Goldman Subpoenaed; Short-Sellers Targeted

Acting quickly to investigate the spreading of false rumors in financial markets, the SEC has subpoenaed Goldman Sachs, Deutsche Bank, Merrill Lynch, and more than 50 hedge funds to trace the source of rumors that have destroyed the value of Bear Stearns and Lehman Bros. stock.

This move comes as SEC Chairman Christopher Cox has ordered a temporary halt to “naked” short-selling in a handful of financial stocks (the order takes effect on July 21, see list here). “Naked” short-selling allows investors to sell a stock without actually owning or borrowing it. This enables the investor to drive down the price with nothing more than a bunch of sell orders. The temptation for manipulation is great, and naked shorting with the intention of driving down prices is illegal (you see, when you short, you just have to hope).

At any rate, this is all good stuff and should put some of the shorters back on their heels and give these financial stocks a little room to breathe.

Rising Inflation

Needless to say, this isn’t very good:

The Labor Department said wholesale inflation, driven by skyrocketing gas and food costs, rose by 9.2 percent for the 12 months ending in June — the fastest pace since the summer of 1981, during another energy crunch.

Read the rest here.

Nor is this:

Consumer prices shot up in June at the second fastest pace in 26 years with two-thirds of the surge blamed on soaring energy prices.

The Labor Department reported that consumer prices jumped 1.1 percent last month, much worse than had been expected.

Read this story here.

And hang on…

Bernanke Seeks to Reassure Investors

Ben Bernanke has just finished the first part of the testimony he is giving today before the Senate Banking Committee. He will shortly be joined by Hank Paulson and Christopher Cox to continue the session. Thoughts so far:

Gentle Ben is a staid and reassuring presence. He claims to be completely comfortable with the capital cushions of Fannie and Freddie and believes that banks, in general, are well-capitalized.

He believes supply and demand is behind the high price of oil (not speculation). Stockpiling has not occurred and the price is up across all currencies.

He is proposing new rules for credit cards to rein in some of the usurious and deceptive practices of that industry.

He stated that 2nd quarter growth was better than expected. He said he expects positive but not robust growth for the year.

Inflation, of course, is a concern. The Fed will begin factoring energy and food prices into their calculations of inflation.

Three other random notes:

Jim Bunning (R-Ken) is a old school anti-Fed nutjob. He railed against the Fed, blaming it for the current problems (partially true) and announced that he would fight with “all the power in his arsenal” to stop the accrual of additional power to the central bank.

Evan Bayh (D-Ind) is a haircut posing as a Senator. He’s a dope, unprepared, and fatuous. I’ll never forget the thinly veiled contempt Petraeus had for his hollowly combative questions in his most recent testimony re: Iraq.

Lastly, can you believe mortgage lenders didn’t have to verify income and assets before approving loans? The new regulations proposed by the Fed will make that simple due diligence a requirement. Is it me, or is that insane? Any lender or borrower who gave or received a loan under those circumstances should suffer the consequences.

Go to CSPAN to watch the rest.

Bernanke, Paulson Testify Before Congress Today

Federal Reserve Chairman Ben Bernanke will deliver his report on the monetary system to the Senate Banking Committee today and then he’ll testify with Treasury Secretary Henry Paulson and SEC Chairman Chris Cox. This is truly must see TV, as these three will work hard to calm the waters.

You can watch it all online on CSPAN beginning at 10:00 a.m.

Jim Rogers: Short Selling Scum

Why does Bloomberg give Jim Rogers a platform in this climate to rip Paulson’s plan and essentially declare Fannie and Freddie dead? And when did Rogers suddenly become such a populist (he’s attacking the potential government bailout on behalf of taxpayers)?

Most reasonable people are against government bailouts of public companies, but we’re all also hoping to have jobs this winter and feed our families, problems Jim Rogers never has to worry about. This douche bag scumball just wants to cover his shorts, regardless of the damage this panic is doing to our banks and economy. Right now, we’ve got to throw down as many sandbags as we can and pray that the waters recede. Jim Rogers is hoping that we all drown.

I was so disgusted by this article I was tempted not to link to it. Shame on Bloomberg for running it.

P.S. It’s for reasons like this that Michael Bloomberg could never be president.

P.P.S. To protect myself from libel, I want to state the obvious: this blog post is just my opinion. I don’t really know if Jim Rogers is a douche bag scumball. In my opinion, he is acting like one.

Fannie and Freddie: You’ve Got Their Back

Secretary of the Treasury Hank Paulson issued a statement yesterday declaring the the Treasury Deparment stands ready to expand their line of credit to the two troubled Government Sponsored Enterprises (GSEs) that backstop or own half of all U.S. mortgages, Freddie Mac and Fannie Mae. In addition, his proposed plan calls for the Treasury Department to purchase an equity stake (buy stock) in the companies if necessary. The Federal Reserve has also made substantial credit available to the two companies.

Lest you think this doesn’t involve you, I urge you to remember that the Treasury Department mean you. Your tax dollars, or much more likely, your good name on an I.O.U., because, frankly, the Treasury Department doesn’t have the money. This plan will need to be approved by Congress (it will) and is not, at this point, even necessary. Both Fannie and Freddie claim to have enough cash on hand to meet all their debt obligations. We’ll see. In any case, and despite the prospect of another bailout, this was a good move by Paulson et al. in advance of today’s market opening. As you may have heard elsewhere, Fannie and Freddie really are too big to fail.

Along with these remarks there is the expressed promise by Paulson and Bernanke to reform and regulate our remarkably deteriorated financial system. This is essential. Deregulation (and downright greed) has been largely responsible for this mess. The regulations that were put in place - many of them after the Great Depression - must be reenacted. Yesterday, Paulson referenced protecting the taxpayer (instead of dollars he’s going to use magic beans) and the legislation currently make it’s way through Congress to reform the GSEs.

Don’t trust the government to protect you. Make sure that Congress handles this legislation (and lots more too after all is said and done) the right way. I know it’s easy to have your eyes glaze over when you read about GSEs, financial regulations, etc. But, trust me, this is of vital interest to anyone reading this. Don’t wait until you lose your home or your job or simply can’t afford to buy milk to get involved. Get angry and get active. Start by contacting Congress.

P.S. Here’s a great piece by the always brilliant Gretchen Morgenson about Fannie and Freddie’s bloated books, greedy executives, and the ultimate lesson of all this: when it comes to big business, it’s privatized profits and socialized losses.

Fannie and Freddie To Be Nationalized?

Just how bad has the housing crisis gotten? Shares of Fannie Mae and Freddie Mac are crashing as I type (look for short sellers to be blamed, to some degree justifiably). Freddie is currently trading right around $6 and Fannie at $9. For perspective, I owned Freddie in the fall and sold it then at $63. This precipitous drop has led to speculation that the government will place both (or maybe just Freddie) in conservatorship, which they are legally allowed to do.

This is an insane state of affairs. This blog has been trumpeting the coming economic apocalype since its inception, but I hope that the panic that is driving this sell-off subsides before they need to be bailed out. Although housing prices are cratering and foreclosures are way up, with more to come, this kind of panic selling is all out of proportion to the underlying value of Fannie and Freddie’s stock. They, indeed, may be liable for billions, but if people hang on (or buy at a bargain price now), the housing market will rebound. People will pay their mortgages. Fannie and Freddie will meet their debt obligations. The earth will continue to revolve around the sun.

Otherwise, once again, the taxpayers will be on the hook. This will not be good for Americans, America, or the world. Things are going to get worse before they get better. But don’t panic. Hold tight, work hard, and don’t take on debt you can’t afford. We’re getting close to the edge. Let’s not go over it.

Economic Apocalypse Now

Not to put too fine a point on it, but today’s meltdown was pretty bad (though not unexpected by readers of this blog). For today:

The Dow closed down 358 points (3%)

Oil spiked to $139.64 (a record close)

Analysts predict additional write-downs and losses for Citigroup and Merrill Lynch, while rumors continue to swirl about Lehman (8% drop) and UBS

All in all, a big pile of merde. I’ve got my fingers crossed that this doesn’t accelerate through the summer (rarely a great season), but I can easily see Dow 9,000 on the horizon, and those $150 barrels of oil just over the next hill.

The Housing Rescue Plan Fiasco

It isn’t easy to oppose a bill that is designed to help prop up America’s cratering housing market. Just yesterday, the S&P/Case Shiller composite index noted that home prices are down more than 15% since April 2007. In some markets, like Las Vegas and Miami, home prices are down more than 25%. This is having an enormous impact (along with inflation) on the health of our economy. But the nine senators who voted against moving this bill (invoking cloture) forward deserve praise.

Although passage is by no means certain - there are a number of amendments to the bill that are in dispute - the move yesterday signals that Congress is working hard on a bipartisan compromise.

Unfortunately, this bill, once again, puts the taxpayer on the hook; this time for the irresponsible borrowing of consumers and financial malfeasance of lenders.

Mike Enzi (R-Wyo) is quoted in this story by Julie Hirschfeld Davis of the AP:

“They expect the federal government to turn their backs on responsible lenders and borrowers and renters waiting — waiting — to become first-time homeowners, and support those groups that have pushed our housing market into decline with bad loans and bad investments. This bill is a federal government bailout.”

Like the Bear Stearns bailout, only bigger, this bill…

…would let the Federal Housing Administration back $300 billion in new, cheaper home loans for an estimated 400,000 distressed borrowers who otherwise would be considered too financially risky to qualify for government-insured, fixed-rate loans.

$300 billion!!! Not only is this the moral hazard writ large, but how exactly are we going to pay for it? What percentage of these new FHA loans will default? Just how rigorous will be the oversight to ensure that speculators don’t receive help? And so on.

I have written that the Bear Stearns bailout was necessary to prevent an epic and immediate collapse of the financial markets. In the end, it was one of those deals that you had to hold your nose and roll with. But this is going too far. Millions (32% of Americans rent) of responsible American renters didn’t buy into a market they couldn’t afford, they waited. Now you’re going to tell them that the U.S. government is going to help defer their dream even further by artificially propping up home prices?

I say, let them fall!

And let those who have borrowed to buy a house they couldn’t afford learn their lesson the hard way. This is a great start to breaking the American culture of debt.

As Benjamin Franklin put it: He that goes a borrowing goes a sorrowing.

Though if the Congress (and likely Bush, too, despite the veto threat) has their way, those who have borrowed (and lent - after a loss, the bill will clear some of the worst mortgages off of the books of lenders like Countrywide) won’t go a sorrowing, they’ll go a prospering.

Look for a final resolution, one way or the other, on the bill this week.

Go to Dick Armey’s (and Steve Forbes’s) AngryRenters.com to sign a petition against it.

Home Prices Down 15%

Home prices continued to decline in April, now down more than 15% since April 2007. Predictably, markets like Las Vegas and Miami have been the hardest hit (down 27%!), though all major metropolitan areas are down according to the S&P/Case Shiller composite index.

In other good news:

Oil continues to hover in the mid-130s, above $136 a barrel today.

Consumer confidence is at a 16-year low.

Producer prices rose a stunning 1.4% in May (largely on energy costs).

Related to producer prices, CNBC reports:

Over the 12 months through May, producer prices have risen 7.2 percent, marking the eighth consecutive month in which prices rose more than 6.0 percent on a year-on-year basis, the longest stretch since the stagflationary period that ended in 1982, a Labor department official said.

Ben Bernanke is signaling that he will not raise the Fed funds rate this time around, but pretty soon he’s going to have to start hiking. The inflationary picture just keeps getting uglier, and he’s going to have to choose between the lessor of two evils.

Obama Disappoints on Public Financing

You knew it was going to happen, but it’s disappointing nonetheless. Opting out of public financing enables him to continue to rake in huge sums by small donors. This is a double whammy for many people because not only is he completely reversing course, but we’ve also helped contribute to the financial groundswell that enables him to do it.

According to Michael Luo and Jeff Zeleny in the New York Times, “when asked in a questionnaire whether he would participate in the system if his opponent did the same, Mr. Obama wrote, “yes,” adding, “If I am the Democratic nominee, I will aggressively pursue an agreement with the Republican nominee to preserve a publicly financed general election.”

Um, you can’t get much flip-floppier than that. And on an issue that is the fundamental corrupting influence in politics - money. Ugh.

It is important, in this case, and with the other disappointments that are sure to come, that we keep our eyes on the prize. But I’ll make a prediction: if Obama and the Dems don’t rise to the occasion once in office, a legitimate third party will rise in this country. This is their shot. The ends had better justify the means.

The Rise of the Borrow and Spend Republican

Chief among the reasons McCain and others cite for the degradation of the Republican brand is the profligacy of the federal government under Republican stewardship. One of the planks of McCain’s economic platform is that he will eliminate unnecessary government expenditure by stopping “earmarks, pork-barrel spending, and waste.” In this, McCain would be an exception to his party’s general ideological shift away from sound fiscal management. In fact, the rise of the borrow-and-spend Republican is one of the major doctrinal changes in the political landscape of the last 25 years.

For Republicans, fiscal conservatism as defined by policies in support of lower spending and lower debt has been, since Reagan, nothing more than a rhetorical canard. Under Reagan, America began to accrue debt at an unprecedented rate during peacetime. It took the country from George Washington until Ronald Reagan to reach the first $1 trillion in debt. By the end of Reagan’s second term, the U.S. had moved from being a creditor nation to the world’s largest debtor nation, with national debt ballooning to 51% of GDP. After a continued run up under Bush the first and a dipduring the Clinton years, George W. Bush launched a series of massive tax cuts (without reciprocal cuts in spending) and a misguided war that has subsequently added more than three trillion to our national debt. The current total of $9.4 trillion equals more than 65% of GDP.

Given such basic financial misdeeds, Americans see Democrats as more trusted to deal with the economy than Republicans. Rasmussen Reports for June 2008 shows that on the number one issue of importance to Americans, the Economy, Democrats are trusted more than Republicans 52% to 39% - a spread of 13%, after Healthcare (favoring Dems by 20%) the second largest gap in their survey.

Now, of course, the national debt isn’t the only reason Americans have come to distrust Republicans to handle the economy. For one thing, a whole host of economic problems are reaching crisis levels just as we head into the home stretch of an election year. It is convenient to blame Republicans for this - and I do - but the mother of this crisis is manifold. In a sense, we are all to blame. That said, the borrow-and-spend narrative has been reinforced for so long now, across multiple Republican administrations, that it has become a defining feature of the party’s brand. Hear the phrase “tax-and-spend” Democrat and there is an immediate rejoinder.

So what does this mean for McCain as he tries to consolidate his fractured party and drag them across the finish line in November? Disaster, if the Dems play their cards right. It has become a cliché to say that they won’t, but I’m not betting against them. With an economy going as badly as ours, “borrow-and-spend” sounds a lot like the hole we’re already in.

Lehman Execs Ousted

Lehman bounced its chief financial officer, Erin Callan, and chief operating officer, Joseph Gregory, today in response to the uproar over the firm’s poor performance. The move is an effort to regain the credibility Lehman lost over repeated misstatements of the company’s exposure to the sub-prime mess and resultant credit crunch.

With more than $60 billion of mortgages, real estate assets, and asset-backed securities still on its books, I’m still not sold, but this will help. As we saw with Bear Stearns, a bank is only as strong as its reputation. Too many doubts, and you’ve got Jaime Dimon in your office.

Bloomberg vs. Guiliani in 2010

The New York Daily News reported today that New York’s current mayor, Mike Bloomberg, is battling New York’s former mayor, Rudy Guiliani, to have his handpicked guy head the state GOP in 2009. This would be the natural move in advance of a gubernatorial bid in 2010 (the position is currently filled by a Joseph Bruno ally, GOP Chairman Joseph Mondello of Nassau County).

Good stuff. My feeling is that if they go head-to-head for the GOP nomination, Bloomberg wins in walk. The Guiliani brand (praise the lord) is tarnished after his quixotic presidential run, and there were a lot of people in New York who wanted to see Bloomberg run for president. If he wants to be governor, with that support and his loot, he will be.

Unemployment Hits 5.5% in May

The unemployment rate rose a half of a percentage point to reach 5.5% in May. This is the biggest monthly rise in 22 years. The Dow gave up all (and more) of yesterday’s triumph of hope over experience.

Other bad news:

Oil jumped nearly $11 to close at a record $138.54 a barrel today.

Home foreclosures reached a record high in the first quarter of 2008 to nearly 1% of all homes.

Lehman is looking to raise another $5 billion to shore up a teetering balance sheet.

The dollar dropped to a weekly low on speculation that the Fed will not hike interest rates due to the weak employment data.

And so on. Remember this is just beginning…