Slouching Towards Wall Street… Notes for the Week Ending Friday, 8 April 2011
All people are born alike — except Republicans and Democrats.
Q: Where was Obama when the lights went out?
Daintily executing his steps in the cynical legislative minuet, Senate Majority Leader Harry Reid requested that the Treasury provide an estimate of how soon the debt limit will be reached, and “a description of the consequences of default by the United States.” Countering on cue, Secretary Geithner observed that the government only has “$335 billion of ‘headroom’ beneath the current limit” of $14.29 trillion.
“Only $335 billion?!” we were moved to snort. “Timmy — you call that ‘headroom’??? TARP cost us three times that! Those monkeys down in Washington better get cracking if they ever expect to be able to bail anyone out again!” As we prepared to sign off for the weekend, the one most in need of a bailout by the US government was… the US government. Notwithstanding ruminations some weeks ago by Newt Gingrich — historian, former legislator and one-time shutter-down of government — that a shutdown might actually be good for the Republican Party, we join our fellow pundits in the universal head scratch wondering who wins when the world is unnecessarily complicated. We admit to sharing Secretary Geithner’s lack of credentials: we, too, are not an economist. But we have observed certain phenomena over the years that resound in our admittedly solipsistic brain as imminently obvious. To quote Groucho once again: a child of five could understand this — someone fetch a child of five!
Here is a business owner’s budget: How much revenue did we take in this quarter? And how much did it cost us to keep the doors open this quarter? Now how much is left over? Now we know how much we can spend — or save for the rainy day that always comes.
Here’s a politician’s budget: How much money is in the pot? What?! But my district needs three times that, so there’s certainly nothing left over for anyone else! What’s that you say? — I didn’t come up with a proposal? OK, we’ll build a bridge. To where? Who cares! Just build, baby, build! Votes, votes, votes! — Oops! — I mean jobs, jobs, jobs!
It should be lost on no American voter that the business of private enterprise is to remain in business and sock money away, taking steps to improve efficiency in order to maximize the difference between the revenues a business generates and what it costs to stay in business, while the business of politics is spending other people’s money to maximize the likelihood of getting re-elected. Please correct our thinking on this point if you find it flawed.
Right on cue, at the eleventh hour and fifty-ninth minute, our leaders once again proved they are every bit as capable of manipulating the public as the most seasoned Hollywood producer. Forget “cast of thousands” and the hundred million-dollar budget. Our drama had a cast in the hundreds of millions, and a budget in the trillions. “The Budgetator” — Top that, James Cameron!
One might think it odd that Tim Geithner’s macroprudential insights are being solicited on the possible closure of the federal government. This is the same Tim Geithner who runs the printing press, that funds the Federal Reserve, that buys the bonds that Tim Geithner issues, that fund the government, that is asking Tim Geithner’s advice on whether to stop spending any more of Tim Geithner’s money and shut themselves down… In a burlesque of one of the worst financial blow-ups in recent memory, Tim Geithner is the banker to Ben Bernanke’s Long-Term Capital Mismanagment. Bernanke, admitting what the world has known all along — that he is running the world’s largest hedge fund — has at last decided to do what every other hedge fund manager routinely does and hold a quarterly call with his investors. In this case, the entire world.
Geithner’s letter contains some interesting observations. He writes that increasing the debt limit “does not increase the obligations we have as a Nation; [Mr. Geithner’s capitalization in the original, reminiscent of Steven Colbert… “Nation…” but we digress]it simply permits Treasury to fund those obligations that Congress has already established.” This is beyond coy even for someone as deliciously snot-nosed as Mr. Geithner, whose uppity tongue lashings of Congress we have thoroughly enjoyed. We agree that increasing the debt limit “does not increase the obligations” of the government. However, it does empower Congress to “increase the obligations of the Nation” by immediately instructing Tim Geithner to issue more debt — the bulk of which will be dutifully purchased by Ben Bernanke’s Long Term Capital Mismanagement hedge fund, which will continue to buy Treasury debt for as long as his banker, Mr. Geithner, does not issue a margin call, which everyone knows he can’t because Congress is relying on this cash to fund their porky-dorky projects. This cyclical sterilization of Treasury debt keeps the Nation’s indebtedness growing, while keeping the interest rate this Nation pays itself artificially low. Yes, in the plain English meaning of the word, raising the debt ceiling does not increase that indebtedness; it is, nonetheless, the requisite condition precedent. If Master of the Universe and hedge fund whiz kid Ben Bernanke were forced to borrow money from unaffiliated bankers the global capital markets, his Long Term Capital Mismanagement would have long since been hit with the mother of all margin calls.
So now we know why the banks aren’t lending to business: they are dutifully buying the Treasury’s paper, helping to suck it out of the system as instructed by their friends at the Fed — their regulator. Like dogs trapped together in a reproductive spasm, Treasury and the Fed have furiously pursued a closed monetary loop that purposely excludes all useful deployment of capital. It will take much more than a bucket of cold water to separate them.
While we are on the topic of plain English definitions, we wish to point out to Messrs Geithner and Bernanke that “sterilization” is also used in a metaphorical sense to mean “emasculation,” a particularly apt usage when applied to Congress, the president, and the gang of market manipulators piloting this great, unseaworthy ship of state.
Evidence of gonadic fortitude came somewhat unexpectedly from the desk of Congressman Paul Ryan, whose budget proposal was written not with a number 2 pencil, but with a chainsaw. Never mind the well-reasoned analyses that say Ryan’s budget will fail (CNN online, 10 April, “Fareed’s Take: Why Paul Ryan’s Budget Won’t Work”), and never mind that we disagree on certain fundamental aspects of Congressman Ryan’s social policy objectives — increased spending for defense, not touching Social Security — the main thing is, someone has finally said the En-word: “En”-titlements. Why has it taken so long to let this pathetic genie out of the bottle?
Tim Headroom says that “because of the magnitude of past commitments by Congress” it is not possible “to avoid raising the debt limit by cutting spending or raising taxes.” We understand that past Congressional commitments are Now expenditures, while tax revenues are Tomorrow revenues. But if Congress makes all the rules, it can certainly make a rule saying Congress has the authority to halt spending while it reassesses projects previously committed to. In this regard we could learn a thing or two from some of our Latin American neighbors. Since America is rapidly turning itself into a third-world nation, we could profit from analyzing the success of countries who have left their bananas behind and emerged as global financial powers.
Brazil’s President Dilma Rousseff has attempted to slam on the fiscal brakes by halting federal spending on projects awarded in the latter months of the Lula presidency. The program would hold up payments for projects that were approved, but have not yet been initiated, or on which work has been suspended for a significant period. The proposal is to reassess these projects — in essence, to put them through a renewed approval process. It is estimated that this program could save at least US$ 20 billion in the current budget year. Needless to say, the proposal is meeting a fecal typhoon of opposition. Still, we should take a hard look at current levels of domestic US pork before we snicker over the venality of our neighbors south of the border. There is no reason Congress could not legislate a “Stop The Madness” provision that shuts down certain cherished government activities, without actually shutting down the government.
Timmy Headroom quotes a February, 2011 report by the Congressional Research Service: “If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed.” This would entail shuttering all discretionary programs, cutting “nearly 70% of outlay for mandatory programs,” and / or a two-thirds increase in revenue collections in the second half of this year. Mr. Geithner says “none of those budget policy choices is feasible or responsible.” Then comes the En-Bomb: “As a consequence, given that Congress has imposed on itself the requirement for periodic increases, there is no alternative to enactment of an increase in the debt limit.”
Plain English: you guys started this monstrous mechanism. You found the spigot open and have failed to close it. You inherited a cesspool of cowardly political pandering and fiscal irresponsibility and you have done nothing, nothing, nothing to fix this rotten system. Rather than take responsibility for fixing your predecessors’ legacy of greed, cretinism and socially destructive policy-making, you have set up a series of straw humanoids ready for finger-pointing at the drop of a dunce cap — you have turned your energies to keeping yourselves in office, to keeping the pockets of your biggest supporters lined, and to urging on the galloping destruction of the most valuable part of American society: the moral credibility on which the stability of both our currency and our society rest. Now, says Mr. Geithner, you’re asking me how to fix this?
Score one for Timmy Headroom. Good on you, Mr. Geithner. Here’s one American who won’t be sterilized any time soon.
All that glitters is apparently not Goldman.
As reported in the Wall Street Journal (7 April, “Hot Idea Comes Up Short At Goldman”) the firm set up a private marketplace in 2007, “open only to institutions and ultrarich investors.” Its purpose was to permit companies to offer shares directly to buyers, without going through the cost, headache, and public disclosure required of offerings in the public markets. While initial results looked quite promising — Oaktree Capital Management sold a 15% stake in this private venue, raising about $1 billion — it quickly and mysteriously dried up. The Journal reports that “fewer than seven Apollo trades took place last year,” referring to Apollo Management, another early launcher in the private exchange which has since abandoned Goldman for the Big Board.
If you find the Journal’s language oddly imprecise — “fewer than seven trades” — note that Goldman counts each individual buyer in a single block as a separate trade. We suspect that the sellers may be arguing with that definition, which is presumably one measure of performance in this new exchange. Fees are not disclosed, but we speculate that Goldman is making a bigger piece of change, for less work, than it would if it were running a public offering. Goldman can get paid piecemeal on any transaction and is not held to a firm commitment cash raise, a standard investment banking structure in which the underwriter guarantees a minimum amount to the client company and must make up any shortfall out of its own coffers.
Goldman says the idea worked, because it permitted private companies to sell shares and still remain private. We assume it was not a big money maker for the banking firm, because Goldman appears not to be competing for trades with other private venues where shares of Facebook, LinkedIn and Twitter are changing hands.
At the same time (WSJ 8 April, “US Eyes New Stock Rules”) the SEC is considering loosening the restrictions on private offerings. New facilities would include an increase in the number of shareholders a company may have and still be deemed private (currently 499), as well as permission to advertise private offerings.
The stated public policy objective of this move would be to keep up with changing markets and respond to the increased demand for private investment — the Journal says the volume of private share purchases went from $2.4 billion in 2009 to $4.6 billion last year. The unstated, but clearly well-understood, objective would be to undermine the role of the exchanges in stock offerings. Bankers would be driven to offer private financings as a viable option for their corporate finance clients — this would presumably be good for the major investment banks, as it opens the playing field where the richest transactions stand to be completed — and it would be good for the client companies.
It is clearly bad for market transparency, but the SEC apparently has other fish to fry. It is not bad enough that private investors are routinely crushed when they try to trade stocks on the regulated exchanges. This new facility would remove a significant capitalist opportunity from the hands of the average investor — read: America’s middle class — and shove it back into the maw of the wealthiest few. We recall that Goldman abruptly cancelled all domestic transactions in its private purchase of Facebook shares. In the interest of fairness it also prohibited all its own partners from participating. This was because Goldman’s legal team believed the profile of the deal had risen to the level of public knowledge, and they feared this would be construed as a violation of the ban on solicitation of private offerings. In the end, the transaction was done exclusively with foreign investors.
As an aside in her letter discussing the new private market proposals, SEC Chairman Schapiro wrote “At no point in time did the staff instruct or advise Facebook or Goldman Sachs that the offering could not be conducted in the United States.” It is not lost on us that, with Congress cutting their funding, the SEC needs all the friends it can get. Thus does Schapiro emerge as Lloyd Blankfein’s new BFF. Next thing you know, he’ll be invited to her birthday party.
Karl Marx is getting a boost from some unlikely sources. America’s middle class have long been in an uncomfortable relationship with the nation’s poor and working classes. Not rich enough to live in gated communities, the middle class send their children to the same public schools, shop in the same malls, and take the same public transportation as their less well-off neighbors. The divide from Here to Across the Tracks is a mere stone’s throw, and when tempers flare, the metaphor becomes reality. Now the social policy objective of new financial regulation has emerged: we really don’t want a middle class in America.
The middle class has historically served key functions in our capitalist democracy — notably, it has been the guarantor of both capitalism, and democracy. The middle class acts as a vast economic buffer. These are the small to mid-sized business owners who employ large numbers of the nation’s working class. They are also the managers of large corporations, where they oversee the action of lower economic classes, for the benefit of the wealthy.
Politically, the middle class are often seen as a homogeneous interest group, largely wanting the same thing with respect to taxes (less), health care (cheaper), and education (better). As the middle class goes, so goes the nation.
Historically the labor unions were one of the guardians of America’s middle class way of life. First, they obtained the guarantees that protected workers from exploitation and enabled them to attain a better way of life. The unions were in large part victims of their own success: having won better working and living conditions for their membership, they saw those improved standards become the norm. Once the middle class way of life was established as an American expectation, the unions were no longer seen as the guardian of our way of life. Still, they kept on the pressure.
Now the unions are being positioned as the enemies of the American way of life. With this country moving increasingly towards a high-low split, the fate of the middle class should be of tremendous concern.
In the aftermath of the vote in the Wisconsin legislature, the Governor of Maine has ordered the removal of a mural from the offices of the state’s Labor Department (The Week, 8 April, “The US At A Glance… Augusta, Maine”). The 36-foot painting, spread across eleven panels, is made up of scenes from Maine’s storied labor history and includes images of striking unionized workers, and of Rosie the Riveter, of World War II fame. Governor LePage’s office said the mural night give the impression that the State of Maine is biased against employers. The governor’s office said business executives have complained, and that they had received “an anonymous fax declaring that the work was reminiscent of North Korean propaganda used ‘to brainwash the masses.’”
When it comes to the day that we are making policy decisions based on anonymous fax communications, it is time to ask ourselves ‘what’s next?”
What’s next is another round in the government’s war on the economic middle. The Wall Street Journal (7 April, “Small Banks Feel They’re Under Fire”) reports that the current cocktail of increased costs of regulation, increased likelihood of litigation, and reduced insurance coverage is squeezing small banks. Bank directors are being sued by shareholders and regulators alike, making it all but impossible to attract qualified businesspeople to serve on bank boards. Unlike Citi or Goldman, board membership on a local community bank doesn’t pay for the third home in the Caribbean. One industry source (Bank Director magazine, bankdirector.com 2008 Bank Director Compensation Review) cites average figures of $10,000 annual retainer, plus an average $700 per meeting fee for board members of community banks. We don’t see Vikram Pandit hustling out to central Pennsylvania to grab this opportunity any time soon.
Quoting a community banker, the Journal article says that his 10% ownership in the local bank has caused him plenty of headaches lately. The bank lost $3.5 million last year and was forced to close two branches. The FDIC has now ordered the bank to find a buyer. We note that neither QE2, nor Congress’ response to the budget emergency required TARP recipients to put money to work in the local economy. The flow of funds to the smaller banks has been shut off by the big ones — who are buying Treasurys at the behest of their friendly regulators and putting the rest of the cash directly into their own pockets. Jobs have been created — on Wall Street. As for the rest of the nation, we are still pounding salt.
“It’s almost like the regulators do not want these community banks,” says this embattled local banker. “They only want the big ones to survive.” It is time for Americans to wake up to reality. We should consider moving to a part of the world where they still value the middle class. Canada, perhaps, or Australia. How about China?
We reported earlier on the escapades of Francisco Everardo Oliveria Silva, known throughout Brazil as Tiririca (pronounced “Chee-ree-REE-ca”) the popular clown and television personality who won a landslide victory in last year’s election. He took a seat as a Deputy in Brazil’s Congress with over 1.3 million votes, by far the largest count of any candidate. Tiririca, whose detractors claim, among other things, that he is illiterate, ran his campaign — complete with wig and clown nose — spouting silly slogans such as “Vote for me — it can’t get any worse!” Clearly, the Brazilian people agreed.
Now Tiririca has been accused of political favoritism for putting two of his cronies on the government payroll. Brazilian newspaper O Estado de Sao Paulo reports that two of Tiririca’s TV script writers are on the government payroll, being paid R$ 8000 (about US$ 5000) a month plus bonuses. The two worked on their boss’ popular comedy program and on his campaign and said they were hired because the new Deputy believes they can contribute good ideas to government. The men are credited with coming up with Tiririca’s campaign slogan “What does a Congressional Deputy do? I truly don’t know, but vote for me and I’ll find out.” Looks like he’s a quick study.
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