TARP fraud compounded by…fraud?

I am shocked, shocked to learn that book cooking has been going on in here. (Maybe). At least, TARPs “top cop” thinks so. (Maybe). Apparently, he’s on the case. (Maybe).

[Excerpt from Financial Times]

“The Official policing the $700 billion Tarp fund says he is investigating whether banks have ‘cooked their books’ to secure bail-out money.

Neil Barofsky, special inspector-general for the troubled asset relief programme, told the Financial Times he was seeking evidence of wrongdoing on the part of banks receiving help from the fund, which was designed to ease credit conditions and support distressed industries.

Quote: “I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case,” said Mr Barofsky, who has been dubbed the “Tarp cop”.”

[End excerpt]

I hope so too! True, I’d have lots to write about, but imagine the crash that would follow if it turned out a few good banks had been a little more than aggressive with the accounting. All bets would be off, I suspect.

There’s a graffiti war going on..

I feel it is my duty to advise you there is a graffiti war going on in the loo at the Tenth Street branch of the Park Slope Tea Lounge.

The bathroom at the popular cafe is filled with several heated exchanges that reveal the ongoing turf wars in the neighborhood. One prominent note on the wall reads: “To the Tea Lounge Nazis, do us the favor and f*** off.” Below that lovely missive, someone scrawled an angry retort: “Then stay out of the Slope.” Nearby, a seemingly innocuous message saying “music is the weapon of the future” provoked this reply: “disagree it’s baby strollers.”

This graffitti is like a hate crime against the stroller yuppies in their holy inner sanctum — can’t we all just get along?

Throw the stress ball

So you know those stress tests all the big guys took? Yes, you do. Don’t play dumb. The ones that were based on awful economic assumptions intended to be a “worst case” scenario analysis about what would happen if things got “this bad?” Yes, the one that had unemployment at 8.4% for a baseline “this sucks” scenario (we’ve already exceeded that – Go Team!!). Well, grading time has begun:

“Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country’s 19 largest banks, people familiar with the matter said. Regulators announced the tests two months ago as part of an effort to determine how much assistance big banks might need to continue lending if the economic downturn worsens. The government is wrestling with how to bolster the lenders without appearing to prop up banks that are beyond repair.”

So what do the results of the stress tests mean? Well, I am really, really, for sure not going to let a bank that takes the test fail…

“The announcement of the tests in February drove down bank stocks, as investors fretted that the government might use the tests to shut down or nationalize lenders. The Obama administration has said it won’t let any of the banks undergoing the tests to fail.”

…and I am seriously not going to let the results leak out. Seriously. I promise…

“”I think serious efforts will be made to respect the confidential nature of the test and its results,” he said, but added that “there is a real danger that the results of the stress test are uncovered and this roils the markets.”"

It is the return of Double Secret Probation! Wipe that smirk off your face, mister. This is serious business

Note

Doomed! (electric avenue version)

It is just a lot of fuss over a simple lost vowel, I know – but this was no ordinary vowel. General Electric’s third “A” in this case. The platinum and diamond encrusted antique letter, which had been worn ceaselessly by the old girl since the Eisenhower Administration, was reportedly stolen and silently replaced in the middle of the night with some poor excuse for a lowercase “T” – as if no one would notice.

Strangely, senior employees at CNBC have donated hundreds of thousands of dollars of their own cash to organize a search for the missing piece, while Starbucks has announced it will be accepting GE options issued as part of employee stock options programs in lieu of their much-in-demand “10% of any latte beverage” coupons.

One of my tipsters points out that Henry Kravis has been secretly lusting after the letter for years and openly speculates that, even as you read this, the big HK is leaning back in a massive leather chair and pressing a concealed button under the arm which subdues the lights and opens a secret panel on the far wall to reveal the carefully illuminated missing letter. We’re not going to find it at any of the usual fences, said tipster laments.

Prompting me to wonder: What’s The Crack Cocaine Of Anthropology?

“Buy America” (I’ve always thought this particular version of patriotic claptrap somewhat unfortunately spelled) provisions haven’t exactly been a popular notion, but I wouldn’t go so far as to compare them with addictive stimulants (though that depends). Others seem to have no issue with throwing around the C-word. To wit, quoting Richard Fisher from yesterday’s C-Span Washington Journal:

“Dallas Federal Reserve President Richard Fisher warned on Monday against *Buy America* provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism.”

“Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high…it’s addictive and [it] leads to economic death.”

Well, it made headlines, so he’s got that going for him.

Let the devil take the hindmost

You know, we’re at one of those interesting points in history where self-interest and idealism converge. I’ve had days and days where the stock market continued to fall and continues to fall, and the analysts express such shock. And I will admit right here that I don’t understand much of this, and I don’t think that makes me far different from most of the people hearing the news, that somehow it hasn’t seemed counterintuitive to continued to fall, because one thing I do know is that it was at such an artificially elevated level to start.

If we are in fact on ground where it’s safe to stand, we can fall and get up and fall and get up again, which most of us do every day. And, yes, I do feel that we all knew at some level, if we took a moment to think about it, that there was a huge amount of artificial altitude, elevation, inflation in this society, that housing prices were ridiculous, that stock prices were way beyond value. And we now know in fact that a lot of that was a purposely contrived illusion — in which we all happily colluded, because they were many of them pleasant illusions because we are talking about mature markets having made gains over 25 years and now reached a place where no more growth is possible.

However, when shareholders continue to demand the same kind of growth in a mature market that they experienced prior to it’s maturation, there are only two possible ways to create this illusion of growth. One is to cook the books (that was Enron’s answer), and the other is to gobble up some portion of a competitor’s market, claim it for a while — telling your stockholders that this is real growth — knowing all the while that sooner or later another competitor is going to gobble it back up from you. So you create the illusion of growth by in effect eating your young. And those were among the market illusions that all of us bought into because — why? We enjoy feeling fat and happy even if we really aren’t.

I personally know there are a lot of people working those territories who knew, not just instinctively, but factually, what was going on. There were people who actually understood the mathematics behind these bogus subprime mortgages, for example. What was it that kept those people from saying the emperor has no clothes. One is fear of what happens to whistleblowers in our institutions and our society, which is that they get marginalized at least and they lose their jobs and all future opportunities in that line of work at worst, and the other emotion of course is called greed — which is that somehow I have not only a right, but an absolute need to claim more than my share out of this, and if someone else suffers I really don’t care. Let the devil take the hindmost. Now, these have to do with the inner dynamics of a person’s life, and it truly baffles me as to why in this society we continue to think that all reality and all power in terms of what drives human affairs lies in these external objective factors like policy and institutional arrangement and money when in fact there is an equally real and powerful set of drivers of human history that reside within us in the dynamics of the human heart. Which to me is not a vague and abstract phrase or a sentimental phrase or mere metaphor; it’s actually something that you can work with, that you can discipline, that you can form, that you can focus, and you can deploy to good or bad effect in the world; at present the lesser angels have enormous power.

More Madoff family photos

I speculate it’s another day to end in the letter ‘y’ — and you know what that means — another goddamn picture of Andy and Mark Madoff fishing, or about to be fishing, or frying a fish or f***ing a fish, because goodness knows the dare was challenged and accepted during one of the inordinate number of expeditions these two went on while the Ponz was going down in New York.

Cries of the Big Three

Since I have a newsroom just below me I happen to know, at the moment, the execs are late.

That’s what Congress gets for making them drive.

Sen. Robert Bennett: Hey, I’ve got a brilliant idea. Why don’t we just have all the debt holders convert all their debt to equity. That would solve the problem of the large debt burdens these automakers have to service, right? And the equity holders would then be able to oversee the business strategy of the auto makers and force them to evolve.

And this pretty much sums up Congress’ ignorance in these matters. Try to understand: No one wants to own stock in these liquidity black holes anymore, Senator. You really think that the banks want to end up holding the keys here and actively managing these money pits? Ugh.

What amazes me is how much discussion can go on about the importance of lending, warranty, jobs, taxes, oversight, and yet the key factor driving much of Detroit’s ills is totally ignored — their product simply sucks.

I’m so good I should play for the Detroit Lions

City

Financial distress meme: The Lehman Letter

Yes, University endowments, heavily reliant on alternative investments that have had the stuffing kicked out of them lately, have taken it on the chin. Still, don’t worry about the University of Virginia. They have things totally under control. No, seriously. Their soothing Lehman Letters should wash all your worries away. The open letter to the UVA community is the third issued by the University of Virginia Investment Management Co. in the last three weeks, but the first from company CEO Chris Brightman.

Brightman focused on the endowment’s long-term pool over the last year and how in the last four months those investments have lost roughly $1 billion. That equates to roughly a 21 percent loss in the endowment pool’s value from October 2007 to October 2008, Brightman wrote:

“To be sure, this is a startlingly large loss…when put into appropriate context, however, it starts to seem less disturbing.”

Brightman noted that while the endowment pool lost $1 billion recently, it grew $1.6 billion between June 2005 and June 2008, leaving the pool $600 million ahead, or at roughly $4.1 billion overall.

I personally have enjoyed the various versions of Lehman Letters that the crisis has been presenting. Someone should put a “Dear Investor” collection up somewhere. Letters on a time-line set next to the net worth of the entity at the time could develop into a very entertaining exhibit at MOMA. Extra points assigned if each instance of “sufficient liquidity” or derivation thereof is highlighted…

Walking

Bankruptcy is not an option

Nancy Pelosi informed us this morning that Congress really has little choice but to throw money at the automakers. And, since they didn’t get $25 billion when they asked for it, now the price has gone up to $34 billion. I have to admit, this entire process is beginning to feel somewhat familiar, particularly after being permitted to listen to a voicemail recovered from Pelosi’s office number:

“…and if $34 billion in unmarked bills is not delivered to the singing tunnel in Detroit Metro Airport’s McNamara Terminal by the end of the month, one in ten jobs in the United States will be executed — AND there will be no more Ford 150 pickup trucks. Don’t test us again, or you will regret it.”

An aide to Pelosi refused to comment when pointed out that the voice sounded suspiciously like Steve Feinberg holding a handkerchief over the microphone of an iPhone.

Citigroup Bailout: weak, arbitrary, incomprehensible

According to the Wall Street Journal just past midnight, the deal is done. Here are the terms. In short: (a) the US government gives Citi $20 billion in cash in exchange for $27 billion of preferred on the same terms as the first $25 billion, except that the interest rate is now 8% instead of 5%, and there is a cap on dividends of $0.01 per share per quarter; and (b) the government (Treasury, FDIC, Fed) agrees to absorb 90% of losses above $29 billion on a $306 billion slice of Citi’s assets, made up of residential and commercial mortgage-backed securities. (If triggered, some of that guarantee will be provided as a loan from the Fed.) There is also a warrant to buy up to $2.7 billion worth of common stock (I presume) at a staggeringly silly price of $10.61 per share (Citi closed at $3.77 on Friday).

The government (should have) had two goals for this bailout. First, since everyone assumes Citi is too big to fail, the bailout had to be big enough that it would settle the matter once and for all. Second, it had to define a standard set of terms that other banks could rely on and, more importantly, the market could rely on being there for other banks. This plan fails on both counts.

The arithmetic on this deal doesn’t work for me (feel free to help me out). Citi has over $2 trillion in assets and several hundred billions of dollars in off-balance sheet liabilities. $27 billion is a drop in the bucket. Friedman Billings Ramsey last week estimated that Citi needed $160 billion in new capital — I’m not sure I agree with the exact number, but that’s the ballpark. Yes, there is a guarantee on $306 billion in assets (which will not get triggered until that $27 billion is wiped out), but that leaves another $2 trillion in other assets, many of which are not looking particularly healthy. If I’m an investor, I’m thinking that Citi is going to have to come back again for more money.

In addition, the plan is arbitrary and cannot possibly set an expectation for future deals. In particular, by saying that the government will back some of Citi’s assets but not others, it doesn’t even establish a principle that can be followed in future bailouts. In effect, the message to the market was and has been: “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute.” As long as that’s the message, investors will continue to worry about all U.S. banks.

The third goal should have been getting a good deal for the U.S. taxpayer, but instead Citi got the same generous terms as the original recapitalization. 8% is still less than the 10% Buffett got from Goldman; a cap on dividends is a nice touch but shouldn’t affect the value of equity any. By refusing to ask for convertible shares, the government achieved its goal of not diluting shareholders and limiting its influence over the bank. And an exercise price of $10.61 for the warrants?! It is justified as the average closing price for the preceding 20 days, but basically that amounts to substituting what people really would like to believe the stock is worth for what it really is worth ($3.77).

If Charles Dickens weren’t so readily seduced by easy ambiguities

“It was the best of times. Seriously. Couldn’t have been better.”

- from A Tale of Two Cities.

Please move to the exits in an orderly fashion. Do not panic. Thank you for your cooperation. You’re fired.

Today AMEX cranked things up a notch yet again. I don’t know how they could possibly top this, but I’m looking forward to the attempt and I’m merely suggesting and not demanding that it involve a giant game of Assassin:

“From: HQ Postmaster
Sent: Wednesday, November 19, 2008 4:15 PM

Subject: Evacuation Drill at American Express and Brookfield Properties
A message from MD Patrick Kelleher, head of Worldwide Security:
Evacuation Drill at American Express and Brookfield Properties

Dear Colleagues:

American Express and Brookfield Properties will be conducting a building evacuation drill for their employees at 200 Vesey Street on Thursday, November 20, between 4 and 5:30 pm Eastern time.

An estimated 8,000 people will be instructed to walk north on North End Avenue or West Street to Murray Street and go home from there. The drill is only an exercise.”

Fan

Today

Well, as just about everyone in the world knows, things are coming to a head.

Whether we get a large economic stimulus package in the US – the economy whose health affects, for better or worse, just about everyone in the world – could very well depend on who is elected today. For a last minute summary of their short-term economic proposals please read on.

If Barack Obama is elected, we are likely to see a large stimulus package. It would probably include the measures that many economists are favoring, including extended unemployment benefits (and suspension of tax on those benefits), immediate cash aid to state governments, increased home heating cost aid, and infrastructure spending. These measures will have a direct impact on the economy by increasing spending now, while increasing it in ways that are necessary (keeping poor people alive) or that are productive long-term investments (infrastructure). Some of his other suggestions will have a more limited impact on the economy, such as a cash tax rebate, or are more or less irrelevant to the economy, such as relaxing the minimum distribution requirements for retirees.

With John McCain, we are not likely to see a stimulus package – or, more accurately, the package we see will be built around tax cuts that are not likely to have a direct economic impact. His proposals include: reducing taxes on retirement account withdrawals; increasing capital loss write-offs; reducing long-term capital gains tax rates; exempting unemployment benefits from taxes; also relaxing minimum distribution requirements; extending all of the Bush tax cuts; and reducing corporate tax rates. Except for the tax cut on unemployment benefits, these proposals suffer from the basic problem that undermined the last stimulus package this spring: in tough economic times, people take their tax rebates (or tax cuts, or cash you give them in any form) and stuff it under their mattresses, or pay down debt. McCain’s plan also includes the famous (or infamous) proposal for the government to buy up and refinance mortgages directly. (Obama favors increased loan modifications and legislation to eliminate some of the legal barriers to modifications.) But while that could potentially help homeowners and lenders, it doesn’t increase economic activity any.

That said, given the way legislation is passed in Washington, the final package is likely to differ greatly from either person’s proposals — whoever is elected. But the next major step that our government takes to combat the financial and economic crisis will depend directly on today’s outcome.

The next treasury secretary?

He wasn’t included on Charlie Gasparino’s short list but supposedly Jon Corzine is being mentioned as a possible candidate for Treasury Secretary in an Obama administration. Obviously JSC’s got the two most important pre-requisites for the position–job history that includes Goldman Sachs and a follically-challenged disposition–covered, and though my pick is a rotation that beings with the Philly Phanatic and whoever wins the World Series each year thereafter, I’ll definitely throw my support to Papa (Gives the Greatest) Bear (Hugs in the Garden State). However there are a couple problems with the nomination, one being if “it would just be just too weird for Paulson to hand the reins over to Corzine, the man he effectively moved aside in the late 90’s at Goldman to seal his own ascension.” First off–um, what? Bald I has a say in whether or not Bald II (or anyone else for that matter) gets the job? Second–this actually makes perfect sense.

Think about it–you’re Paulson and you’re pleased with the job you did taking over at Goldman while Corzine was on vacation with his family but something’s missing. You just haven’t thoroughly humiliated JSC to your liking yet. You need a big finish and also something to keep you amused during retirement as you are a Christian Scientist and there’ll be no prescription drug problem to speak of. What could be better than coming up a plan to save the economy that nobody’s quite sure how or if it’ll work, then throwing the away the map to the treasure chest on your last day and leaving a note on a Post-It in its place that effectively says, “Good luck figuring this out, sucker”. The Bald might be trouble, as he identifies any facially hirsute individual as a brother in arms, but he can be dealt with, easy.

Afternoon

Ego and mouth

Let me be clear: I don’t support either US Presidential candidate. But since we stand on the cusp of the election, I’ll lay out my bottom line: Barack Obama has the kind of cocksure confidence that can only be achieved by not achieving anything else.

Anyone who has actually had to take responsibility for consequences by running any kind of enterprise– whether economic or academic, or even just managing a sports team– is likely at some point to be chastened by either the setbacks brought on by their own mistakes or by seeing their successes followed by negative consequences that they never anticipated.

The kind of self-righteous self-confidence that has become Obama’s trademark is usually found in sophomores in Ivy League colleges– very bright and articulate students, utterly untempered by experience in real world.

The signs of Barack Obama’s self-centered immaturity are painfully obvious, though ignored by true believers who have poured their hopes into him, and by the media who just want the symbolism and the ideology that Obama represents.

Ultimately this election is not about him, but about the fate of this nation, at a time of both domestic and international peril, with a major financial crisis still unresolved and a nuclear Iran looming on the horizon.

For someone who has actually accomplished nothing to blithely talk about taking away what has been earned by those who have accomplished something, and give it to whomever he chooses in the name of “spreading the wealth,” is the kind of casual arrogance that has led to many economic catastrophes in many countries.

The equally casual ease with which Barack Obama has talked about appointing judges on the basis of their empathies with various segments of the population makes a mockery of the very concept of law.

Senator Obama’s running mate, Senator Joe Biden, has for years shown the same easy-way-out mindset. Senator Biden has for decades opposed strengthening our military forces. In 1991, Biden urged relying on sanctions to get Saddam Hussein’s troops out of Kuwait, instead of military force, despite the demonstrated futility of sanctions as a means of undoing an invasion.

Add to Obama and Biden House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, and you have all the ingredients for a historic meltdown.

Just as dissent is not heroic in itself, change is not noble simply for being active. Sadly, too few people are either engaged enough or interested enough to analyse this — making the media’s complicity that much more nefarious

Spitfire

Dogs

Joe

I am totally, utterly tired of this utterly interminable election. But such things are in the eye of the street. I have tried to pay no attention, but then… “Joe the Plumber.”

If you haven’t heard of Joe the Plumber, please lend me the sleeping pills you’ve been using. I’d like to coast through the next many days before the election in a narcotic haze.

John McCain has invoked this (ahem) Ohio man, known now as Joe the Plumber, to charge that Democrat Barack Obama would raise taxes on American workers.

However, at a recent rally Obama responded by saying, McCain “isn’t fighting for Joe the Plumber; he’s fighting for Joe the Hedge-Fund Manager.”

At first I was puzzled, but then it occurred to me: It’s the same Joe. And this has the virtue of explaining much of September’s (non)performance.

This proves NOTHING

Some Congressman — not sure who because I just missed his name — brought up the following IM conversation between two S&P employees, to former residential mortgage ratings managing director (Frank Raiter) from several months back (no name check on the deal but surely I can hazard a guess):

S&P employee #1: By the way that deal is ridiculous
S&P employee #2: I know, right. That model definitely does not capture half the risk
S&P employee #1: We should not be rating it.
S&P employee #2: We rate every deal. It could be structured by cows and we would rate it.

Congressman: What do you think this means, Mr. Raiter?

Raiter: Um…I don’t know…I guess a casual acceptance of these things.

(Perhaps that cow was particularly talented?)

Transit

Night scene

80 million mouths

80 million options are set to expire today. For the uninitiated, that’s a lot. (Who planned that schedule?! Didn’t they know there would be an election on?)

Yes, we’ve already been reminded by the likes of financial journalists, that this equity free fall already exceeds the pain felt during [insert worst crash ever here], that volatility comes on like a fever.

And yes Europe is all giddy because U.S. markets rallied nicely and Google made its numbers. That’s what we are reduced to. A foreign index rally on Google earnings. I find it hard to imagine a more fragile run up. Then again, there were a number of rallies over the last 60 days on the news that such-and-such investment bank was raising XX billion in common (again) that boggled the mind. But that’s another story for another day. U.S. futures are having none of it, and have pulled yesterday’s close down quite a bit already.

So it looks like we are in for a wild day. An intensely volatile and wild day. The kind of day where you might find yourself f****d before you even realize your clothes were missing. So a few pieces of advice to cope with the surprise penetration you thought you were braced for. (It’s always worse than you think at first). Some of you may have heard some of this already:

1. Don’t double down on a losing position. Seriously people. That’s how you dislocate hips. If you were a gymnast you wouldn’t have this kind of market exposure.

2. Manage your risk carefully. Yes contraceptions are a good idea.

3. Don’t follow the crowd. There’s nothing worse than sudden, unexpected group panic when you aren’t properly prepared.

4. Buy the rumor. Sell the news.

5. Never, never, leave your wingman (ahem, or wingwoman).

Voila. If anyone is ready to be violated by the volitile markets today, it is now you.

Attention deadbeats

Loansharks and their kind are in a bind. A lot of clients, including bankers and investment brokers who have gambling problems and cocaine addictions who lost their jobs, are having some difficulty paying back the money borrowed. While they’re yet to resort to the tactics of bigger lenders, who are taking bats to heads and tire-irons to knee caps, they are going to have to start collecting collateral — jewelry, wedding bands, necklaces, family heirlooms, now invaluable Bear and Lehman swag (and in the next couple weeks, Goldman chotckes).

A here unnamed mid-level money lender, decided, instead of being all loan-sharky, and boosting lending rates while credit is tight, to lower interest rates by 50 percent, in an attempt to all to drum up more business during tough times (for people in need of cash). He also offered this little bit of advice to the industry that, while perhaps a bit late, can be revisited next time various individuals mull over the idea of f***ing up beyond belief, Wall Street should take a lesson: never lend what you can’t afford to lose, and lose very little.

I’m guessing at least half of you have personal experience with this sort of thing. Feel free to share at this time.

Hedge funds therapy

Because synopsizing their sadness makes me sad, I’ve decided to put a stop to this. I am opening up a therapy stand, sort of like a kissing booth, to heal the depressed.

I’ve rented out some space in 375 Park, where we’ll hold sessions, during which the dialogue will go something like this:

Me: What’s your name?
Patient: Steve Cohen
Me: Okay let’s start.
Patient: I’m not feeling so great.
Me: It’s not your fault.
Patient: I know, it’s the markets.
Me: No, look at me. It’s not your fault.
Patient: I know.
Me: No, no, you don’t. It’s not your fault.
Patient: I know, traders don’t lose money, mod-
Me: It’s not your fault.
Patient: Don’t f*** with me, not you!
Me: It’s not your fault
[pushing, tears, hugs, tears ]
Patient: [still crying, clutching] I’m sorry
Me: F*** them, ok?