Bernanke's Deflation Preventing Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...
4. Make low-interest-rate loans to banks. Check. That didn’t work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
6. Lower rates further out along the Treasury term structure. Check. That didn’t work...
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...
13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...

Bernanke has failed. "It" has happened. The proof is irrefutable as detailed in Humpty Dumpty On Inflation and Fiat World Mathematical Model.

What now Ben? More of the same stuff that failed miserably before, only on a grander scale?

Addendum

Susanne Trimbath writing for NewGeography takes a different approach on the success of Bernanke in The Rogue Treasury.

The U.S. Treasury took enormous powers for itself last fall by telling Congress they would use it to “ensure the economic well-being of Americans.” Six months after passage of the Emergency Economic Stabilization Act of 2008 Americans are worse off. Since it was signed into law on October 3, 2008, here are the changes in a few measures of our economic well-being:



The U.S. government has already paid out $2.9 trillion, with further commitments to raise the total to over $7 trillion – a number that Senator Max Baucus (D-MT) said “is mind-boggling, indeed it is surreal. It’s like having a second government.” The money Treasury is passing out is more than all government spending in 2008. The Senate Finance Committee, of which Baucus is chair, held a hearing on March 31 (TARP Oversight: A Six Month Update). The three parties established as monitors in the 2008 legislation were there to testify. Without exception they “are deeply troubled by the direction in which Treasury has gone.”

Senator Chuck Grassley (R-IA) suggested [referring to former-Secretary Paulson] that Congress “was awed by a person who comes off of Wall Street, making tens of millions of dollars. … You think he knows all the answers and when it’s all said and done you realize he didn’t know anything more about it than you did.”

Repeating the closing remarks from above ....

Bernanke has failed. "It" has happened.

Addendum August 4, 2010:

Regarding scorecard points 8 and 9 above: the Fed did purchase treasuries and agencies, but without an explicit ceiling.

Please see my July 13, 2010 followup Are we "Trending Towards Deflation" or in It?

Mike "Mish" Shedlock
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Treasury To Delay Reporting Bank Stress Test Results

Lies, coverups, distortions, and no transparency are the norm for the Treasury Department and the Fed, so it should come as no surprise that Bank Stress Test Results Delayed For Earnings.

The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need. The last thing Treasury wants to do is set off a panic, the source said.

It's earnings season and banks are going to pretend they are making money (or losing less than they are), and the Treasury does not want to interrupt those lies with stress test results.

Furthermore, the one thing we know for sure is the longer the Treasury delays reporting and the less detailed information the Treasury provides, the worse the actual results, regardless of what is actually reported.

Mike "Mish" Shedlock
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Corporate Bond Default Rate Highest Since Great Depression

Moodys says Default Rate Surges to Highest Since Depression.

Thirty-five companies defaulted in March, the highest number in a single month since the Great Depression, according to Moody’s Investors Service.

The rate at which speculative-grade corporate borrowers worldwide failed to meet their obligations rose to 7 percent from 4.1 percent at the end of last year, Moody’s said in a report today. So far this year, 79 companies rated by Moody’s have defaulted, the New York-based ratings firm said.

Almost $1.3 trillion of losses and writedowns at financial institutions worldwide, combined with the deepest economic slowdown since World War II, have weakened companies’ finances, reducing their ability to pay debt. The global default rate will peak at 14.6 percent in the final quarter of the year, Moody’s predicted, lower than last month’s 15.3 percent forecast.

In the U.S., the default rate at the end of the first quarter was 7.4 percent, up from 4.5 percent at the end of 2008, and in Europe it jumped to 4.8 percent from 2 percent at the end of the final quarter of last year.

European default forecasts remain the highest and are expected to peak at 21 percent in the fourth quarter, down from the 22.5 percent the ratings firm’s model calculated last month.

Europe’s Recession Deepens

Bloomberg is reporting Europe’s Recession Deepens as Investment Declines

Europe’s recession deepened more than estimated in the fourth quarter after companies scaled back production and consumer spending declined.

Gross domestic product in the euro region fell 1.6 percent from the previous three months, the most in at least 13 years, the European Union’s statistics office in Luxembourg said today, revising a March 5 estimate of a 1.5 percent contraction. Investment plunged 4 percent, also more than estimated, and household spending fell 0.3 percent.

While the rate of contraction in European manufacturing and services industries may be easing, European leaders face increasing pressure as unemployment continues to increase, crushing consumer confidence.

These "signs of recovery" that cheerleaders have been seeing are mostly nonsense. The stock market has been rallying because Treasury Secretary Geithner and President Obama are willing to screw taxpayers out of trillions of dollars for the benefit of banks. Such action will not reduce defaults, restore lending, or do a damn thing for cash strapped consumers out of a job with no job prospects.

Mike "Mish" Shedlock
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Neither Krugman Nor Bernanke Can Distinguish Excessive Printing From Excessive Savings

Earlier today Calculated Risk posted a video and links to Krugman's Talk In Spain on March 17. Here is the video. A partial transcript by me follows.



Krugman: "I am rather a supporter of Mr. Bernanke at the Federal Reserve which is partly because I think he is the right man for the job, partly because before he was demoted to his current position he was a professor at Princeton University which is where I also teach.

How does this end? What can make this better? One answer is a stronger European economy. This problem would be much easier if Europe was a vigorously growing economy with a positive rate of inflation.

Around the world people want to save more than business is willing to invest. We have a global paradox of excessive savings. The best thing that could happen to the economy would be to find a lot more investment opportunities, anything that provides quantum leaps into what we can do that would be worth doing even in a depressed economy."

Note that Krugman is repeating the mindless chatter of Bernanke about excessive savings. The "Savings Glut" theory is easily refuted.

1. Global Savings Glut Revisited December 2006
2. Global Savings Glut Exposed September 2007
3. Bernanke Blames Saving Glut For Housing Bubble June 2008

Any 8th grader would quickly come to the conclusion that it would be impossible to have too much savings. However, Krugman is trapped in academic wonderland and puts his faith on equations such as the following one from Competition, Coordination,and the Crisis



Problems With Academic Wonderland

The problems with such equations are many. For starters it assumes that one can correctly determine the ideal GDP when GDP figures themselves are ridiculously distorted. For example consider the following two cases.

1. The Government sends everyone in the country between 18 and 62 a check for $40,000. This does not add to GDP.

2. The Government hires everyone in the country to sponsor a road and collect trash. The salary is $40,000 a year. The results of the above would be a nearly identical waste of money, yet in case number two, every dime spent would add to GDP.

Clearly this is nonsense and one can see that by this formulation potential GDP is limited only by the capacity to print which is in theory infinite.

What Portion of Government Spending Is Productive?

Inquiring minds are asking "What portion of government spending is productive?"

• In the case of dropping bombs in Iraq, government spending was and remains negative.
• In the case of pork barrel projects in Congressional slush funds, the answer is very little.
• In the case of pothole filling and bridge repair, the answer might be a great deal. However, excessive wages paid vs. what would be paid in a true competitive bidding process will need to be factored in.
• In the case of government sponsorship and takeover of Fannie Mae, Freddie Mac, and AIG, the answer is close to zero.

Government spending simply cannot be as productive as private sector spending. Yet Krugman thinks government spending can lead us out of this mess. It cannot.

There is no such concept as an ideal growth rate in GDP other than the growth that would be achieved if government simply got out of the way and stopped wasting taxpayer money.

Printing vs. Savings

Both Bernanke and Krugman mistake printed dollars accumulating in China and Japan as excessive savings. The reality is that spending without prior saving (i.e. printing money) results in bubbles that eventually pop.

The global credit bubble has now popped and Bernanke and Krugman both want banks to lend when there is every reason for banks to not lend.

The reason banks are reluctant to lend is prior excessive spending led to malinvestments and overcapacity in autos, homes, durable goods, strip malls, and damn near everything else. There is simply no reason for banks to lend or for credit worthy borrowers to borrow.

First Global Output Decline Since 1930's



Industrial Production Annualized Three Month % Changes



The charts above show what happens when consumers are tapped out, wages are low, jobs are very difficult to find, and in short what happens when credit bubbles pop.

Thus the charts are not a result of excessive savings, but rather of prior excessive spending on a Ponzi pace that could not be maintained.

Unfortunately, neither Krugman nor Bernanke can distinguish cause from effect, or excessive printing from excessive savings.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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John Hancock Tower Foreclosure Sale Revisited

I received a surprising number of emails regarding John Hancock Tower Foreclosure Sale, a 65% Haircut In 3 Years.

Here is one from "A Loyal Reader" an attorney and commercial real estate broker very familiar with large commercial real estate transactions.

"Loyal Reader" Replies ...

An addendum is needed for your post on the Hancock sale. The auction buyers apparently had been buying up slices of junior debt. According to the Boston Globe, the auction buyers had bought a "$75 million slice" of the debt; presumably, that was the face value, which they probably got for a hefty discount.

Nonetheless, in addition to backing out the implied value of the assumed financing, you should back in an estimate of the cost to the buyer of picking up the slices of junior debt that allowed them to foreclose. Even if they paid 50%, or $37.5 million, their total cash outlay for getting the building was $57.5 million, and the assumption of a $640M note at a sweetheart rate. The value of the assumed loan was over 3X their cash investment!

Another point of interest: why did the first lender allow the assumption, instead of demanding repayment and leaving the auction buyers to get new financing? The foreclosure event should have given them the right to do that; if not, if the junior debt holders could walk in and assume, then the first lien holder had terrible lawyers.

The auction buyers get all the benefit of owning the building, while the first lien holder is stuck with a loan which, at 97% LTV and 5.6%, will have to be written down on a mark to market basis to something far less than par (although they are probably laboring mightily not to have to do that).

Thanks Loyal Reader

Mike "Mish" Shedlock
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Fed's Effort To Roll Snowball Uphill Is Failing

Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can't. The market is simply too big. Please consider Treasurys slide after Fed purchases.

Treasury prices slipped lower Monday, with longer-term debt reversing earlier strength, after the Federal Reserve purchased $2.53 billion in Treasurys maturing between 2019 and 2026.

Investors remained wary of buying before the Treasury Department auctions $59 billion in new debt this week.

Fed purchases last week did little to keep Treasury yields down, as equity gains and data revived some optimism among investors. A dismal monthly payrolls report on Friday was better than the even grimmer report some investors had braced for.
Ten-year note yields increased 15 basis points last week, pushing back towards levels last seen before the Fed surprised markets after its last policy meeting by announcing it would purchase $300 billion in Treasurys in the following six months.

"The Fed's problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year," said strategists at UBS Securities.

$TNX - 10-Year Treasury Daily Chart



click on chart for sharper image

UBS has it wrong. The Fed's problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited. For more on this line of thinking, please see Quantitative Easing Begins; "Operation Twist" Revisited.

Mike "Mish" Shedlock
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Bankruptcy Time Bomb in US and UK Goes Off

Bankruptcies are soaring in the US and UK. With jobs increasing hard to find, the Downturn Pushes More Toward Bankruptcy.

The ailing economy continues to pull more Americans into bankruptcy court, where the number of troubled consumers filing for protection soared in March to its highest level since October 2005, when a new law made it more arduous and expensive to file.

An average of 5,945 bankruptcy petitions were filed each day in March, up 9 percent from February and up 38 percent compared with a year earlier, according to Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company. In all, 130,793 people filed for bankruptcy in March.
The weak economy and its repercussions — rising unemployment, lower pay, fewer people with health insurance, and the mortgage and foreclosure crises — are all playing a role in the big increase in bankruptcies. And some of the most common factors that tend to lead to bankruptcy filings — divorce and disruptive health problems — have not gone away.

But the biggest factor in the current spate of filings may be the tightening of credit.

“We have a lot of people out of work, but that alone is not driving the spike in bankruptcy filings,” said Robert M. Lawless, a professor at the University of Illinois College of Law. “Along with job loss is the tightening of consumer credit. Compared to 18 months ago, the American consumer does not have the same ability to borrow in an attempt to stave off the day of reckoning. With no income and no credit, it is not surprising that the middle class is looking to the bankruptcy courts for relief.”

Professor Lawless said he expected total bankruptcy filings to reach 1.45 million to 1.5 million by the end of the year, compared with nearly 1.1 million filings in 2008, an increase of 31 percent to 36 percent. It also means that filings are fast approaching the average number of annual filings of about 1.4 million before the new bankruptcy law took effect in October 2005.

I expect bankruptcy filings to exceed that in 2005 even though that total was enormous because of Hurricane Katrina on to of the new bankruptcy law.

Professor Robert Lawless is confusing cause and effect. The cause of rising bankruptcies is the dificulty in finding and keeping good paying jobs. The result is banks are tightening credit to stem credit losses. It is irrational for banks to keep offereing credit to unemployed individuals in this market.

Bankrupt Britain

The Times Online is reporting Bankrupt Britain: 340 people go bust every day

Britain is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year.

Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.

Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.

Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”

Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.

“The prospects for 2009 appear as uncertain and as gloomy as at any point in the crisis.”

The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.

Critics claim the act created a mood of easy credit with no downside.

Time Bomb Has Gone Off

Revolving and other consumer credit that has been extended cannot possibly be paid back. That means it won't be paid back. Thus, it's rational for banks to curtail credit to those without a job. And the economy is losing 600,000 to 700,000 jobs a month.

President Obama's "stimulus" plan is not likely to do much about this situation soon if ever. However, let's assume his plan creates 3 million jobs going forward starting in late 2009. By then the economy will have shed another 3-5 million jobs.

The unemployment rate is already 8.5%, up from 8.1% last month (See Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5% for details).

The unemployment rate will easily exceed 10% by the end of the year at this pace. Counting discouraged workers and those working part time for economic reasons (a truer measure of reality), unemployment is likely to exceed 20%. Moreover, it's important to remember that unemployment is a lagging indicator. Jobs losses will continue even after the economy starts to recover.

The credit time bomb has exploded, taking the Bankruptcy Reform Act of 2005 (Debt Slave Act of 2005) up in smoke along with it. Expect to see bankruptcy filings exceed prior records even though the 2005 total was enormous because of dual effects of Hurricane Katrina on top those filing to beat the bankruptcy law revisions.

The final analysis shows that bank attemps to make consumers debt slaves forever had its consequences, none of them any good.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Artist's Rendition on the State of the Economy

I received a unique email from Scott Moore about the State of the Economy.

Scott writes:

Hi Mish,
I'm an artist in Laguna Beach, California and I'm painting a 5 1/2' x 7' canvas on the state of the economy. Here's some details from the painting and work in progress:



I will be using vintage banks to represent the various areas of the economy. A plastic piggy bank will represent our personal monetary problems. Sometimes real people pose as models for my work.




Today the sun was out and Budge, a good friend and client posed as my businessman for this painting. I tied a rope onto the end of an extension ladder which I lashed to the house (you can see the shadow of the ladder on the cement just past Budge).



Detail of Budge on the mural.



Details added to AIG pig



I'm also beginning to label some of the objects in the sky with the names and logos/logotypes of failing institutions like Chrysler, Bear Stearns, and Fannie Mae.



We would not want to forget Bernie Madoff would we?



Of course there's Bank of America.



Here is the original concept as laid out in Photoshop. The one ray of hope will be one lone figure, representing each of us as we try to hold onto what seems to be slipping away. There will be chess pieces randomly placed across a spanse of chessboard hills, illustrating the financial 'game' that seems impossible to play.



The final rendition is beginning to take shape but I still have a couple more months before it is complete.
===============================================

Wow.
Thanks Scott

Scott's website has many additional details on this and other paintings that are well worth a look. Please visit Scott Moore's Gallery where he takes you step by step through the creation of "The Money Game" and other original works.

Mike "Mish" Shedlock
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Case Shiller March 2009 Analysis

Inquiring minds are considering the Case Shiller Home Price Release for March 2009.

New York, March 31, 2009 – Data through January 2009, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, with 13 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus January 2008.



The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites also set new records, with annual declines of 19.4% and 19.0%, respectively.



The chart above shows the index levels for the 10-City Composite and 20-City Composite Home Price Indices. As of January 2009, average home prices across the United States are at similar levels to what they were in late 2003. From the peak in the second quarter of 2006, the 10-City Composite is down 30.2% and the 20-City Composite is down 29.1%.

Please see the original article for more commentary and tables on the data.

Case-Shiller Declines Since Peak

The following charts were produced by my friend "TC" who has been monitoring Case-Shiller Data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller Declines Since Peak Current Data



click on chart for sharper image

Case-Shiller Declines Since Peak Futures Data



click on chart for sharper image


"TC" writes:

The Jan 2009 Case-Shiller data continues to accelerate to the downside at a record pace. The 10 and 20 city index show declines from their peak at 30% and the bubble cities (along with Detroit) all have declines of 40% or more with Phoenix having the largest percentage drop of nearly 50%. Additionally, all 20 cities tracked by Case-Shiller have now experienced price declines in excess of 10%. I want to once again remind your readers that the Case-Shiller data uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, there are two newer columns titled "Price Level" which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.

When one looks more closing at the current "Price Level" data you can see that cities such as San Francisco have likely already experienced the bulk of their price decline as prices have already returned to those of 8 1/2 years ago (Oct 2000). However, cities in the Pacific Northwest (Seattle & Portland) have only seen prices return to mid-2005 levels and likely have significant price declines in their future.

Lastly, I've added another chart titled "Negative Quarters" which shows many quarters each city has seen price declines (for example Phoenix and New York Metro have seen price declines for 11 of the last 11 quarters).

Thanks "TC"

Unemployment is soaring in 2009 and so will foreclosures, credit card writeoffs, and bankruptcies. That will add to the inventory problems.

As much as housing prices have declined, take another look at the second chart in the news release above. Imagine where prices will be if they fall back to 2001 levels or worse yet 2000 levels. Moreover, why shouldn't prices fall back that far? Finally, how many are prepared for it, if indeed that were that to happen?

Mike "Mish" Shedlock
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John Hancock Tower Foreclosure Sale, a 65% Haircut In 3 Years

Commercial property values are down a lot more than people realize, especially when considering the implied value of financing. Please consider Hancock Tower sells for $660m at auction.

March 31, 2009 10:33 AM - The John Hancock Tower was sold today for $660.6 million at a foreclosure auction in New York City.

The signature Back Bay building was acquired by a partnership between Normandy Real Estate Partners and Five Mile Capital Partners. The partnership was the only entity to bid for the Hancock during the auction, which lasted less than 10 minutes.

The firms initiated foreclosure after the Hancock's previous owner, Broadway Partners of New York, defaulted on some of the loans it used to buy property for $1.3 billion in late 2006.

This property sold for $1.3 billion in 2006 and $935 million in 2003. Today's price is $660 million, a 50% haircut.

But that's only part of the story. A friend writes "Don't forget the value of the financing that Normandy now gets to assume: $640 million mortgage at a rate of 5.6%."

Assuming the building is worth $660, Normandy managed to get 97% financing on an enormous sum of money, at a rate impossible to get in this market, at least starting from scratch. Financing 97% now on that size a loan would entail combined rates at 11% or higher. The value of that cheap financing might be worth $190 million or more.

Thus the real price the Hancock sold at foreclosure is more like $470 million not $660 million. That is a 65% haircut in three years.

Addendum

I received a surprising number of emails regarding this post.

Here is one from "A Loyal Reader" an attorney and commercial real estate broker very familiar with large commercial real estate transactions.

"Loyal Reader" Replies ...

An addendum is needed for your post on the Hancock sale. The auction buyers apparently had been buying up slices of junior debt. According to the Boston Globe, the auction buyers had bought a "$75 million slice" of the debt; presumably, that was the face value, which they probably got for a hefty discount.

Nonetheless, in addition to backing out the implied value of the assumed financing, you should back in an estimate of the cost to the buyer of picking up the slices of junior debt that allowed them to foreclose. Even if they paid 50%, or $37.5 million, their total cash outlay for getting the building was $57.5 million, and the assumption of a $640M note at a sweetheart rate. The value of the assumed loan was over 3X their cash investment!

Another point of interest: why did the first lender allow the assumption, instead of demanding repayment and leaving the auction buyers to get new financing? The foreclosure event should have given them the right to do that; if not, if the junior debt holders could walk in and assume, then the first lien holder had terrible lawyers.

The auction buyers get all the benefit of owning the building, while the first lien holder is stuck with a loan which, at 97% LTV and 5.6%, will have to be written down on a mark to market basis to something far less than par (although they are probably laboring mightily not to have to do that).

Thanks Loyal Reader

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

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

Time to Remove the "L" from "BLS"

For seven consecutive months the Bureau of Labor Statistics (BLS) has revised downward, prior job loss data.

The New York Times mentioned this on March 6 in Will Job Numbers Keep Being Revised Down?

Robert Barbera, the chief economist of ITG, points out a more disturbing trend: The Labor Department keeps concluding that its initial estimates were too optimistic.

Here are the total job losses reported for recent months, as originally reported and as shown in the latest revisions.

August 2008: Initially 84,000, revised to 175,000
September 2008: Initially 159,000, revised to 321,000
October 2008: Initially 240,000, revised to 380,000
November 2008: Initially 533,000, revised to 597,000
December 2008: Initially 524,000, revised to 681,000
January 2009: Initially 598,000, revised to 655,000
February 2009: Initially 651,000, as released today.

On average, from August through January, the first estimate was too optimistic by 112,000 jobs.

March Jobs Data

Inquiring minds are now investigating the BLS March Employment Report for additional revisions.

Sure enough there were more revisions. However, instead of revising the February data, the BLS revised the January data a second time as follows.

The change in total nonfarm employment for January was revised from -655,000 to -741,000, while the change for February remained -651,000.

A tip of the hat to Gonzalo who sent me the Times link. I am going to start tracking these revisions going forward.

For more details on March jobs, please see Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%.

Birth Death Madness

Naked Capitalism has a series of four interesting charts in Guest Post: Non-Farm Payrolls Report: Revisio ad Absurdum Here is the one that most caught my eye.



click on chart for sharper image

There is simply no way there is net new business creation or a pattern this consistent in face of the biggest recession since the great depression.

Limitations of the residual net birth/death model

The BLS explains the flaw in its own methodology quite nicely. Please consider Technical Information: Estimation Methods for Business Births and Deaths.

Limitations of the residual net birth/death model

The current modeling technique consistently reduces error in the estimate of nonfarm payroll employment, as compared to making no adjustment, however it has limitations. The primary limitation stems from the fact that the model is, of necessity, based on historical data. If at some future time, there is a substantial departure from historical patterns of employment changes associated with the residual of net business births and deaths, the model's contribution to error reduction could erode.

Because there is no current monthly information available on business births, and because only incomplete sample data is available on business deaths, estimation of this component will always be potentially more problematic than estimation of change from continuing businesses.

Birth Death Model Horribly Wrong At Turns

In short, the BLS model is horribly wrong at economic turns. We have been in recession for a year and a half, and the BLS is clearly using a historical model from a non-recessionary period as its guide.

Frequently Asked Questions

Let's wrap up with CES Birth/Death Model Frequently Asked Questions.

Q: Are birth/death factors seasonally adjusted?

A: No, they are calculated using population data that is not seasonally adjusted and the factors are applied to the sample-based not seasonally adjusted estimates. Months with generally strong seasonal increases such as April, May and June generally have a relatively large positive factor. Conversely, months with overall strong seasonal decreases, such as January, generally have a relatively large negative factor.

Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?

A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.

Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change?

A: BLS does not calculate an estimate of the seasonally adjusted contribution of the birth/death model. The sample, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate total employment estimate. The components are not seasonally adjusted separately because they do not have any particular economic meaning in and of themselves.

Please read those answers carefully. Many make the mistake of subtracting the birth death revisions from the reported job numbers. It simply does not work that way.

Of interest to me is the answer to the third question. The BLS maintains that the Birth Death revisions make the job reports more accurate than without them. Yet they cannot (or simply will not) tell us exactly how the Birth Death revisions affect the reported monthly job numbers!

It's time to remove the "L" from "BLS".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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New York Times Threatens To Shut Boston Globe

Deflationary news continues to hit the newsprint industry. Please consider New York Times threatens to shut Boston Globe.

The New York Times Co has threatened to shut The Boston Globe unless the newspaper's unions quickly agree to $20 million in concessions, the Globe reported on Friday, quoting union leaders.

The union officials said executives from the Globe and the Times, which owns the Boston newspaper, made the demands on Thursday morning in a meeting with leaders of the newspaper's 13 unions, the Globe reported.

Possible concessions include pay cuts, the end of pension contributions by the company and the elimination of lifetime job guarantees for some veteran staff, the newspaper reported, quoting Boston Newspaper Guild president Daniel Totten.

The guild is the Globe's biggest union, representing more than 700 editorial, advertising and business office employees, the report said.

"Management told union leaders Thursday that the Globe will lose $85 million in 2009, unless serious cutbacks are made, according to a Globe employee briefed on the discussions," the Globe report said. That compares with an estimated $50 million loss last year, the newspaper quoted the employee as saying.

The Times sought the concessions because it can no longer subsidize the Globe's losses, the report said, quoting the Globe employee, who requested anonymity because the person was not authorized to speak publicly.

The threat comes as a host of U.S. newspaper publishers have reduced staff, declared bankruptcy or shuttered newspapers to cope with a recession that has squeezed advertising revenues and with a new era in which readers seek news online.

Many U.S. newspapers have lost 20 percent or more of their advertising revenue as more people get news online for free.

I happen to be fond of the Boston Globe. I get many interesting stories from the Globe and other troubled newspapers. However, the model is what the model is. And the newsprint model simply is not working. Ad revenues are falling, internet competition is increasing, and the quality of commentary and news content from free sources such as blogs is soaring.

Therefore, I strongly advise the union to accept the concessions demanded by the New York Times. There simply is no other way that leads to survival.

Unfortunately, this is likely to be round one with many rounds to come. Pensions, benefits, and wages are headed lower and that trend is unstoppable.

Images From The Globe

The images the Globe puts together are often the best in the nation. Please consider Scenes from the recession.

Here are some stunning images of Earth From Above comes to NYC.

Those are quality images. I know quality. I have had 80 magazine cover images myself. You can see some of my images at MichaelShedlock.Com. (By the way, that site is not maintained, there are some known typos, and I am no longer active in photographic journalism although sometimes my images reappear in print).

So please click on the Globe "Big Picture" images to see some breathtaking images. I saved those links for months, not knowing quite what to do with them. Today I knew.

I wish the Boston Globe well. I think the Globe is a quality newspaper and I hope it survives. Those "Big Picture" images alone are reason enough alone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%

This morning, the Bureau of Labor Statistics (BLS) released the March Employment Report.

Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Since the recession began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. In March, job losses were large and widespread across the major industry sectors.





Nonfarm Payroll employment has shrunk below early 2006 levels.

Establishment Data

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Highlights

• 663,00 jobs were lost in total
  
• 126,000 construction jobs were lost
• 161,000 manufacturing jobs were lost
• 358,000 service providing jobs were lost
• 48,000 retail trade jobs were lost
• 133,000 professional and business services jobs were lost
• 8,000 education and health services jobs were added
  
• 40,000 leisure and hospitality jobs were lost
  
• 5,000 government jobs were lost
  

A total of 305,000 goods producing jobs were lost (higher paying jobs), and the service sector was clobbered once again as well. Government lost 5,000 jobs, a welcome event, but I expect this to change in the months ahead along with various stimulus programs.

It was nearly a clean sweep this month. 8,000 education and health services jobs were the only gains for march.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers are back in outer space.

Many small 1-5 person service providing shops in mortgage lending and real estate are throwing in the towel. Those small businesses are not properly accounted for in the Birth-Death Model. At this point in the cycle birth death numbers should be massively contracting.

Month after month, with the exception of January, the BLS is assuming more jobs were created by new businesses than lost by businesses closing shop. The BLS model is horribly wrong.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

In March, the number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) climbed by 423,000 to 9.0 million. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Persons Not in the Labor Force

About 2.1 million persons (not seasonally adjusted) were marginally attached to the labor force in March, 754,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 685,000 discouraged workers in March, up by 284,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The
other 1.4 million persons marginally attached to the labor force in March had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status



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The chart shows 9 million people are working part time but want a full time job. A year ago the number was 4.9 million.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 8.5% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 15.6%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.

Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is a lagging indicator, it is likely to continue rising until sometime in 2010.

ADP Employment Report

For another look at March jobs including a breakdown of stats by small, medium, and large sized businesses, please take a look at ADP Reports March Nonfarm Private Employment Decreased 742,000.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Social Security: There Is No Trust; There Is No Fund

Social Security is back in the limelight where once again its problems will no doubt be ignored.

Please consider Recession Puts a Major Strain On Social Security Trust Fund.

The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.

My Comment: Therein lies the rub. There is no fund per se. It's all been spent, and then some.

"It suggests we better get working on Social Security and stop burying our heads in the sand," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee. "The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon."

My Comment: There is negative money in the fund so it's complete nonsense to claim it is "technically in balance".

Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts.

My Comment: "...So long as the Treasury repays its debt" And exactly how likely is that? Has anyone looked at Obama's budget?

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits. Last August, the CBO predicted that surplus would exceed $80 billion this year and next, then rise to around $90 billion before slowly evaporating by 2020. But the rapidly deteriorating economy -- particularly the loss of more than 4 million jobs -- has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year and only $3 billion next year, then vanish entirely by 2017.

In his budget, Obama predicted that the trust fund surplus would hit $30 billion this year, according to Mark Lassiter, a spokesman for the Social Security Administration.

But that number, too, is far less than the $80 billion the trustees had forecast for 2009. In addition to declining revenues, Lassiter said the system is likely to incur higher expenses due to big jumps in new retirement and disability claims. Both are expected to rise by at least 12 percent this year compared with 2008.

My Comment: Can we stop with the nonsense? Revenues exceed payouts but that does not mean there is a fund. Every penny and then some has been borrowed and spent. And even the so called surplus is falling like a rock, a decade faster than expected.

Obama's $9.3 Trillion Budget Deficit

Inquiring minds are pondering Obama budget could bring $9.3 trillion in deficits.

President Barack Obama's budget would produce $9.3 trillion in deficits over the next decade, more than four times the deficits of Republican George W. Bush's presidency, congressional auditors said Friday.

The new Congressional Budget Office figures offered a far more dire outlook for Obama's budget than the new administration predicted just last month — a deficit $2.3 trillion worse. It's a prospect even the president's own budget director called unsustainable.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his Democratic allies controlling Congress would have to consider raising taxes after the recession ends or else pare back his agenda.

By CBO's calculation, Obama's budget would generate deficits averaging almost $1 trillion a year of red ink over 2010-2019.

Worst of all, CBO says the deficit under Obama's policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

Most disturbing to Obama allies like Senate Budget Committee Chairman Kent Conrad, D-N.D., are the longer term projections, which climb above $1 trillion again by the end of the next decade and approach 6 percent of GDP by 2019.

The worsening economy is responsible for the even deeper fiscal mess inherited by Obama. As an illustration, CBO says the deficit for the current budget year, which began Oct. 1, will top $1.8 trillion, $93 billion more than foreseen by the White House. That would equal 13 percent of GDP, a level not seen since World War II.

Trust Fund Projections



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Let's return to the ridiculous claim made by analysts: Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts.

For starters it is clear to see the 2041 figure is nonsense. And given that every cent of the fund has been spent, exactly how is the treasury supposed to repay that fund in light of $9.3 trillion (with a T) budget deficits when the "surplus" is a mere $16 Billion (with a B)?

Finally, why does everyone continue the charade of calling Social Security a "trust fund" when it's clearly not a fund and there cannot possibly be any trust in it?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Be Prepared for "Extraordinary Circumstances"

The last words you want to see in an appropriations bill from Congress are the words "in case of an emergency" or their twin sister "in the event of extraordinary circumstances".

When you see those words it is a near certainty that an "emergency" or that "extraordinary circumstances" are right around the corner.

Please consider U.S. panel backs FDIC borrowing.

A key U.S. Senate panel on Tuesday backed proposals to reform credit card practices and increase the authority of regulators to borrow from the Treasury Department to deal with a slew of expected bank failures.

The bill, which was introduced by the committee's chairman, Christopher Dodd, also contains two provisions aimed at increasing the borrowing authority of regulators, the Federal Deposit Insurance Corp and the National Credit Union Administration.

The provisions, introduced by Republican Senator Mike Crapo of Idaho, would increase the FDIC's borrowing authority to $100 billion from the current $30 billion to deal with banks and increase the NCUA's limit to $6 billion from $100 million for nonprofit credit unions.

The provisions also allow the agencies to exceed the new limits through the end of next year for up to $500 billion for the FDIC and $18 billion for the NCUA in the event of extraordinary circumstances.

Congress is out of its collective mind to put such a provision in a bill because "extraordinary circumstances" can mean damn well anything the FDIC wants it to mean.

So please be prepared for $500 billion in "extraordinary circumstances" as it's a near certainty those funds will be tapped.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Citibank to Investors: We Suggest You Bet Against Us

In a statement that ought to scare the hell out of the bears Citigroup Says Buy Bank Puts Because Rally Will Fade.

March 31 (Bloomberg)

Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.

“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.

He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

XLF Holdings Financial SPDR

Inquiring minds are investigating the top XLF holdings as well a couple component charts.



JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) are the four largest components comprising 34.9% of the total weighting of XLF.

Is this really a good time to short these stocks? Let's take a look.

Bank of America Weekly



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Citigroup Weekly



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XLF Weekly



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Citigroup is essentially telling investors to bet against JPMorgan, Citigroup, Bank of America, and a whole slew of financial stocks that have been smashed to smithereens.

Pardon me for asking, but where was this advice a year ago, or six months ago, or even three months ago?

I am not particularly bullish on financials right now, but perhaps I ought to be on the grounds that Citigroup has not gotten anything right during this economic decline and is now recommending a bet against itself.

Indeed, Citigroup's recommendation could be a nice contrary indicator especially as More Ugly Details Emerge On "Geithner's Heist America Plan".

I wrote the above last night and today we see ...

FASB Eases Fair-Value Rules Amid Lawmaker Pressure

Inquiring minds are reading FASB Eases Fair-Value Rules Amid Lawmaker Pressure.

The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.

“Good decision,” Citigroup Chairman Richard Parsons said of FASB’s move. The market for mortgages and other assets was not working, so something had to change, Parsons said in a New York interview today.

Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” former Securities and Exchange Commission Chairman Arthur Levitt said in an interview yesterday.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20 percent, according to Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York.

That Citigroup says it is a "good decision" is probably all you need to know that it's not. Mark-to-Fantasy pricing is not going to restore long term confidence but it could affect the markets in a favorable manner short term.

So far the XLF is up another 3% so far today although anything can happen by the close.

XLF 15 Minute Chart



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I do not have the exact time of day of that Citigroup call, but if it was in the morning, the timing could hardly have been worse for PUT buyers.

Looking at the above chart, those $8.00 strike May PUTs are likely to expire worthless. If so, I have to ask the question: Can anyone at Citigroup get anything right?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner's Gift To Pimco

Geithner's Heist America Plan is receiving words of self-serving praise from Pimco's Bill Gross. Indeed, Geithner’s Non-Recourse Gift Keeps on Giving to Bill Gross.

Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

“This is perhaps the first win/win/win policy to be put on the table,” Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.

Geithner’s plan may already be working. Top-rated commercial-mortgage bonds rose 5.6 percent since March 20 to about 79 cents on the dollar on average, according to Merrill Lynch & Co. indexes. The most-senior class of benchmark 2005 securities backed by fixed-rate Alt-A home loans, or those ranked between prime and subprime, increased about 12 percent to 54 cents as of March 31, according to Deutsche Bank AG.

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor “does bother me.”

“But even beyond that, what bothers me even more is it’s taxpayer money,” Bachus said. “What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won’t sell them.”

‘Taxpayer Loses’

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”

Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

‘We intend to participate and do our part to serve clients as well as promote economic recovery,’’ Pimco’s Gross said in the e-mail.

I seldom agree with Krugman but Obama is indeed "squandering his credibility”. And Stiglitz certainly nails it with “The Geithner plan works only if and when the taxpayer loses big time.”

Thus we must be careful to evaluate what Gross means when he says “This is perhaps the first win/win/win policy to be put on the table.”

Previously I proclaimed Geithner's Plan Can Succeed. However, "success" must be defined in terms of the plan's goals.

The Plan: Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer so that bondholders are made whole.

Yesterday, More Ugly Details Emerge On "Geithner's Heist America Plan"

The whole scheme is not really a bidding process at all but rather backroom political dealing by the "Good Ole Boys" on how to split the pie.

Pie Splitting Rules

1) Bail out the banks at taxpayer expense
2) Do so at the least possible cost to the major bondholders (not the taxpayer)

The more players (hedge funds, etc.) one ads to the backroom poker game, the harder it is to accomplish rule number 2. This explains Geithner's steep rules for entry into the club.

Exclusive Invitation Only Club

And it's not just the small players excluded from the poker game.

I have it from a reliable source "They are excluding large (over $25 billion) hedge funds, who would have the sophistication and resources to look under the Kimono and declare with vicious authority that the emperor has no clothes."

They are very emphatically not letting in big boys who had not previously been foolish enough invest in this crap. They only want big boys with a vested interest in propping up bank bondholders.

The only way into the "club" is to have demonstrated prior foolishness in a major way, somewhere along the line.

Pimco Needs A New Name

‘We intend to participate and do our part to serve clients as well as promote economic recovery,’’ Pimco’s Gross said in the e-mail.

I think Pimco needs a name change. Does PimpCo work?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Subprime Financing Resumes at GMAC

GM sales are down 51%. GM is sitting on tons of inventory it cannot get rid of. What to do?

Please consider GMAC to resume car loans to subprime borrowers.

GMAC Financial Services said it will resume making car and truck loans to subprime borrowers and will lower inventory financing costs for cash-strapped auto dealers, part of a series of moves intended to spur sales at General Motors Corp.

The moves announced Wednesday come as the embattled automaker races to restructure and get customers back into its showrooms amid growing risk that it will be pushed into bankruptcy by the Obama administration.

GM, whose U.S. sales plunged 51 percent in the first two months of this year, also began rolling out a program that will cover some payments for customers who lose their jobs after buying a car, an incentive intended to bring back shoppers worried about job security amid the recession.

GMAC, which provides financing to many GM vehicle buyers, said it would make at least $5 billion of credit available to customers over the next 60 days, a period during which GM has to prove to U.S. officials it can win sweeping concessions from bondholders and its major union.

The finance company plans to resume accepting finance applications from car and truck buyers who have credit scores below 620, a line dividing prime borrowers from less creditworthy subprime borrowers. The median U.S. credit score is 723, according to Fair Isaac Corp's myFICO unit.

Zombies Continues To Haunt

GMAC is a failed corporation. It should have gone under. Instead, the Bush administration kept this zombie corporation alive long enough to haunt taxpayers under the Obama's regime.

Flashback Monday, December 29, 2008: Paulson's $6 Billion Foot In The Door Play

The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., the latest step in the government’s widening effort to keep the largest U.S. automaker out of bankruptcy.

Treasury said it will purchase a $5 billion stake in GMAC, and lend $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

U.S. plans to ease GM into bankruptcy

Inquiring minds are reading U.S. plans to ease GM into bankruptcy.

The Obama administration is seeking to ease General Motors Corp into a "controlled" bankruptcy by persuading some creditors to agree to a plan that would divide the company into two pieces, the New York Times reported on Wednesday.

Citing people briefed on the matter, the Times said the plan is to push GM into a structured bankruptcy "somewhere between a prepackaged bankruptcy and court chaos," using taxpayer financing for leverage.

Plans are still under discussion and details are subject to change, the report said.

Desperation At GMAC

As long as "plans are still under discussion and details are subject to change" GMAC has nothing to lose and everything to gain by resuming subprime financing. Taxpayers are going to foot the bill for this complete nonsense, but from the point of view of GM and GMAC, subprime financing makes perfect sense.

This is exactly the kind of economic stupidity one should expect to see when government interferes in the market.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ADP Reports March Nonfarm Private Employment Decreased 742,000

Nonfarm Private Employment Decreased 742,000 according to the March ADP National Employment Report®.

Nonfarm private employment decreased 742,000 from February to March 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from January to February was revised down by 9,000, from a decline of 697,000 to a decline of 706,000.



Highlights

• Total Nonfarm employment fell by 742,000
  
• Service sector employment fell by 415,000.
• Employment in the goods-producing sector declined 327,000, the twenty-seventh consecutive monthly decline.
• Employment in the manufacturing sector declined 206,000, its thirty-seventh consecutive decline.
• Construction employment dropped 118,000. This was its twenty-sixth consecutivemonthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 1,135,000.

Sharply falling employment at medium and small-size businesses clearly indicates that the recession is spreading aggressively beyond manufacturing and housing related activities.

Medium Businesses Leading The Decline



The above chart, 4th in a series of 5 interesting charts (click on the first link above to see all the charts) shows that medium sized businesses, defined as 50-499 employees are now leading the decline in jobs lost as of summer 2008. Small sized companies (1-49) employees were hanging very tough until July 2008. That is no longer the case.

ADP vs. BLS

Here is an interesting chart showing ADP vs. the official BLS statistics.



click on chart for sharper image

The chart can be customized for date ranges and type of employment, at least in theory. I cannot get any parameters to work other than what shows on the link above.

ADP was tracking the BLS numbers very close until July 2008. Since then ADP reported losses have been way larger than the BLS numbers. However, that does not seem to be reflected in the chart. This could be due to back revisions. I am attempting to get an answer from ADP.

Small Business Report

The ADP Small Business Report notes the following breakdowns.

• Total small business employment: -284,000
• Total medium business employment: -330,000
• Total large business employment: -128,000

“Large businesses, defined as those with 500 or more workers, saw employment decline by 128,000, while medium-size businesses with between 50 and 499 workers declined 330,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 284,000. The sharp employment declines among medium and small-size businesses indicate that the recession continues to spread aggressively beyond manufacturing and housing-related activities to almost every area of the economy.”

Look for another grim employment report on Friday, perhaps in the range of 600,000 to 800,000 jobs lost. This will be the 15th consecutive months of jobs lost with no end in sight.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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