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A conversation with Rahm Emanuel, Incoming White House Chief of Staff

Friday, January 16, 2009

Over the past several days, I have been hearing from a wide assortment of people outside Washington who seem to be really angry about the Geithner tax issue.  It seems there are a lot of people in the US to whom $34,000 is a lot of money.

Meanwhile in DC, both Democrats and Republicans are waxing euphoric about Geithner, how he is the “right man for the job” and “the nation needs him.”  Judd Greg (R-NH) is among the Geithner cheer-leaders, but I doubt he can discuss the man’s qualifications.

That said, I think the decision to delay the Geithner hearing has given opponents a chance to educate members of Congress and defeat this ill-advised nomination.  Indeed, based on conversations I have had with several members of the GOP leadership in the past 24-hours, it seems that members of Congress in both parties are starting to ask themselves what also they do not know about Tim Geithner.  I believe that we can stop this nomination and give President Obama another chance to fill this key Cabinet post with a competent candidate. To me there are three issues, from least to most important:

Taxes

Here are a couple of things I have learned in the past several days.

1)  Geithner’s story about “not knowing” about his tax liability as a contract employee of the IMF seems to be/is falling apart.  Consider the sequence of events.  The IRS tax audit of Geithner  was under limitations because there was no fraud suspicion. Hence only 2003-4 were assessed for the taxes. And ponder how the 2001-2 error was found during the Obama transition team vetting process and paid in November. He did not realize that more taxes were due?? Makes the Obama admin look a little silly since they were the ones who triggered the 2001-2 payment!!!  AND, Geithner was the NY Fed Pres during the time his 2001-2 taxes were unpaid.  Both sides of the aisle in the Congress did not realize that either. FED OFFICIALS ARE REQUIRED BY FED OF NY PERSONNEL RULES TO OBEY AND BE COMPLIANT WITH ALL US LAWS AND REGULATIONS, PERIOD.  GEITHNER SHOULD BE FIRED FOR CAUSE BY THE FRBNY BOARD, BUT SINCE THE CHAIRMAN STEVE FRIEDMAN AND THE OTHER DIRECTORS ARE CURRENT/FORMER GOLDMAN SACHS BANKERS AND/OR CLIENTS, THAT IS UNLIKELY TO OCCUR.

2)  I spoke to a senior former IMF official yesterday about the tax situation:

“Having worked for the IMF I find it hard to believe that any US taxpayer did NOT know that he/she had to pay those taxes.  I knew and paid them.  As “self-employed,” one has to send in estimated taxes quarterly.  I sadly remember my horror at my first April 15 at the IMF when I found that I had vastly underestimated what I had had to pay (double the usual social security etc) and had to cough up $000s immediately.  I went to see Carter Magee immediately to avoid any future shocks. Geithner should be toast!”

She also told me that the IMF personnel function projects tax payments for employees!!  How could Geithner say he did not know??   Also, there may even be a paper trail at the IMF because, it has been suggested to me, many IMF official receive quarterly estimates of tax payments from the IMF personnel office.

Competence

More important the issue of taxes is the question of competence.  Tim Geithner’s tenure at the Fed has been hardly successful and represents a lurch toward state socialism.  If we are going to socialize all of these losses and not use the traditional process of bankruptcy to clear the markets, then Congress needs to vote on that issue. More, remember that all of the TARP investments in C, BAC, JPM are about absorbing losses, not creating new leverage.  Geithner and Bernanke have badly misrepresented the economic benefits of investing tax dollars in zomby banks.  Our past comments on Geithner/Rubin/et al. are below:

What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup

IndyMac, FDICIA and the Mirrors of Wall Street

Conflict

To me, the apparent conflict of interest between Geithner, Hank Paulson, Robert Rubin and other principals of Goldman Sachs is Topic A for the Senate confirmation hearing.  We talk about some of those issues in the comments above.  I’d like to see Paulson finally respond to the numerous FOIA requests from news organization for his telephone and email logs.  In particular, the Senate needs to focus on the reported activities of Geithner on behalf of Goldman Sachs to stop members of the media from reporting on Geithner’s apparent rescue of GS by bailing our AIG.  I from understand that Geithner threatened a member of the NY press corps because of that journalist’s reporting on the AIG rescue.  I have promised said journalist not to reveal the writer’s name for now, but I hope to see that writer in touch with members of the Senate minority early next week.

Chris

Deflationary Pressures – Roundtable Discussion with Peter Hooper of Deutsche Bank Securities and Bruce Kasman of JPMorgan-Chase

January 17, 2009

One of the criticisms I regularly make about the Financial Media is their lack of accountability for their own bad advice, as well as that of the many awful guests they have on.

Its a wonder that some people get quoted or appear on television so regularly, given their lack of acumen, insight and terrible track record. But some people are entertaining (Jim Cramer), others fit a particular political agenda (Don Luskin) and others merely refuse to go away (Ben Stein) — despite their money losing advice.

So whenever a major media outlet fesses up for their past advice — good and bad — the rarity of the event nearly make it a cause for celebration.  Such is the case with Barron’s annual review of their print magazine and online picks and pans. The past 3 years worth of long and short recs are all out there, for better or worse:

“THE BEAR MARKET OF 2008, WHICH HUMBLED some of the most notable investment managers, also took a toll on stocks favored by Barron’s.

The shares of 108 companies that were the focus of bullish articles in Barron’s last year showed an average decline of 29.4%, versus a drop of 25.9% in the relevant benchmark indexes. The performance is measured from the Friday before publication through the end of 2008 and doesn’t include dividends.

This was the second year in a row that our picks lagged behind the indexes. Until 2007, we had consistently outperformed for several years.”

Kudos to them for recognizing that accountability in the Financial Press matters, for collecting and revealing the track record, both good and bad.

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Click for interactive graphic

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Source:
Barron’s Stock Picks & Pans
Barron’s, JANUARY 17, 2009

http://online.barrons.com/public/page/9_7001-SC_BULL_P_2008_L.html

Oops! We Missed the Mark in ’08
ANDREW BARY
Barron’s, JANUARY 17, 2009

http://online.barrons.com/article/SB123215883101792669.html

Economists surveyed in the monthly Wall Street Journal forecasting survey say the economy isn’t improving. WSJ’s Phil Izzo walks Kelsey Hubbard through the gloomy survey results.

1/15/2009

via NYT

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Source:
Hedge Funds, Unhinged
LOUISE STORY
NYT, January 17, 2009

http://www.nytimes.com/2009/01/18/business/18hedge.html

Note: I posted this in the cafe yesterday, but after rereading it, I thought it deserved TBP treatment . . .

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Volker Recommendations

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Excerpt:
FINANCIAL REFORM: A Framework for Financial Stability

In July 2008, the Group of Thirty (G30) launched a project on financial reform under the
leadership of a Steering Committee chaired by Paul A. Volcker, with Tommaso Padoa-
Schioppa and Arminio Fraga Neto as its Vice Chairmen. They were supported by other
G30 members who participated in an informal working group. All members (apart from
those with current and prospective national official responsibilities) have had the opportu-
nity to review and discuss preliminary drafts.

The Report is the responsibility of the Steering Committee and reflects broad areas of
agreement among the participating G30 members, who participated in their individual ca-
pacities. The Report does not reflect the official views of those in policymaking positions or
in leadership roles in the private sector. Where there are substantial differences in emphasis
and substance, they are noted in the text.

The G30 undertook this project as the global financial crisis entered its second year.
The analysis has been informed by the extreme events later in 2008, which rocked the very
foundation of the established financial system and which led to unprecedented and massive
government intervention both in the United States and in many other countries to contain a
spreading financial panic.

Words from the (investment) wise for the week that was (January 12 – 18, 2009)

Investor sentiment around the globe was negatively impacted during 2009′s second full week of trading as a barrage of bleak economic and corporate news offered more confirmation of a deepening recession, bringing risk aversion to center stage.

The US dollar and government bonds (excluding emerging markets and countries on the periphery of the Eurozone) gained, but global equities and commodities were on the defensive as nervous investors tried to gauge the likely damage of the economic malaise.

Global bourses concluded a whipsaw week with hefty losses, but stemmed some of the downside as a relief rally came to the rescue towards the end of the week. The MSCI World Index and the MSCI Emerging Markets Index declined by 6.2% and 5.8% respectively.

The US indices all dropped over the week as shown by the major index movements: Dow Jones Industrial Index -3.7% (YTD -5.6%), S&P 500 Index -4.5% (YTD -5.9%), Nasdaq Composite Index -2.7% (YTD -3.0%) and Russell 2000 Index -3.1% (YTD -6.6%). As a matter of interest, the year-to-date returns at the same point last year (i.e. after 11 trading days) were -6.0% for the Dow and -6.5% for the S&P 500.

Adding a spark of hope on Thursday, the US Senate voted to release the second and final $350 billion tranche of the TARP funds, whereas the House Democrats unveiled a much-awaited $825 billion stimulus package aimed at halting the economic rot. Meanwhile, in a speech at the London School of Economics, Fed Chairman Ben Bernanke said Barack Obama’s economic package could provide a “significant boost” to the US economy.

Source: Daryl Cagle

But back to the stock market. The bar chart below shows the US sector performance for the past week, and specifically how defensive sectors such as consumer staples, healthcare and utilities outperformed other sectors on a relative basis.

The financial sector plummeted by 16.3% as several US banking shares fell to multi-year lows amid growing concerns that they will battle to cope with increasing credit losses as the global recession intensifies.

Source: StockCharts.com

The nascent earnings season saw a glut of fourth-quarter losses. These included larger-than-expected losses from Bank of America (BAC) and Citigroup (C), resulting in their respective share prices plunging by 44.7% and 48.2% over the week.

Citi announced plans to break up the bank into two businesses, following the decision to sell a controlling interest in the valuable Smith Barney brokerage to Morgan Stanley (MS). On the other hand, Bank of America will receive an additional $20 billion of TARP funds to bed down its troublesome acquisition of Merrill Lynch, as well as a guarantee on $118 billion of potential losses on distressed assets. Elsewhere, the Irish government nationalized Anglo Irish Bank, and HSBC was rumored to be seeking fresh capital of $30 billion.

Read the rest of this entry »

The Washington Post has a front page article filled with anecdotes about the foreclosure crisis. Their conclusion? Its getting worse, fast:

One oft-repeated assertion no longer holds true. Those in trouble are not, primarily, lower-income borrowers. The foreclosure crisis has become a wave, afflicting neighborhoods of every stripe — but particularly communities created by the boom itself . . .

They’re “underwater,” industry parlance for borrowers who owe more on their mortgage than their houses are worth. They have joined the growing line of homeowners seeking a break from their lenders.

Both the departing and incoming administrations in Washington have promised help on the foreclosure front, but providing help requires federal regulators to get their collective arms around the size and shape of the crisis. That isn’t easy. No one agency collects information on every loan, every borrower and every delinquency.

But interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don’t have subprime loans, the lending industry’s jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.

The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post’s analysis.

This trend shows up most acutely in California and other high-growth regions, such as Arizona, Nevada, Florida and pockets of the Washington region, most notably in Prince William and Prince George’s counties . . .

The foreclosure crisis hasn’t played itself out. The next wave looms in the form of a new batch of adjustable-rate mortgages scheduled to reset over the next two years. Unless the market comes back with a roar, which is unlikely, more borrowers will struggle to hang on to their homes.

Where are the most underwater homes? Of the 20 Zip codes with the highest share of underwater loans, seven are in California and four are in Riverside County, the vast exurb southeast of Los Angeles.

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Source:
The Growing Foreclosure Crisis
Dina ElBoghdady and Sarah Cohen
Washington Post, January 17, 2009; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011604724.html

Below is a comment by Alex Pollock at American Enterprise Institute on the TARP:

We need two fundamental improvements in the TARP plan to make it reflect the interests of its investors, the taxpayers. First, the activities of the TARP program should be isolated in a separate accounting entity, which would have to issue financial statements as if it were a corporation. Second, 100 percent of all profit, if achieved, should be earmarked as explicit dividends to the taxpayer-investors. Resident Fellow Alex J. Pollock In Walter Bagehot’s famous banking dictum, when faced with a panic, the central bank must “lend freely.” The Fed and other central banks are certainly doing so today, with a vengeance. On top of that, the treasuries of many countries (the United States, Britain, Ireland, Germany, Spain, Belgium, the Netherlands, Iceland, and Switzerland among them) are devoting the public credit to supporting financial companies. We have moved through the typical stages of governments faced with a financial crisis. First, there is delay in recognizing the extent of the losses while issuing assurances. A notable example, often heard in 2007: “The subprime problems are contained.” The problem with thinking of financial market crises as “100-year floods” is that they recur every 10 or 20 years. Then there is the central bank as liquidity provider or lender of last resort. But lending, however freely done, provides by definition only more debt. If a company’s capital is gone, however much more you may lend it, it is still broke. What was needed was not simply more liquidity but more equity capital. So we have the Troubled Asset Relief Program equity injections. Of course, what is really happening in such programs is that the taxpayers are being made involun-tary equity investors. How should they (we) be given fair treatment as investors? In the aggregate, the investments the taxpayers are involuntarily making should have an expected positive return, in exchange for the risks being taken. Treasury Secretary Paulson has suggested that the Tarp program might make a profit, and it might. There is both a yield on the preferred stock investments being made and a potential equity upside on warrants with strike prices reflecting depressed current stock prices. (Recall that the warrants the government got in the Chrysler bailout a generation ago did indeed pay a significant profit.) By one estimate, according to The Wall Street Journal, the current bailout program has achieved a gain of $8 billion in the last three months. With this potential, we need two fundamental improvements in the Tarp plan to make it reflect the interests of the real investors. First, all the activities of the Tarp program should be isolated in a separate accounting entity. All investments and other assets, all related debt and other liabilities, all expenses, all income should be clearly measured as if Tarp were a corporation. An audited balance sheet and income statement should be regularly produced. Then the administration, as operator of the program; the Congress, in its oversight responsibilities; and most importantly, the taxpayers, as investors, could all judge its performance. Second, 100% of all profit, if achieved, should be earmarked as explicit dividends to the taxpayer-investors. Such dividends might be in the form of cash or specific tax credits. This would be a well-deserved recompense to the majority of citizens–who bought houses they could afford, paid their mortgages on time, did not engage in leveraged speculation, paid their taxes, and then bore all the risk of the bailout. Prudence, moderation, and virtue are their own reward, yes, but if the bailout makes money, let’s have some dividends for the taxpayers, too! Thomson Hankey, a mostly unknown intellectual opponent of the celebrated Bagehot, made two basic arguments against the government’s helping banks, as restated by James Grant: “No. 1, moral hazard: Let profit-maximizing people come to believe that the Bank of England will bail them out, and they themselves will assume the leverage that will require them to be bailed out. No. 2, simple fairness: If Britain’s banking interest can claim a right to the accommodation of the Bank of England, why shouldn’t the shipping interest, the construction interest, the railroads, the agricultural interest? Shouldn’t all actors be equally entitled to benefit by any favors?” Secretary Paulson’s Tarp plan obviously has the problem Hankey foresaw more than a century ago: Lots of people in line with hands out, palms upward. Though Hankey’s arguments were insightful, the fear of financial collapse always trumps them. Financial Times offered this nice summary of our situation: “The overstaffed, mismanaged banking industry, now contracting as fast as it had expanded, needs to return to fundamental principles and sound underwriting practices. Sobered by the stock market crash of last October, banks should now be ready to provide investors with a more reasonable, com-petent, and careful industry. . . . A huge human price was being paid by the thousands of people now losing their jobs in London and New York.” But this was actually written two decades ago, after the crash of 1987. The problem with thinking of financial market crises as “100-year floods” is that they recur every 10 or 20 years. Alex J. Pollock is a resident fellow at AEI.

Related Links

Related event on the theory and practice of bailouts Related article on the repeating nature of panics by Pollock Related article on the British bailout by Pollock