By now most people who follow Goldman Sachs in the news know that it received $13 billion from the Federal Reserve to liquidate its portfolio of derivatives with AIG. Because the Fed was willing to pay Goldman par value on these derivatives, even though the market valued them at about 48 cents on the dollar, Goldman walked away with no loss whatever from the AIG collapse. This has been described as a great gift for Goldman and all the other banks who dealt with AIG and who were treated the same way. Many others have described this as a colossal rip-off of the taxpayers.

How did this come about? We know a lot more this week about these transactions because of a report that has been issued by Neil Barofsky, the Special Inspector General for the bank bailout programs. The press has described this report as particularly damning of the NY Federal Reserve which negotiated these deals with the banks, and which was led at the time by Timothy Geithner, the current Treasury Secretary. These press reports, however, have mischaracterized what happened and what went wrong. The NY Fed acted properly and entirely as one would expect under the circumstances when they negotiated these contract abrogations. To see what really went wrong, follow along on the details below.

I'm not a contrarian, although I suppose on the face of it I probably come across as one. I'd label myself a skeptic more than anything else when it comes to markets. A skeptic in the sense that I rarely buy the official narrative. More of a realist I suppose. But that may just be a personal and intellectual conceit.

One of the official narratives I've been hearing a lot of lately--maybe not so much a narrative as a lot of cheerleading--is about gold. Now, there is a secular case to be made for gold. That case rests mostly on a falling dollar and the inverse correlation between our domestic markets and the rise in gold. The case has merit.

But when I see a story like this, one that says gold has a lot longer to climb, the red-flags of my bullshit detector go off. (Metaphor mixed on purpose.)

My question: where have we heard this before? And who's next? James Glassman of Dow 36,000 infamy?

One € bought 1.49$ recently. Have you noticed that there is suspiciously little whining in the press about the falling exchange rate of US dollar?

Last time the exchange rate peaked in 1.59 or something like that.

In real terms, a liter of milk costs here now 91 €cents (down from 1.05) and a liter of juice costs 67 €cents. Hint: we buy milk in euros and juice in dollars, because it is imported.

80%-90% of time juice is more expensive than milk, thus you can see that dollar is at least 36% undervalued.

American cowboy capitalism at its finest is on display today as Kohlberg, Kravis & Roberts (KKR), one of the country’s largest leveraged buy-out firms, is proposing to bring the Dollar General company back on to the public market. You – yes you, oh innocent investor – can buy a piece of this company for just $22 a share! Any why not? Dollar General is one of those stores where everything is on sale for $1, and cash-poor, recession plagued Americans have been flocking to stores just like these.

This is the only part of the retail sector that has been doing well. Wal-Mart, Dollar General and similar low cost vendors have been holding their heads above water while everyone else has been sinking. But before you plunk down your $22/share, come along with me on a ride through the fine print of the prospectus, to learn just what is going on here. You’ll understand better that the role the Wall Street boys want you to play is that of the sucker – the person who gets them out of a tight jam for a mistake they made.

A most revealing comment was made today by The Maestro, Alan Greenspan, speaking at a conference in Alberta on energy and the global economy:

We have been very fortunate that the stock markets moved back and are re-liquifying the whole process.

He pointed to the “wealth effect” created by a rising stock market, especially when investors cash in their capital gains.

In olden times, before Alan Greenspan spent over a decade as Federal Reserve Chairman, Fed officials worried about the growth in money supply, the level of prices in the economy, unemployment, and the strength of the dollar overseas. In fact, if you read the enabling legislation for the Fed, these are the things the Board of Governors should be concentrating on.

I can think of no better way of keeping Goldman in line and teaching it a lesson at the same time than a windfall tax. Indeed, folks at the Wall Street Journal are warming to the idea too:

“A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable.

This year’s bank profits are windfalls in the purest sense. They aren’t the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers’ pockets.

Yes, you read that correctly, the Wall Street Journal published that piece. We might not need those pitchforks just yet.

A comment from Numerian worth a full post on its own:

At first glance, the top line number for Goldman Sachs’ third quarter performance looks spectacular: Net Revenue of $12.37 billion, and $3.19 billion of Net Income. These numbers were multiples larger than the results for the third quarter last year, at the peak of the credit crisis, when Goldman converted itself into a commercial bank. It’s when you look into the details you realize that Goldman didn’t make its numbers this quarter as a commercial bank, nor even as an investment bank (which is what it used to be), but as a hedge fund.

Over a quarter of American homeowners owe more on their mortgage than their home is worth. In some bubbly markets like California, three out of four homeowners are underwater. Should these homeowners deliberately default, rather than continue to pay on a mortgage when it may take 20 years or longer for market values to equal mortgage values?

Eighty-one percent of Americans think no, according to a survey done this summer by the University of Chicago and Northwestern University business schools. Most American homeowners think it is “immoral” to deliberately default on a mortgage when it is possible to make continuing payments. Yet the numbers of American homeowners doing just that is growing. It is estimated that four percent of all defaults on mortgages are “strategic defaults” according to a phrase used by the financial industry: the homeowner can pay the mortgage but makes a strategic decision to suffer foreclosure rather than continue to make payments on a wasting asset.

Just a reminder, September's are usually pretty miserable months for equity markets. I wonder what this one will look like?

Tomoeh Murakami Tse | New York | August 13

WaPo - Experts Question Effect in Other Cases

When Frank DiPascali Jr. walked into a federal courthouse Tuesday afternoon, he expected to be able to stroll right back out. Instead, DiPascali, a key witness in the Bernard Madoff Ponzi scheme, was led away in handcuffs after a federal judge took the unusual step of rejecting the prosecution's recommendation that he remain free on $2.5 million in bail pending sentencing.

On Wednesday, while DiPascali, a former Madoff deputy, sat in a Manhattan jailhouse, legal experts questioned the effect the judge's decision would have on potential witnesses as the federal government continues its investigation of the Madoff scheme and other high-profile cases arising from the financial crisis.

With many bank earnings now available for the second quarter, I thought I would summarize them all in one post. But there is so much useful data in the earnings results of JP Morgan Chase alone, that it seems more illuminating to start with just this bank. Prepare yourself for some serious financial porn below (lots of numbers), but don’t be afraid. You’re entitled to look. After all, if you are a US taxpayer, you own part of Chase, so these are your results as well.

The press is full of admiration for the new Big Boys on the block – JP Morgan Chase and Goldman Sachs. These are the two banks which have managed to keep their heads above water, steal market share from all their weakened competitors, and return their unwanted TARP money to the Treasury. CEOs Jamie Dimon of Chase and Lloyd Blankfein of Goldman Sachs are attributed with a special kind of financial genius that not only foresaw what was coming, but profited from the disaster. The problem with this laudation is that it is simply undeserved once you dig into their financial reports.

I'm very happy to know that my tax dollars helped make Goldman Sachs $3.4 billion last quarter. Now, where's my dividend?

As a matter of fact, I think we need to see some serious and sustained calls for a windfall profits tax on Goldman's most recent quarter. They profited off of our money. Where's my pitchfork?

A case of financial espionage raises questions about Wall Street’s proprietary trading practices and exactly what role they play in the market. The perpetrator of the espionage, Sergei Aleynikov, is a former computer programmer and equity specialist at Goldman Sachs. He is alleged to have downloaded secret software at Goldman that is used to direct large volume, rapid-fire trades to exchanges and commodity markets, often just before the close of regular trading.

At a bail hearing for Aleynikov, now in custody in New York, U.S. Assistant District Attorney Joseph Facciponti said Goldman Sachs stands to lose millions of dollars from its proprietary trading based on the stolen software. Moreover, if others in the market obtain access to these trading secrets, “there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” according to Facciponti.

Richard Daughty has a fun look at the loss of GM and CitiGroup and the insertion of Cisco Systems and Travelers in the DJI index, necessitating a divisor change.

Now on Sunday amongst friends, you too can opine on the divisor change to 0.132319125 from 0.125552709.

Want to know more, read Richard posting as the Mogambo Guru here. The article has a popularity of 1% at the moment, lets give it a push!

Well hooray! Ten US banks have been given permission to repay their TARP loans from the federal government - $68 billion worth. This governmental Seal of Approval may mean these banks are healthy and safe and ready to do business, but what it certainly means is that the executives running these banks want to escape any government control over how much they pay themselves.

What’s in it for us the taxpayers? Not much. The government still needs to borrow trillions and trillions of dollars, which means interest rates aren’t going down. No fundamental reforms have been imposed on the banking industry – just some tweaking around credit card rules – so you still will have a very hard time getting credit. You’ll also earn about 0% interest on your bank deposits, but pay 30% or more for credit depending on your financial condition. This is certainly not going to get the consumer spending or the economy moving, so what is it going to take to enact real change to our financial system?

Our own Zuma has come across a potent set of proposals for real reform from the author William Greider. You’ll want to check out both Zuma’s report on the Diaries page, as well as Greider’s article on Alternet (printed originally in The Nation). The gist of these reforms is radical in today’s political climate – it is nothing less than a legal cap on interest rates. No bank or finance company would be able to charge you more than this cap – to do otherwise would be considered usury. What would our economy look like if we had laws against usury?

Were you excited a few weeks ago when US mortgage rates fell to record lows of 4.75%? President Obama was. He urged struggling homeowners to refinance their mortgages, and whether it was at his urging or not, there was a refinancing rush and even a few people wanting to actually buy a home.

How did rates get so low in the first place? There was a little bit of government engineering and a large amount of market manipulation by the Treasury and the Federal Reserve to achieve these low, low rates. At first, the government had the wind behind its back, because in the first quarter investors were so concerned about credit defaults in the private sector they flocked to buy Treasuries as the only safe instrument available. This drove long term interest rates on Treasuries into the 3% range, and mortgage rates – which trade higher than US government paper – followed in the same path down.

It’s spring. Green shoots are sprouting, the skies are clear, the days ahead are warm, and according to Ben Bernanke, the Bluebird of Happiness has landed on our doorstep. Those green shoots are signs that the economic downturn has bottomed out, and while the road ahead will be bumpy, the Fed sees the recession ending by 2010.

The stock market is not so patient. It wants the recession over now, or at least it really wants to believe the recession is over now. The S&P 500 index is up 36% from its low in March, one of the fastest and largest rises in stock prices ever. As we all are told, the stock market is a forward looking indicator, and a rise of this magnitude must surely indicate the recession is coming to an end.

Or does it? Bear markets have been known to sport sucker rallies, often showing characteristics similar to this one: a tremendous advance that convinces investors the worst is over. Recognizing that there is no sure way for any investor to predict the future and to discern a bear market rally from a true, bull market rally (in which we ultimately will set new highs for stocks), what should we look for?

May 3

Reuters - Warren Buffett told a record crowd at a somber annual meeting of his Berkshire Hathaway Inc that first-quarter operating profit fell and the company's book value declined 6 percent, as the recession hurt many of the company's businesses and investments. Operating profit fell about 12 percent from a year earlier to $1.7 billion, as most of Berkshire's businesses were "basically down," Buffett told an estimated 35,000 people at the meeting in downtown Omaha.

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Megan McCarthy liveblogging - the minute Buffett was asked about newspapers, everyone in the place was as attentive as a doberman on high-dose Adderall. Finally, Warren Buffett takes on the world's most important topic!
Sadly, what Warren had to say wasn't particularly novel: newspapers are in big, bad trouble.

Most newspapers in the United States, we would not buy at any price. They have the possibility of unending losses. 30 years ago, they were an essential business if you wanted to learn sports scores, news, etc. They were only essential to the advertiser as long as they were essential to the reader. That's changing, it's changing every day. And I do not see anything on the horizon that's changing.

Sell in May and go away. If I had any gains in the stock market (and no, I am not in it--my money is in cash for obvious travel related reasons) I'd be selling into the this bear market rally.

But hey, that's just me. Long live green shoots!

Trough has been passed, extrapolate with your eyes when the curve reaches 50:

Story is here: Finfacts Ireland

April 20 (Bloomberg) -- Companies with the most debt and lowest returns on assets are turning the biggest six-week rally in stocks since 1938 -- Bloomberg

"Sell these stocks", told sell-side analyst to me. February 16th. I really appreciate professional crooks in finance, not amateurs like Stanford or Madoff.

Or actually a lie which has been around a longer time and even repeated by some professional American economists.

The lie claims that European banks have much higher leverage than American banks. When I read this first time from propaganda stream I wondered how this could be true. It is not.

In the USA the accounting standard monster used is called GAAP. In Europe it is IFRS. GAAP assumes that netting of derivatives will be successful. IFRS is more conservative/ pessimistic. Usually the truth is what GAAP says, but during bad times the truth is what IFRS says.

The difference between these accounting standards leads to a very different leverage numbers being calculated. I wonder how this affects other European/American companies.

Michigan consumer confidence is now 61.9 . The lowest reading was in November 55.3

Thus the small downside seen in retail sales is somewhat temporary.

VIX is now "only" about 35. Numerous bears have burned their paws, noses and asses with the latest rally. That dip to 666 should not have ever happened. It was probably caused because of some insider information which didn't materialize. So, there is firm support at 667 or higher - LOL. The market has been mostly priced based on the insider information leaked from Washington.

Before this bear market rally, "everybody knew" that S&P 500 was going to 600. What "everybody knows" is of course always wrong in the stock market. If you didn't catch that I wrote "bear market rally", check your brain. I wrote earlier that a bull market in DAX had started with a typical bear market rally, which failed to turn down.

Do individual experts whose stock market forecasting records are good (bad) attract (lose) attention?

there is no relationship between the forecasting accuracy of and the attention paid to stock market gurus

CXO Advisory blog

This probably applies in many other fields too.

One of the great illusions of late 20th century finance was that banks were profitable. On paper - investment, commercial and mortgage banks appeared extremely profitable. The percentage of total S&P 500 profits that was attributable to financial companies rose steadily from 1980 to 2000, and by 2007 reached 40%, depending on how you measured it. This meant that two out of every five dollars of profit generated by America’s 500 largest companies came from the financial function. This, by the way, understated things, since it left out the quasi-banks like General Electric and GMAC.

The illusion comes from the fact that this paper profit was not the result of selling products that allowed businesses and consumers to be more productive and more profitable in their own right. What was really happening was that financial firms were extracting equity that had been built up over nearly a century by businesses and consumers. The financial business had become a predatory business, scavenging the land for pockets of wealth to convert into cash that would be funneled in part to the banks as fees.