Market Talk

The “Republican Commissioners On The Financial Crisis Inquiry Commission” have released their whitewash breakaway report on the causes of the financial crisis. It’s one to print out and read on the way home.

They leave no doubt about where they’re coming from; they state it at the very top of the cover page of the 13 page report. The “Republican Commissioners,” they declare. This is a 100% partisan report, make no bones about it. So it is a 100% political screed. So it has no interest in furthering the cause of the truth, but will be concerned solely with furthering political aims.

Now, they don’t exactly come out and say that not regulating derivatives, or wiping out Glass-Steagall, or taking the leverage caps off Wall Street, were direct causes of the crisis. But by not so much as even mentioning those causes, the paper leaves the impression that there was one main cause of the housing meltdown and credit crisis, and it was government housing policy.

What’s most remarkable about it is the mindset it illustrates. To these four men — Bill Thomas, Keth Hennessey, Douglas Holtz-Eakin and Peter Wallison — the banking industry played no discernible part in the financial crisis. None. They were just caught in the flood like the rest of us. It’s like bizarro-world. I ought to make an xtranormal movie out of the whole thing.

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The Financial Crisis Inquiry Commission has seemed like an afterthought for some time now. It was especially telling that Congress didn’t even wait for the board’s findings before passing its financial-overhaul bill. There have been one or two moments that were television-worthy, but overall the group has worked in what can charitably be called a state of benign neglect. Nobody in Washington really wanted anything constructive to come out of this effort.

But the latest episode, in which the board’s four Republican members are publishing their own breakaway findings, really brings the point home that the entire thing has been a waste of time, and that the ultimate cause of the housing/credit/banking crash, while painfully obvious to anybody with an even slightly objective lens, is something that just isn’t talked about down in DC.

The bank-lobby apologists would have you believe it was the CRA, or government policy toward housing via Fannie Mae and Freddie Mac that caused the crisis. That is absolute horse manure. The causes of the crisis were, in no particular order: scuttling Glass-Steagall, not regulating derivatives in 2000, Greenspan cutting the fed funds rate in the early 2000s (ultimately to 1% in 2003) and leaving them low for too long, and the SEC’s decision to take the leverage caps of Wall Street banks in if memory serves correct 2005. Those are the four biggies, off the top of my head, and three of the four center on a specific philosophy: deregulating the financial system.

The Times reports today that:

The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis.

The release of the 13-page document is an indication of a major partisan division within the 10-member Financial Crisis Inquiry Commission, which was required to deliver its report on Dec. 15 but has pushed that deadline back to January.

This is pathetic. These jokers spent more than a year and I don’t know how much money, and in the end they’re no nearer any agreement than the left/right panelists on a Sunday morning talk show. What was the point of this whole exercise? It wasn’t to uncover the truth; that had come tumbling out in the panic of September 2008. Let’s be for real; Congress didn’t need this commission to find the truth. The truth smacked knocked them on their backsides the weekend of Sept. 12, 2008.

What it needed the commission for was to whitewash the truth, because the people who pay the bills in Washington (incidentally and largely the same people responsible for the crisis) want no part of the truth. They want business as usual.

This was never going to be a modern Pecora Commission. But it didn’t have to devolve into a total joke. Yves Smith over at naked capitalism goes pretty apoplectic over it, and rightly so:

The intent is pretty transparent: to discredit an effort at fact finding into the roots of the crisis, what was hoped to be a Pecora Commission, by making it appear partisan and launching an alternative narrative to muddy the waters. And the reason is clear. Even though FCIC is certain not to have the same effect that the Pecora Commission did, of discrediting major financial services industry figures and exposing various forms of chicanery, it appears that even lesser forms of criticism of the banksters must be sandbagged (the bizarre part of this drama is that at least some Democrats and very selectively, Republicans in office are willing to call out the predatory, extractive behavior of the large banks. But no one has the guts to buck an industry that is a major paymaster in a very serious way.)

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy, In reality, both the runup to the crisis and its aftermath were on of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

Over at The Big Picture, Barry Ritholtz does a big “what if” on the 2008 financial crisis, positing an alternate-universe timeline in which the banks were bailed out. It reads like one of those Star Trek episodes where Kirk and Spock find themselves in a universe where Edith Keeler never died and everything is different.

Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history);  3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

I won’t spoil the fun for you, head over there and read the whole thing, it’s well worth it. If you’re a corporate bond-holder or creditor or counterparty, you’ll be glad Ritholtz wasn’t part of the White House cabinet. If you’re a taxpayer, you’ll wish he had been.

Incidentally, doing this little thought experiment, putting the two time lines side-by-side, reveals the one huge difference between what should have been and what was that led to our current reality: in Ritholtz’s experiment, there is no kleptocracy, no corrupted political machine being crudely wielded by the private sector for its own benefit. No string pulling.

All the bailouts, all the intervention was done in the name of the people, but make no mistake, it was done to save private players from the consequences of their own bad decisions. People innately understand this, but have no way to “fix” it. What’s done is done. That’s led to a lot of lingering hostility, which isn’t likely to go anywhere until somebody figures out how to focus it. Which, come to think of it, I believe the tea party is doing pretty well right now.

- A wider probe of Wall Street may ease the heat on Goldman. “If everyone is guilty, nobody is guilty,” Joe Weisenthal writes at Business Insider. “That principle doesn’t apply in a legal sense, but we think it applies in a reputational sense. There’s no good reason to leave Goldman for some other firm, if in the end their behavior was very similar.”

- Determining what caused the financial crisis has taken on a shift in narrative, Mark Thoma notes at Economist’s View. “Fraud, deception, and other questionable if not illegal behaviors are beginning to take on a larger role in the story of what happened to bring about the problems in the financial sector.”

- Gold surged to another all-time high yesterday as fears of EU’s bailout plan represents another “step down the road to severe inflation or debasement of paper currencies, or both,” Tom Petruno says. “And after last week’s stock market ‘flash crash,’ prudence is all the more in vogue.”

- Initial jobless claims dropped 4,000 to 444,000. The four-week moving average also ticked lower to 451,000, a six-week low. But “for an economy that has begun creating jobs again, claims should be running below 400k at this point in the recovery and thus implies that this recovery is not your typical one,” writes Miller Tabak equity strategist Peter Boockvar.

- Claims have been bouncing around 450,000 for much of 2010, and “it’s still unclear if claims will break through this floor any time soon,” James Picerno says. Still, two months of job growth have renewed hope, suggesting either jobless claims will finally begin to tail off or the rebound in nonfarm payrolls will stall out. If that happens, investors should watch out.

- Adobe (ADBE) hearts Apple (AAPL) in its latest newspaper ad. And it was only a matter of time before the Adobe founders jumped into the Apple-Adobe-Flash fray. They published their own essay about the importance of open standards on a new section of Adobe’s website dedicated to choice.

- Recovery chatter is running rampant, especially with retail sales up and the labor market improving. But Mike Shedlock, an investment advisor for SitkaPacific Capital, still isn’t convinced. “Believe what you want, but I refuse to believe a recovery is in progress when federal income tax collections are off a half trillion dollars, and state after state is still showing declining revenue,” Shedlock says.

- Rumored BlackBerry tablet doesn’t sound so hot. Boy Genius Report confirms the device will be 9.9″ large and should be ready for a December launch. But “RIM employees have privately voiced their frustration to us regarding this initiative,” BGR says.

- “It’s not a promising sign for RIM if its own employees are thinking the BlackBerry tablet will be DOA,” Jay Yarow writes at Silicon Alley Insider. “Overall, the tablet sounds pretty dull and uninspired.”

- “History books will one day describe this stretch as one of the most interesting and important junctures ever for the financial market construct,” Todd Harrison writes at Minyanville. “The script is still being written, which is why we need proactive stair-step solutions rather than reactive blame and haphazard policy. I’m not exaggerating when I say the future of free-market capitalism hangs in the balance.”

I thought I’d get through today without writing or talking about Greece, but it just ain’t gonna happen.

Edward Harrison at Credit Writedowns thinks the Greek story will ultimately prove to be a tragedy:

So, you have Greek politicians threatening to go cap in hand to the IMF, involving the Americans and humiliating the EU, if the EU doesn’t bail the Greeks out. Then you have the Greek Prime Minister denying this and telling the other Europeans they must put the loaded gun on the table this week or the debt markets will implode. Meanwhile, the response from the Germans is ‘Nein.’  In fact, Angela Merkel wants to retroactively change the eurozone criteria so that the Greeks can be excluded from the eurozone if they continue to deficit spend. This doesn’t sound like a lovefest of Friede, Freude Eierkuchen to me. More likely, we have the makings of a more severe crisis.

I had to look up that “Friede, Freude Eierkuchen” reference. From a translated Wikipedia page:

Peace, joy, pancakes today is a phrase that describes a superficially intact, seemingly peaceful, carefree facade of a society. It is often used to express that someone does not see problems as obstacles, but that his life continues exactly as before.

Things are moving fast on this front, and while it’s hard to just imagine some disaster where the eurozone splinters and Greece sinks into the sea, it’s not impossible to imagine, and quite a few sober observers are expecting just that.

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- Two big anniversaries on the Street this week – tomorrow is one-year mark since Dow bottomed and Wednesday marks 10-year anniversary of Nasdaq Comp’s all-time closing high.

- Three vacancies currently exist at the Fed: two governors and a vice chairman. To find the proper candidates, FusionIQ CEO Barry Ritholtz offers his own “litmus test” for potential nominees.

- “This never was just a financial crisis,” Interfluidity blogger Steve Randy Waldman writes. “It was, and is, an economic and political crisis, and we are only a very short way down the path towards resolving it.”

- Some financial institutions are dangerously becoming “too big to save,” former IMF chief economist Simon Johnson says.

- “It may take longer to observe the full effect of continued mortgage delinquencies and foreclosures, but we are at about the point where the data would depart from the market’s ‘all clear’ expectations if credit pressures are likely to resume with force,” John Hussman says.

- James Hamilton considers a new financial conditions index that attempts to combine the information of 44 separate series for predicting real GDP growth.

- Government can and should create jobs, Mark Thoma says.

- Tim Geithner’s financial plan is working – and making him very unpopular. “We saved the economy, but we kind of lost the public,” Geithner tells The New Yorker. But MarketBeat wonders if Geithner’s stock is set to rise.

- Nasdaq Comp trading above pre-Lehman levels.

- Google’s testing a new TV programming search service with Dish Network, which runs on Android-powered TV set-top boxes and allows users to search content from Dish and the Web, WSJ reports.

- So much for all the drama surrounding ABC’s blackout on Cablevision. Academy Awards captures biggest audience for ABC in five years.

- Deflationary winds kicking up? Core CPI slips into negative territory for first time since 1982. “It’s hard to overlook the fat that negative monthly readings for this data series are extraordinary rare,” James Picerno says. “For the sake of economic stability, let’s hope it stays that way.”

- With Goldman Sachs’ (GS) image under attack, spokesman Lucas van Praag’s tough talk has only served to “alienate potential allies and enablers in the press and project a supercilious institutional arrogance which only serves to confirm the unflattering portrayals offered up by the firm’s detractors,” the Epicurean Dealmaker blog says.

- “High volatility in sentiment is a clear sign of utter confusion on the part of market participants and creates a landscape that is ripe for dramatic moves in either direction,” the Pragmatic Capitalist writes.

- Fed’s discount rate hike has more to do with technical reasons than a policy shift, former Dallas Fed president Bob McTeer says.

- Barclays scooped up a lot of talent throughout the financial crisis, according to LinkedIn data.

- Matt Taibbi’s latest account of the financial crisis misses one key point that no one wants to talk about: we could be in a depression without government intervention, Andrew Leonard writes. Still, reflecting on current bank profits, banks’ resistance to regulation and inability of government to do anything about it, “I’m beginning to come around to the view that maybe it would have been more effective to just blow everything up and start all over.”

- Deal activity has gotten off to a sluggish start in 2010, but investment bankers remain busy keeping up with secondary offerings, DealBook reports.

- Bottom line to this economy recovery is job growth. “The good news is Washington is working on it,” S&P’s Howard Silverblatt says. “The bad news is Washington is working on it.”

- Record bank profits may be tough to come by as the Fed starts raising rates.

- Tiger made the world stop from 11:00 to 11:15 this morning. How’d he do? Bill Simmons says the press conference was “a borderline train wreck.”

From WSJ: The Dow's performance one year ago.

It’s hard to believe this is the one-year anniversary of Lehman’s collapse and the financial crisis that ensued — especially since not much has changed to prevent another crisis from happening again.

The government’s decision to let Lehman fail has widely been regarded as a huge mistake that triggered the crisis, but NYT’s Joe Nocera argues Lehman wasn’t the cause of the crash, but merely “the spark that turned a serious subprime crisis into a financial meltdown.”

Increasing risk, leverage and reliance on easy profits were the real causes of the crisis.”If Lehman hadn’t brought the whole thing down, something else would have,” Nocera says. “It was pure dumb luck that Lehman went bust.”

There’s no denying how bad the outcome was at Lehman, but saving it meant some other event would’ve ultimately served as the spark for the crisis. “And the likelihood is that that spark would have been far more dangerous,” Nocera says.

The Dow dropped more than 500 points after that fateful weekend when Lehman filed for bankruptcy and Bank of America (BAC) scooped up a teetering Merrill Lynch. But only a few days later stocks recovered a bit on hopes that the government would step in and backstop the financial system.

Of course that’s exactly what ended up happening, with the $700 billion TARP plan. But not before the real panic ensued when the Dow dropped 777 points on Sept. 29 after the House initially rejected the TARP plan.

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We're getting rescue financing - without the government's help!

We made the argument last week that the government made the right move not bailing out CIT Group (CIT). That decision looks even smarter now that the lender is reportedly close to getting a $3 billion rescue package from its bondholders.

The deal should keep CIT out of bankruptcy court, at least in the short-term, WSJ reports, and it’ll help the lender pay off $1 billion in debt due next month.

From The Journal:

The deal, which was reviewed by CIT’s board Sunday night, charges CIT high interest rates, and it doesn’t permanently fix the company’s long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders’ losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.

The deal, which the Journal says is expected to be formally announced later today, is “spectacularly good news” and marks a “major turning point in the history of the financial crisis,” Reuters blogger Felix Salmon says. It’s good for small and medium-sized businesses, CIT’s shareholders, CEO Jeffrey Peek and CIT’s bondholders, he notes.

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Blogs are buzzing about the role Hank Paulson played late last year in preventing the financial system from collapsing.

WSJ’s Evan Newmark stirred the pot yesterday with a blog post saying it’s time to enshrine Paulson as a national hero. He applauds the TARP for stabilizing credit markets and saving the banks “at the lowest possible cost.”

“TARP was the beginning of the end of the crisis,” he says.

Many deemed Paulson and the TARP as failures, especially after the Obama administration took office. But Newmark argues Tim Geithner hasn’t exactly really done anything significantly different from the previous administration. 

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