More Governor Goofiness

It's bad enough SC Gov. Mark Sanford is writing nonsense in the Wall Street Journal about why he's rejecting stimulus money for the state with the second worst unemployment rate in the country, displaying a level of economic ignorance that borders on the criminal:

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

Of course, that's if the number of unemployed in SC doesn't change and the state has to spend even more money on unemployment benefits...which it most certainly will now since the $700 million won't be creating a single new job. So, as the Palmetto State's tax revenues continue to plummet due to falling home values and foreclosures, and rising unemployment, the state will have to in fact borrow more money to provide the services it has now, or cut them drastically.

Sanford seems like the kind of guy who will do the second there, slicing public services when more and more South Carolinians will need them the most. And let's not forget the state ended up getting $2.1 billion from the feds ANYWAY, making Sanford's fiscal responsibility argument moot. It's clear the Republican governor with the best shot to win nomination in 2012 is the Governor with the largest complex of tent cities.

But in actuality there's now a worse Republican governor than Mark Sanford, and that's Nevada Gov. Jim Gibbons, a guy cutting off his state's unemployed even though he doesn't have anything close to a shot at getting the 2012 nomination.

Conservative Republican Govs. Sanford, Perry, Jindal, and Palin have already taken steps to reject federal stimulus aid. Apparently, Nevada Gov. Jim Gibbons (R), arguably the nation's least popular and most scandal-plagued governor, wants to join the club.

With Nevada suffering from some of the nation's highest unemployment and foreclosure rates, no one seems to understand what Gibbons is thinking rejecting funds for extended unemployment assistance. If the governor assumed taking an uncompromising conservative stand might rally the Republican base to his defense, he badly miscalculated -- GOP lawmakers and the state's Chamber of Commerce want him to cut the nonsense and accept the money.

While many states would have to change their laws to receive the cash -- the federal government's offer of $7 billion is contingent on states' expanding the eligibility for the benefits -- Nevada already meets the criteria, according to the State Department of Unemployment, Training and Rehabilitation, since it gives benefits to some part-time workers and those who quit their jobs under certain conditions.

Further, some governors have rejected the unemployment piece of the package because their unemployment levels are below the national average. With a 10.1 percent unemployment rate, according to the latest data released Friday, Nevada's rate is above the national average and rising, and the state's fund will be broke by the end of the year. That will trigger federal borrowing to replenish the fund, which Nevada has not had to do since 1974.

A spokesperson for Senate Majority Leader Harry Reid of Nevada told the NYT, "What makes this particular situation most extreme is the terrible situation the state is in. I mean, how do you look at someone in your state that has lost their job and tell them, 'No, we're not taking this money'? "

And so it goes. Nobody seems to understand why Gibbons is actually doing this, other than he thinks it's cool or something. Nevada will just have to borrow the money anyway. Republicans really are that stupid. I may despair about Obama being able to fix the economy, but not as much as I would be if Republicans were in charge.

Last Call

I'm a bit depressed.

I honestly thought the Obama administration would be better than this. We're heading down a path here to a very nasty place.

Perhaps the damage from the previous administration is so great, all we can do is assume the crash position, but I refuse to believe that. We're America. We make the impossible work and have for 230 plus years.

I hope we get another shot at saving this economy. I worry greatly about the fact that if I had a child today what kind of world they would have in 20 years. Right nowI don't have a lot of hope. America will survive, but it's going to be a lot tougher than anyone in my generation has ever seen here in the States.

We're going to be tested pretty harshly over the next couple of years. All of us. I hope we pass, because history has shown us that empires always end badly, and economic chaos leads to war. The last time this happened it created 16 years of strife, death, and chaos from 1930-1945. America and the world changed forever.

How will we respond now?

Zandar's Thought Of The Day

The Fed printing a trillion dollars to buy US treasuries + The Fed printing trillions more to fund Timmy's Bailout Bonanza + China clearly concerned with depreciation of the US Treasury debt it owns + The Fed maintaining ZIRP (Zero Interest Rate Policy) + Obama's budget, TARP, the stimulus, and everything else we've already spent + UN telling the world to stop using the dollar as the world's reserve currency = Big smoking crater where the US dollar used to be.

When China eventually stops buying US debt and we're forced to print money to do so, inflation will basically finish off the economy.

This week has basically brought the odds of a multi-year depression up to "frighteningly realisitic".

WaMu Sues The FDIC

Claiming the fire sale price it garnered when the FDIC sold WaMu to JP Morgan, the former bank's parent company is suing the FDIC for $13 billion.

In a complaint filed with the U.S. District Court for the District of Columbia, the thrift's former parent accused the FDIC of having on January 23 made a "cryptic disallowance" of its claims, prompting the lawsuit.

It also accused the FDIC of agreeing to an unreasonably low price in arranging the a $1.9 billion sale of the banking business to JPMorgan on September 25, when regulators seized Washington Mutual and appointed the FDIC as receiver.

JPMorgan did not buy the parent holding company, which filed for Chapter 11 bankruptcy protection the following day.

In its complaint, Washington Mutual seeks to recover as much as $6.5 billion of capital contributions it said it made to its banking unit from December 2007 through the seizure.

Washington Mutual also seeks the return of $4 billion of trust preferred securities it said were wrongfully transferred to the banking unit, and said it may be entitled to as much as $3 billion of tax refunds. It also seeks damages of $177.1 million related to unpaid loans made to the banking unit.

I love it. "We lost all this money, and a bank run killed us, so we're suing the government!" Why not? Everyone else is lining up at the trough for trillions. Helicopter Ben will just print more.

Timmy's Plan Is An Abject Failure

Let me say that again. The Treasury Secretary's plan to save the economy will not work. It's terrifying if you thinkg about it. It works like this:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

But the details have been treacherously difficult, politically and financially, and some of the big decisions are the same as those that bedeviled the Treasury Department under President George W. Bush last year.

Timothy F. Geithner, the Treasury secretary, provoked scathing criticism from investors in February by announcing the broad outlines of the plan without addressing the tough questions, like how the government planned to share the risk with investors or arrive at a fair price for the assets that would neither cheat taxpayers nor harm the banks.

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The bottom line is instead of giving the banks $2 trillion for toxic assets, they give $1.95 trillion or so to big investors to buy the crap from the banks. On the rare chance the assets make money, the investor scores huge returns. If the assets continue to lose value (and they will) the taxpayer has to pick up the tab.

It's nothing more than a $2 trillion bailout for the banks...oh and taxpayer money will then go to private investors. It solves precisely nothing. It is, quite literally, robbing Peter to pay Paul. The toxic assets continue to decay radioactively. The banks pretend they are solvent again. The investors pretend they are solvent. The taxpayer is decimated, and the economy continues to spiral down into hell as the money America needs to reform health care, education, and the enviroment instead goes to Wall Street.

It's the financial system that's broken. Timmy is trying to fix a car with no engine, no transmission, no brakes, and no steering by pretending the gravity making the thing roll downhill is all it really needs.

And on top of everything else, the plan is the very essence of moral hazard. The government is going to be setting up these private investors with decent returns if they make money, but staggering returns if the assets lose money all at taxpayer expense. On top of all THAT, the bidding process absolutely ensures that the government will be overpaying for these bad assets because if the banks sell the toxic crap for less than what they paid for it, the banks will lose money. Ergo, the banks have every reason to sell this stuff way higher than what they are assessing it for and make a profit off the American taxpayer's back. It's a direct bailout. Period. It's a travesty of the highest order and it will not work in the long run.

Now the government will lose trillions on this deal. Trillions.

Let me say that one more time: Abject failure. The Kroog, CalcRisk, Jim Galbraith, John Cole, and Yves Smith have more, and they all hate it.

I hate it. If this is truly Obama's plan, he will be a one-term President, and we will be in a depression for years.

Mark this one, kids. I hate to say it, but Barack Obama is about to bury this country. in the long run this will explode because the housing market will continue to fall, and as it does, America's credit rating will disintegrate until our foreign creditors say "We'd like to be paid back now, please."

Then it ends.

This Week's Busted Banks

A whopper of a week in Busted Banks as yesterday the government seized not only three more banks, but two major corporate credit unions as well.

Two corporate credit unions, with combined assets of $57 billion, were seized by the National Credit Union Administration yesterday to stabilize a system used by 90 million customers amid a worldwide financial crisis. Three U.S. banks failed, bringing this year’s total to 20.

U.S. Central Corporate Federal Credit Union, in Lenexa, Kansas, and Western Corporate Federal Credit Union in San Dimas, California, were put into conservatorship, the regulator said in a statement. The credit unions failed so-called stress tests that found an “unacceptably high concentration of risk” from mortgage-backed securities, the agency said.

“Most of the bad assets that we’ve seen in the corporate world reside at these two institutions,” NCUA spokesman John McKechnie said in a telephone interview. “We will be able to resolve them in a more efficient way.”

The U.S. has 28 corporate credit unions, which make loans and provide other services for the retail credit unions that cater to the public. This is the first time a corporate credit union was seized since 1995, when NCUA took control of Capital Corporate, based in Landover, Maryland.

U.S. Central has about $34 billion in assets and serves 26 retail credit unions. Earlier this year, it was granted a $1 billion federal injection in an effort to shore up public confidence.

Western Corporate has $23 billion in assets and about 1,100 retail credit union members, the NCUA said. Yesterday’s two seizures may cost the agency’s insurance fund about $1.2 billion, McKechnie said.

This is bad news. These are major credit unions going under with billions in assets. They are failing the bank stress tests badly enough that they are now immediate candidates for receivership. More and more of this will happen as 2009 wears on, folks.

StupidiNews, Weekend Edition

• Twenty states are launching their own investigations into AIG's bonuses.
• The US Postal Service is cutting thousands of jobs and offering earlyretirement for 150,000 postal workers.
• The crime of "good old fashioned cattle rustling" is on the rise in Texas in the bad economy.
• GM and Chrysler may need significantly more money than the $21.6 billion they requested.
• The Obama administration's new Freedom Of Information Act guidelines could open the floodgates.

Taibbi Explains It All

Rolling Stone's Matt Taibbi lays it all out: AIG, Geithner, Bush, Greed, the Gramm-Leach-Bliley Act, and the largest power grab in the history of the world, headed by AIG's financial products division head, Joseph Cassano. (mind the language, he pulls no punches.)

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn't have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come.

And as long as the housing market went up, Cassano made AIG billions. When it collapsed, AIG suddenly owed these counterparty banks more than half a trillion dollars. Even better, these counterparty banks were allowed to treat that bet as a 100% asset. So, now they had assets to cover their own bets and could use the liquid cash they had to buy and sell more of these CDOs and CDSs.

Then subprimes went under. The resulting meltdown has put us in the situation we're in now.

Do read the whole thing. Taibbi explains the whole scheme, from CDOs to credit default swaps to the obsessive greed that made everyone from the newbie temp to the federal government look the other way. The last 10 years of our economy was a massive lie, folks.

Now we have to face the truth.

The truth is America is insolvent.

Worse Than Timmy

Yglesias reminds us that the difference between guys like me and the wackos on the right is that while both of us want to see Timmy gone, there are very, very stupid choices being floated by conservatives right now for Timmy's replacement.

If you have some money automatically deducted from your paycheck and put into a 401(k), the value of your investments will go up during booms, but down during busts and recessions. Nobody would, I think, consider you to be a genius investor. But on Wall Street, if you make a lot of money during booms and then lose all your money and require a government bailout during a bust, that’s considered “no one could have predicted” territory and it’s very important to pay you millions of dollars lest your unique talents be lost. In this universe, someone like Jamie Dimon of JP Morgan who ran a company that not only managed to make a lot of money during the boom, but actually lost less money than other companies, is considered to be an enormous genius.

Thus, from inside this alternative universe you get things like a David Reilly columm for Bloomberg in which he suggests firing Timothy Geithner and replacing him with Dimon. Of course, by Wall Street logic that’s technically impossible since nobody takes jobs unless they pay millions of dollars. But what’s really striking here is how stunningly out of touch it is with the public mood. I think that if you put a bank CEO in charge of the Treasury, that might end with the building getting burned down.

Yes, that Jamie Dimon, the same one who said this about the American people:

"I don't think just because someone's underwater they say I don't have to stay there. But they're supposed to pay the mortgage, and we should teach the American people, you're supposed to meet your obligations, not run from them. Because you have a mortgage doesn't mean you should run away as it goes down.

The same Jamie Dimon who said this about Wall Street:

“When I hear the constant vilification of corporate America, I personally don’t understand it. I would ask a lot of our folks in government to stop doing it because I think it’s hurting our country.”

Yeah. That guy. This arrogant douchebag who wrecked JP Morgan Chase and blamed you for it. This is the guy that Bloomberg's David Reilly thinks would somehow be a better choice than Timmy.

You gotta be f'ckin kiddin' me.

March Sadness

So a Chicago TV station is laying into Obama's NCAA tourney picks.

After the first day of the NCAA basketball tournament, President Obama's bracket appears to be a bust.

The president, a self-described basketball junkie, managed to only pick 11 of 16 games correctly--or 69 percent.

CBS 2 imported Obama's picks, which were originally made for ESPN, into its Bracket Challenge game. Currently, the president ranks in the 27th percentile among all players.

Several contestants managed to pick every game correctly. CBS 2 traffic reporter Susan Carlson, who admits to watching very little basketball, picked 15 of 16 games correctly.

Perhaps Duke coach Mike Krzyzewski was right when he said the president should be focusing on the economy, rather than picking NCAA brackets. Obama has picked Duke rival North Carolina to win the title this year.

But hey, the Coach K thing was debunked yesterday and let's face it, if he had gotten all 16 right, how many people would now be saying ZOMG OBAMA SEKRIT PLAN TO INFLUENCE TOURNEY!

As Joshua the computer said in WarGames, "The only way to win is not to play."

Five O' Clock Shadow

Yesterday I warned that commercial real estate giant General Growth Propeties was on the brink of bankruptcy. Over at Calculated Risk, we learn that GGP indeed has a deadline...

...of 5 PM today.

In addition to watching for bank failures this afternoon, the 2nd largest mall owner in the U.S. - General Growth Properties - is facing a significant deadline:

From the WSJ: General Growth Shakes Up Executive Ranks

[General Growth's] most critical deadline is 5 p.m. Friday, when it hopes the majority of its bondholders will have agreed to refrain from demanding payment this year on $2.25 billion in bonds. If that effort fails, General Growth says it might need to seek Chapter 11 bankruptcy protection.

Watch GGP on this one closely. Odds are pretty good a mall in your area and the jobs it provides are at stake. Should the company go bankrupt, who knows if they will be able to continue operations at all. Most likely they will...but almost certainly underperforming malls are going to have to close as a result, and this company owns scores of malls that employ tens of thousands of people in total.

Dude, Ditch The Dollar

Here's another gentle reminder that the fate of the US economy really doesn't rest in the hands of America anymore.

A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

No matter what we do about AIG's bonuses or Timmy The Invisible Boy's continued employment or Plan N, if the world dumps the dollar as reserve currency, our standard of living will evaporate overnight.

The fact that the UN is even considering honestly making this recommendation should frighten the hell out of you. Should the value of the dollar completely crash causing hyper-inflation, America will never recover. And the easiest way to get to hyper-inflation is for the rest of the world to give up on the greenback.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

The fact is, having the dollar as the world's reserve currency is basically killing all the other economies on Earth. They're tired of it. They're thinking for themselves. They want to get out of dollars because they see Helicopter Ben Ginormous Printing Press churning out trillions, and it's making their dollars (and their economies) worth less and less every single day.

Up until now nobody wanted to be the first out of the dollar store because it would pretty much have been A) a declaration of economic war on the the rest of the world and B) oil producers insist on using dollars for oil.

If however the world decided to say, coordinate a global effort to switch to a new reserve currency at once like, say, through the UN or a G20 meeting, that would be very, very, very bad for all of us.

Like "Weimar Republic where it's cheaper to burn the money in the stove than buy firewood with it" bad, y'dig?

Pay attention to this one. If world financial leaders are seriously considering doing this, the dollar will crumble just on the threat of this happening...facilitating it happening even faster. When the "Full Faith And Credit" of the USA doesn't amount to a hill of beans...you'll be wanting the hill of beans instead.

Zandar's Thought Of The Day

Reuters headline: SEC probes insider trading at subprime lenders.

Several U.S. federal investigations into subprime lenders involve possible insider trading before announcements of negative news about the lender, a Securities and Exchange Commission member said on Friday.

SEC Commissioner Elisse Walter said the agency is looking at whether subprime lenders properly accounted for loan loss reserves, impairment of asset values and whether they overvalued foreclosed property and other assets.

But remember, conservatives will tell you the real causes of subprime lenders going under were not naked greed or fraudulent accounting or anything like that.

It was those damn broke-ass minorities.

And you wonder why nobody takes conservatives seriously anymore.

A Strong Role Model

Michelle Obama visiting a high school and on being a strong, female role model:

The students were very interested in Mrs. Obama's life and lifestyle.

A student asked her who does her makeup. She said, "I do my own makeup," except for special occasions, according to the pool report.

The pool report continued, "She was asked about her clothes. She made a kind of "what, this old thing?" gesture. "This is just a little jacket and pants," she said. Of course, she looked fabulous. She was dressed in a black ensemble - black jacket, with skinny black belt, big black flower up to one side. Black skinny pants. Black patent flats. Hair down."

".......She told the kids, don't worry about what your friends say, or teachers who don't think you can do something. "Work hard, do your best."

She said: "I wanted an A, I wanted to be the person who had the right answers. People said, you talk like a white girl - I don't know what that means."

Having been adopted and having been informed in high school, college, and most of my life of being the whitest brotha in the room, I can relate to this.

This is the kind of conversation Americans need to be hearing in 2009.

Just Hire The Kroog Already, Barry

Teh Kroog on AIG:(emphasis mine)

I’ll leave to others the question of who knew or should have known that the bonus firestorm was coming; but it’s part of a pattern. At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.

This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Which is why Timmy should be replaced with somebody who understands this basic fact.

It's not liquidity, it's solvency. Period.

If Geithner doesn't get that (and Teh Kroog is basically saying so), despite the myriad political problems that will arise from replacing him, he still must be replaced by somebody who gets that (or he must be made to understand that, one of the two). It really is that simple.

I mean for crap's sakes, even John McCain's economic adviser understands it's Plan N time.

[UPDATE] Americablog's John Aravosis joins the dump Timmy movement.