By Charles Hugh Smith, OFTWOMINDS
by Charles Hugh Smith

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

Zero Hedge

In the aftermath of the Zachery Kouwe plagiarism fiasco, the last thing Andrew Ross Sorkin’s Dealbook needs is another scandal. Yet this is precisely what may come out of a recent column by the TBTF author, in which ARS insinuated that Lehman whistleblower Matthew Lee came forth with incriminating Repo 105 evidence only after he was made aware he was about to be “downsized.” The Columbia Journalism Review’s Ryan Chittum debunks this story, after pointing out some potentially gross misrepresentations in the Sorkin column, which go to directly to motive and to the integrity behind Lee’s actions. “The Times’s DealBook editor Andrew Ross Sorkin, who wrote the
column, quotes the sources saying the whistle blower came forward only
after “it became clear” he was to be replaced in his job. We’ll get to
that peculiar phrasing in a minute, but the main problem is the Times story gives no indication that Lee was called for comment. In fact, he wasn’t called, according to Lee’s lawyer, Erwin Shustak, whom I talked to yesterday. “I’ve never spoken to the man (Sorkin) in my life,” Shustak says. “Nobody’s spoken to Matthew.” That doesn’t meet a basic fairness test. As it happens, Shustak tells us that Lee had no idea his job was in danger.” If indeed Sorkin misstated facts, a retraction is the only recourse as the potential for legal escalation on all sides of the story is huge. We are confident that while to Lehman managing directors $50 billion may have been a drop in the ocean, legal prosecution going after either ARS (or Lee) to reclaim it in part (or in whole) will surely make the Dealbook editor’s head spin, even after accounting for Paulson and Geithner’s 10,000 purchases of TBTF each (exaggeration ours… we hope).

Chittum writes:

There are some real journalistic lapses in a New York Times column Tuesday
that quoted anonymous sources about a Lehman Brothers whistleblower who
tried to warn about the failing bank’s questionable accounting
maneuvers, including one known as Repo 105.

The problematic passage is here:

Lehman’s shell game didn’t come to light until June 2008,
when a lower-level executive named Matthew Lee sent a letter to
management raising a host of questions about the firm’s practices. (By
the way, the S.E.C. and Fed were still working inside the building at
this point.)
What the examiner didn’t report, however, was that
Mr. Lee started raising questions about Repo 105 only when it became
clear that he was being replaced in his role, according to people
briefed on the matter. Indeed, Mr. Lee’s original letter to management
did not mention the use of Repo 105.

Chittum then proceeds to note the abovementioned discussion with Lee’s lawyer Shustak in which he makes it clear that Sorkin never spoke to his client.

That doesn’t meet a basic fairness test. As it happens, Shustak tells us that Lee had no idea his job was in danger.

“That comment was made not based on any reality or fact that I’m
aware of,” Shustak says. “He couldn’t possibly be accurate because I
know that until Mr. Lee wrote these letters, he had not been notified
that he was part of any layoffs.”

This is useful information that blunts, if not debunks, the
anonymous sources’ innuendo that Lee was motivated to come forward
because he was about to lose his job. Indeed, an on-the-record denial
carries far more weight than an off-the-record or on-background attack,
which this assertion clearly was. Sorkin declined to comment.

The slip occurs near the bottom of a column on the failures of
regulators to discover the Lehman scandal that was right in front of
them, and is a jarring end to an otherwise fine piece.

Chittum continues:

Also, as noted, the Times’s phrasing poses problems, reporting Lee blew the whistle only after “when it became clear” he was being replaced.

Clear to whom? If Lee didn’t know he was being replaced the fact that
he was on his way out is irrelevant. The phrase itself is blurry. Why?

Lee’s lawyer, Shustak, says Lee never sought the limelight:

“Matthew is a very private person,” he says. “His life has been
devastated when he was let go. He has not worked since then and is
living off his 401k. He just doesn’t want to get into the middle of
whatever lawsuits are going to be coming out of this whole report.”

It is a pity that the NYT, which recently let go hundreds of press room staffers, in the latest round of layoffs, has been resorting to such devices as attributing reality where there is none. In the old days, journalists would be forced to issue a retraction (or much worse) if indeed their reporting was not based on facts, as this particular piece so far appears to be. To be sure, this is not the first time the Columbia Journalism Review has discussed ARS – a week ago Dean Starkman wrote the most scathing review of Too Big To Fail we have yet read. Could this be just a case of some bad blood? Or, as Starkman insinuates, is this merely yet another case of Wall Street media capture? the truth will be made apparent over the next several months by the tone of Sorkin’s pieces. Nonetheless, having already attempted to exonerate Fuld once, one wonders just where Sorkin’s allegiance lies.

By the way, doesn’t it seem increasingly hard to vilify Richard S. Fuld Jr., the former chief executive of Lehman Brothers,
given what’s happened since that firm filed for bankruptcy? 

No Andrew, it doesn’t. Yet we understand. After all, a sequel to TBTF has to be in the works at some point. And should Andrew lose his contacts, he may have to rely on his extensive understanding of finance to piece things together as an impartial outsider for once. Ironically, the Lehman examiner’s report is precisely what Too Big To Fail should have been, had ARS actually dug in underneath the surface of all the primary material he had been presented with. We are surprised Doubleday or Penguin has not yet offered Valukas an advance for his next much more relevant Wall Street thriller.

More articles from Zero Hedge….

Zero Hedge

First 130 Congressmen, now Greece: the examples of people who have no idea what the definition of negotiating leverage means just don’t stop. G-Pap has decided to go all in on 2-7 off suit. The problem is everyone knows what his cards are, and his bluff is about to be promptly called by everyone; too bad the Cyclades are still not in the pot. Give them a few weeks… Bloomberg reports that: “Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.” And here we were thinking only Bernanke was clinically insane. G-Pap, it turns out, is shocked that someone can just say no to his generous offer of allowing someone else to bail him out. Act now, or in one month when you can buy Greece (and its islands) in a 363 sale, it will be too late (to overpay).

From Bloomberg:

“It’s an opportunity to make a decision next week at the
summit,” Papandreou told reporters in Brussels today. “This is
an opportunity we should not miss. When you have that instrument
in place, that could be enough to tell the markets hands off, no
speculation, let this country do what it’s doing.”

Greece pinned its hopes on the Brussels summit as German
officials voiced qualms about an EU-led rescue, potentially
backtracking on a commitment hammered out by finance ministers
just three days ago. Greek bonds and the euro fell.

Greece, which was brought to a standstill on March 11 by
the second general strike this year, needs to raise about 10
billion euros ($14 billion) to refinance bonds that come due on
April 20 and May 19. Papandreou said Greece cannot afford to
keep paying current market rates.

The question of the day: are the acconts who bought into Greece’s most recent 10 year bond offering already underwater:

The yield on Greece’s 10-year government bond rose 14 basis
points to 6.23 percent at 2:25 p.m. in Brussels. The euro fell
for a second day against the dollar, slipping as much as 0.7
percent to $1.3648. Credit-default swaps on Greek sovereign debt
rose 7 basis points to 295, the highest in a week, according to
CMA DataVision prices.

And just to show that there is absolutely no confusion which way Germany is leaning when it comes to G-Pap’s ultimatum, Germany kindly suggested that Greece should leave the European Monetary Union. Asap. From Market News.

The head of Germany’s Ifo economic research
institute on Thursday said the best way to solve the Greek financial
crisis is for the country to leave the eurozone.

“I would recommend that Greece leaves the European Monetary Union,”
Sinn said at a press conference in Berlin. The country should then
devalue its currency and a debt moratorium should be put in place, he
proposed.

“This would be cheaper [for the other Eurozone countries] then to
permanently finance Greece,” Sinn said, arguing that Greece’s biggest
problem was its elevated foreign trade deficit and not mainly its high
public debt.

In the meantime, the market once again ignores all bad news, and just focuses on whatever good news there is, even if it means the reading of a Philly Fed, whose upward buoyancy is about to come to an end as the artificial economic stimulus begins to finally wane.

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

I suppose they expect me to believe this:

During congressional testimony, House Financial Services Committee Ranking Member Spencer Bachus asked if the Fed was aware of Lehman’s “accounting gimmicks.”

“We did not have that information,” Bernanke replied. The Fed “had only a couple people in the company to make sure” Lehman repaid money it borrowed from the central bank’s primary lender credit facility, he said.

That’s funny – the report says that FRBNY had all the information.  Now they may not have acted on it, but that’s not the same thing as not knowing about it.

Oh wait – he did say that:

“We were not charged with supervising the company, clearly it was a very troubled company,” Bernanke said on Wednesday. “We had no authority to require them to do anything.”

So if you know someone’s going to rob a bank, and you sit back and let them do so because you have “no authority to regulate them”, and in fact you trade with them, are you complicit in whatever they pull?

Now there’s a good question.

An even better one is whether we should hand regulatory authority to someone who refused to blow the whistle on whatever irregularities it may have observed (like, for instance, gaming the PDCF, being told by Citi they had no good collateral – which I presume means they turned immediately to The Fed with the same garbage, and in fact announcing false “test transactions” that were in fact real transactions)?

After all, if you’re the “uber-regulator” and the primary institution charged with overall banking system stability and clearing, you don’t have any sort of responsibility to blow the whistle when those who are dealing with you are lying, do you?

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

Does anyone remember me ranting at the time of the TARP’s passage about an obscure little sentence that allowed Bernanke to set the reserve ratio on the banks to zero?

Well, Bernanke’s Congressional testimony yesterday garnered a footnote on the issue, specifically:

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Right.  The cost is that you have to actually have something called “capital” behind your loan book, and you had a velocity limiter as well.

This is simply unbelievable.  To call such a thing a “distortion” is the worst sort of outrage to come from a central banker.

Reserve requirements have largely become a quaint subject since Greenspan effectively eliminated them by allowing almost-unlimited marketing and use of “sweep accounts.”  But nonetheless they remain one of the checks and balances on potential bank runs destroying a firm’s cash position without warning.

The sheer lack of recognition and understanding that we’re in this mess almost exclusively due to excessive leverage in all parts of our financial system is beyond ridiculous – especially for an agency that now wants to be granted even more power of oversight and “regulation.” 

“I’m sorry” isn’t good enough when you operate from a perspective that someone else (in this case the taxpayer) gets to clean up your messes, and this sort of philosophical idiocy will do nothing but guarantee that we’ll have much bigger banking messes in our future.

More articles from the Market Ticker….

Peter Cooper submits:

Nobel prize winning economist Joseph Stiglitz has warned that the Federal Reserve’s decision to end its $1.4 trillion mortgage debt purchase program this month is going to worsen the slump in the US housing market by driving up interest rates.

There has been no recovery in the US housing market this year, the biggest item of expenditure in the world’s biggest consumer market. New home and previously owned home sales are still falling. House prices continue to fall.

Read more…. »

A couple days ago, I presented my views on the policy response to the financial crisis and the Great Recession in a UW Center for World Affairs and the Global Economy / UW CIBER / MITA and ICE sponsored event. The power point slides are here (big file, 1.3MB). I took the latitude as the invited speaker to expand the topic from the Obama Administration’s measures to encompass the response to the crisis and recession from both the fiscal and monetary policy authorities.

One slide I generated for the talk is of particular interest, when thinking about the combination of monetary and fiscal policies — it is the plot of consumption and household net wealth.

Figure 1: Log consumption, Ch.2005$ SAAR (blue, left scale) and log househld net wealth (red, right scale), Ch.2005$, deflated using PCE. NBER defined recession dates shaded gray; assumes last recession ended 09Q2. Source: BEA, GDP 09Q4 2nd release; Federal Reserve Board, Flow of Funds, March 11, 2010.

What is quite remarkable is the fact that real consumption expenditures have been essentially flat for a year and a half — even at a time when population has grown. (Since 08Q2, consumption has fallen 0.6 while population has risen 1.3%.) One question is whether the rebound in net wealth will support a resumption in consumption growth even as disposable income growth remains lackluster.

Another slide, pertaining to the rebalancing issue, is an update of my net exports/real exchange rate graph.

Figure 2: Log US dollar real broad exchange rate, lagged two years (blue, left scale), net exports to GDP (red, right scale), and net exports ex.-oil to GDP (green, right). NBER defined recession dates shaded gray; assumes last recession ended 09Q2. Source: BEA, GDP 09Q4 2nd release; Federal Reserve Board; and NBER.

If previous patterns hold, then — to the extent that the 08Q4-09Q2 dollar appreciation was understood to be transitory — the trade balance (at least the ex-oil component) should not deteriorate substantially going forward. This conclusion is consistent with the October IMF WEO discussed in this post.

As I’ve mentioned before, continued progress in keeping the trade deficit relatively small depends in part upon the trajectory of consumption. A resumption of consumption growth would be — all else held constant — desirable, but would tend to worsen the trade deficit. An exogenous upward shift in US exports would relax that constraint (as would further dollar depreciation). This is why the Obama administration has stressed export promotion [1] [2].

On a slightly different matter, the IMF provided an interesting heat map summarizing growth across the G-20, in this Staff Position Note.

Figure from IMF Note on Global Economic Prospects and Policy Challenges, February 27, 2010 – Seoul, Korea.

The map highlights the two-speed nature of the global recovery.

Update: 7:30am, Pacific

One of the graphs that didn’t make it into the presentation is an elaboration of how certain fiscal measures — EGTRRA, JGTRRA, and the total cost of operations in Iraq — limited the fiscal space available to policy makers. In the absence of these measures, we would not have to worry so much about rising debt-to-GDP levels. In other words, deep recessions are the times to run deficits, not in non-recessionary times.

Figure 4: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; and budget authorization for operations in Iraq, FY01-FY10. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); A. Belasco, The Cost of Iraq, Afghanistan, and Other
Global War on Terror Operations Since 9/11,” Congressional Research Service report RL33110 (September 28, 2009), Table 3..

I first made this point about fiscal space (although I didn’t use the phrase) in 2006 [3].

Read more….

AP broke the big news — better be sitting down: “During the 2003-06 boom, the three agencies that supervise most U.S. banks – the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency – gave out at least $19 million in bonuses”

Oh my god! oh my god! Just think, the money used to pay bonuses at these three agencies over this three year period would have been almost enough to pay the one-year bonus of a single top performer at Goldman or AIG. What an incredible waste of taxpayer dollars.

It is understandable that AP would look into this issue, but responsible people there should have quickly realized that there is nothing here. We have all sorts of incompetents running the regulatory agencies (starting with Federal Reserve Board Chairman Ben Bernanke), and we should certainly be asking about whether they deserve their paychecks, but the money at issue with these bonuses is far too trivial to waste anyone’s time with.

–Dean Baker

Read more….

NBR — Roubini Global Economics Chairman, Nouriel Roubini on 0 Percent
Interest Rate (Click for Video [9:17] and report)

NBR:

SUSIE GHARIB:
Joining us now with more analysis about today’s Fed decision,
noted economist Nouriel Roubini, chairman of Roubini Global Economics.
How
Nouriel. How are you doing?

NOURIEL ROUBINI, CHAIRMAN, ROUBINI GLOBAL
ECONOMICS: Very well. Hi.
Good being with you.

Read more….

US Philadelphia Fed rose cheerfully to 18.9; than the predicted reading of 18.0 and the prior reading of 17.6.

Read more….