New Geography

Author: Susanne Trimbath

  • Buffett Favors Health Insurance Bailout

    Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK), and owner and investor of some very large financial firms including insurance companies, is paying favors backward and forward among the political appointees and politicians that have helped him through the financial crisis. This week, he brought Treasury Secretary Henry “Hank” Paulson to Omaha recently to help tout Paulson’s new book.

    He’s also helping out Senator Ben Nelson (D-NE). A year ago, I button-holed Nelson after lunch with the Sarpy County (NE) Chamber of Commerce. He told us in March 2009 that he had discussed the Troubled Asset Relief Program (TARP) with Buffett before voting “yes” on the bailout. Now we are learning that Nelson is discussing other Congressional matters with Buffett – the health insurance bailout.

    In October 2009, Bill Moyers investigative reporting gave us a complete outline of just how cozy the insurance industry is with Congress. I said it back then: what they are calling “healthcare reform” is really just “health insurance bailout.” President Barack Obama slipped up in July and called it “health insurance reform” which sent tongues wagging. How soon they forget, really. Seven months later, he’s back to talking about “Health Care Reform” only this time in the context of the possible failure of Congress to pass any legislation.

    I doubt it’s necessary to reiterate, but just for the record: Nelson “added a provision (to the legislation) extending federal payment for Nebraska’s new Medicaid enrollees beyond 2017, when the federal share is set to begin to decline” The backlash on the “Kornhusker Kickback” came from a wide array of interests, including. Nebraska Governor Dave Heineman. Heineman appeared on Fox Business setting the record straight: he definitely did not suggest this idea to Nelson and he wanted no special deals for Nebraska.

    So, who came galloping to rescue Nelson from the backlash and fallout? None other than Warren Buffett was quoted defending Nelson to the press. And Nelson didn’t let the effort pass unnoticed. Nelson is running television ads in Nebraska quoting Buffett’s comment that “he would have made the same vote” as Nelson on the health insurance bailout. Buffett called Nelson’s vote “courageous”: How much courage did it take for Nelson to vote in favor of legislation that is supported by his largest donor?

    Did I mention, again, that Buffett’s BRK holds insurance companies – ten of them according to the 2008 annual report. The holdings include not only property and casualty insurance, but also “reinsurance” (which could include the full spectrum of insurance businesses). Buffett calls this “the core business of Berkshire.” His insurance operations, “an economic powerhouse,” provided $58.5 billion in cash “float” on which they earned $2.8 billion.

    Berkshire Hathaway employees and PACS are top contributors to Nelson’s political campaigns. Nelson has a long history with insurance. According the Clean Money Campaign, his pre-politics career was spent as “an insurance executive” and “insurance company lawyer.” His “lifetime campaign contributions from the insurance industry rank him fourth in the Senate,” behind only McCain, Kerry, and Dodd.

    Hank Paulson, Warren Buffett, the Financial Crisis Inquiry Commission and now Senator Ben Nelson: part of the problem – not the solution.

  • Buffett and Paulson: Part of the Problem

    Warren Buffet, CEO of Berkshire Hathaway, and Henry “Hank” Paulson, former Treasury Secretary, were guests of honor at the annual meeting of the Omaha Chamber of Commerce this week.

    That the two of them are together should be no surprise: Paulson orchestrated the largest bailout of financial institutions in the history of the world – and Buffett is an owner of some of the largest financial institutions. To put it bluntly, Paulson helped bailed out Buffett’s financial institutions and now Buffett is helping Paulson tout his book. It’s not a pretty picture.

    Yet, the event sold out well in advance. Granted, Buffett’s contribution to Omaha’s economy cannot be minimized. Warren Buffet keeps Omaha on the global map – travel anywhere in the world, tell them you’re from Omaha and see whose name comes up first. He is also a regular contributor to charitable and social causes throughout the region. Berkshire Hathaway’s (NYSE: BRK) companies employ about 246,000 people – though only 19 of them are at the Omaha headquarters. None of BRK’s companies are among the top 25 employers in greater Omaha. (Nebraska Furniture Mart, with just over 2,700, ranks 32nd and is the only one in the Top 100.)

    We all have 20/20 vision in hindsight, including Senator Chuck Grassley (R-IA). In April 2009, seven months after the Bailout passed, Senator Grassley said of Paulson that Congress “was awed by a person who comes off of Wall Street, making tens of millions of dollars. … You think he knows all the answers and when it’s all said and done you realize he didn’t know anything more about it than you did.”

    The Troubled Asset Relief Program (TARP) was sold to Congress and the American public as an absolute necessity to save the American Dream of homeownership. It was supposed to be used to help homeowners with mortgages bigger than the market value of their homes. As soon as Paulson’s Treasury got the money they decided to bailout big banks instead. Since then, Paulson, along with current Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke have refused to comply with demands from Congress to produce documents about the TARP recipients’ use of funds. The legislation was passed and the funds were released, and Treasury gave the money to banks with no restrictions on its use – no monitoring, no reporting requirements, no nothing.

    So, why would Warren Buffett look so favorably on Paulson? Warren Buffett – our widely revered Oracle of Omaha – is one of those who built the boom in the capital markets and are benefiting from the bust. No surprise then that Buffett whose primary business vehicle is a financial holding company, supported the bailout of financial institutions. BRK’s businesses include, among others, property and casualty insurance and financial holding companies.

    Of course Buffett was in favor of the bailout – his companies directly benefited as did the investments made by his companies. He put $5 billion into Goldman Sachs preferred stock with a 10 percent dividend – a substantially better rate of return than the US government got on our $10 billion bailout. Berkshire Hathaway was the largest shareholder in American Express Co. when they received $3.4 billion from Uncle Sam. Paulson is now insisting that US taxpayers will profit from the TARP bailout – if we do, which I doubt, I’m sure we won’t profit as much as Buffett did.

    Paulson claims, in his book, that he turned to Buffett for advice about saving Lehman Brothers from demise. This strikes me as a very odd story, considering that Buffett told the press in March 2009 that he couldn’t understand the financial statements of the banks getting the bailout money. Add to this the fact that Senator Ben Nelson (D-NE) told me that he talked with Warren before voting for the first bailout package. (I button-holed him after lunch with the Sarpy County Chamber of Commerce) and you begin to get the real picture – the government was taking advice from financial institutions about the bailing out financial institutions.

    To bring the problem full circle, consider this. In January, a bi-partisan Financial Crisis Inquiry Commission was appointed to find the answers to the causes of the financial crisis. They may not have to look any further than the nearest mirror. USA Today reported earlier this month that the members of the panel “have consulted for legal firms involved in lawsuits over the crisis.” A Commission composed of members who earn their livelihood from financial institutions is unlikely to solve the mystery of the causes of the greatest financial collapse in the history of the world.

    Like the Commission, Hank Paulson and Warren Buffett are part of the problem – not the solution.

  • Connecting Facts to Forecast 2010

    Anyone can figure out the State of the Union by taking a good look around. I mean, I was born in the afternoon – but not yesterday afternoon – I don’t need four days of press coverage and a long speech by the President to tell me that Americans are suffering.

    This time of year, though, everyone is looking for some hint of what is to come. Even the most rational among us are tempted to seek out some prediction of the future. Economists often rate high on the list of seers sought out by most Americans – right up there with stock brokers, Dionne Warwick’s Psychic Friends Network, and Joan Quigley (White House astrologer to the Reagans).

    In this article, I’ll give you a few of my own predictions and then invite you to tell me the subject areas you want predicted. When pressed for my vision of the future, I like to add up what I already know to arrive at what I think will happen. Here’s an example:

    1. Consumer debt is about $2.5 trillion + The Federal Government Bailout commitment topped out at $12.8 trillion = American consumers, no matter how voracious their appetite for debt and foreign goods, are not the problem and cannot be the solution.

    See how it works? I confess I learned to do this while working with Mike Milken on the Global Conferences at his Milken Institute in Santa Monica, California. He called it taking the “view from 35,000 feet.” It entails taking two or more pieces of information that most people don’t hold in their heads at one time and trying to see how the ideas are connected. Here’s another one:

    2. The eight largest bank holding companies decreased lending year-over-year in the first and second quarters of 2009 + Domestic deposits are growing at double digit rates = Too Big to Fail has created monster institutions that do not have to respond to market forces or consumer demands.

    The largest bank holding companies in order of commercial banking assets are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC Financial Services Group, US Bancorp, Bank of New York Mellon, and Suntrust. That you may not have a “Suntrust” branch on the corner in your town tells you something about how big the first seven are. These banks are so big that they aren’t even using the excess reserves that the Federal Reserve Bank is making available to them – they just let it sit in the Federal Reserve accounts earning zero interest. They are no longer simply U.S. banks, subject to controls by the Fed’s monetary policy actions. They can reach out for funding across the world – including funding from sovereign wealth funds controlled by governments from China to Kuwait.

    Here’s one more, just to get the ball rolling. Then, I’ll turn to your questions and see if we can manage a few more predictions for 2010 and beyond, just using the facts as we know them today.

    3. The Federal Reserve System more than doubled the money in the banking system virtually overnight (from $984 billion on September 17, 2008) and kept it at that level ever since ($2,249 billion as of last week) + the third quarter 2009 increase in economic activity (output or gross domestic product) only got us back to where we were at the same period in 2007 = There’s enough money building up in the banking system to meet the definition of “inflation”: too much money chasing too few goods.

    The rise in GDP, while it may signal the technical end of the recession, does not put an end to the financial stress we are suffering. In the seven years before the technical beginning of the recession, the U.S. economy was growing at more than five percent each year. Basically, that means the recent recession put us about $1 trillion in the hole to economic prosperity. The much-touted improvement in the economy in the third quarter of 2009 was about $90 billion. At this rate, it will take 11 quarters (nearly 3 years) to catch up. That’s why so many economists are more pessimistic than many politicians.

    For the rest of 2010, I invite you to submit comments below or drop me an email with two or three facts that you would like to see connected. I’ll take on the challenge of finding the connections, the relationships and interpreting the signals for what those facts might mean for you and the economy in the coming months.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

    Photo: Vermin Inc

  • More Money for Bailout CEOs

    The day before leaving town to vacation in an opulent $9 million, 5-bedroom home in Hawaii, the Obama administration pledged unlimited financial support for Fannie Mae and Freddie Mac. The mortgage giants are already beneficiaries of $200 billion in taxpayer aid. On Christmas Eve, regulatory filings reported that the CEOs of the two firms are in line for $6 million in compensation. Merry Christmas!

    Executive compensation is the subject of many academic studies, but one focused on Fannie Mae from two Harvard Law School professors is especially well-named: “Perverse Incentives, Nonperformance Pay and Camouflage”. Executives are able to take unlimited risks and reap unlimited upside rewards knowing that US taxpayers will foot the bill on the downside. The mortgage-backed securities issued by the two firms remain at the center of the causes-and-effects of the financial meltdown.

    The compensation for Fannie Mae’s senior managers is recommended by the Compensation Committee “in consultation and with the approval of the Conservator”, which is the U.S. Federal Housing Finance Agency (FHFA). The FHFA was created in July 2008 when Bush signed the Housing and Economic Recovery Act. At the time, the Congressional Budget Office estimated that the $200 billion Act would save 400,000 homeowners – in the first six months, exactly one homeowner was able to refinance under the program. The Act also was supposed to clean up the subprime mortgage crisis – which it did not do as evidenced by the collapse of the global financial markets a few months later.

    Back to the current problem of paying $6 million to run a bankrupt company whose every financial obligation is guaranteed by taxpayer money. Who is on the compensation committee that recommended this pay day? Dennis Beresford from Ernst & Young (E&Y); Brenda Gaines, recently from Citigroup; Jonathan Plutzik, from Credit Suisse First Boston; and David Sidwell, from Morgan Stanley.

    Back in 2004, Ernst & Young was engaged as a consultant to Fannie Mae – right after the Securities and Exchange Commission banned E&Y from taking on new clients. Citigroup took $25 billion in TARP bailout money and Morgan Stanley took $10 billion. Credit Suisse benefited by a mere $400 million as their share of the AIG Financial Products group bailout. Needless to say, this Compensation Committee knows a thing or two about controversies and federal aid!

    Enjoy your luxury Christmas vacation, Mr. President, while 45 out of 50 U.S. states are enjoying statistically significant decreases in employment in the face of rising prices. Please take some time to contemplate the words GE Chairman and CEO Jeff Immelt used in describing the leadership traits that need to change in America: “The richest people made the worst mistakes with the least accountability.”

    And to the rest of you out there reading this, take some time to contemplate the words of Bill Moyers as he concluded a rather shocking essay of the role of lobbyists in the recent “healthcare reform” legislation: “Outrageous? You bet. But don’t just get mad. Get busy.”

  • Bernanke: For Good or For Ill

    This week, Time magazine named Federal Reserve Chairman Ben Bernanke “Person of the Year 2009.” CNBC’s panel of experts gave Bernanke the “Man of the Year” title (no misogynists there!) in 2008. And well they should since their sponsors are among the biggest recipients of the Paulson-Bernanke-Geithner bailout. As I select the link from their website to imbed in this story, an ad from Wells Fargo (NYSE: WFC) is displayed in the right half of the screen. Click on “home” and it’s an ad from General Motors (OTC: MTLQQ).

    I imagine Bernanke is quite embarrassed this holiday season as a result of the many, many less than flattering comparisons he is receiving. CNBC’s sister network, MSNBC, took exception to anything flattering in the designation by reminding everyone that being named Person of the Year is not an honor. Time’s definition, according to MSNBC, is: “The person or persons who most affected the news and our lives, for good or for ill…” They list a few of the previous winners, including Adolf Hitler (1938), Joseph Stalin (1939), and Ayatollah Khomeini (1979). One writer likened Bernanke receiving the award to “celebrating an arsonist for his heroics in putting out a fire that he set.”

    Regardless of Time managing editor Rick Stengel’s qualifying statements, the tone of the write-up suggests, to Charles Scaliger at The New American at least, that Bernanke has a “cult of personality” within the Washington, D.C. Beltway. If you’ve never met Bernanke, which I never have, it’s hard to imagine there is the kind of personality there that one could be cult-ish about. Former Federal Reserve Chairman Alan Greenspan, who I also never met, regardless of his other shortcomings had the ability to say what it took to get the economy to do what he wanted it to do – he didn’t always pick the best things to get it to do, but he was able to get a message across. Bernanke, on the other hand, never seems quite comfortable in front of Congress the way Greenspan used to appear. A nervous central banker is very bad for the economy.

    The designation – whether or not it is an honor – came the day before the Senate Banking Committee approved President Obama’s nomination of Bernanke to four more years as Chairman of the Federal Reserve. That nomination and approval represent further steps in what Rolling Stone writer Matt Taibbi calls “Obama’s Big Sellout.” The President, and 16 out of 23 Senators on the Banking Committee, seem to hold the mistaken impression that those who got us into this mess are going to be able to get us out. Republican Senator Jim DeMint of South Carolina was among the dissenters: “We can’t have a Federal Reserve that the majority of Americans no longer trust, and that’s what we have today.” Bernanke himself told Congress less than ten months ago that he didn’t know what to do about the economy. Maybe the eventual good that will come from Bernanke’s 2009 affect on our lives will be the demise of the Federal Reserve system in the United States and an end to the mountains of fiat money that it produced in vain efforts to solve the financial crisis that will forever be linked to Ben Bernanke’s name: Person of the Year “for good or for ill.”

  • Goldman’s Gunslingers: 401k + 9mm = 666?

    In the new Wall Street math of the post-9/08 world, it seems that some people turn to humor and others to rage. First they burned down our 401k plans: some people found this funny and made jokes about their “201k” plans. The French got angry and took CEOs hostage. Now, Goldman bankers are buying semi-automatic weapons to protect themselves from the angry mob. Matt Taibbi is desperately seeking humor in this, currently rating it a 7 on a scale of 1 to 10. Alice Schroeder, the story’s originator, finds it humorless, suggesting there could (should?) be “proles…brandishing pitchforks at the doors of Park Avenue.”

    In true on-the-ground reporting, a Bloomberg reporter wrote a story after a friend told her that he had written a character reference so that a Goldman Sachs banker could get a gun permit. Alice Schroeder (author of “The Snowball: Warren Buffett and the Business of Life”) also recounts a few examples of Goldman bankers using their other-worldly prescience to protect themselves: Goldman Sachs Chief Executive Office Lloyd Blankfein – only too well known now for saying that Goldman is doing “God’s work” – got a permit “to install a security gate at his house two months before Bear Stearns Cos. collapsed.”

    All of this contributes to the view that Goldman Sachs is, indeed, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I’m certain that Rolling Stone and Bloomberg have taken action to protect their right to be critical of Goldman. I’ve spent plenty of time on the phone with their fact checkers to know they put a lot of effort into being able to support every word they print. Blogger Mike Morgan, who founded www.GoldmanSachs666.com, had to defend his right to be critical of Government Sachs by going to court last April when Goldman lawyers Chadbourne & Parke threatened him with trademark infringement.

    But it isn’t just Goldman and it isn’t just our 401k retirement plans that have been damaged. There are fundamental problems in the way our capital markets are being run. The people running the system have known about these problems since at least the Crash of 1987 – I warned the U.S. central depository for all securities (Depository Trust Company) about it in 1993. Brooksley Born warned a presidential working group about it at a Treasury Department meeting in 1998 – and it contributed to the crash of 2008. As you read this today, nothing has been done to stop it from happening again. The real question is: which group will be the first to turn to action? Those with a sense of humor, those with a sense of security provided by a handgunor those with the sense to make changes?

  • Dubai Debt Debacle

    When a bunch of American bankers woke up last Thursday, I hope they found more to be thankful for than just a traditional turkey dinner. It’s thought that the American banks will have less exposure to Dubai World than most European or Asian banks – although the American banking industry is known to hide a thing or two up their sleeves. Dubai World is asking creditors for a “standstill” – meaning they want the interest to stop accumulating on their debt. It’s a polite way of saying they can’t afford the interest payments anymore.

    Dubai is one of the seven states that make up the United Arab Emirates (UAE). Dubai borrowed heavily to finance a building boom supported by high oil prices. They now lay claim to the world’s tallest building and an island in the shape of a palm tree – at least General Motors went broke building cars. The capital of the UAE is Abu Dhabi. It’s unlikely that Abu Dhabi can come to the rescue. Just last February Abu Dhabi injected $4.5 billion into five banks that were coming under financial pressure when the real estate market shifted. Bailing out banks seemed to stop the U.S. government from bailing out General Motors.

    Dubai World is said to be in debt for $60 billion, although some reports put the figure much higher at about $90 billion. Even at the low end, that figure is equal to all the foreign direct investment in the UAE. (Foreign direct investment is all the money that foreigners invested in UAE.) By comparison, the direct investment of all UAE residents in other countries is less than one half that amount (about $29 billion at the end of December 2008). But don’t think that means that Dubai World’s investments are of little consequence outside the Gulf region. Recent projects include ports in London and Vancouver. DP World was at the center of a controversy in February 2006 when they announced the purchase of a firm that oversees operations at six U.S. ports – DP World subsequently sold them off.

    Dubai World is the UAE government’s investment conglomerate. That makes this a crisis in sovereign (public) debt – possibly only the first shoe to drop in the coming crisis I warned about back in July. Hope you don’t get tired of hearing me say “told ya’ so” – I suspect it will happen with increasing frequency during the next twelve months. The real problem with defaulting sovereigns is that there is no Chapter 11 bankruptcy process for them, like there was for General Motors. When a country defaults on their debt, they just stop paying – “governments can change the rules on a whim.”

  • Honest Services From Bankers? Increasingly Not Likely

    Once you understand what financial services are, you’ll quickly come to realize that American consumers are not getting the honest services that they have come to expect from banks. A bank is a business. They offer financial services for profit. Their primary function is to keep money for individual people or companies and to make loans. Banks – and all the Wall Street firms are banks now – play an important role in the virtuous circle of savings and investment. When households have excess earnings – more money than they need for their expenses – they can make savings deposits at banks. Banks channel savings from households to entrepreneurs and businesses in the form of loans. Entrepreneurs can use the loans to create new businesses which will employee more labor, thus increasing the earnings that households have available to more savings deposits – which brings the process fully around the virtuous circle.

    As U.S. households deal with unemployment above 10% as a direct result of the financial crises caused by excessive risk-taking at banks, one bank, Goldman Sachs, posted the biggest profit in its 140-year history. According to Nobel laureate economist Joseph Stiglitz at Columbia University, Goldman’s 65% increase in profits is like gambling – the largest growth came from its own investments and not from providing financial services to households and businesses.

    Under fraud statutes created in 1988, Congress criminalized actions that deprive us of the right to “honest services.” The law has been used generally to prosecute fraudsters and potential fraudsters – from Jack Abramoff to Rod Blagojevich – whenever the public does not get the honest, faithful service we have a right to expect.

    The theory of “honest services” was used in one of the best known U.S. cases of financial misbehavior – Jeff Skilling of Enron – who has been granted a hearing early next year with the U.S. Supreme Court on the subject. Prosecutors won the original 2006 conviction on the strategy “that Skilling robbed Enron of his ‘honest services’ by setting corporate goals that were met by fraudulent means amid a widespread conspiracy to lie to investors about the company’s financial health.” The U.S. Attorney argued that CEO Skilling set the agenda at Enron. In this case, the fraud and conspiracy were means by which corporate ends were met.

    Skilling’s defense attorney admitted in his appeal before the 5th Circuit in April that his client “might have only bent the rules for the company’s benefit.” The appeal was not granted – a move by the court that is viewed as an overwhelming success for the prosecution. The application of the theory of “honest services” to the Skilling case – targeting corporate CEOs instead of elected officials – has been the subject of debate which may explain why the Supreme Court agreed to hear the arguments.

    Regardless of the outcome of that or other cases on the subject, the fact remains that bankers are doing better for themselves than they are for American households. This is the number one complaint we have about banks today. If I had to summarize the rest of what bothers us about banks, I would start with the fact that they are secretive. They take advantage of a very common fear of finance to convince consumers that they know what’s good for you better then you do.

    Next in line is the fact that they have purchased Congress. Banks have access to the halls of power that – despite 234 years of egalitarian rhetoric – ordinary voters can never achieve. Finally, we resent banks because we are required to use their services, like a utility, to gain access to the American Dream.

    Financial services contribute about 6 percent to the U.S. economy. Manufacturing and information industries use financial services, but the industry increasingly depends on itself: recall the portion of Goldman’s earnings growth coming from using its own investment services. According to the latest data from the Bureau of Economic Analysis, the financial services industry requires $1.27 of its own output to deliver a dollar of its final product to users. Despite the fact that our economic reliance on financial services has been creeping up steadily since 2001, they remain one of the least required inputs for U.S. economic output – only wholesale and retail trade have less input to the output of other industries.

    So, why did Congress vote them nearly a trillion dollars worth of life-support bailout money at the expense of taxpayers? Why did Wall Street get swine flu vaccine ahead of rural hospitals and health care workers? Why did they get the bailout without accountability? By making banks account for what they did with the money, congress could have 1) prohibited spending on bonuses and lavish retreats; 2) ensured improved access to credit for small and medium enterprises; and 3) provided transparency to taxpayers on who got how much and what they did with it. Need more reasons to demand honest services from a banker? Try this list:

    1. Congress raised the FDIC insurance to $200,000 to make depositors comfortable leaving money in banks; then the banks passed the insurance premium on to customers – including those that never had $200,000 cash in the bank in their lives and probably never will. Seriously, how much money do you have to have before it makes sense to have $200,000 in cash in a savings account earning 0.25%?
    2. Banks can borrow at 0% from the Fed yet they raise the interest rates they charge even their best customers. The bank I use for my company willingly lent me $10,000 last year to open a new office and approved a $7,000 credit card limit. Last month they sent me a letter saying they are raising the interest rate by +1.9 percentage point – though I have never missed a payment deadline.
    3. The banks can use our deposits to purchase securities issued by the Federal government, which are yielding better than 3 percent. They pay us about 0.25 percent yet still find it necessary to tack on a multitude of fees – which amount to 53 percent of banks’ income today, up from 35 percent in 1995.

    For now, Brother Banker skips along as lively as a cricket in the embers. But remember this: Marie Antoinette didn’t know anything about the French revolution until they cut off her head. Matt Taibbi, in a recent Rolling Stone article called Goldman Sachs a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” We are at risk for leaving the virtuous circle behind and entering a vicious circle of spiraling inflation. A massive increase in government debt is being paid down by printing more money. Between July 2008 and November 2008, the Federal Reserve more than doubled its balance sheet from $0.9 trillion to $2.5 trillion. A year later, there is no evidence that they are trying to rein it in. As Brother Banker fails to provide honest services, a briar patch of a different kind may be waiting around the corner.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Healthcare Reform or Health Insurance Bailout?

    What is the real endgame of healthcare debate in Washington? Is it going to be a bailout of the insurance industry as opposed to a plan to provide healthcare for every American? The original jumping off point for this entire debate was that the United States is the only major industrialized country that does not have a national healthcare system. The debate has moved away from “how do you get healthcare” to “how do you get health insurance.”

    Even if we accept that the discussion is more properly about reforming insurance than providing healthcare, the debate still focuses on how insurance could be paid for rather than how insurance could be fair. Funny thing is, when Congress voted to bailout the financial institutions, no one asked how they would pay for it. Millions of Americans wrote, emailed, faxed and called their representatives in Washington in opposition to the 2008 bailout. That bill was passed. Yet, with millions of Americans clamoring for healthcare, decades passed with no action. Even now, as we become accustomed to the idea that the federal government will take a stand on how healthcare is paid for – without the government actually paying for it – there are 5 different bills, topping 1,500 pages each, and nothing is even close to being done. George Will told This Week anchor George Stephanopoulos that Congress won’t spend the five minutes it would take to put all five versions of the bill on the internet because then people will know what’s in it – and Congress doesn’t want that. Imagine the hell we-the-voters would rain down on them if we knew what they are up to?

    The scariest part of the potential legislation is the notion of creating an “insurance exchange.” It appears the federal government has already forgotten the trouble that these market exchanges create. The requirement that you give your retirement money (IRA, 401k, etc.) to a financial institution to qualify for favorable tax treatment from the IRS may have done more to inflate the stock market (investment exchange) bubble than all the risk-loving financial institution CEOs combined. All that pension and retirement money is the fuel that the financial institutions used to inflate the bubble. The “market exchange” idea did nothing for air pollution. Similarly, it will likely do nothing for improving access to or the cost of healthcare.

    All of the Sunday morning talk shows (October 25, 2009) debated the “public option.” This sub-debate apparently holds the political key to getting legislation passed, whether or not enough senators and representatives will vote “yes” that there won’t be a filibuster or a veto. The “public option” comes in three flavors. One version is that health insurance will be mandatory and the government will provide an insurance program at a (presumably) very competitive price to consumers. The second version has an opt-out component: insurance is not mandatory so you could opt-out of coverage even under the government’s insurance program. The third version, known as the “trigger”, would set up a deadline, say two to three years after passage, during which time either the insurance industry will stop abusing policyholders – for example, by canceling your insurance the first time you get sick – or the federal government will enter the industry and provide some real competition. According to John Podesta, President and CEO of the Center for American Progress, the public option is key to getting enough votes to pass this in the Senate. He seems to have forgotten that only the House of Representatives can authorize the federal government to spend money – this is not properly the Senate’s turf.

    Cynthia Tucker, of the Atlanta Journal-Constitution, stated it with perfect clarity on ABC’s This Week: The provision of the public option is only a sliver of healthcare reform. It is neither the panacea that the left-wing believes it to be nor the evil plan envisioned by the right-wing. It is all about the 60 votes required to overcome a filibuster in the Senate.

    If only it were as simple as right-wing/left-wing, red-state/blue-state divisions. Democratic Senator Russ Feingold told CBS’s Bob Schieffer on Face the Nation that the lack of a public option “would be a serious gap” in any legislation. He spoke forcefully about the need to control abuses by insurance companies. He went so far as to say that the trigger version of the public option would simply give the insurance companies two or three years to manipulate the system to their advantage. “We need to take action now,” Feingold said, to slow insurance company abuse.

    Not surprisingly, Feingold was not among the Senators receiving Clusters of Cash from the Health Care lobbyists and their clients in the most recent campaign fundraising cycle, according to the Center for Responsive Politics. That might explain his position – or maybe his position explains the lack of contributions.

    Back in October 2008, then Treasury Secretary Paulson advised insurance companies they could qualify for TARP bailout funds. On April 8, 2009, now Treasury Secretary Geithner opened the tap to send TARP funds to insurance companies. One month later, Neal S. Wolin was confirmed by the Senate to serve as the Deputy Secretary to Geithner at Treasury. Until 2008, Wolin worked for The Hartford Financial Services Group, Inc. as President and Chief Operating Officer. On June 12, 2009, Hartford announced that it would receive $3.4 billion under the TARP. Several other insurance companies that applied back in October eventually declined to take TARP money.

    If you still don’t see how cozy the insurance industry is with the federal government in that series of events, listen to Bill Moyers explain it on PBS. “Money not only talks, it writes the prescriptions.”

    During the summer, I thought the Republicans were opposed to the public option as a Trojan Horse – meant only to move us one step closer to a single payer system that would have the federal government paying for all healthcare. Now that it’s just about the federal government paying for all health insurance, Republicans seem to be favoring it. Wonder who will end up the loser at the end?

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Commercial Real Estate Bust of 2010

    Coming soon to a market near you: a bust in commercial real estate that will make the subprime mortgage crisis look like a picnic. The other shoe drops in 2010.

    Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate committee on October 14 that commercial real estate loan losses between now and the end of 2010 pose the most significant risk to U.S. financial institutions. Although you can’t read it online, on October 7, 2009 Wall Street Journal reporters Lingling Wei and Maurice Tamman (Eastern edition, pg. C.1, Fed Frets About Commercial Real Estate) reported on a presentation prepared by an Atlanta Fed real-estate expert who is worried “about the banking industry’s commercial real-estate exposure.”

    Since July, the Federal Reserve has been pumping billions of dollars into commercial-mortgage-backed securities (CMBS, same things as the residential-MBS I’ve written about before in this space, only for shopping malls instead of houses). To accomplish this, the Fed uses the Term Asset-Backed Securities Loan Facility or TALF program. It is one of several alphabet-soup programs the Fed is using to pass a couple of trillion dollars to the stock market through private corporations (not just regulated banking institutions). For example, between March and July 2009, Harley-Davidson Inc. and other non-banks raised $65 billion in sales of bonds backed by everything from motorcycle loans to credit card debt. The Fed made $35 billion in TALF loans to investors buying those securities, which sparked a market rally. That market rally, however, is not in the commercial real estate market – it’s in the securities market. Since its inception, TALF has put between $2 billion and $11 billion per month into the securities market.

    TALF lends money to anyone willing to buy CMBS (or student loans, car loans, etc.). The Fed reasons that, as long as banks can move loans off their books by repackaging and selling them as bonds, they will make more loans. So they justify giving money to non-banks to buy the bonds because the money will go to the banks. Get it?

    Unfortunately, as vacancy rates rise, banks are increasingly reluctant to make new commercial real estate loans. This is obviously the case since Office of Thrift Supervision deputy director Timothy Ward told Congress this week that they will be issuing guidelines on doing loan workouts. A loan work out is what industry experts call “extend and pretend” – extend the terms and pretend like they are paying you. CRE loans, furthermore, are shorter in duration than home mortgages – typically 5 years instead of 30 years. That means a lot of loans will be coming due before the economy picks up enough to fill all those offices with rent-paying businesses. The value of commercial mortgages at least 60 days behind on payments jumped sevenfold in September – to $22.4 billion – or almost 4 percent of all commercial mortgages repackaged and sold as bonds. That’s about the same as the 90 day past-due rate seen for all residential mortgages (including those not sold off by the banks) in the first quarter of 2009.

    As of October 14, 2009, the TALF balance is $43.2 billion and growing. From what we are hearing now, it may not be enough.