Tuesday, April 28, 2009

Joseph Yam, Head of Hong Kong's Monetary Authority

Yam is the highest paid Central Banker in the world. His salary is about 7 times that of Bernanke and 3-4 times that of head of Bank of England,  European Central Bank and more than 4 times that of Japan's Central Banker. That much is well known.

What is less known is how he got to be paid so much. Elementary: he put on his compensation committee people whose businesses are regulated by the Hong Kong Monetary Authority he heads.    Second, he paid those below him huge salaries which automatically meant his own compensation had to be higher. It became a matter of how much higher, not whether it should be.

Instead of keeping the regulated at arms length, Joseph Yam embraced them for his self interest. And that was his worst and unforgivable sin.

Geithner's Wall Street Connection

There is no evidence Geithner or Summers is corrupt by any legal definition even though Summers had been paid handsomely by Wall Street for very little consulting work and speech making while he was president of Harvard, a curious side job for arguably the most prestigious academic job in the United States. Did he have insufficient work to do at Harvard?

However, as James Kwak, co-author of Baseline Scenario, a respectable economics blog, has so eloquently pointed out, Geither, Summers cannot but share many of values of Wall Street especially given their close connections to Goldman Sachs, the ultimate symbol of Wall Street culture. Read Here.

Those shared values played the central role in Geithner/Summers's bailout plan that is so biased in favored of the very bankers that had themselves helped manufacturer the biggest financial disaster since the Great Depression.

It is also instructive to note that Geither wants to kick out Vikram Pandit at Citibank as a belated acknowledgement that senior Wall Street bankers had behaved badly.

Yet, a cursory look at Vikram Pandit's cv shows he had been at his job for about a year, long after Citibank under previous tutelage of Bob Rubin, former Goldman Sachs co-chair and mentor of Larry Summers had done their damage at Citigroup.

How come no one at Goldman Sachs or Morgan Stanley have been singled out for a little public humiliatio, but Pandit who was never a Goldman Sachs alumnus?

Saturday, April 25, 2009

US is Not Sweden, of Course. It is Thailand

It gives me no pleasure to compare USA to Thailand, the land of crony capitalism, notorious for not providing a level playing field to entrepreneurs, big, small or starting. Its politicians and business interests are inseparable.

I wrote about that comparison weeks ago published in the Bangkok Post, the country's leading English language paper. (Here.) I didn't expect to be taken seriously. After all, I was no world famous Nobel laureate.

My view is no longer so "weird". Read Columbia's Joseph Stiglitz, Nobel laureate in economics and Simon Johnson, MIT professor's testimony at the US Congress Joint Economic Committee on April 21. (Here.) Enough to make you do a Peter Finch "I am mad as hell and I can't take it anymore" in that classic movie "Network'.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas, at that same hearing, weighed in with his thinly vieled criticism of the Geithner/Summers bailout strategy. Sober reading.

Saturday, April 18, 2009

Worse than Meets the Eyes -- US Unemployment

The national unemployment rate in USA is 8.5% at the end of March. Regional rates show an astoundingly bad situation. Note how some of the largest states are doing, especially California, the 6th largest economy in the world, were it a separate country. Data are from the Bureau of Labor Statistics, US Government. The national average is helped by the less disastrous "farm belt" states such as Iowa, Wyoming, Utah and others. But unemployment there is also rising. So more bad news maybe expected.

Table A.  States with unemployment rates significantly differ-
ent from that of the U.S., March 2009, seasonally adjusted
State | Rate(p)
United States (1) ...................| 8.5
Arkansas ............................| 6.5
California ..........................| 11.2
Colorado ............................| 7.5
Connecticut .........................| 7.5
Delaware ............................| 7.7
District of Columbia ................| 9.8
Florida .............................| 9.7
Hawaii ..............................| 7.1
Idaho ...............................| 7.0
Indiana .............................| 10.0
Iowa ................................| 5.2
Kansas ..............................| 6.1
Kentucky ............................| 9.8
Louisiana ...........................| 5.8
Maryland ............................| 6.9
Michigan ............................| 12.6
Montana .............................| 6.1
Nebraska ............................| 4.6
Nevada ..............................| 10.4
New Hampshire .......................| 6.2
New Mexico ..........................| 5.9
New York ............................| 7.8
North Carolina ......................| 10.8
North Dakota ........................| 4.2
Ohio ................................| 9.7
Oklahoma ............................| 5.9
Oregon ..............................| 12.1
Pennsylvania ........................| 7.8
Rhode Island ........................| 10.5
South Carolina ......................| 11.4
South Dakota ........................| 4.9
Tennessee ...........................| 9.6
Texas ...............................| 6.7
Utah ................................| 5.2
Vermont .............................| 7.2
Virginia ............................| 6.8
West Virginia .......................| 6.9
Wyoming .............................| 4.5

Friday, April 17, 2009

Anarchy in Thailand

Mr Sondhi, leader of the anti Thaksin "Yellow Shirts" was shot yesterday in Bangkok by an unknown assassin. His is only hurt. His driver is not so fortunate. He was shot several times and is in critical conditions. Read here.

The "Yellow Shirts" illegally occupied the airport last year with impunity earning Thailand the dubious right of becoming a member of the global club of banana republics. At that time, those anti-Thaksin Yellow Shirts suffered a dead whose funeral was attended by the Queen of Thailand.

The "Red Shirts", the pro-Thaksin mob, are not so fortunate. Military were called out in force to disperse the demonsrators. Two were shot dead. Over 80 were wounded. Leaders were put on "Wanted List" by the police.

The asymmestry of justice is now breeding lawlessness with exiled Thaksin widely believed to be funding the Red Shirts.

This cycle of political chaos is likely to continue as the institutions of democracy are being systematically trampled on by all sides.

Thursday, April 16, 2009

Lying for the Greater Good?

Paul O'Neill was the Treasury Secretary under the first President Bush.

Mr O'Neill told ABC News:

“So they all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing? Why didn’t any of the CEO’s, claiming not to need the money, have the courage to refuse?” ...

“If banks now claim they want to return the money because they don’t need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?”...

“Is the public ever going to have clear facts regarding any of the individual institutions?...

For months I have been calling for a public disclosure of all bank assets by rating class, along with facts showing the face value of so-called toxic assets along with the associated current book keeping value and associated reserve account. The public and members of Congress seem to be accepting of the idea that a handful of people in the administration and the Fed should do all of this in secret.”

I couldn't have said it better than he regarding the current Team Obama's refusal to be transparent and its favoritism towards Wall Street.

Tuesday, April 14, 2009

Thailand Country Risk Is Junk

Thailand's national debts are now rated as "Junk". Read Here.

What is really worrying is the increasing animosity of the rural vs urban (read Bangkok) and the poor vs rich.

Call him Evil, but the fact remains the ousted Thaksin did something concrete for the rural poor the traditional money bags in Bangkok never did. Apparently the rural folks do not believe the new government headed by Eton, Oxford educated Prime Minister Abhisit is any different. These rural guys are the hard core of the Red Shirts.

Blood in the Streets in Bangkok

The inevitable happened. The military has intervened. Read here. People are shot and wounded. The military claimed real bullets had only been used as warning shots aimed at the sky while non-lethal bullets "made of paper" only had been used against demonstrators!!! Read Here.

Easter and Thailand

Thaksin's Red Shirts mob disrupted the Asia Summit at the Pattaya beach resort near Bangkok to make a point. But what point? That the sitting Prime Minister is "illegitimate"? That Thaksin, now in exile, should be back in power?

Thaksin is not sitting idle abroad either. He has called for a military overthrow of the current civilian government. How ironic.

He was himself overthrown by the military a few years ago in a coup d'etat that was totally uncontitutional.

Thailand is now quite lawless. Some would say it had always been.

Constitutions come and go. The last government was declared illigetimate because some of the elected officials were found violating elections rules.

That's bad, of course. Except such rules had been violated by any number of officials on any side of the political spectrum and had always been part of the "accepted" price of democracy. Politicans had always gotten away with them as long as the principal leaders got elected fair and square. The Thaksin electoral victories had been monitored by foreign independent non-profit groups that do that stuff to promote democracy.

Oh yes, that does not excuse Thaksin of having been a blatant corrupt politican. Whilst in power, he looked after his own cronies and his alone, breaking traditional practice of being inclusive in sharing economic spoils with your political opponents. He was generous to the rural poor no Bangkok politicians had ever given two hoots about.

Thaksin was duly elected by a convicing majority -- twice. Those who couldn't stand him just couldn't dislodge him in fair and open elections.

As self-serving civilian politicians circle one another to grab or to remain in power, the country will continue to swing between factional struggles intervened by the military with a certain unmentionable power arbitrating from time to time behind a wall of secrecy. It is unmentionable for the law governing that particular topic is draconian, if not medieval. Bloggers and writers have found themselves behind bar in uncharacteristic haste not found in the rest of the economy.

Any expectation that Thailand would join the dynamic Asian tigers in the years ahead is highy imaginative.

Saturday, April 11, 2009

What The Banks Want

The banks want 91 cents on the dollar for some of the toxic assets on their books! Read here.

If those assets were really worth that much, there would not have been a financial crisis in the first place.
But of course this is only the offer price. If you were running a zombie bank knowing that the PPIP scheme will be bidding for those assets at bloated prices, wouldn't you be asking for the sky as well?

Wall Street Won 2.0

On April 6, I wrote "Wall Street Won" on this blog.  That line was not quite "mainstream".  Some would call it a '"leftist" viewpoint.

Now even Newsweek, as mainstream as you can get,  is saying so.  See here

Anyone who wants to see Wall Street reformed to save Capitalism from its abusers can only shake his/her head in dismay.  

Friday, April 10, 2009

US Congress Spoke

The Congressional Oversight Committee headed by Elizabeth Warren has issued a second report on the +/- of the ongoing financial bailout programs.

The report made in part these two points: a) the Treasury may be relying on too rosy an economic scenario to guide its $700 billion bailout... The success of the program after six months is “mixed.”; b) "All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets.” Emphasis added.

The Congressional Report is Here.

I have been arguing for sometime that keeping failed management on team Obama's bailout program is somewhat like keeping arsonists on fire department's payroll to help put out fires.

Perhaps arsonists do know how to help out since they would know how the fires were started in the first place.

Surely they are not the only ones who know how to put out a fire. More important, is it ethical to keep them around instead of putting them behind bars? Just asking.

The Fed: Don't Ask, Don't Tell

Efficient markets require information and transparency. The more we get, the faster the information is distributed to all the better it is for investors to make more intelligent decisions. We learn that in economics 101.

Regulators punish those who trade on insider information available to only a few. We also require quoted companies to publish their financial statements on a timely basis audited by reputable accounting firms. False information is a crime. Lack of disclosure is normally taken as a sign of troubles and markets mark down the prices of those who do not disclose much.

What is happening these days in Washington is mind-boggling. The Federal Reserve Bank is asking the banks not to disclose the results of "stress tests"which the Treasury secretary has so loudly touted as a central feature of his rescue operation. (Here.)

I have a better idea. Let's abolish the requirement that quoted companies must publish anything at all!

Krugman's "Boring" Banking Industry

Krugman's rumination on the rise and fall of the banking industry in today's New York Times is a mouthwatering teaser leaving the reader hungry for more. (Here.)

It is extraordinary that banking profits accounted for a third of all corporate profits in the last decade of the last century.

While "illusion" as Krugman put it was certainly a factor in the seeming success of that industry back then, there must have been a number of other important and fundamental factors at work. Unless we can understand better what those factors were, it is almost certain that the banking industry will again become the engine that drives corporate profits after we get out of this mess to begin another cycle of the same.

Krugman reminds his readers that Larry Summers ridiculed those who in as recent as 2005 warned against a financial meltdown. Summers was then the President of Harvard. At the age of 28 he was already granted tenure by Harvard. He was at the top of his game, wasn't he?

David Halberstam wrote that classic "The Best and the Brightest" in the early 60's as a satire of those with impeccable academic and intellectual credentials who guided the US into the disastrous Vietnam War. One wit called them members of the Harvard Alumni Association in Washington DC.

I have nothing against that great university. However, that institution does seem to breed hubris among many of its alumni who honestly believe they are the best and the brightest.

We maybe seeing history repeating itself in the current financial morass.

Wednesday, April 08, 2009

Financial Times and Geithner

Professor Willem Buiter of the London School of Economics wrote a critical column (April 6, 2009) on Geithner's latest inane statement regarding his supposed inclination to fire uncooperative Wall Street bankers. Here.

The technical shortcomings of the Geithner-Summers plan are now no longer news. However, Mr. Buiter and other critics remain circumspect on the sociological side of the Geithner-Summers plan: how much the economic team members of Obama share the same values, background and friendships with the Wall Street crowd and how much they defer to what Wall Street wants. Simon Johnson's article in the May issue of The Atlantic remains a classic.

Tuesday, April 07, 2009

Larry Summers, the "genius"?

Professor Summers' past is slowly but surely catching up with him.

In a widely read economics blog, Econospeak published online today, we learn of a financial analyst, Ms Iris Mack, fired by Harvard Management Company that manages Harvard's endowment for having written to Larry Summers, then President, back in 2002 warning him of the risks of derivatives the management company was getting into by fund managers who did not really understand those products. Ms Mack has a PhD in mathematics from Harvard.

Last fiscal year Harvard reported a decline of 22% in its endowment due to those derivatives blowing up. That story was published by Boston Globe: Here

We were also reminded that Summers was not forced out of his Harvard presidency only for his ill-considered comments on why women were not somehow constitutionally suited for scientific research. Rather he steadfastly supported his fellow Harvard academic, Andrei Schleifer, who had used his insider information as an advisor to the new Russian government to benefit from market trading under US government contract. Harvard had to reimburse USAID $26 million for Schleifer's fraudulent act.

Summers as Harvard's president not only did not terminate Schleifer's job at Harvard, he made sure he kept his tenure and gave him a prestigious endowed chair.

David McClintick, a writer at Institutional Investor, had written an exhaustive investigative report on that episode in Institutional Investor.

A Flawed Defense of the Geithner Plan

Professor Ricardo Caballero, head of the top ranked MIT economics department defended the Geithner Plan: click here.

He is making the same mistake in confusing "banks" with the current crop of Wall Street leaders.

Yes, we need bankers. But the world will not stop if the current group of "masters of universe" leave the scene, as they should do.

By kowtowing to these people, we are saying effectively we need the arsonists to help us put out the fire they helped set. What about the classic issue of "moral hazard" in banking?

Bank Centric World -- Arianna Huffington

I think Huffington is really smart. That Cambridge (the real one) educated lady with an accent is not someone with a PhD in economics can easily impress or intimidate with a few jargons. Her latest critique of the Geithner-Summers rescue plan, however, is almost on the mark. Click here for the whole essay on her homepage.

Her thesis boils down to this: Team Obama's manic obsessive "idea fixe" regarding banks' centrality in the economy is fundamentally wrong.

To her, that "cosmology" fogged their view and made them write huge wasteful checks to support the banks come what may.

I believe banks are central to the economy for they channel savings to investments without which the economy would indeed stop growing.

My problem with Obama's cosmology is that their world appears to evolve around the very same senior management people who were central in expanding the bubble, in profiting from the bubble personally while taking their firms to ruin.

The defenders keep saying we need bankers to help us out. To which I say, "yes, we do, but not the same people, mate".

Wall Street has a substantial number of talented professional not responsible for the mess we are in. They are perfectly capable of stepping up to take over the management of their own firms.

Obama has forced the resignation of Rich Wagoner at GM and has correctly ordered the restructuring of GM's irresponsible board of directors. Nothing of this sort has happened on Wall Street. Why? Cosmology has something to do with it for sure. There must be something else at work here. But what? Read my take here: Click here.

Wall Street Won

The public is getting more facts and faster regarding the links between Wall Street and Obama's economic team leaders.

New York Times has documented how Larry Summers was receiving payments from Morgan Stanley, Goldman Sachs, Citigroup and others which have received Federal aid. Moreover he was richly rewarded by D.E.Shaw, a large hedge fund. Click here for the story.

All payments were disclosed and were legitimate.

Obama's Chief of Staff Rahm Emanuel was employed by a Wall Street investment bank where he worked for 30 months and was paid more than$16 million. He had no prior experience as a financial professional. The payment was disclosed and was legitimate.

Tim Geithner's deputy was a Goldman Sachs lobbyist.

So what?

The public officials and those they are helping are all part of the same fraternity sharing common values. In the 3 cases cited above the officials were recipients of monetary rewards they in their careers could never ever make except for the generosity of Wall Street firms that have all since needed Federal (taxpayers) help to avoid financial collapse.

This calls into question whether the public servants were acting on behalf of the best interest of the public at all times or did they ever put the interests of those Wall Street above everything else.

For a devastating analysis of the elite in charge of public economic policy and those who are benefiting from it, read MIT professor Simon Johnson's article in the May issue Atlantic. Click here.

Geithner's Gamble

Jeff Sachs at Columbia has come up with an additional cautionary note on how Wall Street could "screw" the taxpayers under the Geithner Plan.   Click here.

Monday, April 06, 2009

Afghanistan -- Another Vietnam?

Afghanistan is NOT Vietnam just as the US is not Sweden. Have I said anything meaningful?

Defenders of Obama's new "surge" in Afghanistan as well as defenders of Geithner's Xmas gift to Wall Street avoiding temporary "nationalization" of banks deliberately obfuscate the relevant issues by drawing seemingly nonsensical comparisons.

What are the relevant issues?

Let me just start with two such issues that should not be controversial irrespective of one's political sympathies.

1) During the Vietnam War, the US had to constantly confront the issue that their ally in the South Vietnam government could not motivate its troops. US had to inject training, manpower, battle field leadership, hardware and huge amounts of money into the S Vietnamese military to keep it fighting. In the end the US had to send in half a million of ground troops to fight the war on behalf of their ally against the enemy -- the Vietcong's and later the Vietnamese troops from the North.

While the enemy also received military aid from its allies -- China and the Soviet Union, they never seemed to have a morale issue! Quite the contrary despite the fact that the communist hardware was vastly inferior to what the US possessed. They lived in primitive conditions without the animal comfort US money bought for the South Vietnamese troops.

We are seeing history repeating itself, alas, in today's Afghanistan.

The Talibans, the tribes, Al Qaeda do not seem to have a morale problem among their fighting men. They live in primitive conditions. And their military hardware is hugely inferior to what their enemy (that's NATO) possesses.

In fact they seem to be holding pretty well against a technologically superior force. 17th century still enjoying a military edge against 21st century.

Let me declare myself.

I think the Taliban's attitude towards women, education, religion is despicable. I think Al Qaeda is evil. Al Qaeda needs to be defeated. Taliban's should be avoided like a plague.

I also think the "legitimate" Afghan government in Kabul is also despicable. It is the wrong ally for the civilized world. The Karzai government is spelled "disaster waiting to happen."

The brother of the president is a well-known drug lord and is perhaps the single largest supplier of opium to the world with the US as the largest consumer. Everyone in Afghanistan knows it and is therefore unimpressed by the democratic rhetoric coming out from any Western leader.

Back in the Vietnam war days the US government also helped the international opium trade to gain support of the hill tribes in the Golden Triangle to fight the Vietcongs. James Bondian airline: Air America, a CIA company, transported opium from inaccessbile hills in that Triangle to facilitate that trade.

The result? Massive influx of narcotics into the US. Did that help the war effort? Yes. But in favor of the wrong side!

2) The corruption in Kabul and those allied with the US is rampant and is fueling popular resentment agains the "legitimate" Afghan government.

No military surge can really eradicate that.

The more US invests in that government, the more it wants to avoid defeat and the more money it will pull into Afghanistan which will further worsen official corruption.

Just as in the case in S Vietnam, more money would disappear into corrupt Afghan officials. Incidentally that has happened in Iraq as well.

Yes, Afghanistan is not Vietnam. But there are some serious issues that are common to both wars that are extremely troublesome to the Nato effort there. Any wonder no countries other than the UK agreed to send combat troops to help out Uncle Sam?

Many non US military experts have written that the effort would be futile unless the government in Kabul is not what it is -- just as in the case of South Vietnam.

Replacing one by another is also tricky. In Vietnam JFK decided President Ngo, a corrupt Catholic leader in a Buddhist country, had to go. CIA assassinated him. Then came a serial change of unsavory and equally corrupt leaders in the capital of South Vietnam - Saigon. It is now renamed Ho Chi Minh City.

Sunday, April 05, 2009

Bankers vs Economy

Distinguished economics professor at Berkeley, Brad deLong, in his famous blog, defended Geithner's Public-Private Investment Program (PPIP)  saying: "Do we want to revive the economy or do we want to punish the bankers?  I don't think we can do both."

Geithner's much criticized PPIP,  by many analysts including myself,  is an amazing Xmas gift to the "bad guys" on Wall Street and to an exclusive, privileged group of Wall Street investors who get to buy toxic assets largely with taxpayers' money with minimal downside risks but with substantial upside rewards.

Professor deLong's defense is disingenuous because the choice is not black and white.  

We are not punishing "bankers" in their aggregate, only those policy setting senior managers who oversaw the demise of Wall Street.  There are plenty of bankers who can stop up to the plate to run their respective firms if only they were given a chance.  

Obama did fire the chair of GM and demanded the board of GM to be replaced.  Yet, he did not do any of this for Wall Street firms receiving public aids.  On the contrary, he went out of his way to invite the 20 odd financial leaders to the White House asking for their "help" to  get out of the crisis.  He didn't do that for Detroit.

Asking for Wall Street help is roughly equal to asking the arsonists who had set fire to the building to help the fire department to put out the fire. 

Saturday, April 04, 2009

Wall Street and the Obama team. Lawrence Summers, a top economic adviser to President Barack Obama, was paid about $5.2 million in compensation from hedge fund D.E. Shaw during the past year, the Wall Street Journal said on its web site on Friday. In addition he was a frequent speaker at various Wall Street functions receiving high speakers fees.

Obama's chief of staff, Rahm Emanuel, was paid over $16 million for 30 months of work for a Wall Street investment firm. He had no prior experience as a financial professional.

The deputy of Tim Geithner was a senior executive at Goldman Sachs.

Obama's erstwhile advisor, Bob Rubin, was co-chair of Goldman Sachs and chair of Citigroup before he left in a hurry to avoid more media attention on his $150 million pay off and his supervision of Citi's demise.

Tim Geithner himself worked for Kissinger Associates, a advisory firm to many of the large Wall Street firms.

The closeness of Wall Street and Obama's Administration is surely a relevant factor in understanding how the team shaped its rescue package that is skewed in favor of Wall Street firms.

Friday, April 03, 2009

Did we hear a Geithner apology?

Washington Post has a long article today (April 3, 2009) on Geithner's role in the financial crisis before he became the Treasury secretary. I bold faced certain sentences for emphasis.

The article said in part: "... Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued.

That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.

A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office.

The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews.

Geithner defended his tenure as New York Fed president in an interview last week. He said he had been "deeply concerned about risk in the system" and worked assiduously behind the scenes to cajole banking institutions to do more to identify weaknesses and protect the financial system. But he also took some responsibility for falling short.

"These efforts to improve risk management did change behavior, but they did not achieve enough traction," Geithner said. "We're having a major financial crisis in part because of failures of supervision."

Mark to Market

Wall Street scored again today by getting the Securities & Exchange Commission (SEC) in the US to suspend its mark-to-market accounting rule. This allows the banks to carry their toxic assets, and for that matter, any questionable assets, at just about any costs they wish. This further allows the banks to sell their toxic assets at artificially high prices to the new Public-Private Investment Program under the Geithner's plan. Shareholders of banks, bank managements and fund managers who buy those toxic assets would gain, taxpayers lose.