Thursday, May 22, 2014

Bernanke Money-Grubs From the .01%

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009), which was published in Chinese in 2014. He is working on a book about Ben Bernanke.   See more at:

"[Bernanke] gave this stuff out [inside information -FJS], but I didn't realize what he was saying at the time, so I didn't do a great trade."

Hedge-fund manager David Tepper, after paying $200,000 to take former Federal Reserve Chairman Ben S. Bernanke to dinner, quoted in the New York Times, May 21, 2014

            Ben S. Bernanke continues to be a man of his times. His mind never looks backward or forward. It is as if every day is complete within itself, with no attachment to precedent; no past, no record, no history, and, in the future, he will bear no responsibility. Some precedent may be helpful to critique former Federal Reserve Chairman Ben S. Bernanke's current escapade.

After Paul Volcker stepped down from the chairmanship in 1987, he made one, solitary public comment that could in any way be deemed a comment on the Federal Reserve. (It was a defense of the new Fed chairman, Alan Greenspan, who had raised interest rates shortly before the 1987 stock-market crash.) Volcker held his tongue for 12 years, until 1999. Then, and only then, he simply could not remain silent while Greenspan sweet-talked Americans into buying NASDAQ shares at 200 times earnings. On May 14, 1999, the former Federal Reserve chairman spoke at the Kogod School of Business commencement at American University: "The fate of the world is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings."

Volcker's observation was obvious at the time but, as usual, the Inner Sanctum never let the public in on the fix.

After Alan Greenspan resigned in 2006, he behaved just as we expected. From Panderer to Power:

"On February 12, 2006, two weeks after Chairman Greenspan retired, he received $250,000 to speak at a dinner Lehman Brothers' hosted for hedge-fund managers. The New York Post reported Lehman paid $100,000 more than Greenspan's 'customary speaking fee' of $150,000. It was a surprise to many he spoke at all. Caroline Baum commented on Bloomberg: "At a minimum, Greenspan evinced bad judgment by not letting time pass before reasserting himself. His refusal to cede the limelight gracefully...left a bad taste in people's mouths." That he spoke publicly, and for money, was undignified. This reflected solely on Greenspan. Worse, he was interfering with the Bernanke Fed. He told the hedge-fund managers that short-term interest rates would have to rise. The next day, they did....

"[C]entral bankers took their gloves off. Mervyn King, Governor of the Bank of England (and former colleague of Ben Bernanke at MIT) announced: 'I'll only say that I am very grateful to Eddie George [King's predecessor] that he has not been in the newspapers and on radio all the time commenting on what the monetary policy committee is doing. In due course I will ensure I do exactly the same thing.'"

It will be interesting if Mervyn King reprimands his former cellmate from M.I.T. He may. King has been one of the few central bankers who admits central banks played a part in the "the worst financial crisis in global history, including the Great Depression" [B. Bernanke to the FCIC in 2009. This declaration reminded the Committee "back off, I saved the word" - FJS]

The media has decided Bernanke is "in play." This is a matter of personal perception, ratcheted by a New York Times story on Thursday, May 20, 2014. The title is telling: "After the Fed, Bernanke Offers His Wisdom for a Big Fee."

The title itself is a message. "Open season" on Bernanke is now permitted. Elizabeth Warren explained this distinction in her recent book, A Fighting Chance. Warren is now a senator from Massachusetts. At the time of the incident she recalls, Warren was poking holes in the Old Boys impregnable frat house. Larry Summers decided to sit her down. Warren writes in A Fighting Chance: "He teed it up this way: I had a choice.... I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People -- powerful people -- listen to what they have to say. But insiders also understand one unbreakable rule: They don't criticize other insiders."

            Permitting the possibility a Times editor was asleep at the wheel, Bernanke has lost protection. He would be the second insider cut loose in the past two weeks. On Monday, May 12, 2014, James Freeman teed up Timmy Geithner's new book, Stress Test in the Wall Street Journal. Freeman is the deputy editor of the Journal's editorial page. In the world Summers described, the Journal would hire an outsider to toss Geithner onto the ash heap of history.

            The New York Times and the Wall Street Journal will always protect their own interests, first.  The Times, for instance, was an early advocate for U.S. military operations in Vietnam. That changed.

            The Times lashing lacks historical perspective. It states: "Mr. Bernanke is following a well-trodden path that his predecessor, Alan Greenspan, and other Washington policymakers have taken." This is recent, though. Certainly, getting paid $200,000 to $400,000 for dinner, night after night, is new.

            Particularly revolting is Bernanke selling himself (being a family publication, a more accurate verb lies dormant) to the .01%. For appearance sake alone, such blatant money-grubbing offers grist to those who see the Federal Reserve as hostage to banking interests. Similarly, claims of "Federal Reserve independence" and other antiseptic nonsense will lose credence to a jaundiced eye.

A perceptive Congressman who sits on the Financial Services Committee may wish Bernanke was still in the penalty box. For instance, Jim Bunning long retired now, could be his party's pick, after, of course, finance and the economy come unplugged. (Any day now. You heard it here first, and second, and third...)

On December 9, 2009, Bunning let loose on the prof: "How can you regulate systemic risk when you are the systemic risk?" This is funny, but also every word is true, including "you" - not, the "Fed," the "FOMC," the "literature" - and "the" - not, his model or his (non)-theory.

            Should some Congressman decide to subpoena the Richard Whitney of 2014, this is the time to gather C-Span clips for a presidential run in 2016. The following background may help. It addresses Bernanke's complete lack of understanding - despite his responsibility - for money-printing without license.

"Using high leverage to improve corporate performance is much like encouraging safe driving by putting a dagger, pointed at the driver's chest, in every car's steering wheel; it may improve driving but may lead to disaster during a snowstorm."

            Ben S. Bernanke, 1990

Bloomberg headline: "Bernanke, Kohn Pledge Fed to Withdraw Credit When Crisis Ends"

April 9, 2009

From the April 9, 2009, Bloomberg story: "Bernanke's speech yesterday detailed steps that the Fed can take to remove that liquidity, including soaking up cash by the issuance of special bills." 

Special bills?!?

60 Minutes, March 2009:
60 Minutes voiceover: "That makes it all the more outrageous when he hears of financial firms handing out perks and bonuses after they've taken bailout money."

Bernanke: "The era of the high living, this is over now. And that they need to be responsible and use the money constructively.... [Bankers need to] have a reasonable sense of humility based on what's happened in the past 18 months." 

60 Minutes, December 5, 2010: 
60 MINUTES: "You have what degree of confidence in your ability to control this?"  

BERNANKE: "One hundred percent."
MarketWatch headline: SHE FOUGHT WALL STREET, AND NOW SHE'S OFF TO JAIL: OPINION: UNLIKE CEO'S, THIS 'OCCUPY' PROTESTOR COULDN"T AVOID PROSECUTION. by David Weidner: "Cecily McMillan was sentenced yesterday to 90 days in prison for assaulting a police officer who was trying to clear Zuccotti Park in lower Manhattan, where Occupy Wall Street protesters had gathered. McMillan, 25, denied the second-degree assault charge."

            May 20, 2014

To add a populist tone, which Ben Bernanke is so generously encouraging: Nor could Cecily McMillan afford to have dinner with the central banker, which, in any case is most useful to hedge-fund managers such as David Tepper, who paid himself over $3 billion in 2013.

"With all due respect, US policy is clueless. It's not that the Americans haven't pumped enough liquidity into the market. Now to say let's pump more into the market is not going to solve their problems." 
Wolfgang Schäuble, German finance minister, Financial Times, November 5, 2010

"We are learning by doing." (Or, something similar)

            Ben S. Bernanke, lecture at George Washington University, March 2012

Testimony before Senate Banking Committee, February 2013
SENATOR TOOMEY: "What would the impact be of actually having to liquidate a big portion of your holdings on the bond market, on the equity markets?

CHAIRMAN BERNANKE: "We don't anticipate having to do that."

SENATOR TOOMEY: "Not ever?!"
[Bernanke went on to confirm "not ever." - FJS]

"First, innovation, almost by definition, involves ideas that no one has yet had, which means that forecasts of future technological change can be, and often are, wildly wrong."

Ben S. Bernanke, May 18, 2013:

"[N]ot only are scientific and technical innovation themselves inherently hard to predict, so are the long-run practical consequences of innovation for our economy and our daily lives."

Ben S. Bernanke, May 18, 2013

"THE FED HAS NO ENDGAME," MSM headline, November 4, 2013

"A brief update on the bloated condition of the Federal Reserve's balance sheet. At present, the Fed holds $3.84 trillion in assets, with capital of just $54.86 billion, putting the Fed at 70-to-1 leverage against its stated capital. Given the relatively long maturity of Fed asset holdings, even a 20 basis point increase in interest rates effectively wipes out the Fed's capital. With the present 10-year Treasury yield already above the weighted average yield at which the Fed established its holdings, this is not a negligible consideration."
            John Hussman, November 5, 2013

"Larry Summers is worried that the Federal Reserves' efforts to stimulate the economy could end up doing damage. 'Low interest rates could become a source of instability down the road,' said Summers....What's more, Summers said that the Fed's policies are likely making the income inequality problem in the U.S. worse, by helping wealthy Americans who hold the majority of stocks, more than the rest of the country. 'A policy that works by pumping up asset prices is not going to be egalitarian,' said Summers."

            Fortune, May 15, 2014.

Not in the short-term, Larry.


"Pininterst, Uber - $10 billion is the new $1 billion."

            May 20, 2014

"Anton Purisima has filed a lawsuit in a Manhattan court for two undecillion dollars. 'The sum, written as two followed by thirty-six zeros, is likely a new record for a demand in a lawsuit, the New York Post says.' It's also more money than even exists in the world by a long shot, Gothamist notes."

            May 20, 2014

Not for long, Gothamist.

"60 Minutes" March 2009

"If you had a message for the American people in this interview what would that be?"

Bernanke: "...I'd say first of all the Federal Reserve is here and is going to do everything possible to support the economy."
                        March 2009

Hi ho, silver. 

Thursday, May 15, 2014


Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

The Producer Price Index for April was released May 14, 2014. The one-month change was +0.6%, after it rose 0.5% in March (revised to that figure in the April report). Foods rose 2.7% (+1.1% in March). In "All the Junk Food You Love is Pricier This Year," Max Nisen writes on Quartz: "Chipotle's [Grill - CMG: NYSE] food prices were up 34.5% last quarter in total, with big increases in [beef, cheese, avocado, and pork]." Chipotle's CFO John Hurtung laments: "While we want to remain accessible to our customers, we're at a point where we need to pass along these rapidly rising costs." Chipotle's stock price was $505 at the close on May 14, 2014, up from $49 at the great liftoff on March 9, 2009.

            Nisen went on to report McDonald's "has already boosted prices. McDonald's CFO Peter Bensen suspects: "[Y]ou do see franchisees generally around the industry, not just McDonald's, anticipating some of these higher input costs." Nisen went on to discuss higher prices at Taco Bell, Pizza Hut, KFC (Kentucky Fried Chicken to those over 50: it was the Chipotle Grill or Facebook of the Go-Go Years) and Pepsi. Pepsi CEO Indra Noori discussed the situation as unintelligibly as possible: "The strength of our brands is clear in our ability to achieve consistent net price realization." Whatever that means, family incomes are falling (See "April 2014 -Castles in the Air" and "The Bed-Pan Economy"). It seems doubtful Pepsi's stock price will benefit, but analysts, accountants and public-relation experts are very well paid.

At the same time, U.S. Treasury yields are falling. From over 2.7% in late April, the 10-year Treasury closed at 2.53% on May 14, 2014. The Wall Street Journal commenced its front page dissection on May 15, 2014: "Global bond rates dropped to their lowest levels of the year Wednesday, as central bankers signaled their determination to jolt the world's largest economies out of their malaise. Investors piled into U.S., German, and British government bonds-used to price everything from mortgages to car loans-driving down their yields. The yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest level in more than six months. In Germany, 10-year bund yields fell to their lowest point in a year. The Journal's headline was "Nervous Investors Pile Into Bonds."

Note the "central bankers" comment. Only 9% of Americans knew who the Federal Reserve chairman was in 1979. These temporary celebrities' [redundant - ed.] determination for the masses to believe "inflation is too low" knows no limits. They are determined to prevent "deflation." Whether they believe that or not, all of the tendencies: among central bankers, the media, and Wall Street, will foster this myth. Martin Wolf wrote another irresponsible mandate in the Financial Times on May 14, 2014 with the headline: "Time for Draghi to Open the Sluice." The top of the front page of the same edition drew readers to the column: "Time for Draghi to Pull Out Another Bazooka," Martin Wolf, page 9.

It is said, and with truth, that "stocks always get it last." Meaning, watch the bond markets for signs of change. That phrase circulated before bond markets were policy tools of central planners. At least part of the reason - I think most of the reason - the 10-year bond yield has fallen is due to short covering. One of the most widespread tactics in recent months has been to hold long positions in riskier bonds while adding protection by shorting Treasuries.

Treasuries are hard to come by. The Federal Reserve's various QE (i.e. money printing: in which the money is credited to banks in exchange for the banks' U.S. Treasury and MBS holdings) programs have made certain maturities hard to come by. For instance, in 2011, the Federal Reserve held 24% of the 10-30 year U.S. Treasuries. On December 31, 2013 it held 46%.

A bond manager who is watching and worried that other bond managers may cover their short positions (they have to buy the Treasuries they had previously sold), contributes to the downward momentum in yields by reducing exposure to a Treasury rally (by buying). Falling yields signal the opposite change to the actual and immediate problem of price inflation everywhere.

If the downward momentum in short-covering really takes wind, the 10-year could fall below 2.0%, for a long enough time to buy or refinance a mortgage before the great inflation grows obvious.

Monday, May 12, 2014

The Bed-Pan Economy

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Data portrayed in the "Employment in Total Non-Farm" payroll (NFP) chart is used by central bankers and Wall Street strategists to assert economic strength. They either think the trend demonstrates morning in America, or, they know otherwise, but cannot fashion anything better.


The Federal Reserve chairman, probably any Fedhead for that matter, whip off cheerleading spiels supported by numbers that make no reference to historical comparison. For that matter, they use numbers that make no reference to other numbers, and numbers without reference have no meaning. Fed chair Yellen recklessly disregarded context in her March 31, 2014 speech in Chicago: "Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady - February [2014] was the 41st consecutive month of payroll growth, one of the longest stretches ever."




Yellen's data, in reference, offers no promise of recovery. There have been no jobs "added" since the unemployment bottom in 2009. Yellen is spoken of as a "great labor economist." She either knows her statement is misleading, or, she is demonstrating how little economists know. It was not too long ago Simple Ben was ordained "the Greatest Economist of the Greatest Depression," after which, he ushered us into The Great Recession and created The Protracted Depression.


In  "April 2014 - Castles in the Air," I wrote the "span from December 2007 to March 2014 is 75 months. Seventy-five months after jobs peaked in 1990 (as we entered the 1900-1991 recession), there were 10 million net new jobs. Seventy-five months after the post-2000 job peak, there were five million net new jobs. In March 2014, we are still half-a-million jobs south of the zero bound."


More important is whether jobs can support a family. The nearby "Breadwinner Economy" chart is designed for this purpose. The chart is from David Stockman's ContraCorner website as is the discussion of what constitutes a breadwinner job in "The Born Again Jobs Scam: The Ugly Truth Behind 'Jobs Friday,'" and "The Fed's Labor Market Delusion."   



Only one aspect of the delusion will be discussed here. This is the quality of breadwinner jobs created since NASDAQ 5000. As such, this does not directly address the problems of those who have lost an $80,000 job for $40,000 employment, the long-term unemployed, the part-time employed, and the misleading data that accompanies headline news. For instance, people who work one hour a week are counted as "part-time workers" in U.S. government data.


From "April 2014 - Castles in the Air":"The Greenspan NASDAQ Bubble peaked in 2000 and breadwinner jobs reached 72.7 million. After Greenspan and Bernanke artificially revved up the mortgage-finance economy through 2007, jobs topped out at 71.9 million in December 2007. By June 2009, the deflated mortgage bubble had cost five million jobs: there were 66.2 million NFP workers in June 2009. By March 2014, there were 68.3 million breadwinner jobs, 3.6 million fewer than in December 2007, a level achieved during the second Clinton Administration. The quality within the breadwinner industries has deteriorated significantly and the population has grown."

A major change in the composition of breadwinner jobs since 2000 has been the shift from production to service. More specifically, jobs from the goods-producing economy (manufacturing, construction, mining, and energy) have declined from 24,627,000 in January 2000 to 18,941,000 in March 2014. The largest relative growth of jobs has been within the Health, Education, and Social Services (HES) area. From 24,382,000 jobs in January 2000, HES jobs have sprouted to 31,505,000 in March 2014.

Goods-producing jobs pay much better than those within health, education, and human services. HES jobs are highly dependent on fiscal solvency, with the exception of hospital employment which is vulnerable when the government loses its exorbitant privilege of funding its promises for free. Less hospitals, 75% of the revenue supporting these jobs comes from local, state, and federal funding. The average pay within the HES assembly is $35,000. Yellen is not going to achieve "escape velocity" without HES employees shuffling their accounts faster than Charles Ponzi.

            Even given the deep contraction in 2009, the re-emergence of HES positions is much slower than the years leading up to the Greenspan Famine. From January 2000 to December 2007, 4.8 million, or 51,000 HES jobs, were added each month. Since the bottom of the Great Recession (stage 1 in Bernanke's Protracted Depression), 1.5 million, or, 26,000 jobs have been added each month. "Restored," not "added," which is Yellen's claim. (Breadwinner jobs also include "Core Government" employment, which excludes Post Office and Education. There were around 11 million in 2007 and in 2014. Uncle Sam's workers receive around $60,000 on average.)
Jobs clawed back within the HES sectors are inferior to those before. By and large, the jobs have not been among doctors, skilled nurses, or medical technicians. About 80% of them - 1.2 million - fall within the Bed-Pan Economy: home-health aids, day-care workers, and nursing-home staff.

The April employment numbers released on May 2, 2014, were greeted warmly. Front-page headlines from the Wall Street Journal ("Job Growth Gathers Steam") and Financial Times ("U.S. Jobs Growth Exceeds Expectations") were as untutored as Chairman Yellen's claims.

Tuesday, May 6, 2014

April 2014 - Castles in the Air

            The word "bubble" is suffering from overuse. Still, with money for nothing inflating markets around the world, we are seeing how prices inflate to enormous proportions where the prospect of pushing those prices even higher draws a crowd. When such artificial stimulants to bond, mortgage and tea-cup enthusiasm reaches a peak, the switch from green to red is often quick.

            A reminder comes by way of "Run, Run, Run, Was the Financial Crisis Panic over Institution Runs Justified?" by Vern McKinley. Published on April 10, 2014, by the Cato Institute, McKinley writes: "Countrywide's [a premier sub-prime lender when the going was good - FJS] second-quarter 2007 financial results indicated no significant weaknesses and the major rating agencies assigned it strong ratings with a stable outlook. [Although, a MarketWatch headline on July 24, 2007: "U.S. Stocks Close Sharply Off on Credit Woes, Dow Slides 226 points; Countrywide Says Risks Extend Beyond Subprime." This is a reminder that "the market" quickly forgets what it does not want to know, as we see on May 1, 2014. - FJS]

"This calm changed dramatically on August 2, 2007, as Countrywide was unable to roll over its commercial paper or borrow in the repo market.... On August 14, Countrywide released its July operational results, reporting that foreclosures and delinquencies were up and that loan production had fallen by 14% during the preceding month.... On August 15... a Merrill Lynch analyst switched Countrywide from a "buy" to a "sell" rating.... [T]hat led to a Los Angeles Times article that [Angelo] Mozilo [CEO of Countrywide] blamed for causing the run that ensued.... One customer pulled $500,000 from a Countrywide Bank branch... 'It's because of the fear of bankruptcy.... I don't care if it's FDIC-insured - I want out.'"

            Countrywide follows a pattern seen dozens of times over the past twenty years. The quality of loans had fallen off a cliff but the economists, the brokerage houses, and - of course - the Federal Reserve - were in the dark. The stock market played the schizophrenic, "Oh, No!" and "Good thing that's Over!" game. It peaked in October 2007. The catalyst for collapse was "loan production had fallen by 14%." Even the carpe diem frat boys on TV know the deteriorating quality of loans will not cause a ruckus as long as the percentage of missed payments and defaults does not rise. But, once Countrywide & friends could no longer feed the fast, rising rate of new loan production, the façade was near its end. The combination of more defaults and lower production is soon impossible to hide. 

            The FOMC (Federal Open Market Committee, where monetary policy is set) had talked about houses at its meeting on March 27-28, 2006. Federal Reserve Chairman Ben S. Bernanke reminded the anointed: "residential housing is, of course, only about 6 percent of GDP." We can read, actually see, inside the professor's mind, since it is so simple: He is looking at a pie chart of the GDP, with slices of red, magenta, honeydew, and fern. The residential housing slice is a thin one, and, as his sort is programmed to regurgitate, isolated from the others. Any ambitious student at Princeton or the FOMC knows "6%" is the "A" response. Lights out. 

At the December 2006 meeting, reclining even deeper into his barcalounger, the most prominent cheerleader for the Great Moderation was tranquil. He tossed manufacturing sectors, including furniture and appliances into his splendid-isolation view, since "this is about 15 percent of the economy compared with 85 percent of the economy." The 85 percent was another world.

            Bernanke went on in this vein through 2007, not taking the time to bone up on inevitable cross currents that accelerate when recognition and margin calls lead the man at the bank to declare "I want out."

A sample of the commotion after Countrywide's August 15, 2007, hiccup follows; showing how quickly an accumulation of accepted beliefs vanish in a credit collapse:


Aug. 16 (Bloomberg) - "Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt. The yield on the three-month Treasury bill fell 0.54 percentage point yesterday to 4.09 percent, the lowest since 2005. It was the biggest single-day decline since Oct. 13, 1989, when the Dow Jones Industrial Average tumbled 6.9 percent...."

Aug. 16 (Thomson Financial) PAULSON SEES MARKET TURMOIL STALLING U.S. GROWTH, BUT NO RECESSION - "U.S. Treasury Secretary Henry Paulson said... the financial system and economy are 'strong enough to absorb the losses....  '[L]ooking over periods of stress that I've seen, this is the strongest global economy we've had,' he said."

Aug. 17 (Boston Globe) "First Magnus Financial Corp., based in Tucson, which purchases mortgages from loan brokers and is one of the 10 largest mortgage wholesalers in New England, yesterday said it would no longer fund new loans...."

Aug. 21 (Reuters) - MARSH: MANY CLAIMS LOOM IN THE SUBPRIME CRISIS "Marsh Inc., the world's largest insurance broker and risk adviser, yesterday warned financial institutions they may face more claims as a result of the subprime mortgage crisis...."

Aug. 21 (Bloomberg) "COMERCIAL PAPER ROILS BORROWERS WITH $550 BILLION COMING DUE "Ottimo Funding LLC, whose name is Italian for 'excellent, has the highest possible credit rating and doesn't own subprime mortgage bonds. That made no difference to investors who refused to buy Ottimo's $3 billion of short-term debt this month as losses on home loans to risky borrowers infect the global credit markets. 'It's pretty much a straight contagion,' said George Marshman, chief investment officer of Stamford, Connecticut- based Aladdin Capital Management, which oversees about $20 billion, including Ottimo."

Aug. 21 (Fortune) CAPITAL ONE AND THE MORTGAGE DOMINO EFFECT "Capital One's shuttered GreenPoint Mortgage is the latest mortgage banking explosion to bump Wall Street's panic meter up a notch."



Aug 22 - (AP) MONEY MARKET FUNDS FACE PRESSURE AMID BROADER UNEASE ABOUT CREDIT "The market turmoil of the past month spawned by growing credit market problems is spilling over to money market funds...."

Aug. 22 (Bloomberg) DEVELOPER'S BIG MANHATTAN MOVE FACES A CREDIT SQEEZE "Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.... Skip to next paragraphHis 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe's reputation as a visionary tycoon.... But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble, so much so that he could lose control not only of the newly acquired portfolio but also the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now."



Specifically stated in the travails of Harry Macklowe, but running through the other dislocations mentioned, is collateral. With Macklowe, it is collateral in the literal sense. Given the turmoil after August 15, 2007, lenders marked down the value of Macklowe's assets that stood behind his borrowings. As a hunch, his assets were additionally discounted because "he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money." In other words, when the reliable but jury-rigged, "Greenspan/Bernanke put" becomes unhinged, the (downward) revaluation of collateral is not a cold, hard calculation, but, "I want out," on the lenders part.
Don Hogan Charles/The New York Times

Harry Macklowe - August 22, 2007

The FOMC chatted about their magenta and honeydew economy deep into 2008. Federal Reserve Chairman Ben S. Bernanke told an audience of economists on June 9, 2008: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." The recently released 2008 FOMC transcripts show Ben & Co. were not putting on a brave face. They really believed this stuff.

A handful of district presidents operated with a full seabag, and could see the 6% of GDP was not separate from the professor's textbook, FOMC-Approved economy. ("Yes, Ben, 6%. Another "A".)

The lethargy is worse in 2014. Old hands on the Federal Reserve staff who dealt in markets have retired. The professors' minds are more constipated than ever. Federal Reserve Chairwoman Janet Yellen sounds like Alan Greenspan in 2005 - or 1995: The Fed is lifting the stock market, the housing market, and the consequent "channel" from those to consumer spending will fuel "escape velocity."

She could not be more wrong. Consumers are not in a position to increase credit. The Greenspan leveraging of America could only happen once. An extraordinary supplement of consumer spending and credit is needed to save the Holy GDP. Consumer credit debt rose from 105% to 117% during the first Reagan Administration (1980-1985) to 205% in 2007. Total credit (business, household, financial, and government) rose from 150% to 350% of GDP. This will not rise to 500%.

Yellen cannot think differently. Federal Reserve policy will "encourage consumers to spend and businesses to invest, to promote a recovery in the housing market, and to put more people to work." (Janet Yellen, March 31, 2014, National Interagency Community Reinvestment Conference, Chicago, Ill) In the same speech: "We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery." The Fed believes the "Wealth Effect" from rising asset prices is the "Channel" to GDP "Escape Velocity." (The first thing we do is kill their vocabulary.)

This channel has never worked as they claim. Michael Feroli, chief U.S. economist at J.P. Morgan, calculates the amount of acquired wealth spent by consumers was 3.8% from 1952 through 2009. That is 3.8 cents of every additional dollar in "wealth." (Another word economists have mangled.) Since 2009, Feroli calculates households have spent 1.9 cents of each incremental dollar, half the historical average. Feroli also found that withdrawal of home equity has been negative for the past five years.

Yellen toted her "wealth" channel to Congressman Frank Lucas on February 11, 2014: "I would agree that one of the channels by which monetary policy works is asset prices, and we have been trying to push down interest rates, particularly longer-term interest rates. Those rates do matter to the valuation of all assets, both [Sic] stocks, houses, and land prices. And so I think it is fair to say that our monetary policy has had an effect of boosting asset prices."

Yellen's theoretical world not only lacks a theory but is at odds with reality. Maybe the Fed can claim a partial victory: the U.S. Census median price for new homes sold in March 2014 rose 13.3% from a year earlier and reached a new record high of $290,000. As one might guess, sales have fallen.

Redfin, a real-estate brokerage firm, calculates house sales have collapsed in 2013's most effervescent Arizona and California housing markets. In Phoenix, inventories rose 42.7% from March 2013 but sales fell 17.4%. Redfin describes what eludes Yellen: "Someone who purchased a $350,000 home in Riverside [CA] in March 2013 with a twenty percent down payment and a 30-year fixed mortgage rate of 3.4% would have a monthly mortgage payment of $1,241. But with prices up 19.6%, the same home would now cost $418,600. At the current mortgage rate of 4.33%, the monthly mortgage payment on that home is now $1,663, a 34% jump from a year ago."

            California Association of Realtors Chief Economist Leslie Appleton-Young recently warned: "Housing affordability is really taking a bite out of the market. We haven't seen this issue since 2007."  This is a remarkable comparison, given that, just seven years earlier, California housing was collapsing faster than London during the Blitz. In October 2007, California Association of Realtors Chief Economist Leslie Appleton-Young announced: "The impact of the credit crunch spread throughout all tiers of the market in September." California statewide median home prices had sunk $58,140 from September 2006 and statewide home sales fell 39% from the year before. The California Association of Realtors "Unsold Inventory Index" increased to 16.6 months, double the level in March 2007. It had been 6.4 months in September 2006. San Francisco Bay Area sales fell 46% over the past year; High Desert sales were 63% lower. (In December 2003, California Association of Realtors Chief Economist Leslie Appleton-Young told her audience the chronic shortage of homes for sale coupled with attractively low mortgage rates would keep the pressure on buyers: "The message is 'Boy, this is the time,' Young said. 'It doesn't look like the situation is going to change any time soon.'")

The rate of home ownership in the United States just fell to the lowest level since 1995: 64.8%. It is not a coincidence that then-Fed Chairman Alan Greenspan started confiscating our interest rates around that time, partly to goose the housing market. He had enjoined Fannie Mae and Freddie Mac to turn their mortgage regurgitations into assembly lines, to quicken the pace of credit flows since the economy was moving to China.

            At the July 1995 FOMC meeting, Greenspan expounded on mortgage growth and the GDP: "[M]ortgage applications for purchasing new and existing homes have been moving up....The home builders data clearly indicate that things are moving. This is important not only because of the importance of the residential construction sector, but also because history suggests that motor vehicle sales and some parts of the residential building industry move together. If there is firmness in the home building area it has to exert, if history is any guide, some upward movement in the motor vehicle area, which would be very useful." Especially useful to a public servant whose annual review consists of the percentage increase to GDP.

            The ownership rate of houses peaked at 69.2% in 2004. The mad rush into home mortgages was only possible through the Fed's perpetual perversion of interest rates. When interest rates are too low, the riffraff banned from Vegas hangs a "Loans" shingle in the pool hall.

It appears Chairman Yellen came close to admitting low rates had destroyed balance in the housing market in her February 2014 meeting with the Congressmen. This is gathered from the phrasing of a question by Representative Patrick Murphy:

MURPHY: "The collapse of the housing bubble and resulting financial crisis devastated the global economy and cost Americans $17 trillion worth of wealth. Many of us assign responsibility for low interest rates and lax capital and leverage standards to the Federal Reserve and then Chairman Greenspan. While I do not believe the Fed caused the crisis, [Come on, Murph! Let it fly! - FJS] its policies certainly helped fuel the Bubble. In June 2009, you said that higher short-term interest rates might have slowed the unsustainable increase in housing prices. With the benefit of hindsight, would measures to slow the housing bubble have been appropriate?"

YELLEN: ".... [P]olicies to have addressed the factors that led to that Bubble would certainly have been desirable. I think a major failure there was in regulation and in supervision, and not just in monetary policy."

            The bureaucrat's utopia. New and more regulation.

            The housing market is not hitting a single cylinder. The Fed cut mortgage rates from 6.5% to 3.3% over five years. Around 80% of mortgage originations are refinancings, not money-purchase mortgages. And now, that has dried up, for the simple arithmetic Redfin described in the Riverside, California market.

The combination of higher payments (delinquencies rise) and lower volume is similar to when Countrywide's loan production sank in the summer of 2007. Mortgage originations from the four big banks (Wells Fargo, Bank of America, J.P.MorganChase, Citi) averaged $300 billion a quarter from 2010 through 2013 (average of $1.2 trillion each year, $300 billion a quarter). They fell to $67 billion in the first quarter of 2014. Total mortgage-backed security (MBS) issuance has fallen from $185 billion in June 2013 to $87.2 billion March 2014.

This is bad for collateral. When credit expands beyond its capacity to fund positive-return projects, asset quality deteriorates This is a dangerous moment: asset prices must not fall, and acceptable collateral must rise at a faster rate, not fall by $98 billion a month, as MBS securitization has since June 2013.  

            House sales affirm life is good at the top. The bottom is getting worse. The National Association of Realtors (NAR) existing home sales data for March 2014 calculates number of houses sold for below $100,000 fell 17% year over year. Those between $100,000 and $250,000, fell 10%. House sales for prices above $1 million rose 14.8% in February 2014 and 7.8% in March 2014. Vacation home sales rose 30% in 2013, from 553,000 in 2012 to 717,000 in 2013.  

            Spending at the top must not slacken. Hermès has stationed a baseball glove in its window - with a sales tag of $14,100. To the question, "Why so expensive?" MarketWatch was reminded the mitt is "absolutely top-grade." The Ritz-Carlton in Chicago offers a $100 grilled cheese sandwich, stuffed with 40-year-old aged Wisconsin cheddar that's been "infused with 24K gold flakes." New asset classes include old cars. Classic Auto Funds Limited (CAF) is "launching several investment partnerships using collectable cars as the hard asset." Fund CAF/1 is already up and running, or, at least, in storage: with a 1971 Ferrari Dino 246 GT and a 1964 Maserati Mistral 3.5. The investment partners (conjecture comes from how this ended in 2007) will turn this asset into (discounted) collateral. The investors will then use the borrowed money to buy Facebook shares (passé as that may be) or to bid against Chinese businessman Liu Yiqian, who bought a fifteenth century porcelain cup at Southeby's in Hong Kong for $36 million. Also recalling 2007: how will this collateral look to the lender in a panic? The larger point here is that collateral's velocity cannot slow down, from fatigue or concern. The imaginary value behind assets must keep rising, or all will fall. 


            Federal Reserve Chairman Janet Yellen came to the job touted as a "great labor economist." She betrayed an untutored knowledge of labor data during a speech in Chicago on March 31, 2014: "Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever."


            What jobs have been created during those 41 months? Not the sort that can pay for a house. Before looking at the poor quality, the quantity is absent. Yellen is looking for a renaissance when there are fewer payroll (NFP: non-farm payroll) workers than in 2007.

            In "The Born Again Jobs Scam: The Ugly Truth Behind 'Jobs Friday,'" David Stockman writes on his ContraCorner website there were 138.4 million NFP jobs in December 2007. In March 2014, the total was 137.9 million. There are 500,000 fewer payroll workers today.

            The span from December 2007 to March 2014 is 75 months. Seventy-five months after jobs peaked in 1990 (as we entered the 1900-1991 recession), there were 10 million net new jobs. Seventy-five months after the post-2000 job peak, there were five million net new jobs. In March 2014, we are still half-a-million jobs south of the zero bound.  

Stockman makes the distinction of "breadwinner jobs." Breadwinner jobs produce annual pay of about $45,000. "The Born Again Jobs Scam," lists the breadwinner-job industries and income data as calculated by the Bureau of Labor Statistics.

It is assumed here that only those with breadwinner jobs can buy a house. Short of that, there are methods to finagle a house through student loan and the used-car loan markets, but that is limited.

The Greenspan NASDAQ Bubble peaked in 2000 and breadwinner jobs reached 72.7 million. After Greenspan and Bernanke artificially revved up the mortgage-finance economy through 2007, jobs topped out at 71.9 million in December 2007. By June 2009, the deflated mortgage bubble had cost five million jobs: there were 66.2 million NFP workers in June 2009. By March 2014, there were 68.3 million breadwinner jobs, 3.6 million fewer than in December 2007, a level achieved during the second Clinton Administration. The quality within the breadwinner industries has deteriorated significantly and the population has grown.

             Ben Bernanke's "six percent" also failed because his approach was wholly abstract. Construction and its financing had lost its mind. Today, again, grandiosity is the rule.

Hudson Yards, on New York's West Side, is the largest such development in Manhattan since Rockefeller Center in the 1930s. Residential towers at 15 Hudson Yards and 35 Hudson Yards will rise 910 feet, with 70 floors of "unobstructed views of the of the city and Hudson River.... 15 Hudson Yards will be the ideal place for New York's creative visionaries to live." A search for a perfect resident at 35 Hudson Yards was unavailing.


The 52-story South Tower will be the first to soar. That in itself is commonplace. It is when one reads "it is to become the home of the luxury handbag maker Coach," tentatively named "Coach Tower," that securitization of vintage cars looks relatively sane. The Masterplan, on Hudson Yards' promotion website, expects 17,440,000 square feet of office, residential, hotels, shops on 28 acres.


When Mayor Bloomberg launched the Hudson Yards initiative, he compared it to Canary Wharf's influence in London. This may not be the most encouraging comparison, at least for the builders, since Canary Wharf crushed the Reichmann Family (Olympia & York), and its creditors, with $20 billion of unpaid bills when it filed for bankruptcy.


As to London, the glass cube tower invasion rises as one of the most celebrated skyline additions in decades goes broke. On April 25, 2014, the Gherkin Building was placed in receivership. The following paragraph from Realty Today just about sums up the derangement of minds and finance in 2007: "VG Immobilien purchased the building in 2007 from architects Norman + Foster [Always a red flag for extravagance - FJS] for $1 billion. The Germany-based realty firm financed the deal through a loan, part of which was in Swiss Francs. The currency has gained about 63 percent on the dollar in the last seven years, which ballooned the debt price to a point that it breached levels of debt allowed to be held in the country, reports Bloomberg."

Another cautionary comparison lies partially built but wholly insolvent in Seoul, South Korea. "Dream Hub," a proposed 138-acre building project, midwifed by former Seoul Mayor Oh Se-Hoon (this was to be his ticket to the presidency), has entered bankruptcy. Sparing the details reported by the Wall Street Journal (which published "just the tip of the iceberg"), six years after groundbreaking, the anticipated 150-story, 2,181-foot-tall skyscraper is stillborn, and Oh Se-Hoon will not comment on his foregone objective to turn Seoul "into a center of global commerce."


Boston Properties has acquired the groundbreaking (on March 27, 2013) Salesforce Tower in San Francisco. The 1,070 foot, 61-floor tower (expected completion in 2017) will rise 200 feet above Transamerica Pyramid, currently the tallest building in San Francisco, and the west coast. It will "eventually be eclipsed in height by the 73-story Wilshire Grand in Los Angeles." Originally contracted on "spec," meaning the builder did not have a substantial tenant at the outset, Salesforce will rent 700,000 square feet in its namesake skyscraper. Mayor Lee of San Francisco commented: "It's not just about an expanding company. It's about a company that has faith in our city and is demonstrating that. And has faith in the kind of values we try to teach our kids about giving back."


These mayors. ("Boston Mayor Martin Walsh said [in late April] he wants to make his city the tech capital of the world.... And he's "not afraid to build a skyscraper for [high-tech] workforce housing.") What does that mean? A case might be made that Boston Properties is the model of faith and charity. Salesforce "had operating losses of $35 million, $111 million, and $286 million the past 3 years?  (Yes, the losses are increasing in size.) On top of that, CRM has net debt of over $1 billion on their balance sheet." (Thank you, Kevin Duffy at Bearing Asset Management) San Francisco as a whole is grossly overrun by social media operations at unsustainable rents that have a whiff of Webvan, the San Francisco Internet grocer that went public in 2000, broke in 2001, after placing a $1 billion order with Bechtel to build grocery warehouses.


            Despite mounting evidence the house and skyscraper markets are long in the tooth, they continue to rise. Harry Macklowe, undeterred after losing the GM Building (and seven others following the 2007 credit crunch), received FAA approval to build "the tallest residential tower in the western hemisphere." If all goes as planned (it is under construction), the 95-story apartment house, at 432 Park Avenue, will glower down upon Central Park, with "[p]rices at the proposed 1,396-foot tall skyscraper start[ing] at $20 million for three-bedroom units with libraries. Full-floor penthouses with 360-degree views cost up to $95 million. A one-bedroom can be had for close to $7 million." Harry "Macklowe claims he has already sold one-third of the 123 units, but [CORE broker Jarrod Guy Randolph] worried about pricing."

            Come on, Jarrod. Follow Harry. He didn't even graduate from college. Parents and students paying extortionist tuitions, take note.


Vision of 432 Park Avenue: Monument to 
the Bernanke/Yellen Zero-Bound