Government Policy Summed Up

The Wizard of Id has managed to succintly summarize our Government's policy towards troubled businesses.  Here is the comic in full:   

More Government Waste with No Bid Contracts

Earlier this month, President Obama brought John McCain to the White House to announce a restructuring of the way the US government procures goods and services.   In particular, the Obama administration claimed to limit the practice of using no-bid contracts.  No bid contracts are uncompetitive and result in higher payments for fungible goods and services.  

Within a few days after the words of eliminating no bid contracts left the President’s mouth, his Treasury Secretary, Tim Geithner, sought to procure for the US Treasury a supply of notebook computers.  Here is the announcement.    The procurement goes through great detail specifying the performance of the computers, what types of drives and memory, the operating system, etc.  It goes on to specify that in fact what the Treasury needs is Dell computers.  Yup, this  "competitive bid", can be filled only by a single source - Dell Computer!  Still, it is put out to bid.  I wonder how many competitive bids the Treasury will get from say HP, IBM, Acer, Gateway or other computer manufacturers?  This is simply more evidence that when Obama speaks he means the opposite of what most people understand his words to mean.  

Congress and Obama Knew About AIG Bonuses

One thing that has been, and is still, a certainty is that when any government politician says something we know the opposite is true.  The furor over the AIG bonuses is a prime example.   (see AIG Bonus Firestorm Misdirection - Updated and AIG Bonus Firestorm Misdirects Attention Away From CDS Payments for prior discussion.)  We now know that President Obama knew about the amount of the AIG bonuses on Thursday March 12 - several days before his "impromptu" expression of outrage.  

The real outrage, however, is that we now learn that Obama's treasury secretary, Timothy Geitner, not only knew about the bonuses in advance, but with Connecticut Senator Christopher Dodd's assistance, inserted a provision in the $400+ billion spending bill that preserved AIG's bonuses.  In a New York Times article on the fallout affecting Senator Dodd, Geitner takes the blame for protecting the bonuses:

On Thursday, Treasury Secretary Timothy F. Geithner came to Mr. Dodd’s defense, saying in an interview with CNN that his staff had raised concerns about whether the legislation limiting executive compensation “was vulnerable to legal challenge.”

Dodd - the chair of the Senate Banking Committee and person responsible for the portion of the legislation providing the loophole, was not forthcoming about his involvement.  The NYT article went on

This week’s uproar was triggered largely by Mr. Dodd himself, when he provided conflicting answers about the provision that allowed the bonuses at A.I.G. According to the Center for Responsive Politics, the company’s employees, political action committees and subsidiaries have made campaign contributions of nearly $300,000 to Mr. Dodd since 1989.

Initially, Mr. Dodd said he did not know how the loophole got into the legislation that sought to crack down on executive compensation. But then in an interview Wednesday with CNN, he acknowledged that his staff helped write the revisions after receiving a request from the Treasury Department.

Aside from the asinine attempts at covering up what was done, the question we should be asking is why did NONE of the 534 other elected officials raise any concern about this provision?  The answer is pretty clear - the $787 Billion stimulus bill was rushed through Congress, and the controlling parties would not let a full debate come to the floor.  Provisions were  inserted in backroom meetings and both houses were given a mere 24 hours to pass the bill.  No debate was allowed.  That, my friends is not how democracy is supposed to work.

The reason this happened is that our elected Senators and Representatives failed to perform their job.  It is their job to represent us and debate the legislation.  I am very skeptical whether any of the 435 Representatives or 100 Senators even read the full bill before it was voted upon.  America, we were cheated.  Our elected officials are no better than the greedy bastards that took the bailout money and lined their own pockets.  In fact, it is worse.  It is nothing short of a breach of trust.  

We need and deserve better representation.  Ask your congressman why he or she voted for a stimulus bill that allowed recipients of federal money to pay huge bonuses?  Listen to what they say and ask them if they personally read the 1000 page bill before they voted on it.  If they told you they did, they are lying.  If they admit they did not, ask them to step down.  It is time that we either throw all the bums out of Congress.  At the very least, we need to make sure that our representatives are effective and that we have a voice.  Consider insisting on our Constitutional right to have one representative for every 30,000 inhabitants (see, Taxation With Representation Is Not So Good Either.)   With more members of Congress, we the people will have more control and the elected officials, individually, will be less powerful, albeit collectively we will all be more powerful.  If none of the 535 members had the foresight or fortitude to question the $787 Billion dollar spending bill, then maybe, just maybe increasing the size of the representatives to 2500 would produce one or two who would stand up for what is right.  It is time to act now before it is too late.

AIG Bonus Firestorm Misdirection - Updated

Update on yesterday's post on AIG Bonus Firestorm Misdirects Attention Away From CDS Payments.  Mike Shedlock's blog quotes Eliot Spitzer as identifying the real disgrace of the AIG scandal is the billions of dollars in taxpayer funds paid to the AIG counterparties.  Here is what Shedlock said:

The Real AIG Scandal

Eliot Spitzer is writing about The Real AIG Scandal.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

Eliot Spitzer nails it. However, any rage at this point is justified. Our best hope is the rage continues and Republicans get some new found backbone to block all further bailout efforts.

In addition, several bills have been introduced into congress to tax the bonuses paid to employees of companies receiving bailout funds!  Here is our post from yesterday:

An incredible amount of outrage has been written and expressed about the $165 Million in bonuses paid by taxpayer owned AIG, and rightfully so, but the AIG bonus issue is simply a misdirection of the real outrage - the payment of $60 Billion in credit default swap bets with taxpayer bailout money. The fact remains thatpouring money into AIG is pouring money into a black hole.

The outcry is building about the AIG bonuses.  President Obama knew about the payments by at least last Thursday, and his administration knew before then. The Treasury is now making noise about either recouping the funds paid on bonuses, or reducing the next tranche of bailout funds.  Provisions are being floated around Congress to tax the bonuses at varying levels.  Frankly, while I am loathe to suggest that Congress use tax policy to penalize anyone, in this instance it could be a winner.  Tax the bonus recipients at the 75-90% level (states will follow suit as well), make the excessive payments non-deductible by AIG.  Taxpayers will recover the bonus payment and AIG will still be responsible for paying back the money borrowed (which will never happen). 

Whatever solution is proposed, however, only focuses on the bonuses.  The real outrage is the payout of billions to CDS counterparties.  Last week, AIG disclosed that it used the bailout funds to bailout its credit default swap counterparties at the same time Treasury learned of the bonuses.  Payments went to Germany's Deutsche Bank, France's Societe Generale, England's Barclay's, Spain's Banco Santander, and many others, including Goldman Sachs, Merrill Lynch, UBS, Royal Bank of Scotland, Bank of America, and Bank of Montreal.  Follow the money - this is nothing more than backdoor bailouts.  Taxpayer funds went to AIG, and AIG in turn distributed the money not only to US institutions, but international financial entities.  That means that we, the taxpayer, are not only bailing out AIG from its bad business decisions, but we are bailing out foreign counterparties that took a risk that AIG would pay off its bets.  

Where is the outrage?  The amount spent on these bailouts far exceeds the bonus payments, yet despite knowing last Thursday about the bonuses, President Obama timed his expression of outrage to coincide with AIG's disclosure of payments to counterparties.  While it isn't a cover-up, it certainly looks like our attention is being misdirected away from a major problem to focus on a relatively small problem.  It is unlikely that the taxpayers will ever see the $170 Billion of bailout funds repaid - and certainly any payment will not be made with equivalent dollars (but that is another topic), and it is likely that unless something is done, the taxpayers will continue to fund the losing propositions made by AIG and the other banks.  We are, however, not helpless while waiting (futilely) for the government to do something.  We can take matters into our own hands and stop doing business with AIG.  It is very simple.  Look at all your insurance policies and find out if any of the issuers are subsidiaries of AIG.  If so, cancel the policy and replace it with a policy from another, more solvent insurer.  

Madoff's Accountant Charged

The SEC had finally decided to take action against Madoff's accountant, David G. Friehling, for enabling Madoff's fraud.  

The SEC's complaint alleges that Friehling enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited BMIS financial statements pursuant to Generally Accepted Auditing Standards (GAAS), including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities.

The SEC's position is that Friehling enabled Madoff's fraud by conducting an audit but not following accounting standards.  In other words, Friehling sold his accounting license to Madoff. 

Instead, the SEC alleges that Friehling merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. If properly stated, those financial statements, along with BMIS related disclosures regarding reserve requirements, would have shown that BMIS owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent.

In other words, Friehling sold his accounting license to Madoff. 

AIG Bonus Firestorm Misdirects Attention Away From CDS Payments

An incredible amount of outrage has been written and expressed about the $165 Million in bonuses paid by taxpayer owned AIG, and rightfully so, but the AIG bonus issue is simply a misdirection of the real outrage - the payment of $60 Billion in credit default swap bets with taxpayer bailout money. The fact remains that pouring money into AIG is pouring money into a black hole.

The outcry is building about the AIG bonuses.  President Obama knew about the payments by at least last Thursday, and his administration knew before then. The Treasury is now making noise about either recouping the funds paid on bonuses, or reducing the next tranche of bailout funds.  Provisions are being floated around Congress to tax the bonuses at varying levels.  Frankly, while I am loathe to suggest that Congress use tax policy to penalize anyone, in this instance it could be a winner.  Tax the bonus recipients at the 75-90% level (states will follow suit as well), make the excessive payments non-deductible by AIG.  Taxpayers will recover the bonus payment and AIG will still be responsible for paying back the money borrowed (which will never happen). 

Whatever solution is proposed, however, only focuses on the bonuses.  The real outrage is the payout of billions to CDS counterparties.  Last week, AIG disclosed that it used the bailout funds to bailout its credit default swap counterparties at the same time Treasury learned of the bonuses.  Payments went to Germany's Deutsche Bank, France's Societe Generale, England's Barclay's, Spain's Banco Santander, and many others, including Goldman Sachs, Merrill Lynch, UBS, Royal Bank of Scotland, Bank of America, and Bank of Montreal.  Follow the money - this is nothing more than backdoor bailouts.  Taxpayer funds went to AIG, and AIG in turn distributed the money not only to US institutions, but international financial entities.  That means that we, the taxpayer, are not only bailing out AIG from its bad business decisions, but we are bailing out foreign counterparties that took a risk that AIG would pay off its bets.  

Where is the outrage?  The amount spent on these bailouts far exceeds the bonus payments, yet despite knowing last Thursday about the bonuses, President Obama timed his expression of outrage to coincide with AIG's disclosure of payments to counterparties.  While it isn't a cover-up, it certainly looks like our attention is being misdirected away from a major problem to focus on a relatively small problem.  It is unlikely that the taxpayers will ever see the $170 Billion of bailout funds repaid - and certainly any payment will not be made with equivalent dollars (but that is another topic), and it is likely that unless something is done, the taxpayers will continue to fund the losing propositions made by AIG and the other banks.  We are, however, not helpless while waiting (futilely) for the government to do something.  We can take matters into our own hands and stop doing business with AIG.  It is very simple.  Look at all your insurance policies and find out if any of the issuers are subsidiaries of AIG.  If so, cancel the policy and replace it with a policy from another, more solvent insurer.  

Don't Revive Glass-Steagall

Over the past few weeks I have read several proposed solutions to the current banking crisis that seem to advocate for a return to the flawed regulatory system put in place after the Great Depression 1.0. In particular, there have been several suggestions that Glass-Steagall should be reinstated. Glass-Steagall, officially known as the Banking Act of 1933, not only established our deposit insurance system (FDIC), but separated deposit banking from investment banking.  66 years later, in 1999, President Clinton signed into law the Gramm-Leach-Bliley Act that repealed the portion of Glass-Steagall that once again permitted integrated financial services companies. Reinstating Glass-Steagall will not prevent the systemic crisis that has occurred with our banking system. The tools are already in place that could have prevented the coming collapse, but it is the failure of government to use those tools to provide transparency to the markets that has set up the situation.

 Our entire system is based on faith and credit (in the sense of trust). There can only be full faith and credit with full transparency. (See, Faith and Credit - Act Now to Restore Confidence.) Full transparency means that banks that accept other people's money (depositors, stockholder, bondholders) must report fully and accurately its assets and liabilities. As a depositor, I want to know whether the bank that holds my money is taking excessive risk or gearing up with excessive leverage.  The government's role should be to ensure the transparency of the markets, and my deposit bank in particular, with timely and accurate disclosures so that risk may be assessed. If my bank's leverage ratio goes to high, I will need information to make a decision as to whether I will keep my money in the bank or move to another, safer institution.  

The trouble is, that our government has abandoned its role in ensuring transparency. The FDIC will not disclose its bank ratings out of fear that depositors will do just what they should do - take their money and run. To date, Congress is refusing to enforce mark to market accounting - which means that no one really knows the value of assets on the banks' balance sheets (and thus also obfuscates the leverage ratio). Frankly, if the assets can not be readily valued, they should not be counted as assets at all, and should not go into the leverage/reserve requirement calculations.  Banks play games with their leverage as well by sweeping in deposits overnight only to re-lend them to the same borrowers the next day. The bottom line is that noone can tell what the banks assets are worth or what its leverage ratio is. A few bloggers, including Karl Denninger (who unfortunately also advocates for reinstating Glass-Steagall), have suggested that reporting daily leverage ratios will help. Frankly, in this day and age, with there is no reason that we cannot have much more frequent financial reporting than on a quarterly basis. Daily reporting may be overkill, but it is the kind of step that will provide the transparency that is needed to save the system. Once a loan goes bad or an asset is devalued, the depositors and investors will know and can use that information to make an informed decision. That transparency will provide faith and credit in our system. Strong, conservative institutions will be rewarded with numerous depositors, and riskier ones will find the type of depositors that are willing to bear the risk.

At the same time, while ensuring disclosure, we need to make sure the government does not rig the system to play favorites or put us at a competitive disadvantage. Government needs to take steps to make sure true and accurate information is available, but cannot intervene in the workings of the market. Government intervention and market regulation simply will not help instill faith in the banking system or cause anyone to give credit to the banks. Reinstating Glass-Steagall, or other artificial devices from the GD 1.0 such as the uptick rule and unit banking, will only weaken our system and put it at a competitive disadvantage with other countries banking systems, and delay recovery. Keep in mind, that Congress separated comercial banks from investment banks at the same time it instituted guaranteed deposits.  The government wanted to make sure that there would be a way to finance the system risk free.  Separating the banks removed that risk somewhat.  However, even with those market regulation devices, systemic collapse was and is still possible.  If the goal is to make sure there is enough funds for deposit insurance, the banks should be assessed fees (premiums) in accordance with the risk they take.  In other words, if a combined financial services entity is deemed more at risk than a stand alone savings bank, then the premiums it should contribute to the FDIC should be greater.  Another point to remember is that Glass-Steagall did not prevent integrated financial services companies.  We still had those entities we referred to as "non-bank banks" and a whole host of other entities that circumvented the Glass-Steagall prohibition.  A return to those days will only prevent the financial institutions from regaining strength, and make them more susceptible to risk from economic cycles.  Not to rehash arguments made before the passage of GLB, but it was noted by both parties in Congress that money flowed out of deposit institutions and into investment banks during economic booms, and the reverse occurred during economic busts.  Allowing diversified financial institutions actually strengthened the system.

What destroyed the system was the abdication of reporting oversight.  The truth was obscured.  Without sunshine, depositors and investors play a rigged game.  What the people need is knowledge and accurate information, not the government assuming the role of a parent dictating which practices are good and allowable, which ones are bad and prohibited. If faith and credit are the key to the system, then transparency is the lock into which that key fits.

 

FDIC Chair Advocates Bail Out to Save Insolvent Banks' Bondholders

In yet another act showing complete disregard for market discipline, fiscal restraint or prudence with taxpayer funds, FDIC Chair Sheila Blair is advocating for the taxpayers to spend more money to buy bad assets from insolvent banks. Blair claims the Bad Asset Plan will jumpstart the economy.  

FDIC chairman Sheila Bair told the newspaper that the cost might exceed the $700 billion Congress approved to bailout the U.S. financial system and that the greatest challenge is persuading banks and taxpayers to accept the necessity of the costly program.

"This takes courage to do, but if we don't do it, history shows that this kind of mechanism -- recognize the losses, get at the root of it and move on -- this is how you jump-start the economy," she said in a discussion with Washington Post reporters and editors. "The other option, just to park those assets on the balance sheet, I don't think that gets us very far."

In other words, instead of letting the insolvent banks and shareholders take the losses, the FDIC is suggesting to let the taxpayer take the losses.  The Calculated Risk Blog posted an excerpt from a 60 minutes article showing the FDIC seizing a bank.  In the excerpt, Blair admits that the government seizes and closes down small banks, but is ill equiped to close larger banks.  

So instead of liquidating the larger banks, we keep funneling more and more taxpayer dollars to support these insolvent institutions.  Buying "troubled assets" - which are nothing more than bad loans and bad investments - is subsidizing the loss. We tried before to purchase the loans and realized there was a disagreement as to value.  Bernanke wanted to buy the assets at a premium over current value in order to induce the banks to sell.  Blair is proposing more of the same.  

Make no mistake about it, capital infusions into these financial institutions as well as premium purchases of bad loans is the use of taxpayer funds to bail out bondholders and stockholders.  It is not making sure innocent depositors are made whole.  The ramifications to the financial system are not devistating.  Certainly, no one is advocating a disorganized, free-for-all liquidation of the banks, but if we are using government resources at all, it should be to facilitate an orderly break-up of the companies,  sell off the assets, and let the bondholders and stockholders take the losses.  Not the taxpayer.  

Why Not Let Insolvent Banks Fail?

Over the weekend, Senators Richard Shelby and John McCain finally floated the idea of letting big banks fail.  After spending billions of taxpayer dollars trying to prop up large but insolvent financial institutions, 2 of 100 Senators are finally realizing the black hole they have created.

The debate is now turning to nationalization.  Let's get some terminology straight - nationalization in this context does not mean having the government run the banks indefinitely. It is a temporary solution to provide an orderly liqidation of the banks.  We do it all the time with smaller banks that become insolvent.  That is the role of the FDIC.  The problem is that the FDIC is ill equiped to handle an insolvency of the size of Citigroup, Bank of America, or even non-bank groups like AIG.  

The solution is to let the banks fail under government control.  Government liquidation oversight will allow time for a replacement banking system to become established.  As part of the process, the governement could even create a new banking system now.  In fact, we already have a banking system in place - local community banks!

The real debate is the difference between Wall Street and Main Street.  Wall Street is dominated by a few very large institutions seeking the largest deals at the upper echelon of finance.  Without doubt some portion of our economy is dependent upon the financing brought by some of these large institutions.  On the other hand, we are told all the time that small business is the engine of the economy.  Small business creates jobs.  It is also true that small business does not do business with Wall Street.

Who finances small business?  The thousands of smaller regional and local banks!  That is right, our economy is not solely dependent upon Wall Street.  It is dependent upon Main Street.  The FDIC does not hesitate to pull the plug on Main Street banks, so why are we hesitating to pull the plug on Wall Street banks?  There is no reason to do so.  Lending will still occur, commerce will continue.  We will be healthier if we stop the bleeding.

Congress needs to understand that we cannot keep using taxpayer funds to replace business losses incurred by large Wall Street financial institutions.  Whether you take our money by taxation or by devaluing currency by printing more, or increase costs by borrowing more, the result is the same:  Main Street bears the brunt of the government action.  There is no just reason for shifting the burden of bad business decisions to the general public.  The failure to allow banks to fail is the failure to govern.  Stop the bleeding now.

FAITH AND CREDIT – ACT NOW TO RESTORE CONFIDENCE

All markets and all free governments are based on faith and credit.  Today we have lost all faith and credit in not only the markets, but we are on the verge of losing our faith and credit in our form of government.  Credit and faith can be lost for a variety of reasons, but the actions of the US Government – including the recent acts by the Obama administration, as well as the Bush administration and Congress – have engendered a monumental loss of confidence in both systems.

When rules are established to induce people to participate in a system, the rules need to be followed and unacceptable variations from the rules need to be corrected swiftly.  We are not doing that and as a result are undermining our entire system and way of life.  The term credit is derived from the latin word creditum meaning something entrusted to another.  The key concept is trust.  Faith on the other hand is derived from the term fides but also has its roots in trust and belief that one will honor their credit.  When rules are not enforced we lose trust in the system.  We lose faith that the credit we place in the markets and in government will be honored.

When we place our own money in a system, we expect that there will be uniform rules.  We credit the system with being if not fair at least consistent.  When we pledge allegiance to a form of government, our consent to be governed is based on the credit we place in the government to act fairly, impartially and with prudence.  We also have faith that the markets will return our funds, or at least give us the bargain that we thought we made.  In the same vein, we have faith that our government will not take actions in an arbitrary, capricious manner, and we have faith that our government will regulate the markets with fidelity.

One of the essential functions of all governments is to regulate the markets so everyone will have confidence in the system.  From time immemorial, governments intervened in markets for the benefit of those governed.  The most basic example is the setting of standard weights and measures. When you go to any market to buy a pint of milk or a bushel of corn or a pound of beef you have faith that the merchant is giving you the pint, bushel or pound for the bargained for price.  If those weights and measures were not standardized, you would not have faith in the system and you would not place any credit with the merchant.  You and others would simply choose not to do business in that market.  It is no surprise that the US Constitution confers on Congress not only the power to regulate commerce, but to specifically fix the standards of weights and measures.

The precarious position we are in today is a direct result of the abdication of the government’s power to root out fraud in the system – the most pernicious deviation from the standards set for the market and government itself.  Much has been written already about the fraud existing in the system.  Not the common garden variety type fraud like those perpetrated by the Madoffs and Stanfords of the world (see, Fraud, Fraud, Fraud), but the systemic fraud that is hidden from ordinary market participants, but when aggregated form a larger fraud than any perpetrated before.  When the game is rigged, people take their money and go home.  The massive withdrawal of funds from the markets and the amount of cash sitting on the sidelines is a direct result of the government’s failure to act to root out the fraud and create a level playing field.  The money won’t come back and the values of the baby boomer’s retirement accounts will not return, if ever, until the system is fixed.

The following are just a few examples of the systemic fraud that needs to be rooted out before faith and credit will be restored to the markets and our system of government:

1.       Continuing to bail out financial institutions at taxpayer expense when the institutions are insolvent and can’t be saved (for example, see Aig Black Hole - Us Continues To Pour Money Into Saving The Insurer );

2.                 Shifting losses from risk assumed by businesses to the taxpayers;

3.                 Refusing to regulate the credit default swap market;

4.                 Refusing to prosecute those borrowers who lied on their mortgage applications;

5.                 Refusing to take action against lenders and mortgage brokers who knowingly facilitated loans based on falsified mortgage applications;

6.                 Refusing to take action against the various ratings agencies that were paid to classify securities as AAA when they were based on falsified applications;

7.                 Refusal to prosecute those involved in the fraud and failure to enact legislation authorizing citizens to act as private attorneys general to ferret out the fraud (see, Hold Those Responsible Accountable!) ;

8.                 Refusal to impose mark to market accounting rules immediately;

9.                 Refusal to identify the recipients of taxpayer funds and to keep the markets, as well as government action, transparent (see Fed Still Refuses To Identify Recipients Of Our Money)    ; and

10.             Spinning official messages to give the impression that certain action is being taken when the exact opposite is being planned (see, e.g., Obama Calls For Fiscal Responsibility - Yeah, Right! and Fiscal Responsibility Summit Held to Pull Wool Over Nations Eyes).

There are many more examples, but the bottom line is that confidence needs to be restored to the system.  Fraud needs to be rooted out.  Wasteful spending needs to stop.  Playing favorites needs to end.  Effective representation of the people and the States needs to begin anew.  Only then will faith and credit be restored.

GM Considers Bankruptcy

GM Auditors Raise the Spectre of Chapter 11 according to an AP article posted on Yahoo.  

"The corporation's recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern," auditors for the accounting firm Deloitte & Touche LLP wrote in the report.

Gee, who didn't see that one coming.  

FED STILL REFUSES TO IDENTIFY RECIPIENTS OF OUR MONEY

Bloomberg is reporting that the Fed Refuses to Release Bank Lending Data, Insists on Secrecy.    

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

Transparency is exactly what is needed to get us out of this mess, yet the government continues to obfuscate the data and hide the private parties that are benefiting from taxpayer dollars.  In January 1932, a couple years into the Great Depression, Herbert Hoover asked Congress to create the Reconstruction Finance Corporation - an entity that lent money to banks and private businesses in order to prop them up during the ordeal.  Like the Fed now, the RFC refused to disclose the identities of the recipients of the taxpayers' money.  It took an act of Congress in July of 1932 to force the RFC to disclose the parties that benefited from the fund.  What was discovered was that the government was playing favorites - picking and choosing the winners and losers.  

The administration claims now that disclosure will undermine confidence in the parties that receive the funds.  What will undermine confidence in the system is the failure of transparency.  If it turns out that the government has been playing favorites, then confidence will be lost in those institutions as well as in government itself.  The only way to restore confidence is full disclosure.  Government is about rules and the equal application of those rules to the people.  Hiding the truth leads to fear and suspicion that the administration of justice and government aid is unequal and unfair.  Hiding the truth undermines our very system of government.

I suspect that most people believe there has been some degree of favoritism already in the administration of the bailout funds, but if we are serious about restoring confidence in the markets, it is imperative that we have faith in our government. That faith can only come about with full disclosure.  

Fed's Beige Book Shows Suffocating Economy

The Federal Reserve Banks released their "beige book" this afternoon.  The book contains not only raw data examined by each of the Federal Reserve Districts, but commentary on the conditions of the economy.  The beige book is released 8 times each year, and contains assessments from each of the 12 reserve districts as well as a national summary.  The latest book can be found on the Federal Reserve website here.

This month, the report leads with the following paragraphs:

Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies “remained weak.” The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.

Consumer spending remained sluggish on net, although many Districts noted some improvement in January and February compared with a dismal holiday spending season. Travel and tourist activity fell noticeably in key destinations, as did activity for a wide range of nonfinancial services, with substantial job cuts note in many instances. Reports on manufacturing activity suggested steep declines in activity in some sectors and pronounced declines overall. Conditions weakened somewhat for agricultural producers and substantially for extractors of natural resources, with reduced global demand cited as an underlying determinant in both cases. Markets for residential real estate remained largely stagnant, with only minimal and scattered signs of stabilization emerging in some areas, while demand for commercial real estate weakened significantly. Reports from banks and other financial institutions indicated further drops in business loan demand, a slight deterioration in credit quality for businesses and households, and continued tight credit availability.

Clearly there is no good news on the economic front.  Consumer spending remained weak, as did travel and tourism as households scaled back.  Healthcare, legal, accounting and other business consulting services were curtailed during the period.  Shipping and transportation continued to fall.  Manufacturing met with a very sharp decline except for biotech in New England (of course, if Obama's budget priorities get passed, bio and pharma will decline as well).  Real Estate is still abysmal, with declining demand across the board - residential, commerical, industrial and retail all showing no signs of improvement.  Lending also fell on lower demand, but commerical lending from community banks was still available, at least in the Boston district.  In addition, while food prices rose slightly, overall there was no upward pressure on prices or wages.

Las Vegas Now Wants Taxpayer Subsidies!

Las Vegas Sands owner, Sheldon Adelson, is criticizing President Obama for railing on bankers for holding meeting in Las Vegas.  Adelson, who not too long ago was once one of the wealthiest Americans, at least while his Las Vegas Sands enterprise was enjoying a sky high ride on the stock market.  Adelson's fortune is tied to the Las Vegas roller coaster.  The company's stock sold at one point for about $140 per share.  Today it is going for about $2.30 per share.  

Las Vegas is one of the most popular destinations for conventions and meetings.  Adelson played no small part in transforming the town from a mob-run laundering operation into the premier destination for meetings and conferences.  In fact, in terms of meeting space, Vegas can't be topped.  Only Orlando gives it a run for the meeting money.   When the economy causes businesses to tighten their belts it is understandable why attendance at meetings, conferences and conventions are cut back.  Las Vegas, like Orlando, is suffering from the poor economy.

The real question is whether taxpayers should subsidize lavish meetings and conferences.  Obama, understandably, does not want bankers who receive taxpayer funds to pay for lavish conferences and meetings.  We expect government funded groups to behave responsibly.  Adelson needs to understand that the taxpayers can't subsidize Las Vegas.  On the other hand, the government should not be in the business of playing favorites and moving meetings from Las Vegas to Obama's hometown of Chicago for example.  

The bottom line is that bonuses and conventions are not the type of spending that taxpayer subsidies should be used for.  If these bankers can afford a conference or bonus, they shouldn't be receiving our money.

CPAC Drifting In Search of Message

What's wrong with the Republican Party?  The GOP conservative CPAC (Conservative Political Action Committee) has been trying to re-identify itself.  The question is whether the GOP has any continued relevance after the Bush legacy.  Tim Pawlenty, the Minnesota Governor, says it is time to get over Reagan according to a Bloomberg story.

The Republican Party needs to do a lot more than move beyond Regan.  True he was a great orator and could unite America with his words of comfort, but after starting a revolution and, eventually in the Clinton years gaining control of both houses of congress, the Republicans forgot their values.  They became tax and spend conservatives.  Frankly, if we are increasing the size of government, I would rather have a government that looks out for the welfare of its citizens than the conservative Republican social agenda.

The fact of the matter is that if the GOP is going to have any relevance, it must focus on fiscal restraint, limited government and federalism.  It needs to stay away from social issues, which have no place in politics (other than to unite people to convince them to give money to a candidate).  The Republican party squandered an opportunity to demonstrate what principled leadership can do, and instead increased the size of government and used it as a vehicle to instill cronyism and redistribute wealth to the wealthy.  It is hard to see how those values resonate with anyone these days.  

AUTOS CONTINUE TO RUST IN PORTS

US Automobile sales are expected to continue to decline about 42% from last year at this time, Reuters reports..  That is only 685,000 cars and light trucks were sold in February, although that number should be up slightly  from January sales.  Annually, that projects to 9.5 million cars and trucks - that is the same sales level as in 1982.  Yikes.  

The decline, however, should not have been unexpected from the auto industry.  Over the past five years, the industry ramped up production and sold cars on credit to borrowers with lower risk profiles than normal.  The availability of credit and low interest rates artificially accelerated demand by a couple years.  The decline in auto sales is heading towards the mean, although as can be expected, the sales decline will need to overshoot the mean before coming back.  

This is not the first time in history that we have experienced such a cycle in manufacturing and in the auto industry in particular.  Granted, this occurs at the same time a global financial crises occurs (due in part to the auto makers' foray into the credit industry), but it is hard to have any sympathy for an industry who's business practices caused sales demand to increase beyond what was sustainable.  Instead of taking the profits and putting them to use restructuring the company and preparing for the inevitable decline in demand, the auto makers squandered the resources and find themselves begging Washington for more bailouts.  

Bailouts are not the solution to poor business practices.  Forced restructuring is the solution.  Chop the companies up into bits and sell off the parts to the highest bidder.  The industry won't go away, and will be much stronger  as a result.  Manufacturing can be profitable, and America can sell price competitive products once the legacy systems burdening the industry are put to rest.  

AIG BLACK HOLE - US CONTINUES TO POUR MONEY INTO SAVING THE INSURER

AIG the insurance giant "partially" taken over by the US Government (under the Bush administration) is getting another $30 billion of your tax dollars.  The Federal Reserve announced this morning that the terms of the bailout have been adjusted.

The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally. The additional resources will help stabilize the company, and in doing so help to stabilize the financial system. 

The New York Times stated that AIG plans to announce a $62 Billion loss last quarter.  Continuing to use taxpayer dollars to bailout AIG is simply throwing good money after bad.  AIG got into this mess because of its unfunded credit default swaps backed by no reserves.  The unregulated CDS market was (and still is) nothing more than a casino style sports book where the events being bet upon were the health and stability of the banking world.  Casinos stay in business because they balance their books with offsetting bets and make money on the vig.  A well run CDS game should have been done the same way.  Unfortuantely, AIG did not have a balanced book, thus with every bank failure and with every corporate failure that it bet against, AIG will have to shell out more and more money to pay off its losing bets.  The notional value of AIG's book is $300 Billion.  The losses could actually be much higher.

Ultimately, AIG will fail - there is no way we can continue to sustain these losses on taxpayer dollars.  While the government is trying to buy time in the hopes that the economy will turn around in time to minimize AIG's losses, our taxpayer dollars are being used to payoff bets AIG made on the health of the financial system.  The wisdom of the continued bailout is being questioned.  Peter Morici told Reuters that "[t]here's no amount of money that you can give (AIG), there are $2 trillion in losses out there."  Karl Denninger, who recently won an award for truth in journalism, even questioned the lawfulness of the Fed's investment.  His analysis is on target.  The gist of the argument is that the Fed is not empowered to make investments, but only to lend money on the best collateral.  What the Fed did with AIG is make an investment first into preferred stock and then converted that into common stock with additional cash.  The Fed isn't making a loan at all, but is shelling out taxpayer money to support an institution that is bound to fail.

The Bush administration made the argument that a takeover of AIG was necessary to prevent a siezure in the insurance industry - so that businesses on Main Street could maintain insurance.  Of course, that was pure rubbish, as all traditional lines of insurance are regulated by the states and require reserves to fund probable liabilities.  The CDS market was not regulated, required no reserves, and is irrelevant to Main Street businesses.  It was a corporate bet that made money for AIG's executives for years, and it is now loosing money for the taxpayer.  This silliness needs to stop.  The only reason to take over AIG in the first place is to assist an orderly liquidation so as not to shock the market.  I accept that as a legitimate function of government.  

Using taxpayer funds to prop up institutions is not a legitimate function of government, and will lead to disasterous consequences down the road.   We rightfully expect our government to be fair and impartial in its dealings with its citizens (including corporate citizens), and we have a right to expect prudence with our money.  The governement cannot bail out all entities.  By picking and choosing which ones to save and which ones it should let perish, the administration is playing favorites.  Playing favorites undermines confidence in government.  Just as Bush and his cronies were roundly unpopular because they blatantly used government power to favor a few at the expense of others, President Obama is heading down that same path.  It makes no difference that the Democratic favorites are different than the Republican favorites.  It is still choosing winners and losers and it is not being neutral.  Faith in government will continue to erode until the nonsense stops.  AIG will fail eventually despite the governments best efforts.  The question is, will the United States go down with AIG?