Market Talk

- Treasury’s Geithner and rest of Obama administration seem intent on praising financial bailouts for preventing the banking system from collapsing. But the government interventions weren’t ideal and involved some costly tradeoffs that need addressing, Economist’s Free Exchange blog says. “Geithner has put out the fire, but that’s not the end of the job.”

- Now that health-care reform has passed, it’s time for the reform ball to keep rolling and the White House to put an emphasis on reforming Wall Street and the banking sector, Barry Ritholtz notes.

- Stocks sidestep health care reform, showing the stock market may be ambivalent toward health-care reform, after all. “If Obamacare is such a disaster for the economy, where’s the market reaction,” Paul Krugman says.

- China officials foreseeing “a record trade deficit” for March would undercut the US’s argument that the renminbi is undervalued, Yves Smith writes at naked capitalism. “If true, this may bear out the contention that domestic inflation is running at a high level. The effect, of repricing goods upwards in renminbi terms, would have the effect of making prices less competitive globally.”

- “Remember the scene in Goodfellas when Joe Pesci says, ‘One dog goes one way, the other dog goes the other way, and this guy’s sayin’, ‘Whadda want from me?’” Todd Harrison writes at Minyanville. “That’s what’s emerging in Europe; Germany is pointing to an IMF-package to aid Greece and France prefers a broader European solution.”

- There are about five times as many people looking for jobs as there are openings, but that problem won’t last forever, at least according to a new study from Northestern University. Study argues there will be more jobs than people to fill them by 2018, WSJ’s Real Time Economics blog notes.

- Maybe Citi (C) CEO Vikram Pandit deserves some credit. That’s the message Chairman Richard Parsons has for all the cynics out there.

- “Mr. Bernanke needs to face some unpleasant realities,” former IMF chief economist Simon Johnson says. “The cherished independence of the Fed is now called into question – and losing this could end up being a huge consequence of the irresponsible behavior and effective blackmail exercised by megabanks – who still say, implicitly, ‘bail us all out, personally and generously, or the world economy will suffer.’”

- What’s in store now that the House’s historic health care legislation has finally passed? “Today’s vote confirms our hope that we can have both strength and competence in Washington. It is an audacious hope, but we have no choice,” Robert Reich says.

- Cinderellas, buzzer beaters and busted brackets – what a weekend at the Big Dance.

SEC and NY Fed just can’t catch a break lately. Former Merrill Lynch officials reportedly warned both agencies that Lehman was engaging in some saucy balance sheet manipulation as far back as March 2008, months before Lehman’s collapse. From the FT:

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less ­liquid than Lehman.

The warnings take on a special significance after last week’s report by Anton Valukas, the Lehman bankruptcy court examiner, who found that Lehman had used questionable financing tools to flatter its balance sheet before its September 2008 collapse.

The findings raise questions over what federal regulators knew about Lehman’s accounting and when they knew it. In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.

The latest revelation shouldn’t come as a shock to anyone. But it also further compromises both agencies, because previously they could have argued they didn’t know how bad Lehman’s problems really were until it was too late. But now, knowing that rival firms were warning them months before the collapse, they’ll have a hard time making that one stick.

“So which theory is it: stunning bureaucratic incompetence, wishful thinking and denial or a cover up? Or a combination of the above?” Yves Smith ponders at naked capitalism. “No matter which theory or theories you subscribe to, the continuing revelations of how the SEC and perhaps more important, the New York Fed conducted themselves in the months before Lehman’s collapse paint an increasingly damning picture.”

Smith, who has been very critical of Geithner in the past, says this is further evidence that he shouldn’t remain Treasury secretary for much longer.

“This Financial Times story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary,” Smith says. “But it may take Congress forcing a release of the Lehman-related e-mails and other correspondence by the New York Fed to bring about that outcome.”

- AOL paid some hefty sums to its former employees – $28.4 million to be exact – to its four top executives it replaced last year. “Want to make money? Become a former AOL executive,” MediaMemo blogger Peter Kafka says.

- Housing starts tumbled 5.9% in February. “This level of starts is both good news and bad news,” Calculated Risk says. “The good news is the excess housing inventory is being absorbed – a necessary step for housing (and the economy to recovery. The bad news is economic growth will probably be sluggish – and unemployment elevated – until residential investment picks up.”

- Bearish stance from Albert Edwards, Societe Generale strategist, isn’t losing steam. He questions recovery’s sustainability in large part because “credit is disappearing at this debilitating dehydrating rate.”

- Google’s (GOOG) Nexus One sales only 135,000 after 74 days at market, according to analytics firm Flurry. “A piddling amount,” Digital Daily blogger John Paczkowski says, especially since Apple’s (AAPL) iPhone and Motorola’s (MOT) Droid sold 1M and 1.05M, respectively, after their first 74 days on the market.

- A downgraded US credit rating wouldn’t be pretty. Good thing Tim Geithner says there’s no way that will happen.

- “Don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived, and REO expertise will be prove to be the key to recovery, as it has been in prior cycles,” Paul Jackson writes at Housing Wire.

- What does corporate America think about financial reform? “It’s actually really hard to say,” Justin Fox says.

- Columbia Journalism Review argues blogs have been doing a better job covering the examiner’s report on Lehman’s collapse when compared to mainstream media’s coverage.

- The worry about the Fed ending its MBS purchase program is it will cause long-term interest rates to rise, which will hinder recovery. But if that happens, the Fed’s capable of restarting the program “very quickly if needed,” Mark Thoma writes.

- NJ Gov Chris Christie proposes steep spending cuts that will hit “the poor, elderly, schoolchildren, college students and inner-city residents hardest, while largely sparing the wealthy and businesses,” NYT says.

- “The disease that left [Lehman] vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management,” Barry Ritholtz writes. Citi and JPM merely made matters worse when Lehman’s “immune system was compromised.”

- Tapping Janet Yellen as Fed vice chairman is a good choice. “She’s open-minded, a good counterweight to the inflation hawks who think that any day now we’ll be partying like it’s 1979,” Paul Krugman says. “She’ll provide exactly the kind of intellectual flexibility the Fed needs.”

- Interesting to note the examiner’s scathing report on who should be held accountable for Lehman’s collapse doesn’t mention short sellers, Jeff Matthews points out on his blog. Instead blame falls on “a lot of really bad management by people desperate to keep a sinking ship afloat any way they could, including ‘accounting maneuvers.’”

- Is it surprising that allegations surrounding Tim Geithner and the NY Fed surfaced in the examiner’s report on Lehman’s collapse? Yves Smith weighs in.

- “All in all, the entire system failed,” Barry Ritholtz bluntly states. “The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me.”

- They can’t be too happy at Ernst & Young today. “Enron brought down Arthur Andersen,” Felix Salmon says. “Will Lehman do the same for Ernst & Young?”

- Takeover talks swarm the rumor mill this week. “I don’t know if this would be considered a sign of a healthy market or an ailing one, but we can’t ignore the presence of so many takeover rumors, specifically those concerning high profile retailers,” Joshua Brown writes at The Reformed Broker.

- Fallout from Lehman raises some troubling questions. There’s a “seminal” question, blogger Karl Denninger says at the Market Ticker, “that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.”

- US-subsidized mortgage modifications rise 6% from a month earlier to one million, Treasury says.

- Economy’s in the midst of a “sham recovery,” former labor secretary Robert Reich writes. Big companies, Wall Street and high-income Americans are doing better, but Main Street, small businesses as well as middle and low-income Americans face a much gloomier outlook.

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.

- 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.

- Wall Street bonuses jumped 17% last year. “For most Americans, these huge bonuses are a bitter pull and hard to comprehend,” NY State comptroller Tom DiNapoli says. “Taxpayers bailed them out, and now they’re back making money while many New York families are still struggling to make ends meet.”

- Costs of recessions run deep. “Recessions cause skills to depreciate, there are psychological costs, there are costs to family members, the loss of a job generally means loss of health care, the costs to working class households go on and on,” Mark Thoma writes.

- “The alliance that has held back reform begins to crack,” former IMF chief economist Simon Johnson says. “The middle of the consensus has started to move, against mega-banks and against dangerous over borrowing by the financial sector. This will be a long hard slog, but we are finally heading in the right direction.”

- “Expensive and ineffective attempts to fight foreclosures at all costs” has been one of the Obama administration’s most disappointing policy initiatives, Barry Ritholtz notes.

- “The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices,” says Peter Boockvar. “But when much of this wears off this summer, the market will be put to another test.”

- Problem bank list continues to expand. Hits 702 banks with $403 billion in assets – the largest amount since 1992. “Not all problem banks will fail – and not all failures will be from the problem bank list – but this shows the problem is significant and still growing,” Calculated Risk writes.

- Wal-Mart (WMT) should’ve made the bigger bet on Netflix (NFLX), Dan Frommer argues at Silicon Alley Insider after WMT paid a reported $100 million for video streaming service Vudu.

- Twitter reaches a fresh milestone, saying it’s publishing 50 million tweets a day, or about 600 messages a second.

- Pent-up iPad demand seems to be exceeding demand estimates when original iPhone was released, which is surprising, John Paczkowski says. “The iPad is, after all, an entirely new device category between the laptop computer and the smartphone. And, unlike the iPhone, its market is unproven.”

- Atlanta Fed’s macroblog takes a deeper look behind the core CPI data reported last week.

- Yves Smith’s take on Vogue profiling Tim Geithner: “I suppose puff pieces to hide the true character of what passes for our leaders are a more civilized way to distract the public from the rot in the empire than killing gladiators, but it sure doesn’t feel that way.”

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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Huh, whatdya know; this stuff's green, too.

Tim Geithner’s role throughout the financial crisis and ensuing recovery gets some heavy play today in a front-page WSJ piece.

The crux of the story: he helped rescue some of the biggest banks and averted economic collapse. But the no-strings attached bailouts he engineered have resulted in banks returning to pre-crisis mode, while the rest of America struggles to recover amid one of the worst downturns since the Great Depression.

And the fact that meaningful regulatory reform hasn’t been passed since he because Treasury Secretary more than a year ago hurts his credibility and only adds to his reputation that he “coddles” Wall Street.

The kicker WSJ quote: “Interviews with dozens of government officials show that Mr. Geithner has acted as a brake on administration officials seeking punitive action against big financial firms.”

Story details several of Geithner’s policy decisions, including resisting efforts to oust Citigroup (C) CEO Vikram Pandit as a condition for more government aid.

“The litany is not pretty,” FusionIQ CEO Barry Ritholtz says. But failure to pass any regulatory reform so far may be his biggest blunder. “Expect it to cost the Democrats dearly come November.”

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We’re sure he was just trying to sound strong, but Tim Geithner’s response to questions about the credit rating of the U.S. has the stink of historical notoriety written all over it. When asked by ABC News if the U.S. would lose its triple-A credit rating, he said bluntly “Absolutely not. That will never happen to this country.”

Frankly, we don’t need to hear bluster from the Treasury Secretary, because at this point in the crisis, it is painfully obvious that a great number of things that “could never happen” have indeed happened, and sitting there and arrogantly saying they can’t is just the wrong approach.

What he should have said was “that will never happen, because we are dedicated to maintaining the good faith and credit of the United States. In times of grave peril, the United States has always been a beacon of light and a refuge, and we are dedicated to doing absolutely everything within our power to keep it that way.” Or something like that.

“That will never happen.” It took all of about five seconds for me to think of Irving Fisher’s “permanently high plateau” comment, just before the stock market crashed in 1929, a crash that, incidentally, took the market something like 25 years from which to recover.

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