Randomly Noted

J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees number came from equity and debt underwriting, with the big piece coming from debt – a quarterly record of $971 million for the bank.

Grouped under the investment bank is also trading – and fixed income once again ruled the day. Of the $6.6 billion of revenues from “fixed income/equities,” $5.23 billion came from fixed-income. The bank didn’t offer a break down i.e. how much was from FX trading, for example.

Finally, the investment bank (trading and traditional IB) contributed about 43% of the firms net income ($2.37 billion of a total $5.5 billion).

A quarter where the investment bank didn’t carry the whole day, er quarter, but carried a lot of it.

We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented  the quality of the portfolio.

Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.

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Over the past couple of weeks, Moody’s Investors Service has been downgrading more pools of commercial mortgage backed securities. And buried in releases of a couple of those downgrade notices comes word that a loan on famous New York City office building landmark has moved into special servicing.

The building is 666 Fifth Avenue and it was built in 1957 by Tishman Realty & Construction. It at one point had Citigroup as a major tenant, with a “Citi” logo replacing the numbers “666″ on the side of the building. Kushner Properties bought the building for nearly $1.8 billion near the top of the NYC real estate market in late 2006.

And now there appear to be some issues with that loan.

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Less than a year after Congress came too close to seriously impinging on the crucial monetary policy independence of the Federal Reserve, a much more reasonable idea about the Fed’s role is emanating from the national legislature.

Championed by a couple of conservative Republicans, the latest notion is to make the Fed more like other central banks. Like the European Central Bank, for instance.

The way to do that, according to Rep. Mike Spence, R-Ind., and Sen. Bob Corker, R-Tenn., is to halve the “dual mandate” the Fed has been trying to fulfill for the past 33 years. That dual mandate, put simply by Eric S. Rosengren, president of the Federal Reserve Bank of Boston, involves trying to achieve “the lowest possible unemployment rate consistent with price stability.”

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Call it the authoritarian advantage.

The notion gets tossed around all the time in macroeconomic discussions. In difficult economic times, non-democratic countries have an advantage. They can make fast decisions by fiat, steering their economies as they see fit. In democracies, of course, things are messier and slower.

Of course, no one here is advocating dictatorship, economic or otherwise. The freer the economy and the citizen the better. But it is worth noting in these troubling times, America is following an expected pattern in which so-called economic and business elites believe in certain paths to economic improvement and growing numbers of voting citizens think otherwise.

Call it a populist backlash.

Example one is the bank bailout. Lots of people now call TARP (Troubled Asset Relief Program) some variant on the best program that also managed to be the most hated. Many people understand that letting the financial system collapse in 2008-09 would have meant greater disaster for everyone, but having voted for bank bailouts is now no badge of honor for politicians seeking re-election.

Trade is another one. It wasn’t long ago there was a pretty broad coalition in the U.S. that believed the freer the trade, the better. The U.S. would benefit because from agriculture to banking services to manufacturing equipment, we had some useful things to sell the world.

Sure, many unions and other advocates of manufacturing workers, whose jobs could easily be shipped abroad, stood long opposed to freer trade, but they now have lots of company. It’s understandable that when jobs get scarce people want to build walls around the jobs that remain, but such policies, especially if widely adopted by nations, will hurt everyone.

The U.S. Federal Reserve is expected to embark on another round of quantitative easing to help spur the stuck-in-the-mud economy. The essential increased printing of money to buy Treasury securities will hurt the value of the dollar, but the Fed believes a stronger level of inflation and even higher inflation expectations are needed to get people and businesses spending again, eventually increasing employment and keeping the scary deflation monster at bay.

But the notion of higher inflation, especially engineered by a central bank, likely won’t sit well with many people. In a recent issue of The New Yorker magazine, James Surowiecki cited a 1996 study by the well-known Yale economist, Robert Shiller, that showed “sizable majorities” of people globally are dead set against inflation, even in a trade-off for higher employment.

That might well be a reasonable stance, because once ignited inflation and its expectations are tough to tame. Also, the Treasury bond buying plans bythe Fed might simply not work. At least Fed officials don’t have to worry about getting re-elected.

People in Congress do, and that’s why it’s a pretty sure bet there won’t be another big round of fiscal stimulus coming, absent an economic disaster. Too much worry about the giant federal deficits already created.

Even though, abstractly at least, the case could be made the Fed’s efforts would have a better chance of success if there was a stimulative assist from fiscal policy, leaving the essential and extraordinarily diffiicult deficit reduction issue for another day.

In the debate about how much of the U.S. unemployment problem is due to factors beyond the flat economy, the chairman of the Federal Reserve has weighed in: not enough to keep the Fed still.

In his much-anticipated speech this morning in which Fed Chairman Ben Bernanke signalled another round of quantitative easing is coming soon, he also noted the obscure issue of how much of the unemployment rate is due to structural factors.

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As the world’s investors focus on upcoming economic data to help guess when and whether the U.S. Federal Reserve will resort to further non-traditional means, such as new purchases of securities, to try to jump-start the economy, another prominent voice advocates the opposite policy.

Charles R. Schwab, the founder and chairman of the prominent brokerage firm that bears his name, wrote a thoughtful opinion piece this past weekend for The Wall Street Journal in which, simplistically stated, he made the case that zero interest rates promised for an extended period haven’t done much good, so let’s go back to more traditional monetary policy.

In Schwab’s words: “It’s time to stop the experiment and return to monetary normalcy.” Among the victims of the emergency zero rate policy are savers, forced to either accept essentially no return on their money or seek risk they don’t want.

In his  declaration, Schwab joins the lone dissenter among the voters on the Federal Open Market Committee, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. Hoenig’s essential point in dissenting from fellow policy makers is that while not strong, the U.S. economy has moved from the emergency that required zero rates.

Among other things, the extraordinarily low rates promised for a long time might buy inflation and asset bubbles down the road.

While there seems no short-term prospect these off-consensus ideas will be adopted, they are important. They seem to me to represent two themes: a belief in markets and a related skepticism of the sophisticated specializations in monetary policy and elsewhere that assume centralized manipulation of technical levers can lead the broad economy to a much better place.

Put another way, it took years of overly leveraged, overly speculative, bubble-oriented prosperity to run its course and leave us in a hole. It will take a long period of deleveraging to get out. There are no shortcuts. Indeed, the attempt to employ short cuts could extend the problem.

Here’s another quote from Schwab’s piece: “What bank today wants to offer and then hold 30-year fixed loans at these artificial and temporary rates?” At another point: ”It is time to let the inherent power of economic forces engage.”

The muted economic response we’ve witnessed to all the fiscal and monetary stimulus (acknowledging things would be a lot worse without that work) has led to what I’ve called a ‘fix-it fatigue.’ It’s become evident in fiscal policy debates and could well show itslef in the mid-term elections in earlyt November.

Schwab’s piece may be evidence of ’fix-it fatigue’ moving to monetary policy.

Reading the minutes of the rate-setting Federal Open Market Committee’s meeting of Aug. 10, one is struck by the two uses of the word “anticipated.”

In both cases, the minutes, released today, talk of anticipations by Federal Reserve policymakers that were not being met. Both those thwarted anticipations are on the downside for the recovery and the resumption of more usual economic conditions in the U.S.

Example one: “members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and saw increased downside risks to the outlook for both growth and inflation.”

Example two, which follows shortly afterwards. “Members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.”

The dual mandate is to maximize employment andto keep inflation under control. Ususally that means keeping inflation from rising. Now, the tougher concern is that the inflation rate is too low.

Federal Reserve Chairman Ben Bernanke made a much-anticipated speech this morning and didn’t break the news the world wanted to know: what would trigger a significant new round of quantitative easing measures by the U.S. central bank.

“At this juncture, the Committee has not agreed on specific criteria or triggers for further action…” Bernanke said. The committee is the rate-setting Federal Open Market Committee.

In general, at a very sensitive point in the economic life of the nation and world, Bernanke chose his words carefully, seeming to understand the weight they carry. His complex sentences at times were reminiscent of his predecessor, Alan Greenspan.

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Underfunded pension commitments to public employees is a central, long-term issue for local governments and for the U.S. municipal bond market.

According to a new academic study, even substantial revisions to those pension plans likely will leave taxpayers with a big bill to fill the hole, a $1.5 trillion-sized hole.

Dramatic policy changes such as eliminating pensions’ cost-of-living adjustments and kicking retirement ages up to levels in line with the Social Security regime still leaves a $1.5 trillion hole, said Joshua D. Rauh, co-author of the study and associate professor at Northwestern University’s Kellogg School of Management.

And such changes can hardly be assumed. “While these ‘drastic’ actions may be less politically viable than more incremental policy measures, even these do not come anywhere close to solving the problems associated with states’ legacy pension liabilities,” says the  study by Rauh and Robert Novy-Marx of the University of Rochester.

Their findings were presented Thursday at a meeting of the National Bureau of Economic Research. 

Without changes, they estimate the unfunded liability stands at $3 trillion.

Throw another worrisome fact into the public pension mix. Most states figure they are going to earn a return on their existing assets of about 8% to help fund future payouts. At least in the current investment environment, that’s quite an assumption.

None of the gloom should stop states from enacting sane reforms for pension schemes. A nascent movement is under way. This column has previously noted a significant ‘agency’ problem exists with public employee retirement benefits. Temporary state political leadership has little incentive to tackle these nasty issues or to be tough in union negotiations, unless  they see tangible short-term political advantage.

As more voters understand the pension liability predicament many states are in, that political will may make itself known.

At a minimum, retirement age and other standards should better mirror private industry.

“The debate over the solution is over transfers,” the study’s authors write. “The current situation is one in which beneficiaries view their benefits as secure promises and taxpayers do not perceive that they will be held accountable for guaranteeing those promises.”

Ultimately, Rauh and Novy-Marx figure taxpayers will have to come up with the money to fill the bulk of the gap that remains regardless of the level of reform that takes place. “If unfunded liabilities continue to grow, the bailouts could be even larger.”