The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The San Fran Fed has a new research piece out debunking the notion that Americans choose to sit around collecting unemployment insurance rather than finding gainful employment (per Senator Jon Kyl and others).  (See previous — heavily commented —  BP post on this subject here.)

Extended Unemployment and UI Benefits

By Rob Valletta and Katherine Kuang

During the current labor market downturn, unemployment duration has reached levels well above its previous highs. Analysis of unemployment data suggests that extended unemployment insurance benefits have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate.

The Journal has a story posted on the paper here.

Of course, I don’t expect that actual facts (remember those?) will change many minds, but thought this study was post-worthy in light of the recent controversy.

As you were.

‘Will Do Less Harm’ in New Post, Says Treasury Spokesperson

NEW YORK (The Borowitz Report) – In a settlement of the government’s securities fraud case against Goldman Sachs, the bank’s CEO, Lloyd Blankfein, has agreed to perform two years of community service as Treasury Secretary of the United States.

At a press conference in New York, Mr. Blankfein said that as Treasury Secretary he would “continue to do God’s work as I did at Goldman, but at a significant pay cut.”

A Treasury Dept. spokesperson said that by performing community service as Treasury Secretary, Mr. Blankfein will be able to do less harm to the economy because he will have significantly less power than he had as Chairman of Goldman.

His experience at Goldman, however, will be “invaluable” in his new role as Treasury Secretary, the spokesperson said: “Lloyd Blankfein’s years of marketing worthless securities have prepared him for the important task of selling Treasuries to the Chinese.”

Mr. Blankfein is the latest in a long line of Goldman chairmen to serve as Treasury Secretary, although he is believed to be the first to do so while wearing an electronic ankle bracelet. More here.

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Hat tip Scott F

The Bank of Canada kept interest rates unchanged as expected at .25% BUT they dropped their “conditional commitment” to keep it unchanged through June as “global economic growth has been somewhat stronger than projected, with momentum in emerging market economies increasing noticeably.” They said the recovery in Canada is “proceeding somewhat more rapidly than they projected in Jan.” Thus, with the recent improvements in the economic outlook, the “need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus” with the extent and timing depending on the economic outlook and inflation. With the next meeting on June 1st, the BoC is leaving open the possibility that they raise rates before then but at least will likely raise rates on that date. In response the Canadian $ is rallying back to parity vs the US$.

Note that Goldman Sachs asked for FOIA Confidential Treatment request (stamped on the cover).

Goldman Defense

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Goldman Defence Doc Part I

Hat tip Bianco Research

Josh Rosner, managing director of Graham Fisher, and Jesse Eisinger, a reporter with Propublica have one of the better and more informed conversations about the GS case.

Josh adds he is now less convinced this was designed to fail than he was during the interview yesterday.

Noam Scheiber reports that the major banks, working closely with the U.S. Chamber of Commerce, are orchestrating an anti-regulation lobbying fest.

“Some two dozen executives from large corporations will be descending on Capitol Hill today to make the case against over-regulating derivatives. The “fly-in” is being organized in part by the U.S. Chamber of Commerce through a group called the Coalition for Derivatives End-Users, according to the Chamber’s Ryan McKee. Many corporations use derivatives to hedge against fluctuations in the price of their inputs—for example, an airline might sign a contract to lock in future fuel prices, thereby passing the risk along to someone else. And so, on one level, it makes perfect sense that the executives and the Chamber would take an interest in derivatives legislation.

But, on another level, the pilgrimage by the so-called corporate “end-users” is a little mystifying. That’s because the legislation that’s piqued the executives’ interest—a derivatives bill that Senate Agriculture Committee Chairman Blanche Lincoln unveiled last week—explicitly exempts derivatives used in commercial activity, as in the jet-fuel example. What the Lincoln bill would regulate is the use of derivatives for more speculative purposes, like a straight-up bet between two Wall Street firms on the future price of oil.”

How out of touch is Chamber of Commerce? Is it any wonder they are losing members?

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Source:
Head Lock: The inside story of how Goldman and the banks are getting clobbered on financial reform
Noam Scheiber
The New Republic, April 20, 2010 | 12:00 am
http://www.tnr.com/article/economy/the-state-play-financial-regulation-edition

A better than expected German investor confidence # in their economy (ZEW), good earnings news from Daimler and Novartis, a successful sale of short term debt from Greece and the EU said 14,500 flights may resume today has led to a European stock rebound which has spilled over into US futures. The ZEW rose to the highest since Oct ’09 aided by a weak euro because 40% of Germany’s economy are exports. Greece sold 13 week bills but at a rate of 3.65% vs 1.67% for the same maturity back in Jan. Greek 10 yr yields are spiking again, by 17 bps to 7.78% ahead of tomorrow’s meeting with the EU and IMF that may last 2-3 weeks. A bailout is inevitable. Yesterday, ECB’s Weber said Greece may need twice as much as what has been committed so far. March UK CPI rose more than expected and Gilt yields are back above 4%. The Reserve Bank of India raised interest rates as expected due to growing inflation concerns. They don’t have OER in their CPI calculation.

When ever I wrote something up, I try to show how I reach my conclusion. What are the data, facts, underlying elements used to reach an ultimate decision. In math, algebra, it was called”showing your work.”

Sometimes, I don’t bother show the tiny details. I assume everyone knows 2=+2=4, understand the basic aspects of the US Constitution, and is hip to Freud, Aristotle and McLuhan. Occasionally, this leads me to omit items that I erroneously assume everyone knows. The SEC vs Goldman was just such a case.

For those of you without the benefits of a legal education, or who do not remember their Series 7 tests, this is a refresher: Pay attention eejits, this is important:

Rule 10b-5: Employment of Manipulative and Deceptive Practices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.”

This is why Goldman Sachs is going to have a hard time defending this case — the vilation of 10b-5 is blatant.

It is also why the 2 SEC commissioners who voted against bringing the case — Republican commissioners, Kathleen Casey and Troy Paredes — should be ashamed of themselves. If you have even a passing familiarity with Rule 10b-5 — say for example, you actually read it once — it is obvious that Tourre and Goldman violated this rule.

If you won’t vote for this enforcement action, than what would you vote for? Apparently nothing — and therefore you do not belong on the SEC.

Its time to demand these two Goldman Sachs suck ups resign their commission. They are unqualified and incompetent, and have no business being part of any field where understanding law or having judgment is involved.

Good Evening: U.S. stocks spent most of Monday trying to recover from the outright shock they received on Friday when the SEC decided to bring civil fraud charges against Goldman Sachs. The news caused stocks to swoon as last week ended, while bonds and the dollar rose. Commodities, but especially the precious metals, were bludgeoned. After every financial talking head from New York to Germany weighed in on the Goldman case over the weekend, markets around the world headed down in sympathy with Friday’s decline in U.S. share prices. China’s decision to rein in mortgage lending (memo to the Maestro: this is how it’s done — before there’s a problem) also played a role in pushing global bourses back on their heels.

When follow through selling in the U.S. dried up on Monday, however, share prices recovered to finish mixed. Even GS shares rose ahead of its earnings announcement tomorrow. Bonds gave back some of Friday’s gains, the dollar was up a fraction, and commodities remained under pressure. After weeks with little to concern them, investors are definitely starting to reassess their risk appetites. With the benefit of a few days of hindsight, I find it curious that the SEC handled its case against Goldman in the way it did. The timing (with financial reforms being teed up in Congress) and methods (using the term, fraud, and giving Goldman little or no warning) will leave thoughtful citizens wondering why.

The SEC has taken its lumps in recent years — and with good reason. Whether it was giving the banks the freedom to lever up during (i.e. so as to cause) the credit bubble or refusing to properly investigate Bernie’s Ponzi scheme as he Madoff with his investors’ cash, it seemed as though the SEC was turning a blind eye to almost everything in recent years. It didn’t matter whether the White House was occupied by Republicans or Democrats, either. An anti-regulatory mood kept the SEC focused on corporate filings, junk bond registrations, and IPO listings. Wall Street’s watchdog lost both its bark and its bite as firm after firm bit the dust due to either misdeeds or excessive leverage. Finally, the SEC could only stand in mute disbelief as the financial system it was charged to help guard started to circle the drain in 2008. If its commissioners had ever once qualified for E&O (Errors & Omissions) insurance, their policies would long ago have been canceled.

Many pundits and commentators have wondered for a long time just when the SEC would again bare its fangs in the way it did during numerous insider trading scandals in the 1980′s. The Galleon case in 2009 was a hint the SEC was at least ambulatory, but Friday’s announcement was a true shocker. Displaying bark and bite, the SEC staff leveled charges against none other than Goldman Sachs. The SEC isn’t just saying our nation’s pre-eminent financial institution is guilty of mere wrongdoing in creating a certain synthetic CDO in 2007. No, they are alleging Goldman committed fraud by purposely crafting a crummy transaction to benefit Paulson & Company without disclosing the relevant facts to investors.

Please keep in mind that the SEC’s charges are just accusations and that Goldman claims to have done nothing wrong in a market where only the most sophisticated investors are supposed to tread. John Paulson’s firm has not been charged with any wrongdoing, but the creation at their behest of the synthetic CDO in question looks somewhat similar to CDOs created by other investment banks for another hedge fund, Magnetar. ProPublica’s Jesse Eisinger and Jake Bernstein have pieced together a very interesting trail of information about the type of CDOs in which Magnetar played an important role (see here). Like Paulson & Co., Magnetar has not been accused of any wrongdoing — yet.

I say “yet” because the impact of the mere claim of fraud against Goldman (and potentially other banks) may have other consequences in the days and weeks ahead. The SEC’s charges mark an escalation of the retribution phase of the 2007-2009 financial crisis. Coming as they do, just as Congress is preparing new financial regulations, the claims against GS will likely encourage our legislators to add teeth to whatever proposals they eventually enact. In fact, the timing of these charges by the SEC is more than a little curious, especially if the vote among its Commissioners was split down party lines, as suggested in the article below.

Even if the fraud charges don’t hold up in court, the drama itself has completely reinvigorated the administration’s push for financial reform legislation on the Hill. I have absolutely no evidence of any connection between the SEC vote and the administration’s reform agenda. But it wouldn’t be the first time this year a major piece of legislation benefited from some unusual political maneuvering. Healthcare reform was on life support until it was resuscitated via the budget reconciliation process. However financial reform evolves, my hope is that the dark world of Credit Default Swaps is moved onto relatively better lit exchanges.

My wish to have all CDS become exchange-traded instruments does not mean investors of the future will be spared taking the other side of a “pig-in-a-poke” transaction by enterprising investment banks of the future. No, the John Paulsons of the world will still be able to make directional bets, and traders on the other side will either make or lose money. Goldman will still stand in the middle and collect a fee for bringing both sides together, but transparency will be heightened and systemic risks will be lowered with an exchange clearing and margining these trades.

Until that happy day comes to pass, complexity will be the rule and Goldman will have to rely on for its defense the myriad risk disclosures contained in the ABACUS 2007-AC1 transaction. “Caveat Emptor” is the unwritten code among sophisticated investors, but Goldman’s attorneys went quite a bit further in the Risk Factors section of the indicative term sheet you can access below. Any one of these factors could have led a prospective investor to utter four letter words, the most appropriate of which would have been “Pass”. Go to page 8, and under Risk Factors you’ll find four items under the heading, “Certain conflicts of interest relating to Goldman Sachs and its Affiliates; No reliance”. Many pundits and opinion-givers incessantly bray about Goldman’s lack of disclosure, but item # 2 goes directly to the heart of the matter:

“Goldman Sachs may, by virtue of its status as an underwriter, advisor, or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.” (source: ABACUS 2007-AC1 CONFIDENTIAL — INDICATIVE TERMS — italics are mine).

Case closed, right? In a court of law, perhaps, but this case will be waged more in the court of public opinion than it will before any bench. I’m sure the SEC will maintain that it is bringing this case to send a message that its lapdog days are over, that no firm — not even the venerable Goldman Sachs — is beyond its reach. I agree, and it’s high time the SEC resumed its enforcement role. But I worry about the over-reach, especially if done so for political purposes. Over-reaching themselves during the previous credit cycle, the banks can rightly be claimed to have brought actions like this upon themselves. But I think even populists would agree that if this case was brought to stir partisan passions and boost pending legislation, then the SEC’s investigation into the ABACUS transaction should have been handled in a different way. A Trojan Horse might be a clever way to achieve an objective, but the bad memories tend to linger for both giver and receiver. Troy is no more, and Greece isn’t faring much better itself these days. Let’s hope the U.S. and its banking system both fare better after this episode runs its course.

– Jack McHugh

U.S. Stocks Rally, Treasuries Drop on Split SEC Goldman Vote

Goldman Sachs Sued by SEC for Fraud Tied to CDOs

Goldman Sachs Points to Magnetar Trades in Its Defense

I have no idea what goes on in the WSJ OpEd offices.

I cannot tell you for sure that their Water Cooler is laced with LSD; I have no idea if they are drunk by the opening bell every morning. I’ve never done the research to see if key persons there played college football sans helmets.

But I can tell you that anyone of these excuses explains the unfathomably bizarre utterances that spews forth from that alternative universe on a regular basis. The asylum inmates there are willing to give even the most egregious offenses a free pass — so long as said offenses originates from a corporation.

The latest evidence of collective dementia was today’s syphilitic venture titled The SEC vs. Goldman. The editors, hellbent on proving they are only visiting here from Alpha Centauri, defend the actions of Goldie as “more a case of hindsight bias than financial villainy.”

Rather than spend time dissecting the specifics, I prefer to direct you to the insanity’s source, and let you judge for yourself . . .

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Source:
The SEC vs. Goldman
WSJ, April 19, 2010
http://online.wsj.com/article/SB20001424052702303491304575188352960427106.html