Market Talk

Reports are that European leaders are huddled in one big, nonstop, weekend-long emergency meeting, trying to figure how they’re going to squelch the panic that is growing in what at this point is starting to look very much like another frightening spike in the credit crisis that threatens to plunge the globe right back in the drink.

I’ll be honest with you, this is a time to choose words carefully. But honestly speaking, this is a crucial, critical point for the entire globe. If European leaders don’t undertake some massive action now, this very day, the Greek sovereign debt crisis risks unraveling the global financial infrastructure, which remains shaky. That sounds scary to put into writing, but I do believe that’s where we are. The Europeans may understand that, or they may not. You should hope they do.

“If this weekend only produces a reaffirmation of platitudes in this regard, next week will be very bad,” Simon Johnson writes at Baseline Scenario. “This is fiddling while cities burn.”

Alistiar Darling, the British finance chief, is flying to Brussels to meet with the EU’s 26 other finance ministers on Sunday, the Telegraph reports, as Britain has been “ordered” to participate in a plan to save the eurozone, even though it isn’t part of the eurozone, and even as the UK is currently effectively without a government, as they’re still trying to figure out who actually won this week’s election.

They’re calling it a “European stabilization mechanism,” and the fact that what was a regularly scheduled summit meeting Friday has turned into an all-weekend emergency meeting where they’re going to hammer together something shows at least that Europe’s leaders are starting to understand the very dire circumstances they are facing. But few details have emerged.

There has been a constant pattern to this crisis: the markets get worried, European leaders make some strong sounding comments, float an idea or two, the market backs off, there’s a rally, and some time later the fear trade picks right back up, only that much further down the spiral, because the leadership just wasted some of their precious credibility by talking without actually doing anything.

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Bloggers Local 109 discusses the recent press coverage of Treasury Secretary Tim Geithner

Tim Geithner’s taken a beating in the blogosphere in recent months, as many expected him to be one of the Obama administration’s first fall guys.

But a funny thing’s happened recently – press coverage of the Treasury secretary has actually turned somewhat positive. The New Yorker recently published a piece praising Geithner, noting taxpayers may actually profit from his financial rescue package. At the very least, it could cost less than the savings-and-loan implosion of the early 1990s. The Atlantic also just wrote a favorable story, noting Geithner’s plan one year later has been cheaper and worked better than most initially imagined.

But all the positive coverage has prompted the critics to come out swinging for the fences even harder.

“I’ve seldom seen so much rubbish written by people who ought to know better in a single day,” Yves Smith writes in a 3,100 word blog post ripping what she calls the Obama administration’s “propaganda campaign,” which she says has reached a new level.

Smith isn’t the only one who’s peeved. She cites former IMF chief economist Simon Johnson, who in a similar tear-down notes there are good reasons why the government should never guarantee financial institutions. “You can’t run any form of reasonable market system when some big players hold ‘get out of bankruptcy free’ cards,” he says.

Smith’s demolition is too good of a read to sum up in a few quotes, so we’ll leave you with a tease of her masterpiece. Be sure to check the rest of her post, here:

The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.

This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Administration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Administration’s “product positioning” and observable reality become increasingly evident.

I almost fell out of my chair when I saw this headline cross the Tape earlier today:

=DJ Treasury Official: No Govt Guarantee For Big Financial Firms

So let’s get this straight. It took $700 billion in TARP funds to save some of the largest and most insolvent banks that threatened to bring down the entire global financial system. Since then, it’s pretty unbelievable that nothing substantial’s been passed to prevent such a catastrophe from happening again. President Obama has recently been pushing financial reform and limiting growth in the financial sector, but doesn’t have much to back up his tough talk, so far.

And if there is no government guarantee, why is there such a heightened focus on getting the Volcker Rule passed that re-institutes some of the Glass-Steagal post-Depression laws?

But I digress – back to the issue at hand. TARP overseer Herbert Allison says there is “no too big to fail guarantee” for big financial firms. From WSJ:

Herbert Allison, who oversees the Treasury’s $700 billion financial rescue plan, disagreed with members of a congressional oversight panel that some financial firms benefit from the assumption that the government would step in to prevent their failure.

“There is no too big to fail guarantee on the part of the U.S. government,” Mr. Allison said.

Elizabeth Warren, who chairs the five-member Congressional Oversight Panel, said it was clear that financial markets do assume the guarantee exists, pointing to a recent ratings agency report that specifically noted the government’s role in backing Citigroup.

“The market clearly perceives that there is a too big to fail guarantee,” Ms. Warren said. “That gives Citi an advantage in raising capital. … That is very valuable to Citi.”

The fact that Allison would issue such a statement is pretty nervy, to say the least.

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Simon Johnson looks at the prospects for real financial reform, and while he doesn’t seem very optimistic, he sees the odds growing, mainly because the banks themselves make a convincing argument, through their actions if certainly not their words.

I asked this morning just how powerful is the banking lobby. Apparently, pretty powerful, because the same group led by Geithner and Summers that was so successful in Korea and overseas has turned meek and mild when confronted with our own crisis. “The Obama administration’s generally weak and unfocused financial reform proposals have morphed into generally weak and unfocused congressional bills,” Johnson writes.

That said, the banks’ own behavior may ultimately do them in. “Despite – or rather because – of all the arrogance and misbehavior among our more prominent financial players, we are making progress on the bigger agenda: Changing the consensus on what is regarded as safe and sound in all kinds of banking.”

From Johnson:

You can strike out one more purported reason why we should keep massive global financial institutions.  They do not enhance transparency, they do not bring clarity, they do not keep governments accountable.  Instead, they are paid a great deal of cash to mislead people.  What is the social value of that exactly?

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How's that euro looking now?

What did we learn about the Greeks this week?

- They didn’t formally, officially, actually “ask” their European neighbors for help.

- Their European neighbors are extremely, completely, firmly “supportive” of their neighbor on the Aegean.

- They make feta cheese from sheep’s milk. (Really, I had to look it up.)

We didn’t learn anything new about Greece last week; heck, we also already knew they’ll strike at the drop of a hat. They were in trouble a week ago Monday, and they’ll be in the same state tomorrow, regardless of that weak attempt at bolstering confidence from the EU. But what we are starting to glean is just what it is that the Europeans fear most: that a Greek default could indeed have disastrous ripple effects for the continent, and who knows where else. And that a bailout would have other ripple effects, perhaps in the long run just as disastrous.

The proverbial sword of Damocles really is hanging over Greece and the EU. But they may not be able to avoid its sting. The Greeks have spent a decade trying to live as part of the Eurozone, but they squandered the benefits it brought and now the masquerade’s about over. Something is going to give, one way or another. The Greeks know it. The Germans know it. It’s quite possible even Tim Geithner knows it (although I wouldn’t wager that last one.)

The path is not exactly clear, but as Simon Johnson lays it out in yesterday’s Journal, there are only a few outcomes, none of which are particularly pleasant. “It’s not just about Greece any more,” he writes. “If these problems are not addressed quickly and effectively, Europe’s economy will be derailed—with serious, if hard to quantify, implications for the rest of the world.”

The Europeans have not been careful so far. The issues for troubled euro zone countries are straightforward: Portugal, Ireland, Italy, Greece and Spain (known to the financial markets, and not in a polite way, as the PIIGS) had varying degrees of foreign- and bank credit-financed rapid expansions over the past decade. In fall 2008, these bubbles collapsed.

As custodian of their shared currency, the European Central Bank responded by quietly opening lifelines to all these countries, effectively buying government bonds through special credit windows. Europe’s periphery was fragile but surviving on this intravenous line of credit from the ECB until a few weeks ago, when it suddenly became apparent that Jean-Claude Trichet, president of the ECB, and his German backers were finally lining up to cut Greece off from that implicit subsidy. The Germans have become tired of supporting countries that do not, to their minds, try hard enough.

Make no mistake, the Germans don’t want to help the Greeks, for the same reasons American citizens didn’t want to bail out their own banks. People can live among the profligate, but nobody wants to reward it. But, much like Joe Six-Pack, the Germans ultimately may not have a choice. Because remember that in this brave new world of international banking, cross-border trading, hedge funds, derivatives and credit swaps, no man, bank or nation is an island. “Ask not for whom the bell tolls,” John Donne wrote nearly four hundred years ago, “It tolls for thee.”

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President Obama strikes a curious chord, to say the least, in his latest comments concerning bonuses given to Goldman Sachs chief Lloyd Blankfein and JPMorgan CEO Jamie Dimon.

Obama says he doesn’t “begrudge” the multi-million dollar bonuses they received, noting some athletes make more dough than these two folks. From Bloomberg:

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

Umm, we’re not even sure where to begin on this one.  Free-market system? That went out the window when the government engaged in its bailout binge with the nation’s largest banks. As former IMF chief economist Simon Johnson points out: “Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout means that the playing field is now massively tilted in favor of these banks.”

And wasn’t it only a few weeks ago that Obama was ripping “fat cat” bankers on Wall Street for their “obscene” bonuses? From fat cats to savvy businessmen, that’s quite the reversal.

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- Obama unveiling the “Volcker Rule” last week was encouraging, but there are still reasons to be skeptical, Simon Johnson says. “There are very real indications that the conversation is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side),” he says.

- A tablet may not be Apple’s (AAPL) only major announcement at Wednesday’s event. Reports are circulating that Apple could announce the end of its AT&T (T) iPhone exclusivity deal later this week.

- Speaking of Apple, the buzz surrounding Wednesday’s event and expected unveiling of the tablet is reaching epic proportions. WSJ’s Digits blog looks at some of the bizarre tablet rumors. NYT’s David Carr is amazed at how Apple can drum up so much buzz without saying anything. And David Pogue says “The only thing we know for sure about the Apple tablet is that we don’t know anything for sure.”

- Are stocks ignoring earnings? Or has the market already priced in a strong earnings season? Bespoke weighs in.

- Disappointing existing home sales data this morning, but new home sales is what really matters for the economy, Calculated Risk says.

- Journalists, economists, bloggers and others weigh in on the troubles facing Ben Bernanke’s confirmation as Fed chairman. WSJ’s Real Time Economics has the details.

- Insider buying falls to a new low for week ending Jan. 20, while insider selling remains high. Not surprising corporate insiders are expressing little faith in their own shares. “As of now, signs of a sustained rebound in earnings and revenues remain mixed,” the Pragmatic Capitalist blog says.

- Sun Micro (JAVA) CEO Jonathan Schwartz is set to resign, leaving JAVA in hands of new owner Oracle (ORCL), Digital Daily blogger John Paczkowski reports, citing sources close to Sun.

- Tishman gives up Stuyvesant Project to its creditors in the collapse of one of the most high-profile deals of the real-estate boom, WSJ reports.

- StockTwits acquires the financial news aggregator Abnormal Returns, which is great all-around for the econoblogosphere and one-man blogs in particular, Felix Salmon says.

If Paul Volcker is a winner for his role in influencing President Obama’s proposed bank plans, is Tim Geithner the biggest loser?

It’s certainly hard to ignore Geithner’s role (or lack thereof) in Obama’s press conference yesterday. The President began his speech by thanking Volcker and Bill Donaldson for their advice and influence regarding his new bank regulations, even calling the new policy “The Volcker Rule.”

“That in itself is shocking,” Henry Blodget writes at Clusterstock, as Volcker, a former Fed chairman, is now just an advisor to Obama whereas Geithner is Treasury Secretary.

Even the lineup on stage at yesterday’s press conference was astounding. Volcker stood right by Obama’s side, followed by Barney Frank and then a distant Geithner, who may as well have been caddy-cornered on the side of the stage.

“At the very least, yesterday’s press conference seemed designed to tell America that Tim Geithner has been marginalized, that Obama is now (finally) committed to change,” Blodget says.

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Please Mr. President, don't be too harsh on us.

There’s no denying President Obama just threw down the gauntlet on the nation’s biggest banks.

In a nutshell, Obama detailed a new plan that would would force financial institutions to choose between commercial banking and proprietary trading, while also limiting the size of big banks. WSJ has the details:

Admistration officials said the new rules would force major institutions from J.P. Morgan Chase to Bank of America to decide the direction of their business. Banks shielded from risk through federal-deposit insurance, or aided in financial crises by low-interest loans from the Federal Reserve Board, would no longer be allowed to engage in trading unrelated to their customers’ interests, one senior administration official said.

Under the proposed rule, commercial banks would be prohibited from owning, investing in or advising hedge funds or private equity firms. Bank regulators would not be simply given the discretion to enforce such rules. They would be required to do so.

“You can choose to engage in proprietary trading, or you can own a bank, but you can’t do both,” the official said.

Some of the comments from Obama’s speech were also pretty astounding, proving he’s not taking this situation lightly. Two separate quotes from the president particularly stand out:

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- “If the bond vigilantes are ready to ride again, there should be little doubt who will be leading the charge,” Tom Petruno says.

- Big buzzword at CES this year is 3-D. But major problem facing TV manufacturers is they have lousy timing.

- Say it loud and clear, it’s a renter’s market. US apartment vacancy rates in 4Q jumped to a 30-year high, while rent prices keep falling.

- Nexus One’s product placement couldn’t be better.

- Apple (AAPL) is looking for new ways to touch its fans. The US Patent and Trademark Office publishes an APPL patent describing touch screens with pixels that both display information and receive touch instructions from the user, according to a blog post on Patently Apple.

- Rail traffic trending in the right direction. “The data continues to reflect a weak recovery, but the trend is positive for now and equity markets have remained robust as the rail data troughed and turned higher,” Pragmatic Capitalist says.

- “One striking aspect of the public debate about the future of derivatives – and how best to regulate them – is that almost all the available experts work for one of the major broker-dealers,” Simon Johnson says.

- Retailers generally reported above-average December sales. Discounters Costco and BJ’s fared well. But Abercrombie lagged behind other teen retailers.

- China unexpectedly raises key interbank rate.

- Believe it or not, GM expects to be profitable this year.