Market Talk

- It shouldn’t come as a surprise that AIG’s reportedly considering suing Goldman Sachs (GS) and other Wall Street banks over soured mortgage assets, Yves Smith says. “Other shoes are starting to drop on the Goldman CDO front.”

- “The real scandal isn’t the Street’s unlawful acts (i.e., SEC vs. Goldman Sachs) but legal acts that have reaped the Street a bonanza and nearly sunk the rest of us,” former labor secretary Robert Reich writes.

- “The thing which struck me most about Goldman’s earnings call this morning was how guarded they were,” Felix Salmon says. “For a company which has happily been talking to the press and leaking the letters it sent to the SEC, no one on the call seemed to want to talk candidly.”

- Banks posting “favorable” earnings on lower loan-loss provisions isn’t necessarily cause for celebration, John Hussman writes. “Keep in mind that Enron and Worldcom were able to report outstanding earnings for a while by adjusting the manner by which revenues and expenses were accrued. I suspect that the US banking system has become a similar breeding ground for innovative accounting.”

- “For years, sophisticated investors and big financial institutions, all run by very well-paid individuals, invested huge sums of money on the basis of a few pearls of folk wisdom (‘housing prices never fall’) and the words of some highly conflicted players, like the ratings agencies,” James Surowiecki notes. “This was a recipe for disaster, and disaster was what we got.”

- “There are simply no social benefits to having banks with over $100 billion in total assets,” former IMF chief economist Simon Johnson asserts.

- Dept. of Transportation reports miles driven in February fell 2.9% from a year earlier. “If vehicle miles continues to decline on a year-over-year basis, it might suggest high gasoline prices are starting to impact the economy,” Calculated Risk says.

- “The key factor for a sustained recovery will be a continued improvement in job creation rates at existing firms and stabilization in the rate of new business formation,” Ellyn Terry writes on the Atlanta Fed’s macroblog.

- Citigroup shares once again toeing the $5 line.

- Lawmakers took aim at Lehman and federal regulators for the investment bank’s collapse, accusing the firm of manipulation and its watchdogs of negligence.

- The SEC fraud charges against Goldman Sachs (GS) aren’t likely to hurt the firm much financially, but clients will likely have more questions about conflicts of interests surrounding the firm;s dealings, Chad Brand writes.

- The big question now “is whether this is just the tip of the iceberg,” James Kostohryz writes at Minyanville. “Given the details of the transaction, it seems highly unlikely to me that this was the only transaction of this nature.” And lawyers “will be chomping at the bit and contacting investors that lost money in mortgage, CDS, etc., transactions to see if there were similar patterns that can be exploited in lawsuits.”

- In the fallout from SEC fraud charges, Goldman CEO Lloyd Blankfein needs to step down, Stephen Gandel notes at Time’s Curious Capitalist blog.

- Goldman Sachs “can go long markets and it can go short markets. But it can’t lie to its clients,” Felix Salmon says. “That’s well beyond the pale.”

- “The only sure way to ensure that no bank becomes too big to fail is to make sure no bank is too big,” Robert Reich says.

- Barry Ritholtz strongly disagrees with the “strategic default” thesis – which states people are defaulting on mortgages and instead using that money for consumer discretionary items.

- Economy’s in early stages of healing process. “If it continues, and the labor market shows sustainable growth, and inflation stays moderate, and the eventual increase in interest rates doesn’t derail the still-fragile state of consumer sentiment, the future looks encouraging,” James Picerno says. “There’s a lot of ‘ifs’ to step over.”

- “Curb your enthusiasm” about the economic rebound,” Economist’s Free Exchange blog says. “Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery.”

- Within weeks though we’ll be able to see the natural forces of supply and demand at work in the housing market” without major government incentives, says Miller Tabak’s Peter Boockvar. Economy’s definitely improving, but “the steroid juice of cheap money is again having its influence,” he says. “We can only hope that we can make the transition without it over the next few years better than we did last time.”

- Boomtown blogger Kara Swisher reports Yahoo’s (YHOO) M&A chief is hard at work trying to buy Foursquare, the hot mobile startup of the moment.

- It’s been a sweet six weeks for S&P 500. Index hasn’t had a 1% pullback, either on a single or multi-day basis. And, according to Bespoke, there have only been 10 other periods since 1990 in which the index went at least 40 days without a 1% decline.

- Breaking up the nation’s biggest banks doesn’t come without costs. “In evaluating the benefits of busting up the big guys, we shouldn’t lose sight of the possibility that this is also a strategy that could carry very real costs,” according to Atlanta Fed’s macroblog.

- In its eight page letter to shareholders, Goldman Sachs (GS) denies it bet against clients.

- Recent consumer spending reports suggest “signs of pent up demand being satisfied slowly but surely,” Barry Ritholtz notes. Data isn’t as cheer as the bulls believe, but it’s also not as dire as the pessimists proclaim. Ultimately, “a slow, painful recovery still awaits us.”

- It’s mindboggling that Fannie Mae (FNM) and Freddie Mac (FRE) aren’t included in Sen. Chris Dodd’s financial regulatory reform bill. “This denial is so egregious,” NYU’s Regulating Wall Street blog says, especially since both are involved in more than half of all US mortgages.

- Recent economic news seems to be trending in right direction. Unfortunately, housing doesn’t fall into that category as sales, starts, prices and builder confidence have all weakened this year, Economist’s Free Exchange notes. “A weak housing sector will be a drag on employment, and so long as employment growth lags, recovery is in doubt.”

- Bebo, Digg exemplify “hot going cold” in Silicon Valley. “At one time Digg and Bebo could do no wrong,” Kara Swisher says. “Now, no right.”

- Apple (AAPL) will likely introduce its mobile ad platform tomorrow at its iPhone developer event. And, ironically, Google (GOOG) can’t wait, Peter Kafka writes.

- Amazon’s (AMZN) Kindle may be coming to Target (TGT). Tech blog Engadget posts a picture of a Target inventory form showing a listing for the e-reader. Blog says Kindle could hit stores April 25. “Is this Amazon’s first response to Apple’s (AAPL) iPad?” Jay Yarow ponders at Silicon Alley Insider.

- Twitter investor Fred Wilson says the microblogging’s platform and ecosystem is at an “inflection point.” Silicon Alley Insider reads between the lines and wonders if Twitter “could buy or build its own photo-uploader and mobile app, squashing third-party developers in its way.”

- Hulu not being shy about broadcasting the fact that it’s profitable. “Even if the number isn’t huge, a profit is well worth bragging about, because I can’t think of another Web video company that has claimed on so far,” including YouTube, MediaMemo blogger Peter Kafka says.

- Capital rules alone won’t keep banks honest. “The better solution is the ‘dumber’ one: avoid having banks that are too big (or too complex) to fail in the first place,” Baseline Scenario bloggers Simon Johnson and James Kwak say.

- Naked Capitalism blogger Yves Smith rips Jamie Dimon’s “self-serving” defense of big financial institutions. “One has to wonder whether anyone in a position of influence really believes what he is selling,” she says.

- “Businesses have dramatically tempered the rate of firing but still seem reluctant to aggressively add to their payrolls,” says Miller Tabak’s Peter Boockvar. “That process will seem more gradual in nature assuming the economy can sustain its healing and recovery in the face of reduced government stimulus and the growing likelihood of higher market interest rates.”

- Felix Salmon discusses the economics of Netflix (NFLX).

- “The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy,” Robert Reich says. “As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.”

- Jeff Miller offers his March employment preview. Following the strong ISM manufacturing report, he estimates zero net job growth before factoring in the temporary census jobs, translating into a monthly gain of 130,000. That’s less than the 200,000 gain economists expect.

- 90% of stocks in S&P 500 are trading above their 50-day moving averages. “This is at the top end of the indicator’s range over the last year,” Bespoke says.

- Hedge fund manager pay soared last year. The top 25 earned a collective $25.3B. “We bet on the country’s revival,” says top-ranked David Tepper, who earned $4 billion. “Those who keep their heads while others are panicking usually do well.”

- Give the good ol’ microwave some respect.

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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- Auto sales are “crawling forward,” but still remain weak, James Hamilton says. “On a seasonally adjusted basis, we’re not making any progress from December…Whatever the explanation, auto sales so far this year remain 40% below the average seen for January and February over 2005 to 2008.”

- Small, mid-cap stocks leading the rally. As confidence about the global economy wavers a bit, some investors and traders are actually turning their attention to companies heavily dependent on the US economy, Tom Petruno writes.

- S&P 500 and US Dollar index are about as negatively correlated as they’ve ever been, Michael Panzner notes. But the equity-dollar relationship typically isn’t sustainable when it hits historical extremes, meaning investors may need to look beyond the currency markets for hints about the stock market’s next move.

- “Amazon’s MP3 store hasn’t done much to weaken Apple’s grip on the digital music business,” MediaMemo blogger Peter Kafka reports. “But that doesn’t mean Apple isn’t paying attention.”

- Since there are no assurances that new regulations will prevent a future financial crisis from occurring, regulators should take the next best step and break up the nation’s biggest banks, James Kwak says. “Politically, breaking up TBTF banks is something that should on paper be able to attract a bipartisan majority.”

- A consumer finance protection agency is a great idea, but it’s a shame that a simple mandate in the original plan — compare all mortgages to plain vanilla 30-year fixed contracts — was rejected, FusionIQ CEO Barry Ritholtz says.

- Millions of homeowners haven’t benefited from lowest mortgage rates in nearly a half-century because they can’t or won’t refinance, WSJ reports.

- Auto veteran Bob Lutz plans to retire from GM after four decades in the business and a career that included executive positions with each of the big three Detroit automakers.

- “It seems like governments are doing a lot of poking, probing and investigating of large investors in the markets recently. Especially when it comes to bets being made that have major implications for governments, i.e., positions taken on currencies and government debt,” WSJ’s MarketBeat says.

- NY Gov. David Paterson finds himself in the middle of yet another scandal.

Hi, my name's Paul, and I've come for the big banks.

Somebody finally said it.

“What we plainly need are authority and methods to minimize the occurrence of those failures that threaten the basic fabric of financial markets,” former Fed chairman Paul Volcker will tell a Senate committee today, according to a prepared testimony obtained by Fox Business. “It is critically important that those institutions, its managers and its creditors, do not assume a public rescue will be forthcoming in time of pressure.”

In other words, no more bailouts, boys.

It’s amazing that it took the Obama administration a year to finally unleash Volcker on the bankers. He was without a doubt the most senior and capable member of Obama’s economic team, but for some odd reason the old man wasn’t heard from for the better part of a year. It was like they had him chained to a radiator in the basement somewhere. But now that the White House sees the handwriting on the wall, it’s let loose its most potent street fighter.

And not a moment too soon. The “Volcker Rule” is already under attack from the bankers, who seem determined to fight any serious efforts at financial reform. As the Journal reports, the banks are already throwing sand in the bull’s eye, arguing that it’s hard to say exactly what “proprietary” trading involves, and any overreach could constrain the capital markets. The old man’s having none of it.

“Every banker I speak with knows very well what ‘proprietary trading’ means and implies,” he says in the testimony. He wants to shave off prop desks, and wants to create a resolution authority, essentially an FDIC for the big banks, with the power to intervene and take control of institutions on the brink of failure. And not so they can be propped back up with public monies. The resolution authority would be performing a “euthanasia, not a rescue.”

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I don’t even know what to add to this, so I’m going to run it verbatim. Barry Ritholtz over at The Big Picture absolutely strips the bark off Washington. The only thing I’d add — and it’s a sad addition — is that I’m not convinced the condition he diagnoses is temporary. And if he’s right about the state of our democracy, his proposal doesn’t stand a chance. Still, it’s worth exploring.

Yesterday, the news broke about a tax on the large banks — it was ostensibly designed to close the deficit. Instead, I’d like to rename it the Too Big Too Fail Tax (TBTFT).

What I found interesting about the tax is the somewhat misleading way it has been premised — namely, that it is payback for all of the Non-TARP subsidies the banks have been enjoying at the expense of the taxpayers. Further, went the MSM narrative, such a tax at a time of populist outrage over big bonuses is a slick political move calculated to assuage the angry masses.

I am not sure how clever the Obama brain trust is — so far, the answer has been “Not very” — but there is an opportunity here for a third basis for this tax. Let’s call it the TBTF tax.

Allow me to explain:

So far, we have learned that Wall Street has become impervious to regulation. Our Parliament of Whores is bought and paid for, well greased by the Street’s lobbyists. Wrap your lips around this big purple legislation and suck. Even the most benign regulation — i.e., a basic disclosure of mortgage costs relative to a plain vanilla, 30 year fixed — has been thwarted.

When lobbying prevents even the most simple of consumer disclosure legislation, you have a broken political system. Such failures can only occur when a democracy has been lost — when corporations own Congress, when the will of the electorate is ignored, when money has utterly corrupted the political process. Have no doubt about this: Our experiment in Democracy is nearly over; we have morphed into a Corporatocracy — a government by and for large corporate interests. Let’s pray it is only temporary.

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It doesn’t take much for bloggers to start bashing something or someone. But pay close attention when they start dishing out praise, because they’re generally on to something good.

Focus has turned to former Fed Chairman Paul Volcker’s recent comments regarding big banks. He believes too-big-to-fail institutions should be broken up and wants the biggest banks to be prohibited from owning and trading risky securities. From NYT:

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

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When they're too big to fail, they usually do.

We’re going to keep hitting on the point that this idea that some institutions are too big to be allowed to fail has got to go.

We get more support today from John Hussman, who runs Hussman Funds and who publishes a weekly commentary every Monday (we highly recommend the entire commentary, by the way.)

“In observing the proposals for changing the regulatory structure of the financial markets,” he writes in this week’s edition, “it strikes me that the idea that some banks are ‘too big to fail’ is a dangerous and misguided premise.”

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