Simon Johnson, who was formerly with the  IMF and who founded the Baseline scenario site has a great article in the  The Altantic about how the bankers oligopoly have staged a “quiet coup”, bringing the US government under their thumb since World War II and the urgent need to put them in their proper place before we spin off into depression. Hat tip, ZeroHedge. Here are a couple of quotes:

“The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.”

“The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.”

On Wednesday FT points out that:

“Amid the general euphoria over Tim Geithner’s plan to tackle toxic assets there is one note of caution: while bank stocks have rallied strongly on the plan, the underlying toxic assets have not.

…the liquidity risk premium – the price discount imposed by difficulty obtaining financing – in these ­markets may not be as big as policymakers hope, implying that prices may not rise very much when government financing comes on stream, leaving banks with still large capital holes.”

But, if the the fix is in, then the PIMCO’s and Blackrocks, while appearing to be studiously analyzing the underlying assets, really plan to pay whatever price the banks ask.  Then, while they will lose their small equity investment in the bank assets as parts of them eventually default, they recover more than enough to profit from the CDS’s they purchase “as insurance”.  Meanwhile, taxpayer money has been given to bank stockholders…but this is another issue.  See the Giethner plan explained at FT.

Even so, Roubini is right: if the bank is, at the time of these transactions, insolvent, then turning assets to cash at book value does not change this fact and these pricing activities may make it more obvious.  See the previous video of Roubini.

Nouriel Roubini on Bloomberg says the bank plan will help banks that are not already insolvent, but those that already are insolvent will have to be taken over.

Bloomberg reports one-month treasury bill rates went negative today:

One-month bill rates turned negative today for the first time since Dec. 26 as investors sought the debt approaching the end of the quarter. At that time, banks prefer to carry securities on their balance sheets instead of cash, driving demand for bills, according to Donald Galante, chief investment officer and senior vice president of fixed income at MF Global Ltd. in New York. He expects rates to rise again by mid-April.

“We’re in a funds rate range of between zero and 0.25 percent,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “If you keep rates this low, you’re going to end up having periods, especially in the Treasury bill market, where the yield goes negative.”

The rate on the one-month bill touched negative 0.0152 percent in New York, compared with 0.03 percent yesterday. It was last negative on Dec. 26, when it reached minus 0.05 percent.

We are not so sure that the implications of another few days of negative treasury yields are so benign.  As the article says, the last time the one-month yield went negative was Dec.26.  Take a to see what the S&P did then:

The American Enterprise Institute argues the Obama Administration’s proposed limits on the benefit for high-income households from itemized deductions such as charitable donations, mortgage interest, and state and local taxes will reduce charitable donations,  make housing more expensive and make state and local taxes more burdensome.

Beginning in 2011, high income taxpayers could get at most a $28 federal tax benefit for a $100 charitable contribution rather than the $39.60 deduction that would apply under current law.

“However, capping the deduction makes state and local taxes more burdensome, increases the cost of housing, and reduces the incentive to donate to charities. These impacts affect high-income taxpayers everywhere, but the impact is likely the greatest in Democratic-leaning states since these tend to have the highest state tax rates, the most expensive houses, and the greatest concentrations of upper-income households that make large donations to charity.

According to projections from the nonpartisan Tax Policy Center, $50 billion in charitable donations will be made by taxpayers that would be affected by the Obama proposal if it was enacted. Recent economic research finds that among higher-income taxpayers, a 1 percent increase in the after-tax cost of a charitable donation reduces contributions by about 1 percent. This means that the Obama proposal would reduce charitable donations by roughly $10 billion in 2011 and by $125 billion over ten years.  To put that in context, $10 billion is the combined annual private support to The United Way, Salvation Army, American Cancer Society, Food for the Poor, YMCA of the USA, and Feed the Children.”

We agree with the assertion that the effects of these limits to deductions will be felt more in democratic (liberal leaning) states for the reasons stated in the article.  However, it should be noted that conservatives give much more to charity than liberals.    Thus, the tax increase will hurt conservative causes and conservative givers more. In fact, one might almost believe that was the intended result…

President Obama obviously won’t change his giving as a result of his new tax since, looking at his tax returns,  it won’t affect him…

Northern Trust in its Daily Global commentary finds glimmers of hope in the new home sales report and durable goods orders released yesterday. Although this is now old news, it’s hard for us to see the “glimmer of hope” they see.  Sales of new single-family homes are down 43.8% in February from a year ago, after a 47.7% plunge in January. Sales of new homes have dropped 75.7% from the peak in July 2005.  The charts in the bigger picture hardly budged…

Northern Trust:

“The trough for new home sales appears to be January 2009…”

Regarding durable goods:

“Orders of durable goods increased 3.4% in February after a downwardly revised drop in January of 7.3% (originally estimated as a 4.5% decline). The 35.3% increase in orders of defense items and the 6.6% jump in bookings of non-defense capital goods excluding aircraft stand out in the report. Orders of aircraft (-28.9%) and autos (-0.6%) dropped but that of machinery (+13.5%), computers (+5.6%), and appliances rose (+1.6%) during February. The main message is that the pickup in orders of durables is significant but consistent monthly gains will be necessary to declare that the factory sector has pulled out of the current doldrums.”

We agree, one blip on the screen … it’s probably more seasonal than anything else.

Henry Blodget may be disgraced as an internet stock analyst but his argument makes sense.  We raised a similar idea.  The basic idea is that when one bank receives and accepts an offer on a particular asset, the argument that “there is no market price” can no longer be used by that bank or others. Thus, banks all over will be forced to take additional write downs, making insolvency in many cases not just rumor but fact.  Bank reluctance to participate may be moot as they may be forced.

If the banks go through the exercise of putting assets up for sale only to have the bids come in at, say, 40 cents instead of the 60 cents on the books, the banks’ accountants and/or federal regulators might notice. So even if the banks recoil in horror and refuse to sell at 40 cents, someone somewhere might insist that assets now carried at 60 cents be written down to 40 cents (after all, they won’t have the “temporary illiquidity discount” excuse anymore, will they?). This will blow another huge hole in the banks’ balance sheets.

Given this, banks would probably be wise not to participate in Geithner’s plan. Which is why the government is already talking about forcing them to:

As the FT reports: “The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank…
Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”

But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made “in consultation with regulators” – a sign that the authorities might put pressure on banks to sell toxic assets.

Phillip Moore’s article in Euromoney describes many investors and much money (from both UK and US investors) allocated to snapping up distressed commercial real estate debt.  What’s interesting to us is the indications in the article that it’s the banks that are unwilling to sell – that is preventing the investments – NOT a need for federal financing…

“There are three principal reasons explaining why, to date, so much of the cash that was earmarked for investment in commercial real estate debt remains “hors de combat”. The first is that in spite of the precipitous falls in values in the commercial property market over the past year, the general consensus appears to be that values still have further to drop.

Another reason explaining why there appears to be a disequilibrium between supply and demand in the commercial real estate debt market is that in spite of the bleak outlook for values, there is still a reluctance among European banks to offload their holdings, or even to acknowledge how distressed their exposure has become.

“There has been a widespread misconception that as commercial and investment banks looked to restructure their balance sheets they would start by marking their real estate books to a more realistic valuation and then look to sell significant volumes of those assets at those prices,” says Cairn Capital’s Henriques. “We have seen very little of that happening, largely because the markdowns the banks are being quoted on their debt valuations are such that they regard the benefits of selling them as somewhat ambiguous. The capital write-downs they would have to take from such a strategy are such that they would erode most if not all of the capital relief they would generate by selling. So while we are confident that there will be opportunities to acquire bank debt, it won’t be the avalanche that some people were expecting at the tail end of last year.”

We think the debt will not be available for the investors to “snap up” until the banks are willing to take what is offered. Granted, the Geithner plan makes overbidding easier, but to bridge the yawning gap that exists now, is going to make the plan very difficult to implement.

In a Seeking Alpha post on March 19, Great Trades described how the Tick 10 day exponential moving average was, of late, serving to warn of market pullbacks:

The below chart of the Tick 10-day EMA readings shows that extremely high positive readings have previously preceded sharp selloffs:

The current level of the Tick 10-day EMA is extremely high, increasing the likelihood of a strong pullback very soon.

We have tried to update this chart through today’s (March 24) trading, below.

As can be seen, the salient feature of the updated chart is that the Tick 10-day EMA is still very high – indicating a possible retreat from the recent 7% gain.  However, technicals like these are just that – technicals. With the government likely involved in a variety of manipulative actions, some overt, some clandestine, technicals can break down even more than normal…

Paul Jackson at Housingwire.com reports:

On the heels of the Treasury’s latest plan to work with private investors to purchase private-party RMBS, Fitch Ratings said Monday afternoon that it had revised its projected cumulative loss estimates for 2005-2007 vintage U.S. prime RMBS transactions — in other words, more downgrades are coming.

Why defaults are surging among prime borrowers has less to do with the mortgage instrument, as was the case early in the mortgage crisis, than with more traditional risk factors tied to declining property values and rising unemployment. For example, Fitch said it found that loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics.

Negative equity, too, is a still-emerging problem: borrowers with negative equity in some recent vintage mortgage pools are approaching 50 percent, the rating agency said. Borrowers with no remaining equity are defaulting at a rate three times greater than their equity-holding counterparts.

Continuing deterioration in what used to be prime credit means the assets Giethner’s plan is aimed at removing from banks are growing faster than PIMCO  can say, “We intend to participate and do our part to serve clients as well as promote economic recovery”.