Posts filed under “BP Cafe”

I received a couple of interesting items c/o my friends at Competitive Enterprise Institute you may not have seen. First is an item from Tim Carney in the Washington Examiner:

“Edward Liddy, CEO of government-run AIG, still owns more than $3 million of stock in Goldman Sachs, which has pocketed $13 billion or more of the $170 billion federal officials have spent bailing out the ailing Wall Street insurance giant.”

Find this article at:

Second is an item by John Berlau on the same issue:

AIG CEO Liddy owns millions in stock in bailout beneficiary Goldman — Tim Carney blockbuster in DC Examiner
by John Berlau (

April 10, 2009

Everyone should read the blockbuster exclusive in today’s Washington Examiner in which Timothy P. Carney confirms that American International Group CEO Edward Liddy — appointed to his position at the behest of Hank Paulson and Tim Geithner after the government takeover of AIG in September — still owns more than $3 million in stock in Goldman Sachs, one of the biggest beneficiaries of the AIG bailout.

I am privileged to be quoted in this article that both breaks news and puts it into an informative policy context. The dogged investigative reporting conducted for this piece by Carney, a former Warren T. Brookes Journalism Fellow at CEI, should be enough to garner him several awards, and in my opinion this piece and likely follow-ups may be Pulitzer Prize-worthy material.

A couple weeks ago, after the brouhaha about the “retention” bonuses paid to the AIG Financial Products employees, Liddy’s calm demeanor before Congress and the media helped diffuse the situation. He emphasized that he was making a nominal $1-a-year salary and argued he was doing the CEO stint merely as a public service. Liddy wrote in a recent Washington Post op-ed that “my annual salary is $1. My only stake is my reputation.”

But Carney found that Liddy was not telling the whole story about his real stake in the AIG bailout. Namely that Liddy, as Carney notes, has “an acute financial stake in one of AIG’s counterparties—namely, his $3.2 million personal investment in Goldman Sachs.” And under Liddy’s direction, AIG disbursed nearly $13 billion from the taxpayer bailout money to Goldman, in a move many say is more disturbing than the employee bonuses that were the source of the recent controversey.

Everyone from former AIG CEO Maurice “Hank” Greenberg to liberal Rep. Brad Sherman, D-Calif., have expressed outrage that Goldman and other banks were compensated at full value for their derivative contracts. Goldman had bought billions in credit deafalt swaps from AIG. Had AIG gone into bankruptcy, Goldman and other counterparties would have almost certainly had to take a “haircut” on the contracts due to declining market conditions.

In the article, Carney generously writes that “there is no reason to believe Liddy is influencing AIG actions to unfairly benefit Goldman.” Yet Liddy had to be aware that many were saying Goldman may not have survived the hit if AIG substantially reduced payment. He resigned his position from Goldman’s board of directors when he became CEO of AIG, ostensibly to avoid conflict of interest, but has not seen fit yet to sell his more than 27,000 shares in Goldman stock, which he is listed as holding in the firm’s 2008 proxy statement. Carney reports that “an AIG spokeswoman confirmed for the Examiner that Liddy still owns all these shares.”

Carney points out the paradox of “strange public-private chimeras like AIG spawned in this age of bailouts.” When it bailed out the firm, the government took an 79.9 percent stake in AIG, making AIG in one sense a government entity. Yet, as Carney points out, this “situation represents a potential conflict of interest that would never be allowed in a government agency.”

It also likely wouldn’t fly in a purely private company, where directors and shareholders are on guard against executives’ “related party transactions” that aren’t in the company’s best interest. Yet, because he is running a public-private hybrid, Liddy lacks accountability to both to private shareholders and government ethics rules

Former Treasury Secretary Paulson, himself a former Goldman Sachs CEO, has a lot to answer for in forcing out AIG CEO Robert Willumstad and bringing on Liddy to replace him. So does Geithner, who was heavily involved in the AIG bailout as president of the Federal Reserve Bank of New York. Why did they not insist that Liddy divest his holdings or find someone who didn’t have this conflict?

Above all, this shatters the illusion that the government can magaically take over a company, fire the CEO, and run it more efficiently for the taxpayers. I have written before on Open Market that Obama’s firing of Rick Wagoner was not the first time the government forced out a CEO. Even before Paulson ousted Willumstad after the bailout, then- New York Attorney General Eliot Spitzer effectively forced out longtime

AIG CEO Greenberg on baseless charges that have almost all been dropped. Greenberg built up AIG successful 35-year tenure, and has testified that the issuance housing-related credit defaut swaps at the center of the firm’s problem exploded in the months after he left.

As I tell Carney in concluding paragraph of the story, “The whole AIG experience demonstrates the fallacy that the government can efficiently sack CEOs and replace them.”

Category: BP Cafe

Is Recovery Just Around the Corner?

Good Evening: Our capital markets entered Wednesday with heightened concerns about our economy in general and the technology sector in specific. By day’s end, however, these concerns were in retreat on both fronts and stocks went out at their session highs. While there was precious little in the way of actual positive news for investors…Read More

Category: BP Cafe, Markets

Regulatory Malfeasance and the Financial System Collapse

Regulatory Malfeasance and the Financial System Collapse by Joseph R. Mason April 14, 2009 Kotok comment: we are pleased to forward this guest commentary by Professor Joe Mason. In it he outlines ways in which the securitization process went awry and led to the financial crisis we have been experiencing. Joe notes some of the…Read More

Category: Bailouts, BP Cafe, Regulation

Jim Welsh Investment letter – April 3 2009

Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets. ~~~ Investment letter – April 3, 2009 In the last three weeks, three significant policy announcements have been made….Read More

Category: BP Cafe

Four Questions about the Financial Crisis

Chairman Ben S. Bernanke
Federal Reserve
At the Morehouse College, Atlanta, Georgia
April 14, 2009

I am pleased to have the privilege of speaking today to the students and faculty of Morehouse College, the only all-male historically black institution of higher learning in the United States. It is sufficient to note that Martin Luther King, Jr., was a graduate of Morehouse. Yet a roster of distinguished alumni that also includes former Atlanta Mayor Maynard Jackson, former U.S. Surgeon General David Satcher, and filmmaker Spike Lee testifies to the success of your stated mission of “producing academically superior, morally conscious leaders for the conditions and issues of today.”

My remarks today will focus on the ongoing turmoil in financial markets and its consequence, the global economic recession. The financial crisis, the worst since the Great Depression, has severely affected the cost and availability of credit to both households and businesses. Credit is the lifeblood of market economies, and the damage to our economy resulting from the constraints on the flow of credit has already been extensive. With recent job losses exceeding half a million per month, this year’s college graduates are facing the toughest labor market in 25 years. In the communities in which you and I grew up, many families are trying to cope with lost employment and depleted savings or are facing foreclosure on their homes. Firms have shut factories and cancelled construction projects. States and municipalities are scrambling to find the funding to provide critical services. And although we naturally tend to be most aware of conditions in the United States, we should not overlook the impact that the crisis is having virtually everywhere in the world, particularly on many citizens of countries that struggle economically even when the global economy is doing well.

In the midst of all of these concerns, many Americans have recently celebrated Easter or Passover. As you may know, a highlight of the traditional Passover meal occurs when the youngest child asks four questions, the answers to which tell the history of the Jews when they were slaves in Egypt and during their exodus to the Promised Land. In the spirit of the holiday, today I will pose and answer four important questions about the financial crisis. Of course, my answers will have to be brief, but we will have more time for additional questions at the conclusion of my prepared remarks.

How Did We Get Here?
The first question I would like to address is: How did we get here? What caused our financial and economic system to break down to the extent it has? Not surprisingly, the answer to this question is complex, and experts disagree on how much weight to give various explanations. In my view, however, to tell the story fully–and, in particular, to understand its international scope–we need to consider how global patterns of saving and investment have evolved over the past decade or more, and how those changes affected credit markets in the United States and some other countries.

At the most basic level, the role of banks and other financial institutions is to take the savings generated by households and businesses and put them to use by making loans and investments. For example, financial institutions use the funds they receive from savers to provide loans that help families buy homes or allow businesses to finance inventories and payrolls. Financial markets, such as the stock and bond markets, perform a similar function, as when a firm raises funds for a new factory by selling a bond directly to investors. When the financial system is working as it should, it allocates funds both prudently (that is, with proper attention to risk) and efficiently (to the most productive uses).
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Category: BP Cafe, Federal Reserve

4/14 Morning Note

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi). This is his most recent commentary: ~~~ Let’s be clear about something here: GS earned…Read More

Category: BP Cafe

The Wells Fargo (band)wagon

Good Evening: The U.S. stock market was able to shake off an early decline to finished mixed today, as financial stocks continued to bask in the afterglow of last week’s “earnings” pre-announcement from Wells Fargo. Those with doubts about both the recent equity rally and the veracity of the WFC results stand in stark contrast…Read More

Category: BP Cafe, Markets

Does the Stock Market Rally have Legs?

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Does the Stock Market Rally have Legs?

April 11, 2009

Is this rally real? Does it have legs? Questions like these are now raised daily by investors and by TV anchors on the financial shows. The CNBC Power Lunch fearsome foursome panel called me a “dodger” when I wouldn’t take their bait last week.

Our response was then and still remains: the answer is a definite, 100% “Maybe!” You can see the interview on . Search under “kotok”. All three segments are listed under April 6.

Ok, let’s go back to the rally question raised on CNBC’s Power Lunch. Stocks seem to have established a serious interim (if not permanent?) low on March 9, when the S&P 500 index hit 666. We initially thought the November 20 low would mark the interim bottom but we were wrong. The question now involves 666.

Since the March 9 low, the S&P 500 has rallied strongly. Using the ETF that is supposed to track that index, with the “spider” symbol SPY, we note that from March 9 to the April 9 pre-holiday close, SPY has delivered a total return of 26.9%. Perhaps more importantly, the equal-weighted S&P 500 ETF, symbol RSP, has outperformed the cap-weighted SPY by ten points. Since March 9, RSP is up 36.2%. This is a continuation of the broadening market trend we have seen since the November 20 low. A widening acceptance of stocks and broadening buying is a very favorable sign. Note that Cumberland has switched from SPY to RSP in our “core” ETF strategy for the US market. We did that after the November low and as soon as we saw the market broadening. When the stock market is broadening, you want to be more equal-weighted; when it is narrowing out of fear, you want to restrict to the very largest caps, which are viewed as the safest.

Okay, so the answer to our rally question is “so far, so good.”

There are many favorable signs. Elements in the credit markets (like commercial paper rates and money market funds) are functioning and improving. Where Fed policy has been applied with enough size and precision, the result has been to ease the market and repair some of the damage. There is every reason to believe the Fed will persist in this approach and enlarge it. Consumer finance and housing finance are the current big targets; hundreds of billions will be thrown (lent) at those sectors.

On the list of unfavorable signs, we note that other sectors that have improved from their worst case are still not fully functional. LIBOR at 3 months is still nearly 100 basis points higher-yielding than the 3-month Overnight Indexed Swap rate (OIS). Banks still do not trust each other when it comes to default risk. Many banks are electing to lend excess reserves to the Fed at a yield of 25 basis points rather than to each other at a yield of 125 basis points. We see this distrust in the very wide spreads between bank debt backed by the FDIC vs. debt of the very same bank that is not FDIC-backed. The spreads are huge.

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Category: BP Cafe, Markets

Commodities have turned the corner

Commodities have turned the corner Commodity prices have started to recover since the massive commodity fund liquidations and inventory reductions at mine, refinery and final consumption levels, which in some instances gave rise to record stock levels of industrial metals on the London Metals Exchange. The recovery in metal and oil prices should be seen…Read More

Category: BP Cafe, Commodities

Words from the (investment) wise 4.12.09

Words from the (investment) wise for the week that was (April 6 – 12, 2009)

Five in a row! Notwithstanding sentiment for equities waxing and waning for most of the Easter-shortened week, bourses closed strongly on Friday and capped a five-week winning streak – the first since October 2007 for the major MSCI and US stock market indices.

An encouraging pre-announcement of first-quarter results by Wells Fargo (WFC) provided some confidence for the nascent earnings season and gave a healthy boost to the financial sector and overall market.

On a related note, the Treasury Department is expected to announce the expansion of the Troubled Asset Relief Program (TARP) to aid ailing life insurance companies within the next few days, adding a third industry to the banks and automakers that have already received bailouts from the government.

Not only did global stock markets extend their gains last week, but the US dollar reclaimed a stronger footing as a result of heightened risk aversion during the earlier part of the week. Holiday-thinned trading in commodities ended with a mixed performance among the 19 constituents of the Reuters/Jefferies CRB Index. Government bonds, under threat of large-scale issuance in the coming months, also had a relatively quiet period.

The performance of the major asset classes is summarized by the chart below, courtesy of

Stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 0.8% (YTD -6.4%) and the MSCI Emerging Markets Index 2.5% (YTD +11.6%). These indices have risen by 25.1% and 30.4% respectively since the low of March 9.

Returns around the globe ranged from top-performers Ukraine (+19.4%), Egypt (+9.7%) and Russia (+8.5%) to Côte d’Ivoire (-4.3%), Macedonia (-4.1%), Norway (-3.9%) and the United Kingdom (-3.4%), which were languishing in the red. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Among the major US indices, the Nasdaq Composite Index (+4.8%) is the only index in positive territory for the year to date. Although not yet claiming this feat, US small caps have also been running hard over the past few weeks, as can be seen from the rising trend line of the S&P 600 Small Cap Index relative to the S&P 500 Large Cap Index since the March 9 lows. The fact that small companies are now outperforming the larger ones is an indication that investors are becoming less risk averse – a positive sign for equities in general to improve further.


As far as leadership since the start of the five-week old rally is concerned, the rebounding Financial SPDR (XLF) is by far the top performer among the economic sector exchange-traded funds (ETFs). Interestingly, cyclical sectors such as the Consumer Discretionary SPDR (XLY), Industrial SPDR (XLI), Materials SPDR (XLB) and Technology SPDR (XLK) all outperformed the S&P 500, whereas the traditional defensive sectors like the Utilities SPDR (XLU), Energy SPDR (XLE), Consumer Staples SPDR (XLP) and Health Care SPDR (XLV) were all lagging the broader market. This is the type of pattern one would typically expect to emerge during a market base formation development.


John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were the Merrill Lynch Regional Bank Holders (RKH) (+16.2%), iShares Cohen & Steers Realty (ICF) (+15.8%) and Financial Select Sector SPDR (XLF) (+14.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-10.9%), iShares Silver Trust (SLV) (-4.7%) and United States Natural Gas (UNG) (-4.6%) performed poorly – in tandem with natural gas and precious metals retreating.

Next, a quick textual analysis of my week’s reading. No surprises here with key words such as “market”, “prices”, “economy”, “financial” and “banks” featuring prominently.

On the question of whether the current rally has more steam left, Kevin Lane, technical analyst of Fusion IQ, said: “It is a very fine line between a rally extension call and a retest call, though we are leaning towards the former after a pullback/pause. However, since both calls – rally or retest – are plausible we continue to suggest investors tighten up stops and portfolio VAR (Value At Risk) until more evidence unfolds. Until more clarity occurs either technically or fundamentally, I can think of worse things in the world than locking in some gains or getting stopped out at a profit on trailing stops.

“So over the next few sessions watch the skew of decliners to advancers and down to up volume. As long as we don’t get ratios of 5 to 1 or higher on both indicators the likelihood of a retest in the near term is lessened.”

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already one point above this level and has to rise by a further 9.0% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.

Although he still maintains that stock markets are witnessing nothing more than a bear market rally, Richard Russell, doyen of newsletter writers and author of the 50-year old Dow Theory Letters, on Friday said. “I was wrong. It looks as though this rally has legs. Lowry‘s Selling Pressure Index has stopped rising and now appears to be topping out. At the same time, Lowry’s Buying Power Index is in a rising trend. The look of the Lowry’s chart suggests that the [short-term] direction of least resistance is up.”

From London, David Fuller (Fullermoney) opined: “… consistent and persistent trends, such as we have seen over the last five weeks, are often important trends. This continues to look like the first psychological perception stage of a new bull market – lows are rising over time, indicating that demand has the upper hand, but most people do not believe in the market’s recovery. Consequently, the perception is of high risk, while it is actually low, given all the cash available to fuel an additional advance.

“… Asian emerging and South American resources markets are currently carrying our preferred secular themes higher. The tech and telecom cyclical theme is also performing well. These look like new bull markets.

“Europe and the USA, T&T excepted, continue to underperform, not surprisingly given the economic problems. Wall Street still has the capacity to be a spoiler because we do not yet have confirmation that the early March lows will hold. Technical confirmation of a new bull market, as we have often said, comes later and requires a break above the 200-day moving average, which then also turns upwards.”

The CBOE Volatility Index (VIX) (green line in the chart below) is another indicator heading in the right direction for equity bulls, having declined from the 80s in October and November to 36.5 on Friday – its lowest close since late September, just ahead of the stock market meltdown. This is comforting as the VIX is the market’s main gauge of fear and usually moves in the opposite direction of the S&P 500 (red line).


Bill Fleckenstein, well-known perma-bear who announced late last year that he was closing his short-only hedge fund as a result of the reduced number of attractive shorting targets, said: “Now that stocks have rebounded as far as they have, the upcoming earnings season will be particularly interesting – and potentially dangerous – but it will offer information as to the sustainability of the recent advance. If stock prices can shrug off the news, then the market may be headed higher still.”

On the topic of earnings, in the coming week all eyes will be on announcements by Goldman Sachs (GS) (Tuesday), JPMorgan Chase (JPM) (Thursday) and Citigroup (C) (Friday), especially with Goldie mulling a multi-billion dollar equity offering.

For more discussion about the direction of stock markets, also see my recent posts “Video interview: ‘The tide is turning,’ says Prieur du Plessis“, “Emerging-market equities show leadership“, “Technical talk: Sentiment review“, “Video-o-rama: Five in a row for stock markets“, and “Picture du Jour: It’s earnings, stupid!“.

I regularly post short comments (maximum 140 characters) on topical economic and market issues on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

“Business pessimism remains deep and widespread across all industries and regions of the globe,” said the latest Survey of Business Confidence of the World conducted by Moody’s “Sales remain extraordinarily soft and pricing power continues to weaken.” However, it is encouraging that the Survey found that businesses were becoming steadily less negative about the economy’s prospects later this year and that the index had inched up very recently, as shown in the graph below.


But although the rate of decline in a number of economic indicators seems to be moderating, the fallout of the financial crisis has clearly not been fully arrested as gleaned from the International Monetary Fund’s (IFM) new forecast that toxic debt racked up by banks and insurers could spiral to $4 trillion. According to Times Online, the IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

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Category: BP Cafe