Equity Markets: A Long Way Down From Here

While everyone is cheering Friday's rosy job's numbers, the market responded with a big fat "so what?"

Meanwhile, I have my eyes on a couple of charts that suggest "It Could Be A Long Way Down From Here"

$NDXA200R: Nasdaq 100 Percent of Stocks Above 200 Day Moving Average



$SPXA200R: S&P 500 Percent of Stocks Above 200 Day Moving Average



Click on either chart for sharper image.

For more on the jobs report please see Jobs Increase by 290,000; Unemployment Rate Rises to 9.9%; A Look at the Details

Assuming you believe those jobs numbers, a huge rise in employment is more than priced in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rep. Alan Grayson: You Own the Red Roof Inn, Thanks to the Fed; Why the Fed Does Not Want an Audit; America is Wall Street's Sucker

Please play this must-see video by Alan Grayson explaining in great detail exactly why the Federal Reserve does not want to be audited, and thus why it absolutely needs to be audited.



"Let's find out once and for all who owns the hotels, who owns the houses, and let's try and put this wild beast that creates money out of nothing and jams it in the pockets of special interests like Maiden Lane, like Bear Stearns, like JPMorgan, like all their friends. Let's put them under some degree of restraint before it all comes crashing down, on us."

Please play the video!

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

Jobs Increase by 290,000; Unemployment Rate Rises to 9.9%; A Look at the Details

This morning the BLS reported an increase of 290,000 jobs. Headline unemployment rose to 9.9%. Hidden beneath the surface the BLS Black Box - Birth Death Model added 188,000 jobs. However, as I have pointed out many times before, the Birth/Death numbers cannot be subtracted straight up to get a raw number. It contributed to this months employment total for sure, but the BLS will not disclose by how much.

This month there were 66,000 temporary census workers added to the payrolls. That number can directly be subtracted. Interestingly, the details show only 59,000 government jobs in total were added. That means, states have cut back 73,000 jobs. Expect this trend to continue.

Next month is the big census hiring effect where as many as 500,000 temporary workers will be hired. In June through August they will all be fired but that will not stop economists and the administration from crowing about the numbers.

On the whole, this was a decent jobs report, but the birth/death number is quite problematic. I do not buy it. Moreover, the BLS report does not remotely jibe with the ADP April 2010 National Employment Report estimate of 32,000. Someone is wildly off, and I expect that to be the BLS, not ADP.

Those expecting the unemployment rate to drop given the headline number were in for a surprise. However, we were not surprised having talked about this before. The participation rate had been falling like a rock, and if people think there may be jobs, they start looking for them.

That means people who were not counted as unemployed, now are. Expect this to go on for a long time, and expect the unemployment rate to be stubbornly high.

By the way, I still do not think the top in the unemployment rate is in and expect it may rise substantially June through August, and keep rising at a modest pace thereafter for most of the rest of the year. Time will tell.

April 2010 Report

Please consider the Bureau of Labor Statistics (BLS) April 2010 Employment Report.

Nonfarm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring
of temporary workers for Census 2010..

Unemployment Rate - Seasonally Adjusted



Nonfarm Payroll Employment - Seasonally Adjusted



Since September 2009, temporary help services employment has risen by 313,000.

Establishment Data



click on chart for sharper image

Highlights

• 290,000 jobs were added
• 14,000 construction jobs were added
• 44,000 manufacturing jobs were added
  
• 166,000 service providing jobs were added
• 12,000 retail trade jobs were added
  
• 80,000 professional and business services jobs were added
• 35,000 education and health services jobs were added
• 45,000 leisure and hospitality jobs were added
  
• 59,000 government jobs were added

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

Index of Aggregate Weekly Hours

Production and non-supervisory work hours rose one tick to 33.4 hours and average hourly earnings rose a nickel.

Birth Death Model Revisions 2009



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Birth Death Model Revisions 2010



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Birth/Death Model Revisions

The BLS Birth/Death Model methodology is so screwed and there have been so many revisions and up it is pointless to further comment other than to repeat a few general statements.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

The BLS added massive numbers of jobs every month to its model, all through the recession. Those jobs never existed. Last month the BLS made those revisions to job totals to reflect errors in its Birth/Death model.

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).

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing practice is clearly another.

Household Data

In April, the number of unemployed persons was 15.3 million, and the unemployment rate edged up to 9.9 percent. The rate had been 9.7 percent for the first 3 months of this year.

The number of long-term unemployed (those jobless for 27 weeks and over) continued to trend up over the month, reaching 6.7 million. In April, 45.9 percent of unemployed persons had been jobless for 27
weeks or more. (

Among the unemployed, the number of reentrants to the labor force rose by 195,000 over the month.

In April, the civilian labor force participation rate increased by 0.3 percentage point to 65.2 percent, as the size of the labor force rose by 805,000. Since December, the participation rate has increased by 0.6 percentage point. The employment-population ratio rose to 58.8 percent over the month and has increased by 0.6 percentage point since December.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was about unchanged at 9.2 million in April. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

[Mish Note: In January the number was 8.3 million]

Persons Not in the Labor Force

About 2.4 million persons were marginally attached to the labor force in April, compared with 2.1 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, 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.

Table A-8 Part Time Status



click on chart for sharper image

The chart shows involuntary part-time employment increased by 738,000 workers in February and March. Wow. A likely explanation is the BLS reported number in January is pure garbage. As I pointed out in my unanswered question, seasonal swings are increasing in amplitude.

The key take-away is there are 9,152,00 of workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

Grim Statistics

The official unemployment rate is 9.9%. 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 17.1%.

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, the union parasites will not see it that way, nor will the politicians.

All things considered, this report looks decent on the surface, less so underneath, given that it took trillions in stimulus whose effects will be waning and the unemployment is still 9.9%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Equity Plunge Yen Connection; Reflections on Ponzi Markets and Program Trading

Inquiring minds are digging deeper into the mysteries of Thursday's stock market plunge starting with an intraday chart of the Yen.

Japanese Yen vs. US$



click on chart for sharper image

The Yen rose 4 cents in an hour vs. the US dollar. Wow.

Now let's invert the chart and overlay a chart of the S&P 500 on top of it.

Please consider the following chart courtesy of "OMI" who emailed me late afternoon.

S&P 500 vs. Yen



click on chart for sharper image

45 minutes before US equities went into a waterfall dive, the Yen went into a skyrocket rally vs. the US dollar (inverted on the above chart).

The Yen and the stock market magically stabilized at exactly the same time, right at the equity bottom.

Yen Erases 50% of Gain Against Euro on G-7 Greece Speculation

Inquiring minds are reading Yen Erases 50% of Gain Against Euro on G-7 Greece Speculation

The yen dropped versus all 16 major counterparts after the Bank of Japan said it will pump 2 trillion yen ($21.8 billion) into the banking system and the nation’s finance minister said the Group of Seven nations will discuss Greece’s fiscal woes.

“The emergency fund injection from the BOJ helped ease risk aversion, triggering selling of the yen,” said Hiroshi Maeba, deputy general manager of foreign-exchange trading in Tokyo at Nomura Securities Co., Japan’s biggest securities broker. “The action here also spurred speculation that the European Central Bank and the Federal Reserve may follow suit.”

The yen slid as much as 3 percent, the most since Feb. 24, 2009, and traded at 117.79 per euro as of 1:02 p.m. in Tokyo. The yen closed at 114.32 against the euro in New York yesterday after touching 110.70, the strongest since December 2001.

The Bank of Japan’s emergency measure represents its first same-day repurchase operations since December. The balance of current-account deposits held by financial institutions at the central bank will likely increase to 16.9 trillion yen, up 800 billion yen from yesterday, the BOJ said.

Japan’s currency still headed for a 6.1 percent weekly advance versus the euro, its largest gain since the week ended Oct. 24, 2008, as concern Europe’s debt crisis will derail the global recovery damped demand for riskier assets.

Citigroup Blamed But Not At Fault

Amazingly the equity plunge was originally blamed on Citigroup, an idea I found laughable as noted in Citigroup Trading Error Cause Market To Crash? Citigroup Says No

Regardless of what anyone finds, a trading error did not cause this collapse. The market collapsed because it was ready to collapse. A retest is likely coming up, especially if shorts covered in that dramatic rise off the bottom.

Role of Computerized Trading

Larry Leibowitz, the chief operating officer of NYSE Euronext says Electronic Trading to Blame for Plunge

Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz, the chief operating officer of NYSE Euronext.

While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

Program Trading and Ponzi Markets Don't Mix

Inquiring minds are reading a great writeup on Jesse's Café Américain called PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure

The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.

This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.

This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.

And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.

Even if any of this was true, it was just the spark that caused the market to plummet because of its highly unstable and artificial technical underpinnings. There is no longer any legitimate price discovery. The US financial system is a casino, dominated by a few big Banks and hedge funds, the gangs of New York.

They'll never learn. Or is it 'we?' They may not really care.

Did Shutdowns Make Plunge Worse?

The Wall Street Journal is asking the question Did Shutdowns Make Plunge Worse?

A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff.

Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm.

Tradeworx Inc., a N.J. firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm.

Mr. Cummings said Tradebot's system is designed to stop trading when the market becomes too volatile, too fast. "That's what we do for safety," he said. "If the market's weird, we don't want to compound the problem."

High Frequency Trading

Let's backup for a second and consider High Frequency Trading (HFT).

In very broad terms, high-frequency trading refers to the buying and selling of stocks at extremely fast speeds with the help of powerful computers. Using complex algorithms, these computers can scan dozens of public and private marketplaces simultaneously, execute millions of orders a second, and alter strategies in a matter of milliseconds.

In the U.S., high-frequency trading firms represent 2.0% of the approximately 20,000 firms operating today, but account for 73.0% of all equity trading volume.

On 24 July 2009, Karl Denninger of The Market Ticker accused high-frequency traders of "intentionally probing the market with tiny orders [...] to gain an illegal view into the other side's willingness to pay. This pattern of offering [sell orders at different levels] was intended to do one and only one thing; manipulate the market by discovering [...] a hidden piece of information - the other side's limit price!" He went on to argue that "the presence of these programs [would] guarantee huge profits to the banks running them" and that "retail buyers would get screwed as the market [moved] much faster to the upside than it otherwise would."

One thing is for certain, a whole bunch of people with "far away" sell stops got taken to the cleaners today.

Computers vs. Computers

Here is a snip I wrote earlier today from Black Swan in Computer Trading? Nasdaq to Cancel Some Trades; Plunge Raises Alarm on Computerized Trading

In essence computers trading against computers decided at some point today to throw in the towel and not bid. Lovely, isn't it?

I have been waiting for this to happen and today it did. Supposedly, computer trading lowers volatility and bid/ask spreads for traders. Today we see that works until it doesn't.

By the way, this was not really a "black-swan" event. This was perfectly predictable although timing it was not. I have been discussing this scenario with a few friends for months.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ECB Holds Meeting, Discusses Nothing

Inquiring minds just might be interested in the latest ECB meeting and some select quotes from ECB president Jean-Claude Trichet as described by CNBC in Euro Zone Economic Outlook Uncertain: Trichet

"Default is, for me, out of question. It's as simple as that," he said. "We did not discuss the matter and I have nothing else to say than that."

Greece and Portugal are "not in the same boat," he said when asked about Lisbon's problems.

He did not want to comment on the euro's slide against the dollar, but said the single European currency benefited from the central bank's staunch fight against inflation. "The euro is a good store of value…over 12 years we maintained price stability in an exemplary manner," Trichet said.

Bond Buying Wasn't Discussed. He also said the bank did not discuss the option of buying euro zone government bonds during its meeting.

As central bank meetings go, that was probably a rather productive meting, at least on a relative scale, assuming of course you believe nothing was discussed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Black Swan in Computer Trading? Nasdaq to Cancel Some Trades; Plunge Raises Alarm on Computerized Trading

Larry Leibowitz, the chief operating officer of NYSE Euronext says Electronic Trading to Blame for Plunge

Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz, the chief operating officer of NYSE Euronext.

While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

Plunge Raises Alarm on Computerized Trading

Inquiring minds are reading Stock plunge raises alarm on algo trading

A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.

But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.

"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."

Computers vs. Computers

In essence computers trading against computers decided at some point today to throw in the towel and not bid.

At some point (manual intervention?) they all decided to bid again, driving stock prices back up. This is what our stock market casino has become.

Lovely, isn't it?

I have been waiting for this to happen and today it did. Supposedly, computer trading lowers volatility and bid/ask spreads for traders. Today we see that works until it doesn't.

Most of the day Citigroup was erroneously blamed for the plunge. Citigroup was not to blame, flash-trading computers vs. computers with fake orders appears to be the culprit.

Who benefits from that? In general, Goldman Sachs. Perhaps I am wrong but I bet they had a great day.

Nasdaq to Cancel Trades Certain Trades

Reuters reports Nasdaq to cancel trades

Nasdaq Operations said it will cancel all trades executed between 2:40 p.m. to 3 p.m. showing a rise or fall of more than 60 percent from the last trade in that security at 2:40 p.m or immediately prior.

Nasdaq said the stocks affected and break points will be disseminated soon.

Nasdaq has set the screw-job limit at a whopping 60% threshold. If you lost 45% today with a stop loss in the wrong spot you just may be out of luck.

It's just what we need to inspire confidence.

Black Swan Event?

By the way, this was not really a "black-swan" event. This was perfectly predictable although timing it was not. I have been discussing this scenario with a few friends for months.

I have one question for the computers: Did someone manually intervene triggering your huge afternoon buy program or did you simply figure out on your own accord there were no more stops to run?

Regardless, a whole bunch of people with "far away" sell stops got taken to the cleaners today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Citigroup Trading Error Cause Market To Crash? Citigroup Says No

The markets went on a gigantic roller coaster on Thursday. The Street is asking Did Trading Error Worsen Market Plunge?

A dramatic drop in Procter & Gamble(PG) looks like the smoking gun. The stock went from $60 at around 2:45 pm ET to plunging below $40 in moments. The Dow Jones Industrial Average, which was already down triple digits, sank another 600 points in less than 15 minutes right around that time. It closed off roughly 350 points.

"That doesn't happen unless someone made a huge mistake," a trader that declined to be identified for this story told TheStreet about the P&G trade. The same trader said the latest speculation was that Citigroup(PG) was the firm behind the wrong trade, mistakenly putting in a 15 billion futures sell order, instead of a 15 million one, but the company would not confirm or deny that.

Citigroup Find No Evidence Of Trading Error

The facts seem to show Citigroup was not to blame. Please consider Citigroup Finds 'No Evidence' of Erroneous Trading

Citigroup Inc. said it found "no evidence" that it was involved in erroneous trades after U.S. equity markets plunged today.

"We, along with the rest of the financial industry, are investigating to find the source of today's market volatility," bank spokesman Stephen Cohen said in a statement. "At this point, we have no evidence that Citi was involved in any erroneous transaction."

New York Stock Exchange spokesman Rich Adamonis said "there were a number of erroneous trades" during a slide that took the Dow Jones Industrial Average down almost 1,000 points, its biggest intraday loss since 1987, before paring the decline. The Dow average ended the session down 347.8 points, or 3.2 percent, at 10,520.32 at 4 p.m.

The Nasdaq OMX Group Inc. said it's working with other markets to review transactions during the plunge. Procter & Gamble Co. said it's looking into electronic trading of the company's stock to determine whether the trades were made in error. Its shares sank as much as 37 percent and closed down 2.3 percent.

I do not doubt there were erroneous busted trades during the crash. However, there is no admission or indication by anyone that an erroneous trade caused this cascade.

PG



click on chart for sharper image

Regardless of what anyone finds, a trading error did not cause this collapse. The market collapsed because it was ready to collapse. A retest is likely coming up, especially if shorts covered in that dramatic rise off the bottom.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Dow Plunges Nearly 1000 Points; Video of Riots in Greece; Dollar Melt-Up Continues; Treasury Bears Slaughtered

Treasuries and the US dollar both rallied hard today as panic broke out in Greece and equity markets worldwide.

Video of Greek Riots



That video is from yesterday. Tensions rose again today.

At one point the S&P futures fell all the way to 1056 from an opening at 1163. I have seen these kind of days close green, but the treasury market sure isn't buying this rally.

Yield Curve as of 2010-05-06 3:15PM EST



Bullish Flattening of Yield Curve

That chart shows a bullish flattening of the yield curve as I expected. Those expecting a bearish flattening (yields rising) got their clocks cleaned today as treasury bears were slaughtered.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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John Dennis for California District 8 - San Francisco

It's long overdue we elect Congressional representatives who will uphold the constitution, are fiscally conservative, and genuinely want to do something about bureaucratic waste and massive government spending.

This is the third in a series of five profiles of candidates who I believe when elected will make a huge difference.

I strongly endorse John Dennis for California District 8.

Please check out where John Dennis stands on the issues.

• National Defense: War is maybe the greatest tragedy that men inflict upon each other.
• Debt & Taxes: I support a scheduled reduction of income taxes leading to the repeal of the 16th Amendment.
• Inflation: To avert a crisis, we must convince foreign creditors that we are serious about getting our financial health in order.
• Liberty & Privacy: The Constitution was written to restrict the actions of the government, not individuals.
• Federal Reserve: Ultimately, I support a free market in money, which would mean ending the Federal Reserve.
• Bailouts: Hundreds-of-billions of dollars have transferred from the taxpayers to failing institutions.

Those are a sampling of issues. Please click on the initial issues link to see more, or expand the above issues for more details on any particular issue.

My good friend, talk show host Charles Goyette, interviewed each of 5 candidates I am recommending. The interviews are about 15 minutes long.

Please click on this link to download and play the John Dennis Interview with Charles Goyette.

John Dennis has an uphill battle against House Speaker Nancy Pelosi. This is what Dennis has to say ...

Email From John Dennis

Hi Mish,

Somebody's got to take the fight to Nancy Pelosi. No Democrat or typical Republican can challenge her in San Francisco, even though she's vulnerable on so many issues.

However, a pro-liberty Republican can. We can challenge Ms. Pelosi for helping bankrupt the country. We can challenge her for blocking H.R. 1207, the "Audit the Fed" bill.

And a pro-liberty candidate can also challenge her for continuing both wars, for hypocrisy on civil liberties, for failing to address the burden of 700+ foreign military bases.

That's why we're already polling at 2.5 times what the Republican challenger received in this district in 2008. And 25% of the likely voters don't know my name yet. When voters hear my positions, and as we unleash the power of the volunteers who drive the liberty movement, Ms. Pelosi will finally have to defend her record. And that's not a position she wants to be in.

Scott Brown was down 20% with 30 days left. As people learn about this campaign, as voters in this district are forced to examine Nancy Pelosi's real record, as our team goes house by house, precinct by precinct winning votes, the media, and Ms. Pelosi, will realize that what was not possible before is possible now.

Nancy Pelosi will face her record and a real opponent this year. And with the right breaks and support we can make history together.

Our campaign has a primary June 8th. We're leading the race, but our opponent is still in it. We want to put this race to rest and get on with the main event. So please support my campaign and get us into position to take on Nancy Pelosi.

In liberty,
John

It is not often voters get a chance to elect a candidate of the quality of a Ron Paul or John Dennis.

Please do what you can to Support John Dennis. If you wish to volunteer time, please Contact John Dennis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bundesbank President Axel Weber Feuds with ECB President Jean-Claude Trichet about Defending Euro

Now that ECB President and monetarist pussycat Jean-Claude Trichet has Thrown the ECB Rulebook Out the Window, battle lines have formed in regards to defending the Euro.

Please consider Weber Draws Battle Lines as Pressure Mounts on ECB

Bundesbank President Axel Weber fired the first shot in a brewing debate over how far the European Central Bank should go to defend the euro.

As the single currency plunged yesterday, Weber said the threat of contagion from Greece’s fiscal crisis doesn’t merit “using every means,” rebuffing calls for the ECB to consider buying government bonds.

ECB President Jean-Claude Trichet is under pressure to do more to calm markets after the pledge of a 110 billion-euro ($142 billion) bailout for Greece from euro-area countries and the International Monetary Fund failed to assuage investors’ concerns.

While Weber’s comments suggest he won’t agree to asset purchases, some economists said that remains an option if the crisis worsens. The ECB could also reverse the withdrawal of emergency lending measures used to fight last year’s recession and dilute collateral rules further.

Merkel’s Coalition Calls for EU ‘Orderly’ Defaults

Trichet is also battling Merkel’s Coalition Call for ‘Orderly’ Defaults

German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with debt to avoid a repeat of the Greek fiscal crisis.

Floor leaders of the three coalition parties agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits.

Merkel, who faces elections in Germany’s most populous state on May 9, is seeking to shift focus from the Greek bailout to drawing lessons from the euro’s biggest crisis. An “orderly insolvency” process would ensure that creditors participate in any future rescue, she said on ARD television yesterday.

For more details, please see Merkel’s Coalition Calls for EU ‘Orderly’ Defaults; Spain Prime Minister says Speculation of a Bailout for Spain is “Complete Madness”

It seems that Bundesbank President Axel Weber and German Chancellor Angela Merkel have figured out a little something that escapes the mind of ECB President Jean-Claude Trichet: Defending the Euro from defaults by Greece, Portugal, and Spain may be extremely expensive, perhaps impossible.

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

Political Hypocrisy: Obama Backs Financial Reform Except Where It's Needed Most; Congressional Hypocrites Exempt Themselves From Insider Trading Laws

President Obama is pushing hard for financial reform except for where this crisis started, the Fed. Please consider Bank Bill Attracts Populist Amendments

Senate lawmakers in both parties are planning populist attacks on Wall Street by proposing a flurry of amendments to pending financial-markets legislation in coming weeks. Such amendments are normally batted back easily, but the anti-bank fervor in Washington has made it difficult for the financial industry to find supporters.

Sens. Ted Kaufman (D., Del.) and Sherrod Brown (D., Ohio) plan an amendment that would prohibit any bank from ever holding more than 10% of the country's deposits and put strict caps on the debt banks issue.

Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) have worked on an amendment that would force commercial banks to separate from investment banks—revisiting the Glass-Steagall Act of the 1930s.

Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) plan a provision to forbid banks with federally insured deposits from certain trading activities.

Obama administration officials have declined to weigh in on any specific amendments, with one exception: a move by Sen. Bernie Sanders (I., Vt.) to give the government more power to audit certain operations at the Federal Reserve. Fed and administration officials have signaled they would fight to stop it at all costs.

Mr. Sanders has more than a dozen co-sponsors. "I can't predict, but I think we've got a good chance to pass it," Mr. Sanders said.

Put Obama to the Test

In spite of all Obama's flowery rhetoric about financial reform, the only time the administration actually chimed in was to block a badly needed piece of financial regulation to audit the Fed, reform the administration wants to stop "at all costs".

I say put Obama to the test. Pass the Sanders proposal, or better yet the Grayson/Ron Paul legislation that passed the House. Let's see if "all stops" means Obama will veto this legislation.

Pulling Out The Stops

In a last fury of politicking, the Three Fed presidents Lobbied Congress To Kill Fed Oversight Proposals

[Federal Reserve Bank of Kansas City President Thomas Hoenig was] on Capitol Hill with three other regional Fed presidents to lobby lawmakers on aspects of the financial overhaul legislation affecting the Fed and its 12 regional banks. Their primary focus was on maintaining the Fed's oversight over thousands of state-chartered banks and bank holding companies that a Senate measure would transfer to the Federal Deposit Insurance Corp., but lawmakers leaving the meeting said they discussed a range of issues.

Sen. John Ensign (R., Nev.) told reporters that there was "broad agreement" between the regional Fed presidents that the current Senate bill would not end the problem of "too big to fail" institutions. It was not immediately clear if the Fed officials were remarking on a formal agreement reached Wednesday between Sens. Christopher Dodd (D., Conn.) and Richard Shelby (R., Ala.), or previous iterations of the legislation.

One of the biggest issues the Fed is facing is a growing sentiment on Capitol Hill that the central bank is too opaque and needs to be more open to scrutiny. Sen. Bernie Sanders (I., Vt.) is sponsoring an amendment that would enhance the government's ability to audit the Fed, a measure Fed officials have repeatedly warned against.

Ensign said Sen. Jim Bunning (R., Ky.) got in a "spirited discussion" with the four regional presidents over the issue of Fed transparency and that there was some acknowledgement by the officials that the central bank needs to be more transparent. Ensign said he "most likely" plans to support to the Sanders amendment, while Sen. Sam Brownback (R., Kan.) said he think it is "prudent, common sense idea.

New Amendments Still Being Written

Bloomberg reports Fed Would Disclose Borrowers Under Planned Senate Amendment

May 6 (Bloomberg)

Senators Byron Dorgan and Charles Grassley plan to propose an amendment to financial reform legislation requiring the Federal Reserve to disclose the terms and recipients of its loans during the credit crisis.

“The Fed has gone beyond what was viewed as its historical authority in the last two and a half years without any transparency or accountability,” Grassley, an Iowa Republican, said yesterday in a press release. “Our amendment changes that by making the Fed’s emergency loan authority subject to the light of day.”

The central bank loaned to dozens of banks, U.S. corporations and bond dealers during the financial crisis through programs designed to provide liquidity backstops. The Fed, by withholding the names of borrowers and the type of collateral they offered, has raised questions about whether the central bank kept insolvent firms afloat.

The problem with that amendment is it only investigates emergency moves. We need a complete ongoing audit of ALL Fed actions.

What You Can Do

Please phone and fax your senators and tell them you want the Fed audited fully, and you do NOT want the watered down Dodd bill or the or the Corker-Merkley provision.

Tell them you do support the Sanders amendment and the Grayson/Ron Paul bill exactly as passed by the house.

Here is a directory sorted by state of all the Senators of the 111th Congress.

You can also look up the phone numbers in the Online Directory For The 111th Congress but the first link may be easier to use for just senators.

Send A Message

Call, Email, and Fax Your Senators Now!
If you did so the other day when I asked, please do so again.

It cannot hurt.

Congressional Insider Trading

If you are looking for the ultimate in hypocrisy please consider Congress Refuses to Outlaw Insider Trading For Lawmakers

Even a cynic can find Washington's hypocrisy shocking at times. The Wall Street Journal reports today a House bill that would force lawmakers to make greater disclosures on financial transactions and disallow them from trading on nonpublic information is going nowhere fast.

That's right. Members of Congress are currently allowed to profit on insider trading!

The bill, which has been languishing in the House for four years, would require elected officials "to make their financial transactions public within 90 days of a purchase or sale" and "prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job," the WSJ reports.

It seems they're above the transparency they've been calling for on Wall Street.

Congressional Hypocrisy Discussion



Aaron Task and Henry Blodget discuss insider trading and short selling of stocks by Congress in the above video. Please give it a play.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sea of Red in Asia as Debt Fears Escalate

Yahoo!Finance reports World stock markets tumble on Europe debt woes

World stocks plunged Thursday as fears Greece's debt crisis will spread to other European countries and undermine the global recovery continued to rattle markets. Investors are questioning whether a $142 billion aid package for Greece will be adequate to keep debt problems from engulfing other European nations with weak government finances.

Analysts said some European countries may have to cut government spending to calm jittery markets, which could undermine economic growth and demand for exports. "On any further deterioration in this situation, emerging markets will be hit via rising risk aversion, weaker trade flows and falling commodity prices," Citigroup said in a report.

The weaker euro hurt Japanese companies who do significant business in Europe. Canon Inc. was down 3.3 percent, and rival camera maker Nikon Corp. fell 3.1 percent. Financial issues declined across Asia, with Japan's Sumitomo Mitsui Financial Group Inc. down 4.3 percent and South Korea's KB Financial Group Inc. tumbling 4.6 percent.

Asia-Pacific Markets



Click on chart for sharper image. At the time of capture China was smoked for over 4%.

Chart courtesy of Yahoo!Finance

$SSEC Shanghai Composite



One measure of risk taking and risk aversion is emerging markets. China has not acted well all year. The Chinese stock market gave a warning signal in 2008 and perhaps it is doing so again. Today's 4% decline is not reflected in the above chart.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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San Diego Sues its Pension System to Shift Responsibility for Deficit from Taxpayers to the Employees

San Diego's pension plan has a $2 billion deficit. To help fill the deficit the city plans to shift responsibility for some of the gap to the employees.

In a unanimous vote, San Diego Sues Its Pension System

The city of San Diego is suing its retirement system in a dispute regarding how much financial responsibility, if any, city workers should bear for a pension deficit topping $2 billion.

If successful, the lawsuit could lead to city workers helping pay for the pension fund’s investment losses rather than the current practice of having taxpayers make up for any deficiencies. The potential taxpayer savings have been estimated at $40 million for the fiscal year that begins July 1.

The lawsuit is based on City Attorney Jan Goldsmith’s interpretation of the city charter. He says that document, essentially a city constitution, states that the city and its employees shall contribute “substantially equal” amounts to pension obligations each year.

The City Council unanimously approved the lawsuit in closed session last week, and Goldsmith filed it Monday in Superior Court.

He is asking Judge Joan Lewis to force the San Diego City Employees’ Retirement System to increase employee contribution rates so workers will pay what he says is their fair share of $80 million. That is the portion of this year’s $232 million city pension payment that Goldsmith estimates can be attributed to investment losses.

Councilman Carl DeMaio, an advocate for pension changes, said the potential for increased contributions from workers — and, in turn, less take-home pay — could push unions to the bargaining table and lead to benefit reductions that lessen the burden for taxpayers.

“We’ve been pursuing pension reform from a number of angles, and I don’t believe that you ever are going to find a silver bullet to undo the city’s pension mess, but this is one of the arrows in the quiver,” he said of the lawsuit.

The judge is expected to rule on the issue before the city makes its annual pension payment July 1.

Taxpayers are fed up and this unanimous vote shows the San Diego city council has gotten the message. Three cheers for the city of San Diego for this move. The next thing the city ought to do is start outsourcing work and firing city employees including the fire department.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Video of Temporary Dome Solution; BP Safety Violations; Well Still Leaking 5,000 BPD, Could Hit 60,000 BPD; Maps

One Leak Stopped, Well Still Leaking 5,000 BPD, Could Hit 60,000 BPD

BP Stopped One Leak From Gulf of Mexico Oil Well

BP Plc has stopped one of three oil leaks from its well in the Gulf of Mexico, advancing efforts to end a spill after a drilling rig sank last month, the U.S. Coast Guard said.

Crews successfully closed a valve installed yesterday, stopping leakage from a section of drill pipe severed from the well when the rig sank, John Curry, spokesman for London-based BP, said today. There is no change in the official estimate that the well is leaking 5,000 barrels of oil a day, he said.

The leak that’s been stopped was much smaller than the primary source of the spill which is coming from severed drill pipe still attached to the well, Curry said. Brandon Blackwell, a Coast Guard spokesman, said earlier today the valve had stopped a leak near the well head.

BP and the Coast Guard have said there’s potential for greater leakage from the well because something has kept it from flowing at a full rate. Cause of the constriction may be a partially closed valve or a kink in the pipe, Suttles has said.

The leak could surge to 60,000 barrels a day if plans to cap it with a containment dome fail, Representative Edward Markey said yesterday after meeting with industry executives.

Using Detergent-Like Chemicals to Breakup Spill

British Petroleum is using detergents to breakup oil into microbe digestible snacks. The only problem is it will take a thousand years to work.

Please consider Detergent-Like Chemicals Turn Oil Into Microbe Snacks

BP Plc is fighting the oil slick menacing the Gulf Coast with more than 160,000 gallons of a detergent-like chemical intended to break the oil down into tiny digestible particles.

The chemicals use the Gulf waves as a giant washtub to scrub the oil from the water, eventually dropping it to the seafloor where deep-sea microbes will feast on it for centuries, said James N. Butler, a professor emeritus of applied chemistry at Harvard University who has studied dispersants.

While dispersants can help reduce the thick oil slick, the oil will still be out there, said Carl Hacker, resident ecologist at the University of Texas School of Public Health in Houston. The oil molecules could linger for a “geologic” period of time, perhaps thousands of years, said Terry Wade, deputy director at the Geochemical and Environmental Research Group at Texas A&M University in College Station, Texas.

BP is mounting a multipronged defense against the oil slick, using skimmer boats to scoop oil from the water’s surface, placing booms to repel it from shorelines, and burning the oil at sea. None of those methods, including dispersants, will be able to eliminate the oil threat, according to researchers who have studied cleanups.

“Once the oil reaches the shore, there are very few options,” said Pedro Alvarez, chairman of civil and environmental engineering at Rice University in Houston.

It takes five to 10 years for a shore to recover when oil reaches it, said Alvarez at Rice University. Using dispersants and other biotechnology can cut that time to two to four years, he said.

The chemicals are low in toxicity, but spread the oil further, potentially exposing more sea life, Henry said. The agencies decided that using chemicals at sea was preferable to allowing the oil to come ashore, where it would have a more deadly effect on wildlife and fisheries, he said.

BP Cited For 13 Safety Violations

Bloomberg reports BP Cited for 13 Safety Violations at Washington Plant

BP Plc’s Cherry Point refinery in Washington state has been cited for 13 “serious safety violations” by state regulators.

The inspection focused on the hydrocracker, the refinery’s largest process unit, according to a statement from Washington’s Department of Labor and Industries, the state agency responsible for occupational safety and health.

The agency found 12 process safety management problems, including failure to routinely inspect or maintain safety control devices. The citations carry a total fine of $69,200.

One violation noted that there were 38 safety recommendations for which there was no record of implementation. BP’s process safety at Cherry Point and the company’s four other U.S. plants was reviewed by an independent panel led by former Secretary of State James Baker III in 2006. That review followed an explosion that killed 15 people and injured more than 180 at BP’s refinery in Texas City, Texas, in March 2005.

BP said it needs more time to review the alleged violations.

BP Needs More Time?

A $69,200 fine is all they got. With that fine, BP might take 20 years to investigate.

Schwarzenegger No Longer Supports Oil Drilling

A 600 mile circumference oil slick was enough to change the California Governor's mind. Please consider Schwarzenegger No Longer Supports Oil Drilling

Gov. Arnold Schwarzenegger on Monday withdrew his support of a plan to expand oil drilling off the California coast, citing the massive oil spill that resulted from a drilling rig explosion in the Gulf of Mexico.

The announcement assures that no new drilling will take place off the state's coastline in the foreseeable future because Schwarzenegger would have to include the drilling proposal in his May revision of the state budget.

Speaking at a news conference near Sacramento, the governor said television images of the oil spill in the Gulf have changed his mind about the safety of ocean-based oil platforms.

"You turn on the television and see this enormous disaster, you say to yourself, 'Why would we want to take on that kind of risk?"' Schwarzenegger said.

This is a repeat play of a "1969 blowout on a Union Oil Co. platform off the Santa Barbara coast fouled miles (kilometers) of ocean and beaches that led to a moratorium on offshore drilling."

Temporary Dome Solution

CBN News says Dome to be Temporary Solution for Oil Spill

A short-term solution for bottling up the Gulf Coast oil spill is on the way.

On Wednesday afternoon, a barge will haul a 100-ton containment dome to the spill site 50 miles off shore. It is designed to siphon gushing oil into waiting barges on the surface. But such domes have never been tried at such depth -- about 5,000 feet down -- so it is unclear how well or if it will work.

Experts believe the well is spewing at least 200,000 gallons of oil a day in what could become the country's worst environmental crisis.

The spill has forced President Barack Obama to freeze his plan to expand offshore drilling.

Tighter Regulations Coming

The Wall Street Journal reports US Oil Spill To Have Impact On All Companies

The oil spill from a BP PLC (BP) well in the Gulf of Mexico will have an impact on all companies operating in the region, including the likelihood of tighter regulations and slower opening of new exploration areas, Statoil ASA's (STO) Chief Financial Officer, Eldar Saetre, said Wednesday.

In response to the accident, President Barack Obama's administration has suspended plans to open up new areas of U.S. water to oil drilling. Florida governor Charlie Crist and California governor Arnold Schwarzenegger have come out against drilling off their states' coastlines since the accident.

Gulf Oil Spill Trajectory

Inquiring minds might be interested in the projected trajectory of the spill.

May 5 - May 7 Projected Trajectory



Click on chart to enlarge.

The map shows seabird nesting locations and potential beach impacts. There are more maps in the above link.

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

Oakland California Bankrupt - Councilwoman Pat Kernighan Calls Rest of Council "Crazy and Irresponsible"

The party is over for Oakland even whether its city council is willing to admit it or not. As always, union contracts and pension benefits drove the city into the ground. Please consider Oakland faces pension costs, higher taxes.

Oakland voters will likely be asked in November to approve higher taxes to halve a $42 million deficit, but even if they agree, the city will face an even deeper crisis within months.

Ballooning pension costs will push the city's projected deficit to $58.7 million by July 2011.

The biggest portion of that budget shortfall is a debt payment of $43.9 million due July 1, 2011, to the old Police and Fire Retirement System. The payment would be more than 10 percent of the roughly $400 million city budget.

The looming crisis prompted great concern at last week's meeting from two council members, Pat Kernighan and Ignacio De La Fuente. When the council refused to ask staff to prepare a report on the impending budget woes, the typically mild-mannered Kernighan did not restrain herself.

"If that doesn't happen, you guys are crazy and irresponsible!" she exclaimed.

The costs of benefits to retirees appears to be the single biggest issue facing Oakland. Not only are the costs growing, but the city has not been funding them adequately, some council members said.

Last year, Oakland was supposed to pay $85.7 million for retiree medical care, according to a city staff report. But the city only paid $12.5 million, the report said.

City Administrator Is Incompetent

There is much more in the article. Give it a look. The main problem facing the city is their absurdly generous pension system called PFERS. City Administrator Dan Lindheim says "PFERS is locked in stone. It's impossible to change."

That is one hell of an attitude to take when the city you are running is bankrupt.

That Lindheim would not agree to produce a report on the budget woes is proof enough of Pat Kernighan's claim "you guys are crazy and irresponsible!"

Either Lindheim is incompetent or a patsy for the unions at taxpayer expense, most likely both.

Oakland teachers vote to OK a strike

Unfortunately for Oakland, its teachers do not understand simple math. The city is broke, bankrupt, yet Oakland teachers vote to OK a strike, insisting on a wage hike.

Oakland teachers are ready to strike again if necessary if talks sour at the bargaining table, union officials said Tuesday.

On the heels of last week's one-day walkout, the teachers voted 565-184 late Monday to give union leaders the option to "take further actions to secure a fair contract, up to and including a strike," according to Oakland Education Association officials.

The two sides are far apart on several issues including wages, class size, caseloads for school nurses and counselors, and staffing for adult education.

Union leaders have said a raise must be part of any deal.

Administrators have said they can't afford it, given an $85 million budget shortfall for the next school year.

565 Oakland Teachers Do Not Understand Simple Math

The vote authorizing a strike was 565-184. This tells me that a minimum of 565 Oakland teachers are unfit to teach because they do not comprehend simple math. They should be fired.

The only way to resolve these issues is in bankruptcy court. Before Oakland wastes more taxpayer money of a situation that is clearly beyond repair, it needs to pursue bankruptcy options to dissolve those pension contracts.

Regrettably, the "crazy and irresponsible" city administrator and council will not even produce a report that details how big the problem is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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B.J. Lawson Wins N.C. District 4 Primary - Durham, Chapel Hill and parts of Raleigh

Politico 2010 has the results of Tuesday's North Carolina primary. I am pleased to report B.J. Lawson, a candidate I have endorsed, won the N.C. District 4 Primary.



Lawson gathered 46.2% of the vote. This is a strong showing for a 4-man race.

The Daily Paul site, dedicated to restoring constitutional government to the United States of America proclaims, "I'm celebrating by sending him a check. Anyone care to join me?"

Money is always welcome, but so is your time and energy! Please click here to Volunteer Time or Services to B.J. Lawson.

B.J. Lawson Profile

This is the second in a series of five profiles of candidates who I believe when elected will make a huge difference.

Please check out where Lawson Stands on the Issues

• Cut Taxes to Stimulate Job Growth
• Reduce the Size of Government
• Reform the Federal Regulatory Burden
• Reduce Spending to Restore Fiscal Balance
• Empower Local Education
• Restore Trust in Government

Those are highlights. Click on the above link for details.

David Price, his Democratic congressional opponent in the upcoming election admits to not reading or understanding health care legislation before voting.

Lawson says "Passing legislation that is not fully understood, or understandable, is simply legislative malpractice. We must demand better of our elected representatives if we are to restore the trust and legitimacy of our federal government."

Charles Goyette Interview

My good friend, talk show host Charles Goyette, interviewed each of 5 candidates I am recommending. The interviews are about 15 minutes long.

Please click on this link to download and play this B.J. Lawson Interview with Charles Goyette.

Email from B. J. Lawson

Dear Mish

Washington has proven more corrupt and less effective as it has consolidated power and grown tremendously over the past several decades. It is time to transition to a federal government that focuses on the specific duties enumerated in our Constitution.

Instead of always giving more power to Washington, and always looking to Washington for "help", it is time to keep more resources in our communities to address our challenges. We cannot keep sending more money and power to Washington for the pleasure of lobbyists, bureaucrats, and bailouts and expect better results.

These issues are compounded government process that is simply broken. Congress passes legislation that it hasn't even read, delegates its lawmaking authority to unelected lobbyists and bureaucrats, and does not respect any limits on its power over our individual lives.

My first priority is to fix our broken economy.

Instead of borrowing and printing more money for bailouts and "stimulus" packages, we must balance our budget, stop pretending we can afford to police the world at our expense, and eliminate corporate welfare and unconstitutional spending that benefits special interests.

We must eliminate the IRS and its 67,000 pages of job-killing regulations that punish productivity, entrepreneurship, saving, and investment. We must also eliminate overreaching and counterproductive regulations that drive jobs and investment overseas, while being ignored by our largest financial institutions and the federal government itself.

My next priority is to reform health care by taking it back from corporate and government bureaucracies, and returning it to patients and providers.

True health care reform that puts control back in the hands of patients and providers is required to revitalize the economy, as soaring health care costs are squeezing businesses and consumers alike and reducing the competitiveness of the U.S. economy in a global market.

My final priority is to approach every issue, and every vote, with the goal of restoring a Constitutional federal government. That means restoring our recently sacrificed civil liberties, ending federal control over public education, and pursuing a just and sustainable legal immigration policy.

Together we can take back America from those who think the constitution is as bendable as a stick of chewing gum.

B.J. Lawson

Thanks B.J.

Congratulations on your primary victory. We wish you good luck in the November election.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Buffett Defends the Indefensible: Goldman Sachs and Rating Agencies; Goldman's Sweetheart Deal With Buffett Revisited

In the midst of the stock market crash, Warren Buffett got a great deal on Goldman Sachs preferreds. Those preferreds are making him $15 a second.

I do not fault Buffett one second for taking that deal. It seemed like a great deal at the time, and it was. The problem is, it's important to distinguish between a deal good for his shareholders, and the integrity of Goldman Sachs.

Sadly, Warren Buffett is now caught in no man's land, unable or unwilling to see the difference.

With that backdrop, please consider Buffett strongly defends Goldman; Berkshire net up.

Speaking at Berkshire's annual meeting, Buffett also said Berkshire swung to a $3.63 billion first-quarter profit, compared with a year-earlier $1.53 billion loss, helped by an improving economy and gains from investments and derivatives.

Buffett said he did not hold against Goldman the U.S. Securities and Exchange Commission civil fraud lawsuit alleging the bank hid from investors that securities underlying a risky debt transaction were chosen by Paulson & Co, a hedge fund firm that was betting they would lose value.

News that investigators opened a criminal probe into Goldman has led to increased speculation about Blankfein's job security, but Buffett expressed strong support.

Asked who should run Goldman if Blankfein were replaced, Buffett said: "If Lloyd had a twin brother, I would vote for him. I have never given that a thought."

The $5 billion investment consists of preferred shares that throw off $500 million in annual dividends, plus warrants to buy an equal amount of common stock. Goldman can buy back, or "call," the preferreds at a premium.

GOLDMAN, DERIVATIVES

"We love the investment," Buffett said. "Our preferreds are paying $15 a second, so as we sit here, 'Tick, tick, tick, tick,' that's $15 every second," he said.

Buffett added that the SEC lawsuit was not a serious enough event to raise reputational issues that would call into question the Berkshire investment.

That last sentence is complete nonsense at best. At worst it is a blatant lie.

Goldman's reputation most assuredly has been called into question by the SEC. Moreover, Janet Tavakoli calls it into question every day of the week. So do many others. Arguably so did the the market, judging from its reaction.

Finally, no financial company has every survived criminal fraud charges and a criminal fraud investigation is now underway.

Let's step back for a second. I never understood (until now), why Goldman Sachs would have offered Buffett the deal that it did. Anyone would have taken it. However, the deal was offered to only to Buffett.

Goldman Buys Insurance

Supposedly Goldman Sachs made that deal to calm the markets. That idea did not make much sense then and it makes even less sense now. What I do buy is the idea that Goldman bought a future favor, perhaps not even this favor, but a favor nonetheless. Consider it insurance.

Goldman's insurance policy has paid off. Goldman Sachs clearly has Buffett in its pocket.

Buffett voluntarily put himself in the position of having his integrity questioned. He could have said "we got a great deal" and left it at that. It would have been a true statement.

However, it's hard not to defend someone who give you a sweetheart deal that makes $15 a second.

Buffett Defends Rating Agencies

Inquiring minds are reading the Wall Street Journal article Buffett: Ratings Companies Still Have 'Phenomenal' Business Model

In the past year, Berkshire Hathaway has been rapidly selling shares of Moody's Corp., the ratings outfit.

But Berkshire still has a large stake in Moody's, which many say played a key role in the financial crisis by handing out high ratings to mortgage bonds that later collapsed.

Berkshire CEO Warren Buffett mounted a defense of the firms. He said he believes the ratings outfits, including Standard & Poor's, have "incredibly wonderful businesses" and that their "pricing power is significant."

That explains why he invested in Moody's. But he conceded that the firms made mistakes. "Many feel that the ratings agencies let them down," he said. "They succumbed to the same mania that prevailed throughout the investment world" when the housing market was rapidly inflating. "They couldn't see a world where residential housing countrywide would collapse," he said.

'Phenomenal' Business Model

Yes indeed, I agree with Buffett that Moody's, Fitch, and the S&P have an "incredibly wonderful businesses" in the same sense the Mafia has an "incredibly wonderful businesses" with its numbers racket.

At least with the Mafia, you know what the odds are, and profits are paid in cash.

With the rating agencies we saw blatant incompetence and fraud every step of the way. What makes that a 'Phenomenal' Business Model is explicit government sanction.

I have been harping about this since September 2007, but if you have not seen it yet, or if you need a refresher course on the business model, please see Time To Break Up The Credit Rating Cartel

Once again, I do not fault Buffet for spotting an "incredibly wonderful businesses" whose "pricing power is significant." I can and do fault Buffett for his defense of pervasive rating agency fraud, shrugging it off as a mistake.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Merkel’s Coalition Calls for EU ‘Orderly’ Defaults; Spain Prime Minister says Speculation of a Bailout for Spain is “Complete Madness”

"Orderly defaults" has a nice ring to it. Somehow I suspect when Greece defaults it will be anything but orderly. Nonetheless it is interesting to hear the word default bantered about so soon after an announcement of a $145 billion bailout for Greece.

Please consider Merkel’s Coalition Calls for EU ‘Orderly’ Defaults

German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with debt to avoid a repeat of the Greek fiscal crisis.

Floor leaders of the three coalition parties agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits.

Merkel, who faces elections in Germany’s most populous state on May 9, is seeking to shift focus from the Greek bailout to drawing lessons from the euro’s biggest crisis. An “orderly insolvency” process would ensure that creditors participate in any future rescue, she said on ARD television yesterday.

“We quite urgently need something for the members of European Monetary Union that we also didn’t have during the banking crisis two years ago,” German Finance Minister Wolfgang Schaeuble told reporters yesterday. “Namely the possibility of a restructuring procedure in the event of looming insolvency that helps prevent systemic contagion risks.”

Spain and Portugal are Endangered Species

Inquiring minds are interested ridiculous denial of contagion threats.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said speculation of a bailout for Spain is “complete madness” and the nation has “strong solvency.” His remarks came as a 110 billion-euro ($143 billion) rescue package to help Greece avoid default fails to ease concern that swelling sovereign debt will derail the economic recovery.

“Spain and Portugal are both endangered species,” said Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which manages $9 billion.

The extra yield investors demand to hold Spanish debt rather than German equivalents has risen this week as the European Union’s rescue plan for Greece failed to insulate other euro-area nations from the crisis. Even as Spain’s debt burden, at 53 percent of output, is lower than the EU average, its budget deficit is the euro region’s third-largest.

International Monetary Fund spokesman Bill Murray, in a statement released in Washington today, said there’s “no truth” to rumors about Spain.

“These rumors can increase the interest-rate differential compared with German bonds and damage our national interests,” Zapatero told a news conference in Brussels today. “This is simply intolerable and I can tell you that we will certainly combat it.”

Rumors Don't Do Squat

Spain and Portugal are in trouble and attempts to talk that crisis down is silly. Rumors do not have any lasting effect. If Spain was in good shape, the market would shrug off rumors.

If Zapatero wants to can squash rumors with actions, all he has to do is show a credible plan to reduce its budget deficit.

So let's see some action. Bazooka talk is laughable,

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window

After all his tough bulldog talk over the years, the world can now see Trichet is in reality nothing more than a monetarist pussycat when the chips are on the line.

Let's recap.

Trichet Floods Banking System With Cash

October 08, 2008: Trichet Offers Unlimited Cash

European Central Bank President Jean-Claude Trichet said he can't rule out further interest-rate cuts after joining a round of global reductions today and offering to flood the banking system with as much cash as it needs.

So Much For Price Stability Mandates

What was it someone was telling me just two weeks ago? Oh, here it is: "Trichet will NEVER cut. The ECB has price stability mandates."

The person went out of his way to put "NEVER" in caps.

That's rather touching given that today the ECB made a 50 basis point in conjunction with global coordinated panic (see Global Coordinated Rate Cuts Won't Solve Economic Crisis).

ECB Waives Collateral Rules

May 03, 2010: ECB Comes to Greece’s Aid by Waiving Collateral Rules; ECB Plays With Fire; Europe's Web of Debt

In a move that is supposed to stop contagion and inspire confidence, the ECB Comes to Greece’s Aid by Waiving Collateral Rules

The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market.

Today’s decision was a reversal for ECB President Jean-Claude Trichet, who began the year saying the ECB would not change its “collateral policy for the sake of any particular country.”

ECB Plays With Fire

This is a dangerous precedent that challenges the credibility of both the ECB and Jean-Claude Trichet.

Intermediate-term, the ECB's actions add more tinder to the woodpile. Spain and Portugal are the matches.

Rulebook Heads for the Window

May 03, 2010: Trichet May Rewrite ECB Rule Book to Tame Greek Risk

European Central Bank President Jean- Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro.

Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans. The central bank may have to extend that to other nations, renew a program of lending unlimited cash to banks for a year, and even start buying government debt if the 110 billion-euro ($146 billion) bailout plan for Greece fails to stem the euro’s slide, economists said.

The next response to a broadening loss of confidence in euro-area finances would be for the ECB to channel cash through banks, either by lending them more for longer in its regular auctions or by weakening collateral rules further, Deo said. Another option would be to accept bank loans to governments as security, he said.

The bank’s policy makers may move as soon as their May 6 meeting in Lisbon to reintroduce unlimited three-month loans, Citigroup Inc. economists led by Juergen Michels said today.

The ECB may have to go even further and buy government bonds if it is to stabilize financial markets and avoid a return to recession as governments slash spending to appease investors, said David Owen, chief European economist at Jeffries Group Inc. in London. “There is a good chance the ECB will ultimately have to resort to quantitative easing,” he said.

Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland, wrote in a report today that “markets should be alert to the risk of ECB bond buying, as early as today.”

While the ECB is prohibited from buying assets directly from authorities, it can buy them on the secondary market. Trichet said on May 2 that “at this stage, we have absolutely no decision on the purchase of government bonds.”

"No Decision" means pussycat-hearted Trichet is considering it.

I say consider it done. The market is very likely to force the ECB's hand after Trichet's tough bulldog talk failed to accomplish a thing other than make the ECB's pledge look silly.

By the way, whatever the ECB does to help Greece will not work. Worse yet for the ECB, Portugal and Spain are on deck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Privately Lobbies Senate to Kill Audit; What You Can Do!

A bill sponsored by Ron Paul and Alan Grayson to thoroughly audit the Fed, passed the House. However in a brazen move that ought to offend the sensibilities of every citizen, the Fed is lobbying Senate members to water down the bill so that it is meaningless.

The Huffington Post tells the story in Fed Privately Lobbying Against Audit.

The Federal Reserve is privately lobbying against a bipartisan Senate amendment that would open the central bank to an audit by the Government Accountability Office, according to documents distributed to Senate offices by a Fed official.

In order to obtain the documents, HuffPost agreed not to reveal the name of the Federal Reserve official who did the specific lobbying in question.

"As I mentioned, we believe that the bipartisan Corker-Merkley provision in the Dodd Bill is quite strong and addresses issues of transparency and disclosure without impinging on the independence of monetary policy," the official goes on.

Merkley teamed with Sen. Bob Corker (R-Tenn.) on an audit provision, but Merkley himself says he'd prefer to go further. "I appreciate Representative [Alan] Grayson's concerns over accountability at the Federal Reserve. I have been a strong proponent of Fed reform and voted against the re-confirmation of Ben Bernanke because the Fed has been so lax in using its regulatory powers," Merkley said in a statement to HuffPost, responding to an analysis from Rep. Alan Grayson (D-Fla.) showing that the Senate bill did not meaningfully expand transparency.

The Fed argument is a replay of a tactic that the bank tried in the House. Instead of outright opposition, the Fed backed an amendment in the lower chamber from Rep. Mel Watt (D-N.C.), which the bank said would expand transparency but not interfere with monetary policy. It became clear, however, that the amendment would not expand transparency and was an attempt to defeat the audit in general. The Watt amendment was soundly defeated.

The Corker-Merkley amendment is the Senate version of the Watt amendment and the Fed is once again arguing that the broader amendment will impinge on the independence of monetary policy.

"The Sanders amendment, however, would directly interfere with monetary policy," argues the Fed official. "The amendment removes the current statutory protection for core monetary policy activities from GAO audit and would permit the GAO to audit monetary policy decisions and the decisionmaking process itself."

Last year, the Fed brought on Enron's former top lobbyist, Linda Robertson, to help fend off the audit. "Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street's demise," Bloomberg reported

Dodd Bill Would Allow Fed To Hide Its Spending

Inquiring minds are reading Dodd Bill Would Allow Fed To Hide Its Spending.

The Wall Street reform bill headed for a test vote on the Senate floor Monday night will allow the Federal Reserve to continue to pump trillions of dollars into major banks largely in secrecy, the co-author of House language that would open the central bank to an audit charged in a memo to the Senate.

"The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn't do anything of the sort. I'm going to run down the details for you, and reprint the legislative language so you can read it yourself," writes Rep. Alan Grayson (D-Fla.).

It would not allow the GAO to look into the Fed's massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions.

Grayson and co-author Rep. Ron Paul (R-Texas) passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress. It was a remarkable victory, with a populist coalition beating back the combined lobbying efforts of the Treasury Department, the Fed and Wall Street banks. ....

What You Can Do

All you need to know is that if the Fed is for the Dodd bill or the Corker-Merkley provision, then you do not want either.

Please phone and fax your senators and tell them you want the Fed audited fully, and you do NOT want the watered down Dodd bill or the or the Corker-Merkley provision.

Tell them you do support the Grayson/Ron Paul bill exactly as passed by the house.

Here is a directory sorted by state of all the Senators of the 111th Congress.

You can also look up the phone numbers in the Online Directory For The 111th Congress but the first link may be easier to use for just senators.

Send A Message

Call, Email, and Fax Now!

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