The Banking Crisis Cometh

Like WaMu, the FDIC brokered most of Colonial’s burden onto another bank’s balance sheet. BB&T (NYSE:BTT) picked up the lion’s share. And just like the WaMu/JP Morgan (NYSE:JPM) deal, the FDIC greased the gears by including some kind of backstop provision. In this case, BB&T and the FDIC (read: your tax revenues) will enter a loss sharing agreement on $15 billion in shaky Colonial assets.

Colonial’s failure took a $2.8 billion chunk out of the FDIC’s deposit insurance fund. With just $13 billion left — at best — the fund is at its lowest level since 1993. Along with four other banks that failed over the weekend as well, the FDIC has closed 77 banks this year. One more and we’ve tripled last year’s count.

“The FDIC has been tardy in resolving banks and cleaning them up,” says Dan Amoss, “which will result in higher costs to the FDIC in the long run. Plus, with these ‘loss sharing’ deals (Colonial/BB&T), the FDIC is putting off the recognition of losses over a period of years, and its estimates of ultimate losses will likely be low, whether they’re ultimately absorbed by the deposit insurance fund or acquiring banks like BB&T.

“A perfect example is Integrity Bank in Georgia, which should have been shut down long before it was allowed to attract new deposits with high CD rates.

“Also, note to readers: If your CD rates seem too good to be true, your bank may not be healthy, and you may have to deal with the hassle of not accessing your money while the bank is resolved.”

Source: More Bad Banking News

Fenster: They treat me like a criminal. I’ll end up a criminal.
Hockney: You are a criminal.
Fenster: Why you gotta go and do that? I’m trying to make a point.
– The Usual Suspects (1994)

Ah, Goldman Sachs, how we despise thee. Let us count the ways.

First there is the matter of jaw-dropping compensation. As The New York Times reported last week:

Goldman posted the richest quarterly profit in its 140-year history and, to the envy of its rivals, announced that it had earmarked $11.4 billion so far this year to compensate its workers.

At that rate, Goldman employees could, on average, earn roughly $770,000 each this year – or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more…

The unofficial party line from Goldman is, “Don’t hate us because we’re smart.” (Or in the street vernacular, “Don’t hate the player, hate the game.”)

To get rich in a capitalist system you need three things – hard work, smarts and luck. America, rightly, bears little or no ill will when fortunes are made through the combination of these three. Take the Google guys, for example… or Warren Buffett… or any other number of big winners in our (quasi) free market system.

Heck, America even goes one better than that. In the United States, you can make ridiculous sums of money that no one even remotely thinks you deserve, and most folks won’t begrudge your good fortune.

If a ne’er do well CEO convinces his shareholders to pay him a bonus worth tens of millions for doing diddly-squat, that might be a shame… but it’s the shareholders’ money, free to be wasted as they wish.

Or if an athlete signs on to a professional sports team for tens of millions and then, say, gets into a nightclub shooting, wilts under pressure, or otherwise turns out to be a total flop, well… c’est la vie. A contract is a contract.

Point being, private financial exchanges are akin to what happens in the privacy of a home. The result may be weird or goofy or stupid or obscene, but as long as consenting adults are involved, the public doesn’t really care.

Where Goldman (and others) crossed the line is in the source of their gains…

Taxpayer Largesse

First, an interesting tidbit. Goldman’s take of $770,000 per employee is stunning enough. But as it turns out, Goldman may have actually used a subtle accounting trick to make that number smaller, so as to tone down some of the spotlight glare.

Various Wall Street sources have reported to Dealbook that “in a footnote to its financial results… Goldman said that for the first time it was including consultants and temporary staff in its overall employee figures. This had the result of increasing its official staffing levels by 2,000 jobs or so in both the first and second quarters.”

By spreading the haul over a bigger head count, you see, the gaudy top line number – average profit per employee – is reduced.

So by throwing in consultants and temps and, who knows, maybe even janitors and deli delivery boys, Goldman can practice its own peculiar brand of modesty in at least keeping the profit per head below a million bucks.

Again, the reason for gall is not because Goldman’s traders are “smart.” It is because this pound of flesh was extracted directly from taxpayer’s hides.

On one level the chain of events is simple:

• Goldman Sachs takes huge, multibillion-dollar taxpayer cash infusion from the government.
• Goldman uses these funds to make an absolute killing.
• Goldman says “Gee thanks!” and pays back the money with minimal (i.e. zero) penalty attached.

But actually it’s a lot murkier and uglier than that.

Thanks a Billion, Hank

To really get a bead on how stinky this whole situation is, consider why 2009 has proven so profitable for Goldman Sachs. Two reasons stand out. First, half its competition has been crippled or killed off. Second, AIG (a major Goldman Sachs counterparty) was specifically kept afloat.

If you’ll recall, the previous Treasury Secretary was Hank Paulson, a.k.a. “Hammerin’ Hank,” the ex-CEO of Goldman Sachs. (Paulson was recently back in the news defending his tough-guy leanings in the whole Bank of America/Merrill Lynch fiasco.)

Taipan Daily is not one to promote irresponsible conspiracy theories. But nor do we shy away from putting two and two together. So with that in mind, let’s look back at the dark days of September 2008.

During Paulson’s time at Treasury, there was no question who was top dog (in terms of the relationship between the Treasury and the Federal Reserve). Hammerin’ Hank was everywhere. Bernanke was a shrinking violet in comparison.

Now the uncomfortable questions…

On that fateful weekend in question when Lehman Brothers collapsed, who stood to benefit (in the long run) from the disappearance of a major Wall Street competitor? Goldman Sachs.

Coincidence? Maybe. But then note what happened just a few days later. Within 72 hours of Lehman Brothers’ collapse, Paulson announced that AIG would be saved… at an outrageous opening bid of $85 billion. (The taxpayer tab would eventually run much, much higher – and it’s still running.)

Again, using the old Latin phrase “cui bono” (Who benefits?) as our guide, one has to ask… who was one of the major beneficiaries, if not THE major beneficiary, in seeing AIG survive?

Goldman Sachs.

This is true because AIG played the role of busted bookie, having made tens of billions worth of dumb bets with other investment houses on the street. Normally when a gambling house folds, the gamblers waiting to be made whole are SOL – a technical acronym which means “out of luck.”

But when the gamblers are high rollers it’s a different story. In part, Paulson and Bernanke saved AIG, flooding it with tens of billions in taxpayer cash, so that those very same funds could be kicked right back out to other players on the street. In its death throes AIG served as a “beard”… a convenient one-stop money laundering shop, used by the Treasury and the Fed to avoid the political inconvenience of writing big checks out in the open.

As a result of AIG’s last-minute bailout, and the discreet transfer operation outlined above, Goldman walked away with a cool $13 billion or so… profits on AIG-backed contracts that would not have paid off had Hammerin’ Hank – the ex Goldman CEO – not saved the day.

Rotten Egg Insurance

There is yet another amusing question that must be asked. It would be a small miracle if Congress figures out the importance of this question, but who knows – they may eventually get around to it.

That question has to do with the morality, or even the legality, of buying rotten egg insurance on the very eggs one is selling.

Put it this way… suppose I set myself up in the fly-by-night homebuilding business. You decide to trust me, and soon move your family into a beautiful new 3,000 square foot home built by my construction firm.

In time you discover the home is a disaster. The drywall is rotted and mildewed… the electrical wiring is a fire hazard… the foundation is cracked… the generic insulation is asbestos-prone… a residential nightmare through and through.

Naturally you would want restitution on this disaster of a house. You might get some money back, but nowhere near enough. On top of that, the emotional anguish (and headache and hassle) could never be repaid.

So how would you feel if you later found out that, even as I sold you the house, I had acted with foresight by loading up on a certain type of disaster insurance… insurance that paid off specifically in the event of a construction-related loss? And what if, let’s further say, you found out that I made an absolute killing on the trade – making more from my side bet than I paid in restitution on our deal?

This is a fair summation of what Goldman Sachs did in relation to the whole toxic asset subprime debacle. It sold rotten eggs – or rotten houses if you like – and protected itself by taking out disaster insurance on the very garbage it was selling.

This is murky legal ground, of course. One can hardly blame an investment bank for looking out for itself. And making bearish bets in the market should hardly be illegal.

At the same time, this dramatic separation between “sell side” and “buy side” is very interesting. What to make of it when an organization that is shoveling toxic-related assets out the door as fast as it can – stuffing its clients like geese until their livers explode – is simultaneously making aggressive downside bets on the very same dreck?

It’s no big deal though… they were just being “smart”…

An Age-Old Pattern

There is yet more… plenty more. We could get into the front-running accusations tied to the stolen Goldman code, or the practices of certain players that look tantamount to stealing $15 billion-$25 billion a year directly from investors’ pockets, or the direct manipulation of certain markets… but that would be overkill. By now the point has hopefully been driven home.

The truth of the matter is that nearly all major banks – not just Goldman Sachs – have exploited their privileged position within the system for decades. Goldman is simply the biggest, most brazen example at this point in the cycle – and one of the few “smart” enough not to have blown itself up.

The crux of the problem is “regulatory capture,” in which the players in an industry amass so much power and influence that they successfully “capture” the watchdogs who are supposedly watching them.

Financial history has seen these episodes play out over and over again. One over-the-top example was the 1980s failure of Continental Illinois Bank and Trust Company – at one time the seventh largest bank in the United States.

When “Conti” finally failed, it was only after an extended comedy of errors, in which the bone-headed bankers running the show repeatedly told the Federal Reserve to shove off and mind its own business. Conti’s ship of fools was piloted by buffoonishly confident captains until the very day it ran aground.

And the Fed, far from being the all powerful regulator and stern disciplinarian it was supposed to be when it came to reining in the big money center banks, was instead cowed and stymied by Conti’s political clout and systemic importance. (Just as it is thoroughly cowed by the likes of Goldman Sachs and JPMorgan today…)

A Bonus Too Far

The reason this kind of thing matters is because now, finally, the big banks may have taken their greedy taxpayer rip-off game “a bonus too far.”

And again, it isn’t just Goldman Sachs. It isn’t even just the United States. In a recent piece titled “The devil’s punchbowl,” The Economist reports:

A new hiring frenzy in the City [London's financial district], with bonuses guaranteed for “only” the first year; investment-banking results for the second quarter likely to top those of the first; an innovative securitisation [sic] by Barclays to get bank loans off its balance sheet. The term “business as usual” normally delights tradesmen and their customers. Applied to the banks that plunged Britain into economic crisis, it strikes fear to the heart.

Surprisingly, there has been a steady drumbeat of public outrage over Goldman Sachs’ latest round of eye-popping profits (rather than the usual obliviousness). It is no longer quite “business as usual” for the most connected player on Wall Street.

The American taxpayer is slowly waking up to the true source of such profits, and the free market travesty such ill-gotten gains represent. If anything, these fat cats are more socialist than capitalist in their smoky back-room domination of a secretive, incestuous, oligarch-infested state.

But with that said, your humble editor doubts it will be outrage alone that derails the big bank gravy train. Politicians love a bit of theater in front of the cameras to please the folks back home, but most of the time it winds down to nothing.

No, what would really wreck the gravy train would be another global banking crisis… a sort of “financial supernova 2.0″ with as much destructive power as the first one (if not more).

And we could see it too… more on that to come.

Source: A Bonus Too Far (Bankers on Borrowed Time)

Here’s Karl Denniger at the Market Ticker on why you should be concerned:

Let’s put this in plain language: The discount window is open for any bank that has good collateral at less than 1/10th of that interest rate.

Therefore there is absolutely no reason for any institution to go into the Fed Funds market for overnight money at 7% unless they have no good collateral to post against it and thus cannot go to the window.

So which bank was it?  That remains unknown.

But there’s absolutely no reason a well capitalized bank would borrow at 7% when they could do it at 1/10 of the price.  And the last time this fishy late night borrowing went down was right before the massive wave of bank failures of Lehman Brothers, Washington Mutual, and Wachovia.

This isn’t stopping banks from paying out huge bonuses (again). The banking hubris that got us into this mess has returned in full force.

According to the Wall Street Journal, Goldman Sachs “is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007… Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict.”

The return of the mega bonus just goes to show how hard it is to break Wall Street’s bad habits.  We suspect the financial geniuses are busily crafting the next bubble.  Any ideas what it might be?

Do we believe the government’s clean bill of health on the 10 TARP escapees, and do we mark down the shares of the banks that remain in the government’s debt?

The question is a simple one. But the answer is anything but clear-cut.

At the extremes, the question isn’t difficult. Citigroup (NYSE: C) is being forced to raise $55 billion of capital through preferred stock conversion, and even then is not sure of survival. In addition to the federal TARP injections, Citi has benefited from a $300 billion guarantee of its assets. It has been forced to sell some of its major subsidiaries, including Japanese broker Nikko Cordial Securities, which it bought only two years ago. Its chief executive officer, Vikram S. Pandit, cost Citi $600 millionwhen the bank lured him into the organization by buying out his hedge fund two years ago.

That hedge fund was subsequently closed. And it’s by no means clear that Pandit has the skills needed to run a low-risk financial behemoth whose future should be oriented towards doing stuff that is very simple.

With Citi’s stock trading at about $3.50 a share, investors may feel the chance is worth taking. But given the company’s long history of serial financial disasters, it must be much more likely that the government will eventually be badgered by taxpayers into losing patience with the mess, resulting in its final dismemberment with little or no payoff for shareholders.

At the opposite end of the banking-bailout spectrum, at least two of the banks that have paid off TARP – U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – seem to be in good shape, and indeed have expressed indignation at being forced to go through the demeaning TARP process at all.

Their shareholders should be equally indignant: Both banks have been forced to raise capital while their share prices were still depressed, and to slash their dividends from levels that had literally taken years to build up. It will be interesting to see whether either bank has the moxie to restore its previous dividend in full in the coming quarter. Doing so would be a sign of management that was both confident and shareholder-friendly – and of an outlook for each bank that was decidedly favorable.

Certainly, however tempting it may be for these banks to assert their strength by taking over weaker neighbors, their dividends should be fully restored as a matter of principle before they go out on any acquisition binges. The last few years have seen far too many self-aggrandizing management schemes that are engineered at the expense of shareholders, and a policy of acquisitions-before-dividend restoration would signal that management has still not received the message of how a responsible financial institution should be run.

If all the banks still in TARP were like Citigroup, and all those that had escaped were like USB and BBT, the government would have done a great job, and investors would have useful information. However, they’re not. Among the escapees is Capital One Financial Corp. (NYSE: COF). Capital One has raised $1.5 billion in new equity, but it made losses in the first quarter and is a leader in the subprime credit card segment, surely close to the next epicenter of the ongoing financial crisis. It doesn’t help that Congress has also passed a credit card reform actoutlawing many of Capital One’s favorite practices. In short, nothing will convince me that Capital One is a safe place for your investment dollars, and my best guess is that before the end of this year we will know that the government blew this one big-time.

In the final quadrant, those that have not repaid TARP but appear to be in good shape, we have Wells Fargo & Co. (NYSE: WFC) and PNC Financial Services Group (NYSE: PNC). Both appear to have been in relatively good shape from their own operations, but during the crisis bought banks of equivalent size to themselves that had made a mess of things: Wells bought Wachovia Corp. and PNC bought the Cleveland-based National City Corp. Their failure to repay TARP may mean that further problems are lurking under the hood in the banks they acquired; Wachovia, in particular, made an exceptionally foolish acquisition by spending an estimated $25 billion to buy the huge California mortgage bank, Golden West Financial, in August 2006.

But only time will tell. Both Wachovia and PNC are worth watching closely. If, during the next couple of quarters, only medium-sized problems surface, then it’s likely that these institutions will emerge stronger from their deals and will be well worth an investment.

The bottom line: Keep an eye on Wells Fargo and PNC, but don’t buy them yet. If either U.S. Bancorp (which is due to declare a dividend in the next few days) or BBT restores their previous quarterly dividends of 43 cents and 47 cents, respectively, back the truck up and buy!

Source: What TARP Banks Are Investment Grade?

And now, it’s broke. And even politicians think they know how to run an auto company. Just read the papers. “Obama insists on changes,” says one headline.

Normally, the politicos should hold their tongues…and let an industry’s owners run their businesses. Alas, as of a few days ago, the politicians ARE the owners.

Here’s a question:

When the government takes a majority stake in the auto business you know you are:

A) In a bad dream
B) In a bad way
C) In a bad country
D) In France

Correct answer: well, we we’re not in France. But as for the rest, it could be any of them…or all of the above.

Here’s an easier question. Who will the U.S. government put on the board of directors of General Motors?

A) A political hack
B) An industry hack
C) A far-sighted maverick who will shake up the business and put it on the road to growth and prosperity

If you answered “C” – you are from another planet. There is a reason neither governments, nor workers should own businesses. In the following, roundabout way, we explain why…

But first, a bit of news. As far as we can tell, the bear market rally is still on. The Dow rose 44 points on Friday. Oil closed at $53. The dollar is still sinking. And gold lost $3 to end the day’s trading at $888.

Thirty-two banks have shut down so far this year in the United States. Little, mismanaged banks go broke. But big, mismanaged banks get federal money. With these subsidies and bailouts, the big banks get larger…and live to foul-up another day.

Poor Warren Buffett seemed a little discouraged at his annual shareholders’ fest in Omaha. He must be nearing the end of his career. And consumers just aren’t buying as much furniture, cola, and candy as they used to, he told the faithful. (NYSE:BRK.A/BRK.B) Berkshire Hathaway’s profits were 10% below those of last year.

Swine flu seems to be disappearing from the front pages. Has it gone the way of Y2K and terrorism? Has another great disaster been averted? Might be too early to tell…

Oh you doomers and gloomers, cheer up! There’s always some other disaster waiting for a headline. How about this? The Seattle Times looks at Las Vegas and sees what it calls “the next global crisis.” After 10 years of drought, Las Vegas is running out of water.

The city fathers are thinking of all sorts of solutions – except, of course, for the obvious and effective one. They’re planning on huge pipelines…hundreds of miles long…and sucking water out of aquifers millions of years old. But, according to the paper, Las Vegas charges only about a tenth as much for its water as Atlanta does. The simple solution is to let free enterprise provide water…so that it could be priced correctly.

Colleague Chris Mayer has been following the water crisis story since the introduction of his newsletter, Mayer’s Special Situations, in 2006.

“Water is not just a problem in Las Vegas. The lack of sources for fresh water is a problem facing much of the American West, though the problem is particularly acute there and in the state of Nevada generally. Nevada is the most arid state in the union,” says Chris.

“The tight water supply has implications all over the West. In Arizona, you can’t build a residential development unless you find a ‘designated assured water supply’ that can sustain that development for 100 years. I could go on and on about this kind of thing. Suffice it to say, the American West faces a water crisis.”

Maybe the increase in water prices would discourage people from planting Georgia-style grass lawns in the Nevada desert. Or maybe it would discourage people from moving to Las Vegas in the first place. But that’s the thing with capitalism; it doesn’t take people where they want to go…it takes them where they ought to be. That’s also why people hate free enterprise so much. Where they ought to be is, often, where they least want to go. In the present example, people think they have a right to water – practically for free. They think there’s a ‘water clause’ in the Constitution that says government is supposed to provide them as much water as they want at a price they can afford.

Most things work better when they are run by private enterprises. Too bad. Free enterprise is out of style. The days of privatizing are over. Now, everyone wants the government to take charge.

What a turnaround from a few years ago – when people thought they could solve practically every problem by privatizing it. And then, the voters would buy shares in the newly privatized companies…and we’d all get rich!

“For water, the really bad stuff hasn’t happened – yet,” says Chris. “As investors, it’s a good place to be for a long time.”

Now, over to Addison for a look at this year’s federal deficit:

“Panic over the financial system is no longer crowding out discussion of the federal deficit here in I.O.U.S.A.,” writes Addison in today’s issue of The 5 Min. Forecast.

“Even the New York Times is noticing the deficit as a percentage of GDP will likely shoot above 10% this year – a post-WWII high.

“Bond investors caught onto this even sooner than the Times. They’ve driven yields on the 10-year Treasury note to their highest since last November – above 3%.

“Ben Bernanke and Co. can keep short-term rates as low as they like, but the bond market clearly sees signs of trouble on the longer end of the yield curve.”

“‘The reality remains that the United States is struggling through the most severe post-World War II recession with a rather compromised credit system,” writes The Richebächer Letter’s Rob Parenteau, “and the only sure area of rising final demand over the next year will be coming from fiscal deficit spending.’”

And back to Bill, with more thoughts:

The proletariat began buying stocks in the ’80s. The ‘shareholder nation’ was a dream of Maggie Thatcher and Ronald Reagan: Everyman a Capitalist.

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds…or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers – who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn’t mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich…and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the ’80s, realized how it worked, he was outraged; ‘they make money in their sleep,’ he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. “Buy stocks,” thundered Wall Street.

And so…the little guys piled in….and stocks soared.

“Buy and Hold,” the pros told them. “Stocks for the Long Run,” wrote professors of finance.

Of course, some people wanted to make money faster. So ‘day trading’ became popular in the late ’90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the ’80s and ’90s, too, people began to believe that you could motivate workers by giving them “a piece of the upside.” And the workers, too, believed they might get rich if they had a stake in their employer’s company. Especially in the financial sector, ‘results-based compensation’ caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened…well, that would be the owners problem, wouldn’t it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners – including the new capitalists – wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits – so they could exercise their stock options and pay themselves big bonuses. They were all ‘capitalists’ – but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high…he’d want to move to a lower-cost production center. And if the managers asked for too much – he’d fire them and get new ones.

But neither the working stiffs nor the suits shared the owners’ interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries…GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn’t allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century – suppressing earnings in the short term in order to make the company stronger later on – its bonus-seeking, option-driven managers wouldn’t permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you’re wondering what that means in today’s world, you’re not alone. We’re wondering too.

Until tomorrow,

Bill Bonner

Source: How Unions and Governments Destroy Businesses

Speaking at a dinner at Columbia University, Soros actually compared the current situation to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis are actually more severe than the Great Depression.

“We witnessed the collapse of the financial system,” Soros told his audience. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

He said the bankruptcy of. Lehman Brothers Holdings Inc. (OTC: LEHMQ) in September marked a turning point in the functioning of the market system.

His comments echoed those made earlier at the same conference by former U.S. Federal Reserve Chairman Paul A. Volcker, who is now a top adviser to U.S. President Barack Obama. Volcker said that overseas industrial production was declining even more rapidly than it was in the United States, which is itself under severe strain.

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker said.

Market Matters

Nothing has been able to get this economy (and stock market) back on track. Congress passes – and President Barack Obama signs – a near-$900 billion stimulus package and the U.S. Federal Reserve revises (negatively) its economic outlook for the remainder of 2009. Major financial institutions get significant (bailout) assistance from the government and Bank of America Corp.’s (BAC) chief is subpoenaed for misleading investors over Merrill Lynch & Co. Inc.’s (MER) (excessive) bonuses.

Automakers beg Congress for (and receive) a bailout of their own and General Motors Corp. (GM) and Chrysler LLC come back for even more as part of their restructuring plans.  Investors try to look past the unscrupulous practices of Madoff and the U.S. Securities and Exchange Commission (SEC) brings suit against billionaire Alan Stanford’s global enterprises over an apparent $8 billion fraud through its high-yielding CDs (with Venezuelans particularly hard hit).

Stanford Financial manages assets of $50 billion in 140 countries, with the primary bank operations in question based in Antigua.  With the Dow Jones Industrial Average hitting a six-year low and falling below the perceived floor set in November, investors are left scratching their heads.

So much for the “challenging” times setting a tone for bipartisanship in Washington.  As the stimulus package passed with only token Republican support in the Senate, its party leader called it “a missed opportunity, one for which our children and grandchildren will pay a hefty price.“  He then revealed that not one House member even took the time to read the bill.  The Obama administration also announced a plan to help millions of homeowners avoid foreclosure, while attempting to stabilize the housing market (to the tune of another $275 billion).  As long as the Treasury’s checkbook is out, GM wants another $16 billion and Chrysler could live a few more days with an additional $2 billion.

Oil rose (briefly) late in the week as the U.S. Department of Energy revealed a surprising decline in crude inventories and a slight increase in the demand for gas now that prices at the pumps have fallen below $2 a gallon and stayed for a while.

After taking the Dow down more than 300 points following Presidents’ Day, nervous investors sold all the way to a new six-year low and the worst week for equities since October.

Financials continued to be hammered as talks of bank nationalization picked up steam.  Global stock markets followed suit with Japan’s Topix closing at a 20-year low.   With investors shunning equities of all shapes and sizes (and U.S. Treasuries offering little in the way of returns), gold became the safe-haven recipient and futures climbed above $1,000 an ounce.  For now, investors just talk of “values,” “opportunities,” “rallies,” and “rebounds,” but few seem willing to follow-through with any real buying.

Economically Speaking

With U.S. Federal Reserve Chairman Ben S. Bernanke and friends trying any and all tricks in their arsenal to jumpstart the economy, the central bank chief admitted that the efforts to date have resulted in very limited successes.  The Fed negatively revised its outlook for the remainder of the year and now projects that unemployment could reach 8.8% and the GDP may shrink by as much as 1.3% in 2009.  Meanwhile, our global trading partners are struggling with problems of their own.  Japan’s economy experienced its worst quarter in almost 35 years as its manufacturers suffered through substantially declining demand for their goods.

The domestic economic data confirmed that the Fed’s new (weaker) projections may be right on target.  Housing starts in January fell by almost 15% and activity now stands 56% below the pace of construction last year.  Industrial production tumbled more than expected last month, and automakers face even more shutdowns as part of their recently proposed restructuring plans.

The labor market remained incredibly weak as new jobless claims rose again in the most recent release and the number of workers receiving unemployment benefits for over a week stood around a record high 5 million people.  On the inflation front, the cries of deflation can be put on hold for the time being.  Both the producer price index (PPI – wholesale) and the consumer price index (CPI – retail) experienced their biggest gains since July 2008, as energy prices actually rose last month.

Still, consumer prices remained flat (no real increase) on an annual basis, the lowest level of price change since August 1955.

Weekly Economic Calendar

Source: Super-Investor George Soros the Latest to Predict the Worst is Yet to Come