• The deficit problem: Dealing with America’s fiscal hole | The Economist
• The Washington establishment suffers a serious defeat – Glenn Greenwald – Salon.com
• Fed Beaten: Bill To Audit Federal Reserve Passes Key Hurdle
• The Case for a Job-Creation Tax Credit – Economix Blog – NYTimes.com
• Ron Paul Defends His Plan for Fed Oversight – DealBook Blog – NYTimes.com
• FT.com – Germany warns US on market bubbles
• What Causes Employment to Lag Output in Recoveries? – Mark Thoma
• Amendment to Limit Bank Leverage Passes With Room Nearly Empty
• FDIC: Failed Bank Information – Bank Closing Information for Commerce Bank of Southwest Florida, Fort Myers, FL
• Felix Salmon: Henry Blodget Should Be Banned From The Industry
• Ohio Sues Credit Rating Agencies – DealBook Blog – NYTimes.com
• Escalation of US-China trade row biggest global threat-M.Stanley | Reuters
• In his gloomiest prediction yet, Marc Faber sees big financial bust leading to war – Business Intelligence Middle East – bi-me.com – News, analysis, reports
• Thierry Henry tells Ireland: You deserve a replay | Football | guardian.co.uk
• U.S. layoffs fall in October | Reuters (Big companies are laying off less.)
• Cuts will cost British universities their international reputations (It’s not just US schools.)
• BBC News – Deflation returns to the Japanese economy
• BBC News – Volkswagen to invest billions to increase production (Aren’t we awash in productive capacity?)
• The Twenty Year Stock Bubble Is Still Inflated — John Lounsbury

Distraction of the Day: Look what U.S. Customs found. (video embedded below)

Related posts:

• Links: 2009-01-17
• News round-up: 29 Aug 2008 – company reports
• News from around the web: 2009-11-20
• News from around the web: 2009-08-06
• Links: 2009-02-19

• Nationwide Says British House Prices May Fall on Job Losses – Bloomberg.com
• Investors ask Goldman to be less greedy: report | Reuters
• BBC News – Tobacco firm Philip Morris to pay out $300m in damages
• Susan Boyle Makes Amazon History
• Execution Dignity – Robin Hanson
• Is the Fed Creating New Bubbles? – BusinessWeek
• Palinoia – Megan McArdle
• Liz Pulliam Weston – Bankruptcy, foreclosure, mortgage payments and debt – MSN Money
• Oprah Ends Talk Show: Twitter Erupts with 8,000 Tweets Per Hour
• How to tackle a deficit | Free exchange | Economist.com
• Department store sales dive by 10.5% | The Japan Times Online
• Just 62.5% of ‘10 university grads offered jobs next spring: survey | The Japan Times Online (It’s not just in California)
• Scientists crack corn code: Reference genome of maize, most important US crop (Get ready for cloned and seriously genetically-modified food)
• Lyme disease vaccine? Tick saliva found to protect mice from Lyme disease
• UK jobless ‘could hit 9.5% by 2011′ – Independent.ie
• Blindness causes structural brain changes, implying brain can re-organize itself to adapt
• Thierry Henry handball prompts Irish justice minister to demand replay | Football | guardian.co.uk (Hand of god worthy)

Distraction of the Day: California’s state universities jack up in-state tuition 32%

Related posts:

• News from around the web: 2009-10-29
• News from around the web: 2009-07-31
• Links: 2009-07-04
• News from around the web: 2009-08-19
• News from around the web: 2009-09-25

• The Rise and Fall of Empires – Paul Kedrosky (cool visual)
• FT Alphaville – A Minskian roadmap to the next gold mania
• At Failed Banks, Post-Mortems Disclose Excessive, Yet Obvious, Risk – NYTimes.com
• Economic Perspectives from Kansas City: Should America Kowtow to China?
• FT.com – Fears of China property bubble
• The Ayn Rand revival | Jennifer Abel | Comment is free | guardian.co.uk
• BBC News – Will Ferrell named ‘most overpaid film star’
• Obama’s Vietnam syndrome | The Japan Times Online
• FiveThirtyEight: Politics Done Right: The Palin Calculus: A Rejoinder
• FiveThirtyEight: Politics Done Right: 10 Reasons That Sarah Palin Could Win the Republican Nomination
• FT Alphaville – The return of capital controls, Indonesia edition
• Continuity You Can Believe In? (Voices for and against Obama’s econ policy.)
• oftwominds: The Fantasy of an Export-Led Recovery
• Paulson on Bank of America: Stock Could ‘Almost Double’ – MarketBeat – WSJ (He likes Citi too.)
• California faces a projected deficit of $21 billion — latimes.com
• The Financial Regulatory Chess Game, Arnold Kling | EconLog

Distraction of the Day: This cow thinks he is a dog

Related posts:

• Links: 2009-01-09
• Links: 2009-11-13
• News round-up: 30 Sep 2008
• Links: 2009-07-16
• Links: 2009-03-14

• Josh Reviews Everything: And then he took his pants off. Again.
• frontline: a class divided: watch the program | PBS
• In Case Someone Says You Couldnt See This Coming – Yves Smith
• U.S. conservatives: Obama bowed too deeply to Emperor | The Japan Times Online
• Bankruptcy Experts Challenge Obama’s ‘Too Big To Fail’ Plans – Deal Journal – WSJ
• The effectiveness of fiscal and monetary stimulus in depressions | vox
• Chance of Great Depression Now 5%… – Brad DeLong
• Slashdot Your Rights Online Story | Chinese Court Rules Microsoft Violated IP Rights
• Cassandra Does Tokyo: Balderdash (n) – fiddle-faddle, piffle (trivial nonsense), hokum
• Goldman Sachs, Buffett Said to Plan Aid for Small Businesses – Bloomberg.com
• Geithner in the doghouse over AIG debacle | guardian.co.uk
• UK house prices: peak for affordability ‘now over’ – Telegraph
• Buffett’s Berkshire Discloses Exxon, Nestle Stakes – Bloomberg.com

Distraction of the Day: US razing dams to restore waterways

Related posts:

• Links: 2009-04-08 – European edition
• News from around the web: 2009-07-29
• News from around the web: 2009-11-08
• News from around the web: 2009-11-05
• Links: 2009-03-02

• Economist’s View: "China and the American Jobs Machine" (And don’t fall into the Blame Asia Meme http://bit.ly/pseaY)
• 买黄金! | egghat’s blog (This German post says that owning gold was illegal in China six years ago. Now the message to get into gold is everywhere there.)
• Toddlers insensitive to fear go on to commit crimes – New Scientist
• Lack of Open Seats Could Complicate GOP Math – Roll Call
• General Electric Pursues Pot of Government Stimulus Gold – WSJ.com
• How To Prevent the Next Financial Crisis – CBS MoneyWatch.com
• The one thing depleting faster than oil is the credibility of those measuring it
• Get tough with China how? | Free exchange | Economist.com
• Pension deficits in Britain underestimated by £268bn – Telegraph
• FT Alphaville – Bringing it back on balance sheet, by the numbers (Will this make return on assets lower?)
• A Minsky Recovery? – Arnold Kling | EconLog
• Canadian homes sales hit record high; outlook upgraded
• You’re Backing Up Your Data the Wrong Way – Lifehacker
• Digital Domain – Apple Wouldn’t Risk Its Cool Over an Ad Gimmick, Would It? – NYTimes.com
• U.K. Home Sellers Cut Asking Prices 1.6% in November – Bloomberg.com (Is this a sign of seasonal weakness or more?)
• Capital One, Discover credit card defaults lower

Distraction of the Day: People are stealing everywhere

It reminds me of this post: If you can’t afford food, steal it: lessons from Japan

Related posts:

• Links: 2009-03-23
• Links: 2009-03-28
• Links: 2009-03-26
• News from around the web: 2009-09-10
• Links: 2009-10-28

• Bailed-out Anglo needs €5.7bn cash but EC eyes wind-down – Independent.ie
• Colts 35, Patriots 34 – Colts Pull Off Improbable Win as Patriots’ Gamble Backfires – NYTimes.com
• Paul Krugman – World Out of Balance – NYTimes.com
• Pay limits hamper BofA chief search: report
• Inflationary armageddon? Not yet, but come 2011 it’s another story – Roger Bootle
• FT.com – Gold output set for decline in long term
• China Lambastes Dollar “Carry Trade,” Diverting Attention from Its Currency Manipulation – Yves Smith
• Pay People to Work Shorter Hours – Dean Baker (If you give business tax credits to have people work shorter hours, eventually productivity gains hit a wall and new employees must be hired. This is a stop-gap)
• PBGC Is Not Only Underwater, It’s Drowning — John Lounsbury
• Diane Chu: China – The Sleeping Lion Awakened
• Interfluidity :: Discretion and financial regulation
• How the tax code encourages debt : James Surowiecki – The New Yorker
• FT Alphaville – The not-so-small small bank CRE problem

Distraction of the Day: Would you buy a battery-pack heated jacket?

Related posts:

• News from around the web: 2009-08-08
• News from around the web: 2009-09-06
• New nightly news from around the web: 2009-07-29
• News from around the web: 2009-09-22
• News from around the web: 2009-08-25

• Japan Economy Accelerates, Reducing Danger of Renewed Recession – Bloomberg.com
• Economist’s View: Fed Watch: Should the Fed Be Doing More?
• China rounds on U.S. rates as global economic risk
• The Best F**king Book About the Financial Crisis?
• Richard Thaler – At Swoopo.com, a Price for the Thrill of the Auction – NYTimes.com
• Economist’s View: "The Illusion of Improving Global Imbalances"
• Citi Sells Stake in Japanese Call Center to Bain Capital – DealBook Blog – NYTimes.com  (more asset sales.)
• China has now become the biggest risk to the world economy – Telegraph
• Just How Much Of A Eurozone Rebound Really Was There In Q3? | Edward Hugh (French growth looks the best.)
• The World’s Worst Trader? – Barrons.com

Distraction of the Day: Baby trapped in running washing machine

Related posts:

• Links: 2009-02-20
• Links: 2009-01-05
• News from around the web: 2009-08-19
• Links: 2009-02-19
• Midday Reading: 2009-08-10

An article in the National Post suggests General Motors may look to divert some of its bailout money to Europe in the wake of a chill in German government support for subsidies. Talk of using taxpayer money to benefit workers in other countries is sure to raise ire, especially in the United States where the unemployment rate has hit double-digit levels.

When General Motors was forced into receivership this past Spring, it received tens of billions in bailout money from the U.S. and Canadian governments in order to protect jobs in the auto sector.

For his part, Stephen Harper, Canada’s Prime Minister said the aid was regrettable but necessary.

The Vancouver Sun reported at the time:

Canada had no choice but to support the restructuring of auto giant General Motors Corp. with about $10 billion in taxpayer aid or face devastating economic consequences, Canadian government and union leaders said Monday.

Hundreds of thousands of jobs would have been lost and communities across southern Ontario would otherwise have been devastated, Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty said at a news conference Monday, hours after the 100-year-old company sought protection from bankruptcy in the U.S.

"We could either participate in reshaping these companies for the future or stand idly by as they restructured out of Canada," Harper said in Toronto.

"The decision announced today is regrettable but necessary."

The federal and Ontario governments’ contribution to the restructuring is set at $9.5 billion US, according to a joint statement Monday from the prime minister and U.S. President Barack Obama.

For that, Canadian taxpayers will hold a 12-per-cent equity stake and will also appoint one independent director to the company’s board.

The U.S. government sunk even more into General Motors – $50 billion. All of this money and the ‘cash for clunkers’ program have allowed General Motors to return to life. However, many issues remain, the most consequential of which is GM Europe. 

Since late May, it has appeared that a consortium headed by Magna International was set to take over GM Europe on the condition of 4.5 billion in state aid from Germany. As early as August, stories surfaced in which GM was considering raising capital in order to keep Opel. GM never wanted to sell Opel and Vauxhall, but it was forced to do so by circumstance.

However, when GM abruptly backed out of the Magna deal early in November it enraged the German government, who are now not likely to offer any aid. At the time I said:

Will Obama now come up with the funds?  If this minister gets his way, there don’t seem to be a whole lot of solutions here.

Well, here is one solution via the National Post (note the part I have highlighted in bold):

General Motors Co. may use some of the money it won from Canadian and U.S. taxpayers in the spring to fix its Opel unit in Europe in the months ahead as it works out a new financing plan for the money-losing business.

Detroit-based GM plans to fund Opel’s turnaround using a mix of sources after deciding to keep the business itself instead of selling a majority stake to Magna International Inc. and Russia’s Sberbank. That could include tapping funds pledged by the federal and Ontario governments, said Chris Preuss, GM’s vice-president of global communications.

"We’re going to be needing to participate directly in the financing" of Opel, Mr. Preuss said in an interview yesterday. "The taxpayers of both Canada and the U.S. have a stake in this. But what was agreed upon was that we have to be able to run a global business."

Translation: GM has every right to use its bailout money as it sees fit.

GM continues to misjudge the political situation. They handled the decision to back out of the deal with Magna very poorly. We are now likely to see increasing signs of economic nationalism at play.

But, just as the backing out created huge waves in Germany, this latest salvo from GM is likely to enrage Canadians and Americans as they see their tax dollars at work to protect the jobs of Europeans. GM may think using Canadian and American bailout funds for GM Europe is a good ‘technical’ solution. But, it is a very poor choice politically and they will pay the price.

Related posts:

• Germany gives GM a stiff arm on state aid
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital
• German Press: Fiat to sign a deal with Opel, not Chrysler
• GM board decides to keep European Opel unit

• Deluge of Pleas to Spare Oreo, Dog Thrown Off Roof – City Room Blog – NYTimes.com
• Bob Herbert – A Recovery for Some – NYTimes.com
• Bair calls U.S. bank bailout not a good thing | Reuters
• It’s the stupidity economy – Paul Krugman Blog – NYTimes.com
• Picture du Jour: Dow rally in perspective – Prieur du Plessis
• BBC NEWS | Business | Nosy friends scan Norwegian tax secrets
• Prolonged deflation to continue here until 2011 as prices fall 6pc – Independent.ie
• A Post-Mortem on the Opel Deal – DealBook Blog – NYTimes.com
• Arrogant Fed hasn’t learned a thing – MSN Money
• China-India tensions rising | The Japan Times Online
• Employment Policy – Angry Bear
• Sarah Palin "Going Rogue": Takes Aim At McCain Campaign, Steve Schmidt
• Bidding Wars Resume – NYTimes.com
• President Obama, deficit terrorism is not the answer! – Marshall Auerback
• Mish: Obama Wants Spending Cuts, He Should Start With Military
• The Europeanization Of America – Bruce Bartlett
• The FHA Is Broke — John Lounsbury
• Surprise (Not): Madoff’s Results Were Generated Via a Randomizer
• House price drop indicates ‘double-dip’ for property market | Money | guardian.co.uk
• 2012 movie is truly disastrous – New Scientist
• The Associated Press: Obama eyes domestic spending freeze
• Dell Jumps on Android Bandwagon With Mini 3 Smartphone
• FDIC Asks Banks for $45Bn of Prepaid Assessments : HousingWire
• EconomPic: Trade Deficit Jumps in September (This can only mean lower savings, all else equal.)
• Why We Need an Individual Mandate for Health Insurance – CBS MoneyWatch.com

Distraction of the Day: Man calls 911 looking for sex (honorable Darwin Award?)

Related posts:

• News from around the web: 2009-11-19
• News from around the web: 2009-08-05
• News from around the web: 2009-09-01
• News from around the web: 2009-09-10
• News from around the web: 2009-10-11

Finance and Economy

• Wall Street Makes It Hard to Earn Legal Living: Alice Schroeder – Bloomberg.com
• FT Alphaville – FDIC saves securitisation
• BBC NEWS – Russian economy growing strongly
• Henry Kaufman: The Real Threat to Fed Independence – WSJ.com
• Origins of the Federal Reserve – Murray N. Rothbard – Mises Institute (controversial but interesting)
• Richard Russell: Six reasons to invest in gold – Prieur du Plessis
• EconomPic: Just One Super-Secular Mean Reversion? (The 1970s was an aberration in rates)
• Paul Krugman – Free to Lose – NYTimes.com (It’s the automatic stabilizers in Germany.)
• FTD.de | Staatshilfe oder nicht?: Chaostage bei General Motors (With the FDP now in power instead of the SPD, GM is meeting a less-union friendly regime in Germany. Econ Minister Bruederle says point blank at about 6:30 here that no state aid is coming http://bit.ly/4csztT GM has misplayed its hand.)
• La eurozona sale de la recesion al crecer un 04 en el tercer trimestre (Spain is the only larger Eurozone economy not to show growth in Q3)
• Bush Warns of ‘Temptation’ to Abandon Free-Market System in Wake of Recession – FOXNews.com (no comment)
• Ten most troubled states in the U.S. – CNN Money

Politics

• More in U.S. Say Health Coverage Is Not Gov’t. Responsibility (it’s amazing how much the tide has turned here)
• FiveThirtyEight: Politics Done Right: Time for Dems to Panic?
• Obama’s Betrayals « Patrick J. Buchanan (more on civil liberties and war)
• U.S. Adviser to Kurds Stands to Reap Oil Profits – NYTimes.com (Is this a smear job? Let’s see how it unfolds.)
• Lieberman Going Rogue (Again) – Swampland – TIME.com

Other

• How Google Voice Violates Googles Own Privacy Policy
• Earthquakes Actually Aftershocks Of 19th Century Quakes; Repercussions Of 1811 And 1812 New Madrid Quakes Continue To Be Felt
• Jim Jubak – Has Apple blown its big chance? – MSN Money

Related posts:

• Links: 2009-01-31
• Links: 2009-05-26
• News from around the web: 2009-08-06
• Bedtime Reading: 2009-04-28
• Night Time Reading: 2009-09-08

Hong Kong’s leader Donald Tsang has come out with a scathing criticism of U.S. monetary policy, comparing it to Japan’s which he believes contributed to 1997’s Asian crisis. This is the most direct and strident criticism of the U.S. Federal reserve’s monetary policy from a major international politician yet.

Bloomberg reports:

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

Tsang’s criticisms are sure to draw attention as it comes during the APEC summit in Singapore, which is a cross-Pacific economic and political group now being used to show Asian-U.S. cooperation and harmony. Tsang has an especially painful memory of the Asian Crisis as he was Hong Kong’s financial secretary at the time and was forced with the central bank to spend $15 billion to defend Hong Kong’s currency peg as speculative capital fled Asian markets en masse. Depression ensued across wide swathes of Asia, leaving a psychological scar that reverberates today.

As for the comparisons of America to Japan, I find them very well placed.  Yesterday I posted an article in which Marshall Auerback and Fox’s Brian Sullivan discussed parallels between the two. Nouriel Roubini fears that a U.S. dollar carry trade is building which is being used to help inflate assets outside of the U.S. in a global financial bubble.

This is certainly what the Japanese had done in the 1990s. Last August, before the Lehman collapse and panic I wrote that Japan was an enabler of the tech bubble of the late nineties:

the Bank of Japan did not realize the limitations of monetary policy. It could provide easy money, but it could not control where that money ended up. So, ultimately it ended up in the carry trade and helped supply the fuel for the tech bubble.

Was the BOJ responsible for the Tech Bubble? That’s a question that cannot be answered. But, what is true is that the Japanese government and monetary authorities were very instrumental both in the late 1990s and earlier this decade in providing free money to global investors via the carry trade.

Tsang is saying that Japan’s easy money policy also infected Asian markets, helping to inflate an unsustainable bubble which led to collapse and depression. In a macabre repeat of economic history, he sees the same re-occurring now as the U.S. tries desperately to ward off deflation.

Source

Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests – Bloomberg

Related posts:

• Japan’s easy money policy was the trigger for the tech wreck
• Is the U.S. dollar carry trade replacing the one in Japanese yen?
• Depression in Japan
• Asia is de-coupling
• Big Mac Index: Europe overvalued, Asia undervalued

• FT.com – Lloyds raises new capital target as bondholders warm to CoCos (sounds like good investor appetite for Lloyd’s)
• FT.com – Dollar knocked by China renminbi hints (Chinese showing they could revalue just before Obama arrives)
• Goldman’s Complete Presentation And Transcript From The Merrill Lynch Financial Services Conference | zero hedge
• Intel Pays A.M.D. $1.25 Billion to Settle Disputes – NYTimes.com
• From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons
• Household savings rose as recession took hold – Independent.ie
• How Obama Can Bounce Back » Eliot Spitzer
• Boom or Bust Leaves Bankers With Bum Choices: Caroline Baum – Bloomberg.com
• Tom Gregory: The Lloyd¹s Prayer
• BBC NEWS | Business | Russian bank to cut 67,000 jobs (These guys were to be part-owner of Opel)
• Is China headed toward collapse? – Eamon Javers – POLITICO.com
• Unchecked and Unbalanced Watch, Arnold Kling | EconLog (Also see Kay and Thoma’s cited links.)
• oftwominds: Bubbles, Inflation and Overcapacity
• Will There Be a ‘New Normal’ For Unemployment? – Mark Thoma
• Rolfe Winkler: Chart of the Day: The Dow priced in gold (This is an ugly chart)
• BBC NEWS | Special Reports | Free market flawed, says survey
• Saudis Ditch NYMEX WTI – A Global Paradigm Shift — Dian Chu

Distraction of the Day: The girl who can’t stop sneezing

Related posts:

• News from around the web: 2009-10-16
• News round-up: 15 Aug 2008 – blog edition
• News from around the web: 2009-07-25
• News from around the web: 2009-11-03
• News from around the web: 2009-10-30

• Bear Juror Says U.S. Case So Weak She’d Invest With Defendants – Bloomberg.com
• Russia Warns of Gas Crisis as Ukraine Faces Financial Turmoil – Bloomberg.com
• Staatsbank HRE verliert 1,7 Milliarden Euro – Spiegel Online
• WNYC – The Brian Lehrer Show: Tweeting Tragedy (November 10, 2009) (This is about tweets at Fort Hood.)
• Republicans Edge Ahead of Democrats in 2010 Vote
• Google Navigation hacked onto T-Mobile G1
• Japan Machine Orders Rise More Than Expected; Recovery May Last – Bloomberg.com
• Google Offers A 16 Terabyte Cloud Drive For $4,096 A Year
• Economist’s View: "The Fed Is Already Transparent" (More from Frederic Mishkin)
• Property Values – What You Get for … $800,000 – NYTimes.com
• International Real Estate – House Hunting in … South Africa – NYTimes.com
• FT.com – BayernLB faces loss on Austrian unit
• Congress to miss health care deadline, key senator says – CNN.com
• FT.com – Jeffrey Sachs – Obama has lost his way on jobs
• Drunk Woman Falls Onto Subway Tracks and Survives Near Miss [Video]
• TweetMeme Leaderboard – Top 100 Twitter News Sources
• Opel-Poker: Magna fordert von GM Millionen zurück – SPIEGEL ONLINE
• Stop Paying for Windows Security; Microsoft’s Security Tools Are Good Enough – Lifehacker
• El precio de los pisos modera su caída hasta el 74 interanual en octubre
• BBC NEWS | Business | Bear Stearns ex-managers cleared
• A Morgan Stanley star falls in China | Reuters
• Slashdot | Glenn Beck Loses Dispute Over Parody Domain
• FT.com – Concerns at rise in JGB yields (The video explains the concerns well.)
• Attention Lloyd Blankfein: The Public Purpose of Banking – Marshall Auerback
• 100,000 DROIDS And Counting | Android Phone Fans
• Andy Xie: Why China and Japan Need an East Asia Bloc
• Too Big To Fail – self-evident

Distraction of the Day: World’s dirtiest footballer?

Related posts:

• News from around the web: 2009-10-14
• News from around the web: 2009-09-21
• Links: 2009-07-17
• News from around the web: 2009-10-11
• News round-up: 30 Jul 2008

I have really started to dislike municipal bonds as an asset class. They have seen a huge rally along with almost every other financial asset but the underlying fundamentals are weak because of financial distress at states and municipalities.

Last week, I wrote a first piece on this topic, based on some work by Philip Greenspun and Fred Sheehan. I also just wrote a piece about Ambac Financial’s likely bankruptcy, which will impact this market because of Ambac’s municipal bond guarantees. But, a Barron’s piece about Jim Chanos of Kynikos called “Short Seller: Dump Munis” piqued my interest and precipitated this particular article.

Chanos is bearish

The Barron’s piece by Tom Sullivan said:

James Chanos, the famed short seller who was among the first to foresee the collapse of Enron, recently sounded the alarm on the municipal-bond market — in the hallowed halls of the New York Historical Society, no less.

The "cracking of state and local municipalities is coming," he predicted at a recent meeting attended by Barron’s staffer Susan Witty, adding that he wouldn’t touch munis.

In a subsequent telephone interview with this columnist, Chanos said, "State and local municipal finance are a mess and going to get worse."

It’s not just the recession, which has reduced tax receipts. Rather, he says the poor economy "is masking real problems in municipal cost structures." The big problem, he says, is "the platinum-plated health-care and retirement benefits" given to state and local workers. "It’s all coming home to roost" as boomers start to retire.

California faces a $60 billion deficit, and the politicians there believe that in "a worst-case scenario, the federal government will bail them out," says Chanos. "If the feds do bail them out, as I believe they will," the state’s bonds will likely lose their federal tax exemption, he adds.

Sullivan went on to use New York and New Jersey as other examples of what is amiss for state bonds.

Revenue shortfalls

A New York Times article which I linked to this morning makes the situation in New York plain, ending with this:

The comptroller’s office numbers are more pessimistic than those from Mr. Paterson’s budget office. They project that the deficit for the remainder of the current fiscal year stands at $4.1 billion, with deficits of $7.8 billion and $15.7 billion in the succeeding years.

Mr. Ravitch, who helped steer New York City through its financial crisis in the 1970s, said, “The numbers are real and my own personal view is that they’re going to get worse.”

New York and New Jersey are suffering the same problems that California suffered, namely a huge fall in income and property tax revenue. This is true all over the country in places as far apart as Oklahoma, Hawaii, Texas, and Georgia.

Assets falling, liabilities ballooning

But, it’s not just about revenues versus outlays – the income statement. It’s also about assets and liabilities – the balance sheet. recently I spoke to Peter Schweich, a retired vice president of Boston University and founder of Boston University Academy, who had done some research on municipalities in Massachusetts and he explained that his research indicated that municipalities had seen a 30% fall in investment portfolio values during the credit crisis (much obviously gained back since). Even worse, he pointed me to enormous looming liabilities not reflected on balance sheet or considered by the ratings agencies.  In a recent Forbes article, he wrote:

While municipalities are able to raise property taxes to cover current salaries, not without considerable pain to the taxpayer, few of them, if any, are prepared for the future financial demands of their grossly underfunded or completely unfunded Other Post Employment Benefits (OPEB) obligation. OPEB obligations are primarily associated with health benefits for retirees.

In 2006, the Federal Reserve Bank of Chicago held a pension conference. In a short note, it reported that a "back of the envelope guess" for OPEB was $700 billion and that "other estimates suggest that OPEB exposure could range from five to 10 times current outlays for retiree health care."…

Cambridge, Mass., now known to most Americans as the city where a homeowner can be arrested for "breaking into" his own home, serves as a good example of the overwhelming burden residential and business property owners across the country are about to confront. Current and future Cambridge residents are now facing a completely unfunded OPEB obligation of $602 million. That figure, alone, is nearly one-and-a-half half times greater than the city’s entire 2009 budget. In addition, like most municipalities, the recent economic downturn has resulted in a significant loss to Cambridge’s regular pension fund: a 28.6% loss in 2008 in the amount of $225 million.

In addition, Cambridge has an unfunded liability for its regular pension fund (distinct from the OPEB fund) to the tune of nearly $70 million, and, of course, Cambridge also carries bond obligations, as do many municipalities. The Cambridge bond obligation exceeds $300 million. This means Cambridge, with approximately 75,000 permanent non-university student residents, one municipal employee for every 22 residents, and 22,000 taxable parcels, has current financial liabilities of nearly $1.2 billion…

Not surprisingly, the Cambridge city manager boasts of Cambridge’s financial stability each year in the introductory letter to his submitted budget. To bolster his claim, he proudly points to the Triple A bond ratings that Cambridge holds from Moody’s, Fitch and S&P. Cambridge, therefore, has 75,000 residents, 22,000 taxable parcels, $1.2 billion in financial liabilities–and a Triple A bond rating from Moody’s, S&P and Fitch.

These are circumstances that are being repeated across the United States. Expect scandals involving alleged improprieties to mount when financial distress hits. One notable example in the news is San Diego, where the top pension administrator is exiting after last year’s over 25% loss and where the fund is also being buffeted by two separate scandals: a conflict of interest scandal and a scandal where overtime pay was counted toward the formula in firefighters’ pension overtime. San Diego was also in the news a few years back because of a separate scandal where an alleged special pension benefit for the fire chief was under attack. See also San Diego’s Pension Scandal for Dummies from 2005, which details the conflict of interest case to that date.

Ratings agency problems

Then there are the rating agencies. Remember the whistleblower scandal from last month? It was all about municipal bonds and the Moody’s allegedly putting their revenue generating relationship with municipalities ahead of the rating function. If you recall, it was exactly this conflict of interest which led to Arthur Andersen’s downfall in the Enron scandal.

This is what Reuters said about the Moody’s whisteblower scandal last month:

Two former Moody’s executives — Scott McCleskey and Eric Kolchinsky — testified that senior managers were willing to silence employees who raised concerns about the ratings process or compliance efforts.

McCleskey said that while he was the head of compliance at Moody’s, he voiced concerns that the firm was not properly monitoring ratings on municipal debt. McCleskey, who was dismissed by Moody’s in 2008, said he was instructed not to mention the issue in e-mails or writing.

Kolchinsky, a Moody’s managing director who was recently suspended by the firm, said senior managers pushed revenue over ratings quality and were willing to fire employees who disagreed.

The two whistleblowers were flanked by Moody’s current chief credit officer, Richard Cantor. Cantor sat impassively, staring straight ahead as his former colleagues described their concerns to the lawmakers.

In his testimony, Cantor said Moody’s had recently hired an independent law firm to review Kolchinsky’s allegations.

That was criticized as an empty gesture by Chairman Towns, who said the law firm had no deadline and would not produce a written report.

Kolchinsky told lawmakers that Moody’s compliance group was understaffed and lacked independence. He also alleged Moody’s knowingly issued misleading ratings on complex securities and that analysts were "bullied" by managers, who overrode their decisions to protect revenue.  Kolchinsky said he would soon meet with the SEC to discuss his charges. SEC officials said the regulator had contacted Kolchinsky about his concerns in March 2009.

McCleskey, meanwhile, sent the SEC a letter in March 2009 warning about Moody’s weak compliance department and ratings process. He said Moody’s management had ignored his warnings that the company failed to properly monitor municipal bond ratings.

The company also spurned his suggestion to erect a firewall between the compliance department and its revenue-generating units, he said.

No doubt, there are those who are still recommending munis because of their tax-free status, as a recent WSJ article demonstrated. But, the fundamentals are weak and getting worse – both in terms of the income statement and the balance sheet. These governments are soon to lose their guarantees from Ambac (and eventually MBIA despite hiving off the muni business). To my surprise, these governments are getting no federal government backstop as the California situation has demonstrated. And the Fed and Treasury are on record as saying they will not guarantee any municipal bonds. Finally, I question whether one should rely on the ratings these bonds have to make an informed investment decision. Even the junk-bond king Michael Milken, a credit analyst of note, is now warning that credit ratings are inflated.

Municipal bonds are a clear case of buyer beware.

Related posts:

• The coming collapse of the municipal bond market
• MBIA and Ambac sued by LA
• Ambac may file bankruptcy soon
• California starts issuing IOUs as bankruptcy nears
• State and local government weighed down by housing

• Financial Armageddon: In-Your-Face Influence Peddling
• FT.com – Not all bubbles present a risk to the economy (Blinkered Fed thinking on asset bubbles. Reminiscent of the Greenspan era.)
• Fitch Says U.K. Rating Most at Risk Among Top-Rated – Bloomberg.com
• Japan faces risk of ratings downgrade over debt| Currencies| Reuters
• Mishkin Defend Bubbles (and of Course, the Fed) – Yves Smith
• FT Alphaville – Barclays’ Protium-purified balance sheet (Who says accounting doesn’t matter.)
• The Edwards Strikes Back (I like the Han Solo comparison.)
• On the Brink, New York Must Cut, Paterson Says – NYTimes.com
• BBC NEWS | UK | Wales | Jobless man’s 45m lottery ticket
• Google’s Late Release of Android 2.0 Hurting Developers | Android Tapp. Android App Reviews
• Just lay back and think of it as a Vagina Added Tax – Firedog Lake
• House prices continue to rise despite increased availability | Money | guardian.co.uk
• Brace yourselves for Credit Crunch II . . . – Times Online
• Goldman Sachs: You Think God Would Let ‘Egomaniacs’ Work Here? – Dealbreaker
• The Information Broker – Andrew Ross Sorkin – nymag.com
• Stuyvesant Town woes may pave way for loan changes | Reuters
• Making Wall Street pay | Dean Baker | Comment is free | guardian.co.uk
• BBC NEWS | Business | GMAC to get more bail-out funds
• David Einhorn vs the bloggers on credit default swaps – FT Alphaville
• Banks Choosing Treasury Bonds Over Loans – Real Time Economics – WSJ
• The other shoe drops at Caijing – James Fallows
• Larry Johnson Released by Chiefs After Inflammatory Tweets

Related posts:

• Links: 2009-09-30
• News from around the web: 2009-10-20
• Links: 2009-03-08
• Links: 2009-10-23
• Links: 2009-04-02

I am feeling fairly ill so posting will be light today. Hopefully, I will back in shape tomorrow.

• VIDEO: Former Brit Ambassador Craig Murray Says UK and USA Sent Prisoners to Uzbekistan for Torture Part 1 Patrick J. Buchanan

  Chilling. Must-see video

• Former UK Ambassador: CIA Sent People To Be ‘Raped With Broken Bottles’ « Patrick J. Buchanan
• Federal Reserve Says Judge Erred in Requiring Bank Disclosure – Bloomberg.com
• FT.com | Willem Buiter’s Maverecon | Gold – a six thousand year-old bubble

  "Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender. It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value."

• Mirror closes final salary pension plan to existing members – Telegraph
• Public Pensions Face Ugly Choices – Forbes.com
• Editorial – Jobless Recovery – NYTimes.com
• Economists Seek to Cure a Defect in National Data – NYTimes.com

  I have been invited to this event. Not sure yet if I can attend. But let’s applaud the effort to overall the government’s statistics.

• FT.com – Clive Crook – Obama has lost sight of the centre
• For brave investors, Zimbabwe could be the ultimate turnaround story – Telegraph
• 50 Apps For New Droid Owners | Android Phone Fans
• Gold Climbs to Record as Weaker Dollar Boosts Investment Demand – Bloomberg.com
• Sir Alex Ferguson to avoid FA charge for Chelsea referee comments |Football |guardian.co.uk

  Sir Alex is a menace and should face FA charges for this.

• Advanta files for bankruptcy protection | Reuters
• Cambridge Runs Amok – Forbes.com
• Abschluss-Doku des gescheiterten Opel-Verkaufs Blick Log
• The Becker-Posner Blog: Productivity and Unemployment–Posner

  Productivity gains that result from job cuts and recession are not the same as those that result from technological improvements.

• I’m doing ‘God’s work’. Meet Mr Goldman Sachs – Times Online
• Lieberman Says Again He’ll Join Filibuster — Political Wire
• Short Seller: Dump Munis – Current Yield – Tom Sullivan – Barrons.com
• The Economics of Trust – Forbes.com
• Frank Rich- The Night They Drove the Tea Partiers Down – NYTimes.com
• Strong US recovery biggest threat to Australia

  ASK economic guru David Hale about the worst risk facing Australia and you will get a surprising answer. ”It’s a really strong United States recovery,” he said. ”The V-shape that some people are talking about. It would force the Fed to push up rates quite quickly in the second half of next year, not from zero to 1 per cent, but from zero to 2 or 3; it would reverse the big rally in the Australian dollar and it might provoke a big global stock market correction.”

• FSA probe HBOS information accuracy – Independent.ie
• Hitlers barndomshjem til salgs for 18,5 mill. kr. | Eiendom Utenriks | E24

Distraction of the Day: Man drives car into courthouse

Related posts:

• Links: 2009-01-25
• News from around the web: 2009-11-05
• News round-up: 13 Oct 2008
• News round-up: 30 Jul 2008
• Links: 2009-02-21

Related posts:

• News from around the web: 2009-07-27
• News from around the web: 2009-10-11
• News from around the web: 2009-07-31
• Links: 2009-01-19 – banks and bloggers
• News from around the web: 2009-11-16

Related posts:

• Links: 2009-04-05
• Links: 2009-05-09
• Links: 2009-01-31
• Links: 2009-11-10
• Links: 2009-01-08

Related posts:

• Links: 2009-07-06
• Links: 2009-10-23
• Links: 2009-03-16 – blogger edition
• Links: 2009-03-05
• News from around the web: 2009-10-10

Be sure to see William Shatner’s poetic reading of Levi Johnston’s tweets below. Pretty funny.

Also see: News from around the web: 2009-07-29 where Shatner reads Palin Poetry.

Related posts:

• News from around the web: 2009-07-29
• News from around the web: 2009-10-22
• News from around the web: 2009-10-13
• News from around the web: 2009-11-18
• News from around the web: 2009-08-03

I was interviewed on the BBC last night about the GM/Opel/Vauxhall deal. I am waiting for video before posting any more about it.  My general feeling, however is GM’s backing out is being driven by reflation as GM no longer needs to sell Opel/Vauxhall in this economic environment. Quite frankly, I think it is a bit premature to think reflation has been successful.  But, GM has Neelie Kroes breathing down its neck.  It had to act.

• GMAC’s Mortgage Unit Loses $747M in Q309 : HousingWire

  Remind me, why are taxpayers propping them up?

• Should Jon Corzine Take Over Bank Of America? – Dealbreaker

  He IS out of a job.

• EconomPic: ISM Services Slowly Expanding

  Dichotomy with manufacturing suggests that underlying demand is weak.

• Profit `Not Satanic,’ Barclays Says, After Goldman Invokes Jesus – Bloomberg.com

  Interesting.

• Barclays Chief: Jesus Loves Bonuses – Dealbreaker

  Sure he does. Keep telling yourself that. I am NOT for capping pay, but this is not a good quote.

• Bank of Ireland losses near €1bn – Independent.ie

  More bad news in Ireland

• Top finance blogs – Prieur du Plessis

  We are in the group. And I recommend Prieur’s site very highly.

• Top earning dead celebrities 2009

  Yves Saint Laurent gets top billing. MJ is only third.

• Michael J. Panzner: Treasury Officials Meet With Financial Bloggers

  More on econobloggers at Treasury

• Curious Meeting at Treasury Department – Yves Smith

  Must read account of Treasury’s cultivation of econobloggers

• FT.com | Money Supply | The Fed and its “extended period” language

  More on the FOMC

• The Fed Thoughtfully Strokes Its Beard, Flaps Its Gums – Annaly Salvos

  Hat tip Scott. Will the Fed get rid of ‘extended period’ in its statement?

• AT&T to Verizon: “There’s a Lawsuit for That”

  Verizon is saying AT&T has terrible 3G coverage. A&T is livid.

• VIDEO: What the Military Industrial Complex Does Not Want You to Know: The History of Iran « Patrick J. Buchanan

  A historically accurate depiction of the last 56 years in Iran.

• Profile: Neelie Kroes, EU competition commissioner

  "The EU competition commissioner forcing through the radical break-up of Britain’s banking system"

• Rising factory orders bolster recovery prospects | Reuters

  More evidence of a manufacturing recovery.

• FT.com – Sony Ericsson unveils Android-powered phone

  Google is getting serious play here. Android has arrived.

• House prices rise by 1.2%, says Halifax

  Better mth to mth than Nationwide but worse yr-on-yr.

• Rolfe Winkler – Burlington…not so Buffett-like

  This analysis says Burlington Northern is not a good deal.

• Norwegian Wood – Edward Hugh

  A comprehensive overview of the Norwegian economy after the rate rise

Distraction of the Day: Defining Adultery in the Age of Alzheimer’s

Of Love and Alzheimer’s – WSJ

Related posts:

• News from around the web: 2009-10-20
• Links: 2009-05-13
• Links: 2009-03-16 – blogger edition
• Links: 2009-08-15 blogger edition
• News from around the web: 2009-10-03

The sale to Canadian auto parts maker Magna International and its partner, Russian lender Sberbank is off. With bankruptcy now behind it, General Motors now feels confident it can proceed with Opel under the GM umbrella.

From the GM press release:

Given an improving business environment for GM over the past few months, and the importance of Opel//Vauxhall to GM’s global strategy, the GM Board of Directors has decided to retain Opel and will initiate a restructuring of its European operations in earnest.

“GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” said Fritz Henderson, president and CEO. “We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employee, suppliers, and dealers, which is reflected in the decision reached today. This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall’s long-term future.”

On a preliminary basis, the GM plan entails total restructuring expenses of about € 3 billion, significantly lower than all bids submitted as part of the investor solicitation. GM will work with all European labor unions to develop a plan for meaningful contributions to Opel’s restructuring. While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence.

“While strained, the business environment in Europe has improved.” Henderson said. “At the same time, GM’s overall financial health and stability have improved significantly over the past few months, giving us confidence that the European business can be successfully restructured. We are grateful for the hard work of the German and other EU governments in navigating this difficult economic period. We’re also appreciative of the effort put forward by Magna and its partners in Russia in trying to reach an equitable agreement.”

I will be speaking about this issue in an hour’s time on the BBC. But, look at this as a result of economic reflation. GM has exited bankruptcy and feels confident enough of the future path of the economy to keep Opel instead of having to sell in a fire sale. 

The Germans are livid, according to the Wall Street Journal.

The governor of the German state of Hesse, where General Motors Co.’s Opel unit is headquartered, said Wednesday he is "concerned and at the same time annoyed that the months-long efforts to find a good solution for Opel have failed because of GM."

In a statement, Roland Koch, a confidant of German chancellor Angela Merkel, said that considering the "negative experience in recent years with GM’s corporate policy, I’m worried a lot about the future of (Opel) and its staff."

In a surprise move, GM’s board late Tuesday decided it wants to retain its core European operations after talks over a possible sale have been dragging on for months.

Koch said he expects GM to repay by Nov. 30 the bridge financing provided by the German state "so that the German tax payer doesn’t get harmed."

Remember that other EU countries came out of the woodwork saying, in effect, that the Germans had bought off GM and were being advantaged by unfair subsidies while in places like Belgium and Spain workers were suffering.

Very interesting. More after the BBC show!

Related posts:

• GM considers keeping Opel, raising capital
• GM looks to use US and Canadian tax money to bailout Opel
• Economic nationalism and GM’s decision to keep Opel and Vauxhall
• Germans reject Chinese offer for Opel
• Germany gives GM a stiff arm on state aid

I will be on Canada’s BNN TV at noonish talking about finance: Banks and Buffett. It will be a casual discussion with the moderators Howard Green and Andrea Mandel-Campbell and one other guest, Brian Milner of the Globe & Mail.

Below are today’s links. Enjoy.

• Hillary’s Ill Will Tour – Patrick J. Buchanan’s website

  This is not the image we want to project. The author suggests Clinton is "John Bolton in a dress?" Interesting.

• FT Alphaville – China is ‘the most obvious area of concern’, Fitch says

  via a Reuters chat room

• Executive pensions rose in ‘08 even as stocks fell: report | Reuters

  Pensions rose 19 percent for top execs. Nice one. While ordinary Americans 401(K) got decimated, you get this.

• FT.com – Gold nears record high on India purchase

  200 tonnes from the IMF.

• RBS and Lloyds break-up: the main points – Telegraph

  Must-read to get overview of what is planned

• UBS’s Third Quarter Results Disappoint – MarketBeat – WSJ

  "the flagship private banking arm is what really missed forecasts"

• RBS Surpasses Citigroup as World’s Costliest Banking Bailout – Bloomberg.com
• Animal House Rules: Treasury Proposes to Use DOUBLE SECRET PROBATION – Bill Black

  Hilarious but sad

• Inside the Motorola Droid, an iPhone likeness | Nanotech – CNET News

  Another positive review of the Droid.

• FT.com – Ackermann hits at split-up of banks

  He calls effort “totally misguided”

• Global protocol could limit Sub-Saharan land grab

  "limit aggressive moves by China, South Korea and Gulf states"

• Obama’s latest use of "secrecy" to shield presidential lawbreaking – Glen Greenwald

  More of the same

• Economist’s View: "Half of US Children — and Most Black Children — Will Use Food Stamps"

  The title says it all

• RBS to cut 3,700 branch jobs

  "EU-imposed restructuring to be outlined tomorrow"

Distraction of the Day: Forklift operator causes $100,000 in booze to come crashing down. He’s OK though.

Related posts:

• Links: 2009-11-02
• News from around the web: 2009-10-30
• Links: 2009-10-21
• Nighttime reading: 2009-08-02
• News from around the web: 2009-11-09

I will be out of pocket in the early morning. Back late morning for more news. I expect to update my thoughts on the UK TBTF situation.

Related posts:

• Links: 2009-10-28
• Links: 2009-02-10
• News from around the web: 2009-10-30
• News from around the web: 2009-11-03
• Links: 2009-11-06

• White House Will Not Be Told By The AP How Many Jobs The Stimulus Has Created – Dealbreaker

  Funny.

• Industrial output up 1.4% last month | The Japan Times Online

  More bullish data in Japan.

• What Exactly Is Going On In Finland? – Edward Hugh

  As comprehensive a review as any out there.

• Why three buses come at once, and how to avoid it – New Scientist

  You kind of suspected this.

• FT.com / Martin Wolf – How mistaken ideas helped to bring the economy down

  Good look at Andrew Smithers.

• FT.com – Lloyds seeks to raise £21bn

  Investors must think worst is over

• Wal-Mart starts selling coffins

  Good for business, not PR

• Droid vs iPhone: The Comparison Chart [PIC]

  Best smartphone chart yet

• It’s Alive, It’s ALIVE, It’s ALLLIIIIVVVE!

  Funny GDP-themed ode to Gene Wilder

• FT Alphaville – Let them eat equity tranches – for real

  ‘Skin in the game’ is a first step on securitization

Distraction of the Day: Share a Grave With a Stranger? Double Decker graves in London

Related posts:

• Links: 2009-11-02
• News from around the web: 2009-07-31
• News from around the web: 2009-11-14
• News from around the web: 2009-11-12
• News from around the web: 2009-10-10