• BIS Says Banks Need More Capital to Withstand Shocks (Bloomberg)
• You’re Hired. At Least for Now. (Kiplingers) More employers will rely on temps and contract workers.
• S.E.C. Enforcers Focus on Avoiding Madoff Repeat (NYT)
• Is Proprietary Trading Too Wild for Wall Street? (Time)
• Freakonomics Radio Quite a few surprises here . . .
• Basketball Warning: Giant Time Suck

What are you reading?

click for full blog list

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Compared to the harrowing decline and sizzling rally after the unemployment figures were released on Friday, Monday’s market action was almost boring. With no economic data scheduled for release, and with stock markets overseas mixed (Asia down; Europe up), U.S. stock index futures correctly foretold a mixed opening in New York yesterday. The averages hovered just over and under the unchanged mark until the final hour of trading. Some fresh worries about Greece , courtesy of a rumor that had Deutsche Bank refusing to lend to Greek banks in the Repo market, seemed to weigh on stocks late in the session. The sell off that ensued left the averages with losses ranging from – 0.7% (NASDAQ) to -1.1% (Russell 2000). Bonds were little changed, as was the dollar. Only commodities could buck the dullness, and the CRB index rode the strength of the grain markets to a gain of 1.1% on Monday.

Amendment I
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.” (First Amendment to the Constitution of the United States)

This space is usually reserved for opinions that try to take the high road when discussing high finance, but today I ask for indulgence as I stroll down the low road of political finance. Let me say from the outset that I am a patriotic defender of our nation’s Constitution, as well as the first ten amendments to it that are more commonly known as “The Bill of Rights”. These documents are simple, elegant, and powerful. And, unlike almost every piece of legislation authored today, copies of them can comfortably fit in one’s pocket or purse. Embracing an enduring form of brevity, our Founding Fathers were green in a way that should make the modern lawmaker envious.

I am an ardent supporter of the rights bestowed by “We the People” to citizens of these United States by the First Amendment to the Constitution. I benefit from its protection every time I use this forum to convey my views and opinions. Because I have so much respect for our Constitution and the Bill of Rights, I am usually sympathetic to judges who hail from the “strict constructionist” wing of jurisprudence. As opposed to those judges who use modern interpretations of the Constitution to enable them to legislate from the bench, a strict constructionist tries to rule based on laws as they are written. Judges of this philosophical bent are usually fonder of precedent than are those who wish to give either older legislation or even the Constitution itself a face lift based on the “spirit” of said law. The make up of our sitting Supreme Court is said to contain more strict constructionists than not.

Corporate Campaign Spending Backed by U.S. High Court

Imagine, then, the shock with which lovers of either free speech or strict constructionism (or both) viewed this recent ruling by the Supreme Court in “Citizens United v. Federal Election Commission”. In a 5-4 decision, the Supreme Court ruled that corporations no longer are bound by decades of precedent that restricted their influence over elections to voluntary contributions made by individuals in said corporation to a Political Action Committee (or PAC). Now, says the Supreme Court, corporations will be able to spend whatever general corporate funds they deem necessary to take to the air waves and target an ad campaign for or against any issue about which they would like to persuade the voting populous. What were the folks on the High Court smoking?

The rationale, if one could call it that, seems to be one which very strictly interprets the First Amendment: “Congress shall make no law…abridging the freedom of speech…” From the majority opinion, penned by Justice Kennedy:

“The government may regulate corporate political speech through disclaimer and disclosure requirements, but it may not suppress that speech altogether,” Kennedy wrote.

Defenders of free speech were dumbstruck by the ruling, but I, for one, will not remain mute. After reading again our Constitution and its Amendments, I have one simple question: How can a corporation be granted the same rights under law that are expressly and only reserved for individual citizens?

The Constitution of the United States
The Bill of Rights

Corporations, though composed of individuals bearing rights, are not citizens. Ergo, their “speech” is not protected. From newspaper stands to members of the S&P 500, corporate entities do not have rights granted them by our Constitution. You don’t have to trust me on this issue; read for yourselves what our Founding Father proscribed for our democratic republic in the core documents that endure more than two centuries after their ratification in 1789. Rights are bestowed upon individuals, first and foremost, and the only entities conveyed any rights or roles in governing those individuals are the following: both houses of Congress (the legislative branch), the President (the executive branch), the Supreme Court (the judicial branch), and State governments. That’s it. Nowhere will you find the word “corporation”, nor will you find a reference to any entity even faintly resembling the eighteenth century equivalent of a Dow 30 constituent.

There are many other reasons why this ruling ranges from the puzzling (i.e. can money be considered speech?) to the dangerous (corporate PACs and lobbies already have undue political influence, so this ruling will only encourage citizens to believe — rightly or wrongly — that corporations “own” the political system). This ruling will be corrosive to the ties that bind us all. Many already suspect — again, rightly or wrongly — that the banks lobbied to have financial regulations stripped away in the decade prior to the financial crisis, only to come running for a taxpayer-funded bailout when the system their campaign donations helped design came apart at the seams in 2008. Giving corporations even more power and political influence will only cause this nascent mistrust to spread.

But rather than fight the corporations (though we, as shareholders, should at least try to stop them from spending our undistributed profits on politics), perhaps our best chance lies in using the strict constructionist argument against the Justices themselves. I hope someone like Charlie Rose can persuade Justice Kennedy or Chief Justice Roberts to be interviewed during their next break. If Mr. Rose can use the Socratic method to ask them about the Constitution, their adherence to strict constructionism, and just where in the document we can read about “corporate political speech”, then the silence that follows will be something to behold. If the Justices want to strictly interpret the Constitution, then they must – by their own logic — agree that only individuals are granted rights under it.

Unless these Justices can be shown the folly of their ways (and it’s an extreme long shot), then the only other avenue for reversing this ruling involves the drawn out process of passing a Constitutional Amendment. Despite the recent bluster you saw during the State of the Union address, don’t count on Congress for help. It would be easier to find a “man bites dog” story than to see our elected officials try to sew shut the pockets that finance their careers. Sadly, it just might be this newly legal form of corporate campaign finance that enables incumbents to survive during the fall elections. So unless voters decide to throw off their apathy and clamor for a Constitutional Amendment, perhaps throwing out the entrenched politicians on both sides of the aisle this autumn will suffice. Without action of some sort, there is a risk that a growing number of Americans will feel disenfranchised by corporate political influence. How such a group will some day seek to “redress their grievances” is anyone’s guess.

– Jack McHugh — on the lighter side of Constitutional matters, please read both the article below and the accompanying passage from our Constitution. I wonder if the Maestro ever received Congressional approval before he was knighted by Queen Elizabeth for his “contribution to global economic stability” in 2002? Not only was his Knighthood for “economic stability” a tad premature, it may have been — to a strict constructionist — unconstitutional.

Knighthood for Fed’s Greenspan

“No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.” (Article I, Section 9, Paragraph 8 of the Constitution of the United States)

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Congrats to my friend Michelle Leder, who just sold her site Footnoted.org to Morningstar.

I don’t have the details on the transaction, but my guess is they bought the site for $XX dollars, and they retained Michelle for a salaried post for YY years.

This will give Michelle a sales team and an infrastructure, and allows Morningstar to leverage her name and expertise.

Its probably a good transaction — win-win all around.

Here’s Michelle’s comments:

“One final note about today’s news: While I negotiated mightily for the keys to the Gulfstream, the corporate apartment in Paris, the company yacht, the lifetime consulting contract and, of course, a tax gross up — all crazy perks we’ve written about in various M&A deals — I came up empty handed. That’s because Morningstar doesn’t believe in those sorts of things. Nor do I. Instead, my reward will come if I’m able to grow the footnoted business the way that I envision, which is exactly as it should be and just another reason why I’m so excited to be joining Morningstar.”

I hope you at least got the antique map collection!

Official Morningstar PR Release:

Morningstar, a leading provider of independent investment research, today announced it has acquired the Footnoted business of Financial Fineprint Inc., a privately held firm based in Peekskill, N.Y. The acquisition includes the Footnoted.org website and the Footnoted Pro service. Terms were not disclosed.

Footnoted.org was founded in 2003 by Michelle Leder, author and journalist. Footnoted’s research staff pores over hundreds of SEC filings a day to unearth critical information buried in the fine print, such as evidence of aggressive accounting, excessive compensation, or the type of questionable self-dealing that can indicate more serious problems at a company. With original insight and analysis culled from corporate filings, Footnoted’s free site has become a must-read for professional money managers and analysts, as well as sophisticated individual investors. The company also publishes Footnoted Pro, a service for institutional investors, such as hedge fund firms, that provides insight on actionable items and trends in filings.

Leder will continue to run Footnoted, and Morningstar will make some content from the site available on Morningstar.com, the company’s investment website. In the near future, footnoted.org will become footnoted.com. Additionally, Morningstar will also offer Footnoted Pro to its individual investor, advisor, and institutional clients.”

More later . . .

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Source:
Morningstar Acquires Footnoted.org
CHICAGO, Feb. 9, 2010
Morningstar PR, Inc. (NASDAQ: MORN)

Airtime: Tues. Feb. 9 2010 | 8:50 AM ET

$104.3 million  (sculpture)

Hat tip CNN/Money.com

A record 38.2 million Americans were enrolled in the food stamp program at latest count, up 246,000 from the previous month and the latest in record-high monthly tallies that began in December 2008. Food stamps are the primary federal anti-hunger program, helping poor people buy groceries. The Agriculture Department updated enrollment data on Friday with a preliminary figure for November. USDA estimates up to $58 billion will be spent on food stamps this fiscal year, which ends Sept 30, with average enrollment of 40.5 million people. Food stamps were renamed the Supplemental Nutritional Assistance Program in 2008. Participation has surged since the financial-market turmoil of late 2008 and has set records each month since December 2008, when it reached 31.78 million. Enrollment is highest during times of economic distress.

Comment

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Public sector workers in Greece are preparing to strike this week. They oppose the plan to reduce their wages and pensions. These payments are more than half of the Greek budget. Greece’s estimated 2009 deficit was 12.7% of GDP. If the proposed austerity measures are enacted, the proposed 2010 budget deficit will be 8.7% of GDP.

The government of Greece must cut its deficit or the bond market vigilantes will crush the pricing of Greek debt, interest rates will climb much higher, and the country will find its ability to finance its operations significantly impaired. We have some thoughts on how this will play out. But first there is a lesson from Greek history which the unions have ignored.

The famous Greek philosopher and poet, Simonides of Ceos, was engaged by Scopas, a nobleman from Thessaly, to chant a lyric poem in honor of his host. Simonides performed admirably but also included a passage praising the famous twin young Greek gods, Castor and Pollux. After the performance, Scopas offered to pay Simonides only half the agreed sum and told Simonides that he needed to get the other half from the two gods he had praised.

Later during the banquet, Simonides received a message to come outside and meet two young men. When he exited the nobleman’s banquet he found no one waiting for him. Suddenly the roof of the banquet hall collapsed and killed the guests, including Scopas.

The story is famous because Simonides was the only survivor and was subsequently asked to identify the mangled corpses. Since he remembered where folks were seated at the banquet he could state who was whom and coined the phrase “here lies so and so” as he identified the victims’ remains for their relatives. Simonides’ phrase is a probable source of the modern-day epitaph we find on tombstones throughout the English-speaking world.

Thanks for this story goes to my son-in-law, Scott Newstok, whose literary expertise includes the study of epitaphs, as articulated in his new book Quoting Death in Early Modern England. Let me also add thanks to Cicero, who originally recorded the story.

Like Scopas, the Greek public-sector unions are flirting with two relatively young gods of modern finance. They are similar to Castor and Pollux in that they are twins of sorts. They were born out of the post-war European evolution. And the unions are making the modern-day, public-sector equivalent of Scopas’ demands. Those two young organizations are the European Union (EU) and the European Central Bank (ECB).

In our view the future of the euro as a currency and of the EU and the regional economic and currency zone is now at stake. The outcome depends on how they handle the Greek debt issue. In the formation of the original eleven-member euro zone and the original fifteen-member EU, the Maastricht Treaty of 1991 contemplated that sooner or later one of the members of this regional assemblage of states would misbehave. Maastricht is very clear on the importance of the point that the ECB and the other member states of the EU do not bail out a state that violates the agreements on budget discipline.

The credibility of the euro as a hard currency is on the line. President Jean-Claude Trichet and the members of the ECB governing council know it, which is why we believe the central bank will not alter policy to fund Greece directly. Furthermore, it will not bend its rules regarding collateral, if the Greek government fails to implement the proposed budget cures. Greek government budget failure would result in sovereign credit rating downgrades that would render Greek debt unacceptable as collateral under current ECB rules.

The same outcome is true in a different procedural form for the EU’s 27 members. How does the non-euro zone EU member, the UK, or euro zone members France or Ireland explain to their citizens that they will be subjected to risk and maybe taxation so that Greek public workers do not have to rein in their very high compensation and benefits?

Imagine that scenario in the United States. Would Mississippi and Texas be obliged to pay the compensation and benefits that were extracted over the years by government workers in Vermont or New Jersey? If that doesn’t fly here, why do we expect it to fly there?

We expect the public upheaval in the weaker euro zone states to intensify before it runs its course. That is the pattern of the past. We also expect that the EU deliberative political bodies will be very active trying to find words of compromise, while not agreeing to pay. Politicians are the same everywhere.

But in the end, the ECB knows that the most credible and reliable thing that exists in European politics is the trusted currency. ECB also knows that the euro can only survive and maintain its hard-currency and world-reserve status if it is not debased because of pressure from the public-sector employees. The ECB was created by the Maastricht Treaty to avoid this pressure.

So, out goes our neck: we are going to bet on the euro. We believe that the policy of preserving the currency as a reliable and trusted store of value will prevail. Europeans know that loose fiscal polices can be managed if the monetary policy stays consistent and reliable. They also know that if the monetary policy succumbs to political pressures, all the movement toward stability since World War II will be put at risk.

We write this after a hard week of multiple and sequential discussions with colleagues in Europe. We examined this issue in depth with present and former central bankers, economists, and investors from eight countries and representing industrial enterprises and banks.

Lastly, we must acknowledge that there is huge volatility in front of us. My colleague Bill Witherell has described it in his recent missive. Volatility is due to uncertainty. Uncertainty drives risk premia. In sovereign debt, uncertainty shows up in higher interest rates and in the higher pricing of credit default swaps.

Two months ago we wrote that 2010 will be the year of sovereign debt issues. That will be true in Europe and in the United States as governments are forced to address swollen budgets and to restructure their arrangements with public-sector unions. We are seeing that in Greece and Spain and elsewhere in Europe, and we are seeing that in New Jersey and California and New York and elsewhere in the US.

Were Simonides alive today he might be creating the epitaph to be used for the unions that will be striking. He would do it in Greek. We will choose American English, and a limerick.

Here lies the body of the swollen public sector budget.
Markets have repudiated how politicians can fudge it.
Bond vigilantes took out their mop,
Investors cried that “this must stop,”
And now credit default swap pricing will judge it!

February 8, 2010

David R. Kotok, Chairman and Chief Investment Officer
For personal correspondence: david.kotok@cumber.com

But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.

Why is that?

There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:

1) Lending Standards were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.

2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously), and in these purchases, mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.

3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.

4) Single Regulator, Lack of Regulatory Capture: The hodge-podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicious or corrupting North of the border.

The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).

Hence, with a subprime market less than a quarter the size of the US (percentage wise), and homeowners who were on the hook for their own bad purchases, its no surprise that Canada’s housing market is far less boom & bust prone than the US RE market has been.

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US vs Canada Delinquency Rates

US vs Canada Home Prices

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Sources:

Housing Rebound in Canada Spurs Talk of a New Bubble
PHRED DVORAK 
WSJ, Feb 8, 2010
http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html

Why Didn’t Canada’s Housing Market Go Bust?
James MacGee  
The Federal Reserve Bank of Cleveland 12.02.09
http://www.clevelandfed.org/research/commentary/2009/0909.cfm

What Toronto can teach New York and London
Chrystia Freeland
FT, January 29 2010 
http://www.ft.com/cms/s/2/db2b340a-0a1b-11df-8b23-00144feabdc0.html

Additional Sources:
Banks urge Ottawa to tighten mortgage rules
Boyd Erman and Tara PerkinsFrom Globe and Mail Feb. 06, 2010
http://www.theglobeandmail.com/report-on-business/banks-urge-ottawa-to-tighten-mortgage-rules/article1458585/

Nobody’s saviour
TARA PERKINS 
The Globe and Mail, Apr. 20, 2009  
http://www.theglobeandmail.com/report-on-business/article1138040.ece

Homeownership Rate Falls Back to Pre-Boom Level (Economix)
http://economix.blogs.nytimes.com/2010/02/02/homeownership-rate-falls-back-to-pre-boom-level/

Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%
Jody Shenn
Bloomberg, Feb. 8 2010
http://www.bloomberg.com/apps/news?pid=20601110&sid=at0fpRHaUHhE