Crony Capitalism V2

Wall Street has been shaping Geithner/Summers's financial rescue policies. This much is well-known. But the brazenness with which they do so and the docileness with which Geithner et al allow the Wall Street chieftains to walk all over Washington is getting a little obscene.

Here is the latest chapter on how Wall Street is effectively playing with public money in full view, buying up each other's toxic assets after getting bailout $$ to bid up prices of such assets which they couldn't sell to unconnected parties at unrigged market prices. Read this from NYU Professor Nouriel Roubini's famous website:

"In order to persuade the private sector to participate in the PPIP, the government is engineering solutions that sidestep the strings attached to direct government aid, in particular executive pay restrictions. Moreover, reports show that banks are planning to bid on each other's assets to drive up the price and take advantage of the subsidies, while the FDIC is mulling to let banks share in any upside if they participate in the program as Treasury wants to keep participation voluntary. Increasingly, questions arise about the legality of this approach starting with AIG's full bailout of counterparties with taxpayer money. Given the limited TARP buffer left ($150 billion after PPIP) and likely Congressional opposition to new TARP money, the administration is under pressure to restore the banking system with the help of private capital if it wants to avoid anything resembling nationalization. This puts Wall Street in a position to dictate the terms..."

Racial barriers in USA

President Obama is doing one thing really well. He is systematically tearing down the barriers in USA against "people of color". What an euphemism.

Obama has nominated Sonia Sotomayor to be a Supreme Court Judge who calls herself a NewYorkrican.

The cognoscenti will recognize that word to mean a New Yorker whose origin was Puerto Rico, a Spanish speaking Latin society and an almost US state.

Ms Sotomayor, a graduate of Princeton and Yale Law School, will be the first American of Hispanic heritage to sit on the Court if confirmed by the Senate.

One by one, Obama is showing his country "color" is no longer a relevant issue in USA. Well done.

Now, could you please fire Geithner and Summers for having taking too good a care of their buddies on Wall Street in their rescue package you have approved?

That's Crony Capitalism, don't you know?

Whither the Republican Party in USA?

Every thriving democracy needs at least one strong, intelligent opposition party.

USA, though a young country, has the longest democracy in history. The 2 party model (Democrat and Republican) in the US, Conservative and Labor in the UK, has been a shining example of how a democracy can work without splintered by multi-party chaos. Witness Italy.

That's why the decline of the Republican Party into becoming a fringe group representing a narrow electorate consisting mainly of white, Christian and ultra-nationalists, and often racist, is an alarming development.

The following two articles are worthy of your time. Paul Krugman in the NY Times is here and the Bloomberg article on former Secretary of State and retired General Colin General Powell is here.

It is sad to see the Party of Lincoln, Eisenhower and the Rockefellers, symbols of fiscal conservatism, cultural tolerance, political moderation abroad has descended into a totally unrecognizable party of intolerance.

Many traced that change to Richard Nixon. While a brilliant international tactician, he brought a dark side to US politics with his many brooding Freudian insecurities and "hatred" against his domestic "enemies".

Ronald Reagon was not a "hater" the way Nixon was. But he too had a black and white view of Democrats and Republicans; the tax cutters (GOP) vs the tax and spenders (the Democrats).

In fact under Nixon and Reagon, US began its march towards becoming a larger and larger debtor country.

Fiscal conservatism, long associated with Republican principles, was replaced by reckless tax cutting and spending at the same time. The worst is George W Bush, the last president, in economic policies and in his reliance on fundamentalists in USA to assume a key role in domestic politics.

US becoming a Third World Country?

I have been arguing that "crony capitalism" USA is damaging the country in public/private sector governance and credibility around the world.

Now, the other shoe is about to drop. USA is poised to lose its AAA bond rating as its national debt shoots up from a small single digit as a percentage of its GDP to a double digit in 2009-2011.

The Obama Administration is saying budget deficit will soon come down a couple of years out. No economists outside of the Administration buy that scenario. A very sad situation for US debt for as long as one can remember is the Platinum Standard for sovereign debt. Read the latest from Bloomberg News here.

Crony Capitalism USA

My view on "Stress Tests" distributed by Project Syndicate and published in the Japan Times, May 19, 2009 is Here.

Don't Fight The Fed

That old adage about "not fighting the Fed" is based on a simple but solid fact: ample liquidity translates into a strong stock market. And a strong market is what we have. The talk of a "bear market rally" is correct ONLY if liquidity was not a factor.

Yes, the general economy is still a mess. But the amount and the speed with which the Fed and other Central Banks are injecting liquidity into the global economy all but ensures a strong stock market. Even the length of the global recession is likely to be shorter than expected. Instead of a long flat bottom U shape recovery, we are likely to see one resembling a moderate V.

The Rise of RMB and the Fall of US$?

The latest hot topic in the press is the potential assumption of China's RMB as a reserve currency, perhaps even replacing the US$ as the world's global currency. Roubini wrote an op ed piece in the New York Times. Successful speculator Jim Rogers is "sure" the dollar is finished to be replaced by RMB.

The logic goes like this. The US$ assumed its central role after WWII as the monetary equivalent of the Sterling when Britannia Ruled the Waves. One empire fell, a new one took its place. Money went with the power. They went hand in hand, in fact. But Pax America is also over as it had squandered its resources.

Empires always fell when their economies declined. America's economy has seen its best days. The reasons are well-known. Insufficient savings by both the public and the private sectors. Insufficient investments. While hi tech is still alive and well in Silicon Valley -- but America is no longer the only place where hi-tech thrives -- not much else is.

Basic infrastructure in America is a sham. Education is a scandal, apart from the tiny elite circle of high schools and universities sought after by the world's elite families. The national average of a number of measurable indicators has been falling over decades compared to a large number of foreign countries.

China on the other hand is a big saver, a big investor in infrastructure and is aiming to catch up and overtake America. The drive and the energy of a nation starved for global recognition only makes America look tired.

The latest Wall Street bubble from years of incompetent national governance and less than honest private sector governance is just another sign of a nation lost in its own self-absorbed admiration of a past gone.

Question: is RMB ready to replace the US$?

There are signs that the Beijing government is keen to do so. But they are not in a hurry because they know more than outsiders that China continues to have a number of serious structural issues to deal with.

China's domestic legal structure exists more in name than in execution. Judicial independence is years, decades away from reality. The ranks of world class corporate management is still thin. Corporate governance is still subordinate to national policies as many senior managers are proxies of the ruling Communist Party.

The currency, increasingly credible, is years away from being a convertible currency. Its convertibility itself depends on the strength of its legal structure.

Can the currency of an authoritarian country assume the role of a global currency? It would indeed be a first if it did.

More on the RMB in future postings.

Stress Tests Meet Saturday Night Live (SNL) on NBC

SNL in a venerable American institution that has bred numerous successful comedians. Among them are Eddie Murphy, Chevy Chase, Tina Fey, Bill Murray, Dan Ackroyd, Adam Sandler and the late John Belushi and the late Gilder Radner.

The show also features VIP guests that have included not just Hollywood celebrities but many high government officials and public figures. Senator Obama, Clinton, Al Gore among others have done so. Late President Gerald Ford opened the show once. Others fight to be on it because the show is one of the most watched in the country.

Its satire of Obamamania during the last presidential campaign was cited by his then opponent, Senator Hilary Clinton, as "evidence" of media bias against her. Its satire of officials often had the effect of a "kiss of death". You don't want to be the target of its satire.

In this context, Tim Geithner, whose "stress tests" have been panned by many analysts, including this one, would be having sleepless nights because SNL has just done a skit on that very subject. Watch it here.

Stress Tests and Buying Bonds

The stock market behavior of late smells of "insider trading".  It seemed obvious many already knew what the Stress Tests "results" would be.

A number of highly respected financial professionals have commented on how non-rigorous the tests were and how incomplete the released information was.

Geithner managed to create the virtual reality that the banks under tests of "stress" needed only x amount of money.  Senior bankers rushed to say a) they would be able to raise it to satisfy government criteria; b) the tests were overly "pessimistic" while clearly happy that the government had given them a pass, and c) they couldn't wait to get the government out of their hair so that they could continue their way of paying themselves.  

Isn't it curious none of the Wall Street bankers nor the boards of directors to whom senior management was held accountable had been told to take a walk the way Detroit executives had?  

Crony Capitalism is not just an Asian thing in some third rate developing country, is it? 

I have long argued Geithner/Summers' approach to avoiding a total meltdown was not to solve the fundamental problem of getting rid of toxic assets, changing Wall Street's out-of-control management and looking after taxpayer's interest.  

They bought Wall Street's argument that nothing was fundamentally wrong except confidence using in effect FDR's well-known homely:  There is nothing to fear except fear itself.  

More specifically, the toxic assets on the banks' books were, as claimed by bankers, worth a lot more than what they were because the "market" then was wrong in marking those assets down as reflected in the tanking of banks' shares on stock exchanges.  To this day we have no idea how much of that toxic stuff the banks continue to hold.

Geithner/Summers devised the Stress Test program to allow the banks not to have to mark to market their toxic assets.  Meanwhile Bernanke on the side was pumping trillions of money and credit commitments to flood the market with liquidity driving interest rate to near zero.

With money coming out of one's ears, so to speak, a number of things happened:  stock markets took off as money became "cheap".  Bond prices declined as inflation fears have taken hold.  Oil and Gold are on the rise.

The way forward is to put money in inflation hedges: gold, oil, other commodities and short bonds.  Stock markets will rise but watch out. This Geithner/Summers plan can be a trap.

Stress Tests and Cheating

Imagine for a second you were back in university and had taken a final. The professor who was grading your paper called you up to discuss your grade before the grade was released.

You got a chance to argue with him or her about the fairness, indeed, even the accuracy, of that grade. In that process you got a chance to "explain" what you really meant in this or that paragraph the grading professor had misinterpreted.

This in a net shell is the meaning of the delayed release of the Stress Tests designed by Geithner/Summers to find out how healthy the banks have been. No one has analyzed and criticized it better than Arianna Huffington. Read here.

Wall Street and Stress Tests

Warren Buffett said the other day what was pretty much an open secret among financial professionals.  Geithner's stress tests of banks' capital adequacy were irrelevant to intelligent investment decisions even though Buffett's comment was specifically related to Wells Fargo Bank, his second largest holding in Berkshire Hathaway.  Read Here.

Geithner's "stress tests" served Wall Street on these grounds: first, these tests were a delay tactic  signaling to the nervous market the government was to "uncover" the true financial conditions of the banks.  The subtext was until the truth was revealed there was not reason to panic.  Second, the tests had enough ambiguity due to a lack of transparency to allow the banks themselves not to panic for it appeared those tests were not the same as "mark to market" discipline a free market demands.  Lastly, during this holding pattern while the tests were being conducted, Geithner's PPIP program was put in place to boost the value of toxic assets to further help the banks to pass those stress tests -- whatever they were. 

We still do not know how those tests were carried out, what assets did they apply do and indeed we read there is much internal government squabble as to when or how much the results should be released to the public.

A royal mess. 

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?

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.

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

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.

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.

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.