Relevant and even prescient commentary on news, politics and the economy.

Billions for Bankers, Nothing for the Housing

Good Thing We Have Deficit Hawks in Congress:

The tenants were all living low-rent under a program that’s beginning to expire – but had been promised they could still qualify for a federal Section 8 rent subsidy.

But this week, when many of them began to show up at New York City Housing Authority offices, which accepts the vouchers and administers the subsidy, they were told the program was kaput….

NYCHA Chairman John Rhea Thursday blamed the move – which could push thousands into the city’s already crowded shelters – on Congress, a lower-than-usual attrition rate in the program and unprecedented demand….

More than half the vouchers – 1,833 – had been given to families and individuals who were once homeless.

Rhea, a former investment banker who took over the agency this year, said Congress didn’t set aside enough money to run the program through the end of the year.

Congress took $58 million from the authority in May from funds that were earmarked for Section 8, Rhea said. [link to Rhea appointment added]

Good to see responsible budgeting only means putting 3,000 families out on the streets just in time for the first big snowstorm of the year.

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Would Have Been Hoisted from Comments Elsewhere

But Steve Randy Waldman already did the heavy lifting:

several of the other officers had been stationed at the height of the housing bubble at facilities located near D.C. in Northern Virginia. They lived in very modest homes which were removed from their workplaces by substantial driving distances, but these homes were nevertheless particularly pricey for someone with a family and on a military salary. The humble homes ate significant chunks out of those salaries as the commutes did to the (already scarce) time these men had to spend with their families….

While we were away, about halfway through our deployment, the crash began and something mysterious had gone horribly wrong with the machinery of America. The small equity positions these men has invested in their respective residences were wiped out in a matter of months. By the time they were close to returning to these homes the men were all badly underwater by over one hundred thousand dollars and, what was worse, the Army had reassigned them….

Their instinct was that if they had borrowed money from a friend or a neighbor they would feel a deep, almost sacred, obligation to make good on their debt and pay it off in full plus interest as soon as they could manage it….That was, after all, the “right thing to do” as they had been taught by their parents and grandparents.

But then the bailouts with taxpayer money started. The “too big to fail” talk began, and then the wave of foreclosures and layoffs and emerging scandals of the unjust excesses of the financial industry, and so on. And these men began to feel that from the personal scale of their little world, their family was also perhaps “too big to fail” by the forfeit of their hard-won life’s savings.

They also started to question how the bailouts could make sense without some of the benefits flowing to innocent and responsible men such as themselves….

Go Read the Whole Thing.

Note:I mentioned this near the end of my last post, but it really deserves to be seen and read by more than the six people who might read to the end of that one.

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Are TBTF Banks Out of Danger? The Market Doesn’t Think So

Down here it’s just winners and losers
And don’t get caught on the wrong side of that line

This will be a long post. Even with all the pictures above the fold.

It started with a finger exercise during my daughter’s swim team practice:

Just in case you thought I was picking on The Big C in my previous post, let us look at the other major financial institutions (Too Big to Fail, or TBTF, Banks) over the same time period.

The Remaining Investment Banks:

While Goldman Sachs—as with most of the other so-called Winners—shows a significant upturn and major gains since the beginning of 2009, Morgan Stanley’s appreciation has been rather less apparent. However, both have returned only to approximately the price they held during the interregnum (after Bear Stearns fell but while Lehman Brothers ignored the warning and decided not to right the ship).

The Mortgage Lending Leaders:

Both firms show an increase in stock performance beginning in Q1 of 2009. Wells Fargo had a precipitous dive after LEH filed bankruptcy, but recovered in a similar amount of time. JPMorganChase, having acquired Bear for either a song or too much money, remains below the level it reached during the interregnum, but solidly in the middle of its range since 2006.

The Consumers-as-Profit-Center (“Retail”) Banks:

As is apparent, Capital One’s stock decline was not precipitated by the proximate solvency crisis itself, but rather by the decline in earnings and profits, and deflation in wages, that was in full swing by early 2006. While Bank of America does not have that preamble, it sees a similar decline in its stock price from the middle of 2007. By the time the recession is officially declared, the trend has started. And while Bear’s fire sale to JPM causes a decline in bank stocks, it is not until LEH that BAC mirrors its competitors above. More like MS than GS, BAC’s recovery to less than one-half of its pre-recession trading price suggests that the market is less confident than management that the firm’s major issues are behind it.

But one thing abides. The market isn’t happy.

Even as we might divide this squad into Winners (GS, JPM, WFC), Losers (C, MS), and Also-Rans (COF, BAC), six of those seven (exception: JPM) appear to be viewed by the market as no stronger than they were during the interregnum, the time when everyone was waiting to see if the other shoe would drop.

There are certainly other reasons the stock price might be down: insider selling at the firms is at record or near-record levels, and sooner or later people will figure out that when insiders are selling at 82:1 levels is not the best time to buy. Their loans are down (post on that coming soon) while, as Linda notes at ataxingmatter:

A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks. That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk. That advantage may amount to as much as 48% of the TBTF banks’ profits this year (or as ‘little’ as 9%, on very conservative assumptions). The government, by the way, gets nothing for this implicit guarantee–unlike a commercial guarantor, it is not being paid a regular premium for the service.

So maybe investors believe that this advantage will go away. (Or, as noted above, maybe investors have figured out that the Big Banks aren’t taking advantage of this opporunity, expecting that it will never go away.)

The one certainty is that, with all of their advantages (the refusal of the Administration to support cramdowns for non-investment properties, leading to perverted accounting that makes banks solvent and mortgageholders underwater at the same time on the same property; the continuing payment of interest on Reserves in a deflationary environment, which has created a perverse incentive for the TBTF Banks not to lend; charging their smaller competitors for the TBTF Banks’s failures by raising their FDIC contribution and collecting three years of it upfront after not having saved for a rainy day; having Administration economic policy run by Larry Summers, whose last foray into the financial markets was too embarassing even for him to explain (h/t Felix); Ben Bernanke having decided that doing only half his job should be enough (h/t Brad DeLong); and the general delusion that the banks are necessary to and helping with a recovery. And that’s off the top of my head.

As The Epicurean Dealmaker observed last week vin a post eeryone should read:

Chancellor [of the Exchequer Alistair] Darling could not have been clearer:

“I’m giving them a choice. They can use their profits to build up their capital base, but if they insist on paying substantial rewards, I’m determined to claw money back for the taxpayer,” he said.

[H]e plans to do this by making banks choose between their employees and their shareholders…

Economists have made this point repeatedly: the first priority of people who run a business should be their responsibility to their shareholders. (See Steve Randy Waldman’s post yesterday for a clear explanation. And then see the post he pulled from comments after that, which saves me the trouble of hoisting from another person’s comments again for the real ramifications of TARP and the bailout. Why do Megan McArdle and the Administration hate the troops?)

Paying large bonuses while the banks themselves remain near insolvency is bad for the shareholders. Goldman Effing Sachs realizes that, even if they didn’t quite go far enough.

Why do I believe the state of the TBTF Banks ranges from near insolvency (C, MS) to on the edge of insolvency? The market tells me so.

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Why Does Santa hate poor kids? (Seven shopping days to Christmas )

by Bruce Webb

I posted the below last Christmas Eve. Which was too late to actually discuss the issue. People decry the commercialization of Christmas, which is fair enough. And on econoblogs we discuss income inequality a lot, plus we wonder why working class people simply accept the logic of “no poor person ever gave me a job”. Well I suggest the answer may be as simple as teaching poor kids that Santa hates them and the Tooth Fairy thinks they are second class citizens. Those early lessons stick. More downer below the fold. But there is a point here.

This is in response to some comments on Kos’s Track Santa post (about NORAD ‘tracking’ Santa and putting it up on their website).

Well, the guy dresses in all red (24+ / 0-)
and gives away the products of his factory’s labor to those depending on their needs.

Of course NORAD was going to track him. I’m surprised they didn’t lob the occasional Nike missile at him back in the day.

Effin’ Commie.

by Robobagpiper on Wed Dec 24, 2008 at 08:45:02 AM PST
[ Reply to This |Recommend ]
Spreadin’ the wealth around. (14+ / 0-)
Why does Santa hate the real America?

DEPENDING ON THEIR NEEDS? Not in this country. In my experience children in lower-income households figure out the Santa thing somewhat earlier than kids from more affluent families. Otherwise they would go crazy asking the question that titles this diary.

Because when you get back to school after Christmas vacation the first question you ask is “What did Santa bring you?” And the rich kids, the ones that already have everything anyway are always the ones who get the most and the coolest stuff. I don’t know that anyone is trying to deliver this message conciously or even that kids consciously understand it. But it serves to socialize class differences in a Social Darwinist kind of way. After all if God didn’t want rich people to be rich why are they rich? Obviously they must deserve it because of their higher level of education and skill or something and that extends to their children. Now I think even the youngest poor kid understands that the rich kid gets better birthday presents, you have to be pretty dim not to understand the difference between your parents struggling to make rent and pay bills and the kid who lives in the big house on the hill. But why the hell does Santa have to pile on?

Robobagpipers comment was funny but in reality is painfully off the mark. Far from being a socialist devoted to the concept of ‘From each according to his ability, to each depending on their needs’ instead Santa ends up as the patron saint of Income Inequality.

My family was kind of lower middle-class but we always had nice Christmas’s. Lots of good food and nice gift exchanges on Christmas Eve plus some bonus presents from Santa on Christmas morning. Whereupon we got in the car and visited my Grandmother who lived sixty miles away with her daughters and their children plus an infant great-grandson in pretty dire poverty. I learned pretty early on not to discuss what Santa brought me with my cousin Joe because Santa didn’t bring him jack.

I am not suggesting ruining Christmas and the belief in Santa for the really small kids. But you need to think about the message you are sending after your kid reaches school age, particularly if you live in a town or city with a fairly wide range of income inequality. Because whether your kid comes home and asks ‘Why does Santa like me and hate Billy? Was he naughty?’ or worse ‘Why does Santa like Billy and hate me? Was I naughty?’ you might be left stammering. At least if you believe in social and economic justice the other 364 days a year.
2009 Update. Or maybe the other 362 days a year. Because the Tooth Fairy and the Easter Bunny discriminate on the same basis. But I suggest it is the pretty lame first grader that really believes in either. But Santa is different, where the Tooth Fairy works on the same tariff and the Easter Bunny can be counted on delivering the same Easter Basket year in and year out, who knows, Santa might come through with that pony. If you have been good.

This is not to blame Santa for this sense of entitlement and exceptionalism by the wealthy, instead that is perhaps better explained by a toxic mix of Calvinism, Capitalism and a generous dollop of Social Darwinism. But what better way to teach some future Wall Street Master of the Universe that by God he DESERVES that multi-million dollar bonus even if his firm had to be bailed out by the government than catching him when he is four or five years old. After all if Santa hadn’t meant him to be rich where did that big pile of presents come from? While poor kids have to be bailed out by the Marines’ Toys for Tots and the Salvation Army. Serves them right for being naughty losers.

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Much to My Amazement

UPDATE: It gets even stranger. The bankrupt-since-October-2008 Lehman Brothers is going to pay $50,000,000 in bonuses for this year. (h/t alea’s Twitter feed)

It appears all of the “gosh, we really made a lot of money from bailing out rich bankers who socked it to their customers” rhetoric is having a small problem in the realization:

The U.S. government abruptly shelved plans to start trimming its 34% stake in Citigroup Inc., after investors demanded a price so low that the Treasury Department would have lost money on the deal….

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects…

Gosh, golly, gee. Really? I wonder if that’s a recent phenomenon:

(Recession period—still not officially over—shown in cyan.)

Hmmm. Guess not. Ah, well, there’s always next year. Or the year after. Or…

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Banks exiting TARP

by Linda Beale (cross posted from ataxingmatter)

Banks exiting TARP

Citibank has confirmed its plans to pay back the bailout funds directly provided to it. See NY Times. Of course, the fact that banks are paying back direct bailout funds does not mean that there is no further bank bailout going on. The government now stands as guarantor, an assurance that has provided a significant cost-of-funds advantage to big banks. One has to wonder whehter there will ever be a complete reckoning regarding the total amount of the assistance that big banks and insurers have received. It is something that is terribly important, if we want to make wise decisions on financial system reforms. One suspects that whatever bill passes the Congress will have a number of poor provisions, given the influence of bank lobbyists and the vulnerability of Congress to that influence. Without public pressure expressing the rightious rage at bank’s profiting from the bailout without corresponding assistant to Main Street and bankers’ profiting personally while middle America hemorhages jobs, we’ll continue without the significant changes that are needed.

Not surprisingly, the banks that exit the US bailout program are going to continue to benefit from the “special” rules written to override the regular rules preventing loss trafficking. Last week, Treasury made clear that government sales of stakes in banks won’t be taken into account in determining whether there has been a sufficient ownership change to invoke the rules under section 382 et seq that limit loss use to a formula intended to keep losses used at pre-ownership change use rate.

And lifted from comments by Rdan.
Ken Houghton says:
I don’t wonder. The word is already out: it was profitable, no matter what the reality is. (To paraphrase a combination of John Anderson in 1980 and Lloyd Bentsen in 1984, let me borrow at -0,25%, loan at 30%, and write $300 billion in hot checks, and I can balance the budget too.)

Linda Beale responds:
Ken is certainly right–the research so far on cost-of-funds analysis for Big Banks aided by TARP suggests that as much as 48% of the Big Banks’ current profits are due to the cost-of-funds advantage from the government guarantee. They have soaked up corporate welfare and loved it, while still fighting with every breath any possibility of a “mortgage cramdown” which would permit homeowners to reduce the principal amount of their home mortgages in bankruptcy. Why the shoveback against the cramdown? Because it would require them to recognize the real losses now, rather than at their timing. And would lower their market cap value, making it harder for them to continue merging and growing ever bigger and even more “too big to fail.”

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Obama, Bush, Mankiw: A Look Taxes, Spending, and Bull#@% in the Great Recession

by cactus

Obama, Bush, and Mankiw: A Look Taxes, Spending, and Bull#@% in the Great Recession

This post serves as a quick follow-up to my previous post on real GDP per capita growth and the tax burden. Let’s start with a few facts…. not random opinion, but facts.

1. The “Great Recession” began in December of 07 – that is, Q4 07.

2. If you look at Current Federal Gov’t receipts (line 1 of the BEA’s NIPA Table 3.2) divided by personal incomes and (line 1 of the BEA’s NIPA Table 2.1) you get this:


I dunno about you, but to me this looks an awful lot like a game of “Meet the new boss, same as the old boss.” Because both bosses seem to be cutting gov’t revenues, that is to say, taxes.

In fact, Obama seems to be a bit more prolific…. (Gubmint Revenues / Personal Income) = 0.22 in Q3 of 2007, and .2000 in Q4 of 2008, GW’s last quarter in office. That is to say, a change of 0.02 over 5 quarters, or about 0.004 a quarter.

But in Q3 of 2009, the last quarter for which we have data, (Gubmint Revenues / Personal Income) = 0.183, which distributed over the three quarters of Obama’s term so far, comes to about 0.005 a quarter. That is to say, the percentage of your income the gubmint takes away went down faster during the time Obama was in office than during the recession months when GW ran the show. Sure, a lot of that was stuff that started under GW, but it is silly to say anything along the lines that taxes have gone up since Obama took office and that’s what’s wrong with the economy right now.

3. The next graph looks at how gubmint revenues and gubmint spending (line 20 of the above mentioned NIPA table 3.2) have changed since Q3 of 2007, the last quarter before the recession. (I’ve adjusted for inflation using the CPI from the middle month of the quarter – data from FRED.)

I’m doing this at speed (deadlines!!!!) but if I didn’t screw up, it looks like this:

All of which is to say, the stimulus, such as it is, is (slightly) more of a reduction in gov’t revenues than an increase in gov’t spending. I had a series of posts last year about how the stimulus was badly designed, and indicating that I was afraid Obama was going to simply continue following the failed policies of the old administration. So far, Obama has disappointed me by doing just that. And we’re all paying a price.
by cactus

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Get Ready to Throw Momma from the Train

It’s coming closer:

Once the tax expires, those inheriting estates after Dec. 31 will have to pay capital gains taxes on any asset sold. The cost will be based on the original price of the property, which could mean record-keeping headaches and bigger tax bills for some people.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Baucus argued on the Senate floor.

Fortunately, unlike Health Care “Reform,” this only affects a few people:

The estates of about a quarter of 1 percent [0.0025 — ken] of Americans would be subject to the tax under the House bill, according to the the Brookings Institution-Urban Institute Tax Policy Center.

I guess someone hasn’t blown Joe Lieberman enough this week.

(Title Reference)

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