Tag Archives: Daily Finance

This Is Why We Were All So Focused On Chelsea’s Wedding: All The Bad News

Graph from Daniel Indiviglio

Bureau of Economic Analysis:

Real gross domestic product — the output of goods and services produced by labor and property
located in the United States — increased at an annual rate of 2.4 percent in the second quarter of 2010,
(that is, from the first quarter to the second quarter), according to the “advance” estimate released by the
Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

The Bureau emphasized that the second-quarter advance estimate released today is based on
source data that are incomplete or subject to further revision by the source agency (see the box on page 3).
The “second” estimate for the second quarter, based on more complete data, will be released on
August 27, 2010.

Heather Horn at The Atlantic with the round-up. Horn:

U.S. economic growth slowed in the second quarter, the Commerce Department announced on Friday. Simultaneously, Commerce revised its assessments of previous quarters’ growth, to reflect new information both that the recession was “deeper than earlier believed,” as The Wall Street Journal puts it, and that growth in the first quarter of this year was higher than earlier believed.

What do these reports actually mean?

Calculated Risk:

A few key numbers:

  • “Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first.”PCE is slowing.
  • Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.Residential investment was boosted by the tax credit and will decline in Q3.
  • “The change in real private inventories added 1.05 percentage points to the second-quarter changein real GDP after adding 2.64 percentage points to the first-quarter change.”That is probably the end of the inventory adjustment.
  • Daniel Indiviglio at The Atlantic:

    Consumer Spending

    Americans spent more in the second quarter than they did in the first, as consumer expenditures rose by 1.6%. That is, however, a slower rate of growth than the first quarter’s value of 1.9%. Consumer spending was effectively responsible for about half of net GDP growth in Q2.

    Within spending, measures that suggest stronger consumer confidence mostly improved. In general, spending on services was relatively strong, up 0.8%. That’s after being nearly flat in the first quarter. The numbers also indicate that Americans were eating in less and out more, which is generally a sign that they aren’t being as stingy with their money. Durable good sales also grew pretty much across the board, with more autos, furniture, and recreational purchases all adding to growth.

    Investment

    Gross private domestic investment grew at approximately the same rate as it did in the first quarter — by around 29%. Businesses continued investing more in equipment and software last quarter. Industrial equipment purchases grew sharply, after a flat first quarter. Firms’ investment in structures also grew in Q2, after a decline in the quarter prior.

    One significant part of investment came through additional residential investment, as the home buyer credit drove purchases for part of the second quarter. After a 12.3% decline in Q1, they grew by 27.9% last quarter.

    Net Exports

    The only real black eye in the report came with net exports. They contracted significantly. In the first quarter, they were responsible for slicing just 0.31% off of GDP growth, but last quarter their negative contribution was equal to GDP’s entire net growth value. In other words, if Americans didn’t buy so many more products from other nations compared to what they sold those countries, GDP growth would have been more than double the 2.4% total.

    The culprit here was imports. Export growth were essentially flat from Q1 to Q2, but imports grew more than twice as quickly last quarter compared to the first, by 28.8%.

    Government Spending

    Finally, the government spending grew significantly. Here, we saw a reversal with state expenditures. They declined by 3.8% in the first quarter, but grew by 1.3% in the second. Federal spending, however, grew at far brisker pace of 9.2% in the second quarter, compared to a much slower 1.8% growth rate in the first part of the year.

    Joseph Lazzaro at Daily Finance:

    In the second quarter, one clear reason the U.S. economy performed well below its potential was that budget-pinched consumers remained frugal. Consumer spending rose at a 1.6% rate, down from a 1.9% rate in the first quarter. Meanwhile, final sales increased a modest 1.3%, compared to 1.1% in the first quarter.

    However, business investment represented a ray of light, surging 17% after rising 7.8% in the first quarter.

    Imports also soared at a 28.2% pace in the second quarter, while exports rose at a 10.3% rate. However, the trade deficit means net exports subtracted from GDP growth in the second quarter.

    GDP Likely To Intensify Washington Debate

    The sub-par second quarter GDP growth rate also is likely to intensify the debate in Washington between Republicans and Democrats concerning how best to stimulate the economy and prevent a double-dip recession.

    Republicans argue that fiscal stimulus hasn’t worked, and the answer lies in federal tax cuts to free up money in the private sector. The GOP says extending the 2001 Bush income tax cuts would be a good first step in this process. Further, they say government spending also must be cut and federal regulations eliminated to allow the economy to grow faster.

    Democrats counter that the fiscal stimulus has worked — it prevented a deeper recession — and that its main flaw was that the stimulus wasn’t big enough given the massive GDP hole created by the bursting of the housing bubble and the accompanying financial crisis.

    One thing Republicans and Democrats can agree on: The U.S. economy is growing far too slowly and will need some engine of growth — tax cuts, fiscal stimulus, or otherwise — to both lower unemployment and keep corporate revenue and earnings rising.

    Ryan Avent at Free Exchange at The Economist. More Avent:

    Which means that the economy will struggle to hit even the low range of the Fed’s output forecast. And the price index for core personal consumption expenditures continued to tick downward.

    The result is likely to shake up the debate at the August Fed meeting and is very likely to increase the calls for new stimulus measures on Capitol Hill. The faster growth recorded in the two prior quarters failed to generate much of a boost in employment, and legislators, particularly those facing a November election, may fear that labour market recovery will slow even more amid weak economic growth. But there are few easy answers available. Last week, the Senate only barely passed a tiny, $34 billion extension to unemployment benefits. The best hope for American workers—and for vulnerable legislators—may be renewed interest in expansionary policy at the Federal Reserve.

    Atrios:

    Things are worse than was predicted and have been worse than we thought. I get that the administration is constrained by a Senate which can’t even pass a crappy jobs bill filled with tax breaks which won’t do much, but they could have done something with HAMP both to help people and to help the broader economy. And they didn’t.

    Ed Morrissey:

    This is a political disaster for Democrats.  There’s no way to spin a 2.4% GDP rate as a positive step in a recovery.  Worse yet, the pattern has been to revise these numbers downwards when Commerce firms up its data.  The next statement of Q2 GDP will come on August 27, just before Congress comes back in session and right at the prime time of summer campaign season, just a week before Labor Day.  If this drops much lower in the next iteration, Democrats will have to explain the failure of their economic program to angry voters across the nation — and they’re not going to want to hear “It’s Bush’s fault!” two years after electing Obama and four years after giving Nancy Pelosi and Harry Reid control of Congress.

    Doug Mataconis continues:

    Indeed not.

    While I still remain skeptical about the prospects for huge Republican gains in November, the pieces are coming into place to create exactly the type of political environment that might bring that about. A bad economy. An unpopular war. And, a President who has clearly lost much of the magic he had two years ago during the election.

    Hang on, because this is about to get very interesting.

    James Pethokoukis:

    Politically,  the issue is not whether the U.S. economy will slip into a double-dip recession — though it is hardly out of the question for a negative GDP quarter to pop up this year.  It’s how the economy will impact voter mood in 100 days. Will they think America is back on track toward prosperity with growth below trend and unemployment hovering around double digits? That seems unlikely to me.

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    Filed under Economics, The Crisis

    Russian Cyber Gangs Attack Citi Or At Least That’s What The Wall Street Journal Says

    Mark Memmott at NPR:

    The two sides of this story couldn’t be further apart:

    The Wall Street Journal says it’s been told by unnamed “government officials” that the FBI “is probing a computer-security breach targeting Citigroup Inc. that resulted in a theft of tens of millions of dollars by computer hackers who appear linked to a Russian cyber gang.”

    But Citigroup’s Joe Petro, managing director of its Security and Investigative Services, says that “we had no breach of the system and there were no losses, no customer losses, no bank losses. … Any allegation that the FBI is working a case at Citigroup involving tens of millions of losses is just not true.”

    Owen Fletcher at PC World:

    The Russian Business Network is a well-known group linked to malicious software, hacking, child pornography and spam. The Federal Bureau of Investigation is probing the case, the report said.

    It was not known whether the money had been recovered and a Citibank representative said the company had not had any system breach or losses, according to the report.

    The report left unclear who the money was stolen from but said a program called Black Energy, designed by a Russian hacker, was one tool used in the attack. The tool can be used to command a botnet, or a large group of computers infected by malware and controlled by an attacker, in assaults meant to take down target Web sites. This year a modified version of the software appeared online that could steal banking information, and in the Citi attack a version tailored to target the bank was used, the Journal said.

    John Hudson at The Atlantic has the round-up. Douglas McIntyre at Daily Finance:

    The U.S. banking system may be at risk from these cyberattacks, but the financial system may not be their most important target, at least as far as the federal government is concerned. Last July, hackers, probably from North Korea, targeted government websites in the U.S. and South Korea. Computers at the Treasury Department and FTC were shut down briefly.

    Programmers are becoming much more sophisticated at breaking into the servers and PCs that run major websites, including those run by the U.S. government. Anti-hacker software is supposed to be well-designed and highly effective, but it appears that is not always the case.

    The government and businesses with sensitive information, including banks and defense contractors, are likely to be subject to more and more of these breaches, and there isn’t much evidence to show that all of them can be stopped.

    Ryan Chittum at Columbia Journalism Review:

    The paper counters that with an explanation of why Citi would lie:

    U.S. banks have generally been loath to disclose computer attacks for fear of scaring off customers. In part this is an outgrowth of an experience Citibank had in 1994, when it revealed that a Russian hacker had stolen more than $10 million from customer accounts. Competitors swooped in to try to steal the bank’s largest depositors.You can bet this one was one of the most heavily “lawyered” WSJ stories in a good while. The liability for getting this one wrong would be huge, especially after a flat denial.

    […]

    It’s rare to see a story like this where the subject denies the very premise of a super-sensitive story and yet the paper goes ahead and writes it anyway.

    The WSJ is calling Citigroup a liar. Good for it.

    Alain Sherter at Bnet

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    Filed under Economics, Russia, Technology

    Plunder And Booty At Three Dollars A Share

    Jesse Walker in Reason:

    Somali pirates set up their own stock exchange:

    One wealthy former pirate named Mohammed took Reuters around the small facility and said it had proved to be an important way for the pirates to win support from the local community for their operations, despite the dangers involved.

    “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.

    “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

    Alex Massie:

    Capitalism is not in crisis everywhere.

    Sam Gustin at Daily Finance:

    “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

    Also quoted is “piracy investor” Sahra Ibrahim, a 22-year-old divorcee, who was lined up with others waiting “for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel.”

    “I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”

    Chris in Paris at AmericaBlog:

    Oh the irony. Too bad there are so few differences between those pirates and our own. The suits and cars may be better but they’re all pirates

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    Filed under Africa, Economics

    Are They Birds Of A Feather And Do They Fly Together?

    Peter Kafka at All Things Digital:

    When will Comcast and GE’s NBCU finally unveil their hook-up plans? When Vivendi says they can.

    The former French water utility has the ability to hold up the deal due to its 20 percent stake in NBCU and a put option that gives it the right to sell the stake back to back to GE (GE), hang on to it or take the thing public.

    There’s no reason for Vivendi to do anything but the first option, but the company is not going to come out and say so, which means that negotiations for GE to buy the stake aren’t going as fast as it or Comcast (CMCSA) would like. Vivendi itself wrote down the value of the stake by a few billion earlier this year, but that was then, and this is now.

    Sam Gustin at Daily Finance:

    How fitting that NBC, perhaps the most distinguished TV brand in the world, would become controlled by Comcast, a company that provides TV programming on cable — a medium that was once once scorned by the legacy networks, but now appears to have supplanted their one-time dominance. In a way, Comcast’s deal to buy a controlling stake in NBC Universal represents one of the final nails in the coffin of the Big 3 networks’ 50-year monopoly of the TV business.

    Among the complex deal’s basic outlines are the following. Comcast will contribute cash and its cable channels. GE will raise several billion dollars in debt and buy out Vivendi’s 20% stake. GE will then sell 51% of its newly full ownership stake to Comcast. GE will contribute the NBC Universal assets and pass on to the joint venture some additional debt.

    The deal will value NBC Universal at “about” $30 billion, but that could change as the final valuations of the various components are hammered out, according to a source with knowledge of the talks.

    It’s entirely possible that NBC Universal chief Jeff Zucker, as well as “a good portion of their management team” — could stay on to run the joint venture, but it’s too early to know for sure, and no decisions have been made.

    Diane Mermigas at Seeking Alpha:

    It could just be posturing, but Vivendi (VIVEF.PK) says it is in no hurry to sell its 20 percent stake in NBC Universal, which would trigger a $30 billion deal to make Comcast (CMSCA) the majority owner. Even if the transaction does not occur, there will be interesting fallout.

    Vivendi is in talks to unload its minority stake to the highest bidder. That could be NBCU co-owner General Electric (GE), a third party, or the public (in a stock offering). Vivendi has until 2012 to sell its stake during an annual window from Nov. 15 to Dec. 10. Sources close to the deal say cash-strapped GE would place $12 billion against the new NBCU to buy out Vivendi. GE would be a minority owner in NBCU with Comcast.

    Vivendi Chief Financial Officer Philippe Capron said today no decision has been made yet about the “complex” situation. “We have never been closer to the end of the story. It’s in the future, but I can’t comment on the timing or the likelihood of what will happen,” Capron said at the Morgan stanley Technology, Media and Telecoms Conference in Barcelona.

    Huffington Post:

    Media mogul John Malone said Thursday that Comcast Corp.’s plan to buy a controlling stake in NBC Universal would give it too much market power and force competitors to consider similar acquisitions.

    Comcast Corp. – the nation’s largest cable TV provider – is in talks to buy a 51 percent stake in NBC Universal from General Electric Co. GE is negotiating to buy back Vivendi SA’s 20 percent ownership in NBC Universal and then sell a majority stake to Comcast.

    Malone, who is chairman of Liberty Media Corp., which has a controlling stake in satellite TV carrier DirecTV Group Inc., said GE did not approach him about investing in NBC Universal.

    “It was developed very quietly between Comcast and GE and they did not seek any other,” Malone told The Associated Press on Thursday.

    UPDATE: John Hudson at The Atlantic

    UPDATE #2: Tim Arango at NYT

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    Filed under Economics, TV

    Come Bailout In The Tulips With Me

    Portfolio:

    This is not the headline Treasury Secretary Tim Geithner (or, frankly his boss, President Obama) wanted to read:

    HOW CAN GEITHNER SURVIVE THIS? Scathing Report Singles Out Treasury Chief For Bungled AIG Bailout

    That banner hed is stripped across the top of the HuffingtonPost, over a three-column photo of Geithner with a highball glass to his lips. Here’s hoping there’s something strong in that glass.

    A brutal report issued Monday by a government watchdog holds Timothy Geithner — then the head of the Federal Reserve Bank of New York and now the nation’s Treasury Secretary — responsible for overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs.

    The authoritative new narrative describes how, while bailing out insurance giant AIG last fall, a team led by Geithner failed nearly every step of the way.

    Atrios:

    Heckuva job, Timmeh.

    John Hudson with The Atlantic round-up.

    Economics of Contempt:

    Geithner Vindicated in TARP Watchdog Report

    That’s right, vindicated. Read the whole report. It makes clear that the NY Fed did try to negotiation haircuts with AIG’s counterparties, but not at all surprisingly, the counterparties (and the French regulators) refused, and the NY Fed was left with no choice but to pay par value. Geithner, contrary to popular belief, didn’t have the powers of a bankruptcy court. It’s funny how quickly the Immaculate Negotiation argument breaks down in the real world. (I will be accepting apologies in the form of cash or personal checks.)

    Despite the overtly political “conclusions” and “lessons learned” sections (sadly, the only sections journalists read), the SIGTARP report (finally) gets a lot of the real facts out in the public domain, so we can finally talk about them now.

    Douglas McIntyre at Daily Finance:

    The Fed defended its actions, of course, saying that they were meant to prevent a collapse of the credit markets. The Treasury said it did not have the right to push banks to take less than the face value of the assets that had insured with AIG. The New York Fed eventually loaned a division of AIG $23 billion to make its $62 billion in payments to counterparties including Goldman.

    The Fed and Treasury still insist that they acted correctly, and that it was not their right to push banks for concessions — a claim that now rings hollow. The Fed and Treasury pushed Bank of America (BAC) to buy Merrill Lynch, and Henry Paulson, who was Treasury Secretary during the crisis, forced banks to take TARP funds — even if they did not need the government money. Paulson apparently thought that struggling banks that really needed the capital would not look as bad if all major financial firms participated in the program.

    During that extraordinary time when credit markets were collapsing, it is hard to accept that the government stepped outside the boundaries of “appropriate” action in some cases, and did not do so in others. What is very clear is that the actions of the New York Fed cost taxpayers billions of dollars, much of which they may never get back.

    Megan McArdle:

    What could the Fed have done?  It could have abused its regulatory authority:  threatened the banks that wouldn’t play ball with some sort of retaliation.  But this would probablyhave created deep problems with the French. It would also have further devastated a shaken banking sector.  Leaving aside the morality of using regulatory authority for unauthorized purposes, countries where the regulator arbitrarily uses its authority to secure sweetheart deals for the government do not have robust, thriving financial sectors.

    Yes, yes, I know–ours isn’t so hot either.  It’s pretty galling how little pain the remaining banks have suffered as a result of the crisis.

    But really, you’d like living with a third world banking system, and the slow economic growth it tends to generate, even less.  Banking, more than any other industry, is built on trust in the future.  If people think their savings can at any time be diverted into government coffers by the will of the regulator, they move them elsewhere, or stop saving entirely.

    Daniel Indiviglio at The Atlantic:

    But I think there’s a broader point to make here about this supposed backdoor bailout for banks. One of the clear intentions in bailing out AIG was to ensure financial stability. That implicitly meant that counterparties in its contracts would get what was owed to them.

    Yet, this isn’t different from any other firms benefitting when another they have a relationship with is bailed out. For example, if you bail out a computer maker, then the microchip companies it has contracts with will celebrate, because they will get paid. In the case of AIG, of course, banks were like the microchip companies in this example. If a company survives, so do its contracts.

    And that’s just part of the messy reality of bailouts. Like it or not, if you save a company, you get all of the baggage that comes along with it. The only reason people noticed in the case of AIG was because of the sheer magnitudes of dollars and the parties involved — tens of billions went to investment banks instead of tens of thousands that might go to largely unknown suppliers if a manufacturing company had been saved.

    At the end of the day, all you can really do is shake your head. But you should also change laws so that in the future firms won’t need to be bailed out, but can be allowed to fail without bringing down the entire economy.

    UPDATE: Matthew Yglesias

    UPDATE #2: Paul Krugman

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    Filed under Economics, Political Figures, The Crisis

    Green, Green, Green

    Al_Gore_i_An_Inconv_100607o

    John Broder at NYT:

    Former Vice President Al Gore thought he had spotted a winner last year when a small California firm sought financing for an energy-saving technology from the venture capital firm where Mr. Gore is a partner.

    The company, Silver Spring Networks, produces hardware and software to make the electricity grid more efficient. It came to Mr. Gore’s firm, Kleiner Perkins Caufield & Byers, one of Silicon Valley’s top venture capital providers, looking for $75 million to expand its partnerships with utilities seeking to install millions of so-called smart meters in homes and businesses.

    Mr. Gore and his partners decided to back the company, and in gratitude Silver Spring retained him and John Doerr, another Kleiner Perkins partner, as unpaid corporate advisers.

    The deal appeared to pay off in a big way last week, when the Energy Department announced $3.4 billion in smart grid grants. Of the total, more than $560 million went to utilities with which Silver Spring has contracts. Kleiner Perkins and its partners, including Mr. Gore, could recoup their investment many times over in coming years.

    Nick Loris at Heritage Foundation:

    If Al Gore wants to invest his money in green technology, windmills, solar panels or algae, he can do as he pleases. It’s his money.  The taxpayer does not have such autonomy. Along with Gore’s investments, the government is taking other people’s money to invest in these projects who do not have a say in the matter. It’s what economist Frederic Bastiat described as legalized plunder: “See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

    When it comes to investment, that’s exactly what venture capitalist firms are for – to supply funding for the early stages of high risk, potentially high profit start-ups. The government footing a portion of the bill significantly reduces the risk and there’s a reason they need to do so. It’s because these projects are too expensive to compete in the market otherwise and even after years of subsidies and tax breaks, renewable energy still only provides a small fraction of our energy. Maybe wind and solar investments will occur without government support but that’s for the market to decide.

    In a speech last year, the former vice president called for the United States to commit to having 100 percent of the country’s electricity supplied by renewable energy within 10 years. With cap and trade, a mandated renewable electricity standard, and billions of dollars in taxpayer-funded green energy investments, it’s no surprise “few have put as much money behind their advocacy as Mr. Gore and are as well positioned to profit from this green transformation, if and when it comes.” But it’s not just Gore. Large energy companies are hedging their bets on political policy designed to make renewable energy more competitive and are pushing for federal funding.

    Gore responded to criticism of this saying, “I absolutely believe in investing in ways that are consistent with my values and beliefs. I encourage others to invest in the same way.”

    That’s fine. Many Americans do invest in ways consistent with their values and beliefs and many hold stock where they work or in what they think will be profitable. It becomes objectionable when the government forces people to invest in projects, whether they’re profitable or not. But if the government is investing in them, it’s a pretty telling sign they won’t be. This isn’t laissez-faire capitalism; it’s crony capitalism.

    Meredith Jessup at Townhall:

    Speaking of Al Gore, check out the UK’s Telegraph which reports on how Gore has been cashing-in on his own global warming hysteria.  The headline: Al Gore Could Be World’s First Carbon Billionaire.

    Mr. Gore of course says he’s putting his “money where my mouth is.”  But is it any coincidence that last year, Gore put $56 million in a company that’s now receiving hundreds of millions of dollars in government contracts granted by the Obama administration’s Energy Department?  Even the NYTimes is wondering

    Tom Maguire:

    I am sure Dick Cheney was proud of the work done by Halliburton in supporting American interests in Iraq and around the world, too.  And Michael Moore was a progressive rabble-rouser even before he became rich by being a progressive rabble-rouser.  This is a great country.

    Gore is not a public official, thank heaven, so it is perfectly reasonable for him to back his ideas with his money.  What is not reasonable is the silence of the conflict of interest crowd that screams “cui bono” every time a righty does something like this.

    Gateway Pundit

    Don Suber

    Sam Gustin at Daily Finance:

    Gore, the co-recipient of the 2007 Nobel Peace prize for his environmental advocacy, has testified before numerous times before Congress, and given dozens of speeches based on his award-winning film An Inconvenient Truth, which portrayed an ominous future marked by ecological catastrophe.

    To be sure, Gore has enemies, and many of them. He picked them up throughout a long career in public service, first as congressman, then as a senator — he was dubbed Sen. Moonbeam — then as vice-president to Bill Clinton, and finally as a green tech evangelist and ecological doomsayer.

    Now this foes are fuming that Gore is poised to profit — in a big way — from investments in companies which seek to address the ecological crises he has been warnings about for year. Broder writes that Gore could be viewed as “profiteering from government policies he supports that would direct billions of dollars to the business ventures he has invested in.”

    At a hearing earlier this year, Representative Marsha Blackburn, a Tennessee Republican, attacked Gore for being poised to profit from the very policies he was urging the government to adopt.

    “Do you think there is something wrong with being active in business in this country?” Mr. Gore responded. “I am proud of it. I am proud of it.”

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    Filed under Economics, Environment, Political Figures

    I’ll Take An Order Of 1,000 Widgets, 500 In Chocolate, 500 in Cherry Garcia

    Christopher Weber at Politics Daily:

    A measure of U.S. manufacturing activity surpassed all expectations last month, jumping to its highest level in three and a half years and, economists say, marking a clear sign the overall economy is in recovery mode.

    Economists had expected the Institute for Supply Management’s (ISM) manufacturing index to hit 53 in October, from a reading of 52.6 a month earlier, CNNMoney reported. Instead, the purchasing managers’ group said the index topped out at 55.7, the highest reading since April 2006, when it registered 56.

    “This is another clear sign the recession is over, and the recovery has begun,” Adam York, an economist at Wells Fargo, told CNN.

    The ISM index is a national survey of purchasing managers in the manufacturing field. Index readings above 50 signal growth, while levels below 50 indicate contraction. Readings below 41.2 generally mean the overall economy is in recession. The index has registered growth for three straight months.

    The jump in the index was pushed along by growing production and employment, according to Norbert Ore, chair of the ISM’s manufacturing business survey committee.

    “Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode,” Ore said.

    Daniel Indiviglio at The Atlantic:

    First, the manufacturing data is hard to call anything other than really great. The Institute for Supply Management’s index of national factory activity rose to 55.7. Here’s what the ISM says that means:

    The recovery in manufacturing strengthened in October as the PMI registered 55.7 percent, which is 3.1 percentage points higher than the 52.6 percent reported in September, and the highest reading for the index since April 2006 (56 percent). A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.Now, if this were completely chalked up to stimulus efforts, then that would skew the data. But while government efforts likely had some effect on the index, I think the more detailed breakdown shows that the recovery could be genuine.

    Rex Nutting at WSJ Marketwatch:

    Thirteen of 18 industries were growing in October, including industries such as furniture, food, chemicals, and paper that have nothing to do with the auto sector.

    The cash-for-clunkers program certainly has helped the automakers and its related industries, but there is a much simpler and stronger explanation for the steady improvement in manufacturing industries since the winter: Inventories are finally getting under control.

    In this crazy world of option ARMS, credit default swaps and other financial wizardry, it’s good to see that some things work the same way they have for thousands of years: Producers get too ambitious and produce too many widgets, which end up stacked up in the back room. So they stop making so many widgets while they sell all the widgets they have in the storeroom. Eventually, they need to make new widgets to meet widget demand.

    Joseph Lazzaro at Daily Finance:

    Another encouraging, monthly performance by the U.S. manufacturing sector: The nation’s industrial output continues to rebound after a roughly three-year contraction. Aside from the top-line ISM index rise, the two most important take-aways from the October ISM factory report are: 1) the unevenness of the recovery, as expressed by survey respondents; and 2) the employment component’s rise above 50 — the expansion level — for the first time in 16 months. Regarding the latter, like the U.S. housing sector’s recent stabilization, the October factory employment stat does not indicate robust hiring — far from it — but the fact that it is stabilizing will likely be interpreted by U.S. stock markets as a positive: i.e. manufacturing in 2010 probably will not be the major GDP contractor that it has been since 2006. One caution: The new orders index did decline in October, and that would represent a danger sign if it drops below 50 in the months ahead.

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    Filed under Economics, The Crisis

    The Seventh Seal, The Eleventh Chapter

    large_CIT

    Andrew Ross Sorkin’s Dealbook at NYT:

    Three months ago, the CIT Group barely averted what it considered to be a ruinous bankruptcy filing that would likely have put the 101-year-old lender out of business.

    On Sunday afternoon, the company filed for Chapter 11 — but under a so-called prepackaged bankruptcy plan that will enable it to emerge from court protection by the end of the year, under the control of its debtholders. (Read the filing after the jump.)

    The filing, made in a Manhattan federal court, will still mean much pain for many parties, beginning with taxpayers. CIT received $2.3 billion in government aid last year, a bailout that came in the form of preferred stock. That will almost certainly be wiped out in the bankruptcy process, the first realized loss in the government’s rescue of the financial system.

    While several firms that have received bailout money, including Goldman Sachs and Morgan Stanley, have repaid the government, others — including the American International Group, General Motors and Chrysler — are expected to lead to losses.

    CIT’s filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers. The company’s struggles have been watched with interest and trepidation by analysts and the thousands of small and mid-sized businesses that borrow from CIT.

    Mike Spector and Kate Haywood at WSJ:

    CIT’s board met early Sunday afternoon, these people said, and the company sought Chapter 11 protection in New York a few hours later. The lender expected to have considerable support from creditors for its “prepackaged” reorganization, which could allow CIT to have its plan approved quickly and emerge from bankruptcy by the end of the year, other people familiar with the matter said.

    Sam Gustin at Daily Finance:

    CIT survived the Great Depression, but it couldn’t weather the Great Recession. Its demise may be a sign that the wave of crumbling, sub-prime mortgage-infected financial giants has not ceased.CIT’s bankruptcy filing will be the fifth largest in U.S. history, after Lehman Brothers, Washington Mutual, Worldcom and General Motors. CIT’s board of directors met Sunday and approved the Chapter 11 filing, in New York’s Manhattan bankruptcy court. The lender, which provides crucial capital to small businesses around the country, is expected to have the support of most of its creditors. The bankruptcy will be “pre-packaged,” and allow the company to keep operating and emerge by the end of the year.

    The filing comes after the company made a last-ditch debt-exchange offer, which CIT’s bondholders rejected. On Friday, billionaire Wall Street gadfly Carl Icahn — who claims to be CIT’s largest debt-holder — agreed to support the prepacked bankruptcy filing. Icahn had previously lobbied for CIT’s outright liquidation, but failed to convince other debt-holders to support him.

    Calculated Risk

    Stacy-Marie Ishmael at Seeking Alpha:

    CIT did not mention that the US taxpayer is likely to be the biggest loser in all this – recall that the US government invested $2.33bn in CIT preferred shares in December 2008 through the Tarp; preferred shareholders will get money only after other creditors are paid back.

    UPDATE: John Hudson at The Atlantic

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    What Do We Buy It For The 80th Anniversary? Lehman Stock?

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    This week marks the 80th anniversary of the Crash.

    David Roeder at Chicago Sun-Times:

    The stock market’s famous Black Tuesday was exactly 80 years ago. Today’s investors can be excused if they feel somehow like they witnessed it firsthand.

    Most of this decade, the stock market has been in bear territory. The current recession is quite old by historical standards, though believed to be technically over, and foreclosed and vacant homes pockmark the land. So do empty storefronts.

    Credit was too freely given before the crisis started, and it may be unjustly denied now, especially to homeowners or businesses trying to restructure debt.

    It feels like the Great Depression and hence its informal name, the Great Recession. And yet it’s not in the same league.

    So far this year, federal authorities have closed 106 banks across the country, a number that’s gotten substantial attention. In the early 1930s, 10,000 banks shut down, and that was before the protections of the Federal Deposit Insurance Corp.

    The Great Depression shaved about 30 percent from the value of the nation’s economic output. The Great Recession has cost about 5 percent.

    Unemployment during the 1930s was more than 20 percent. Today, the official rate is 9.5 percent. It might be in the mid-teens if you count people who have given up the job hunt, or taken just part-time work to get by, but by that standard, the figures from 70 years ago probably understate the problem too.

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    The Huffington Post has a series of blog posts from New Deal 2.0. Eliot Spitzer:

    How little we have learned! Reviewing the 80 years that have passed since the ’29 Crash and reflecting on the abyss into which we descended just over a year ago, it is easy to feel despondent at our lack of accrued wisdom. Sure, we had several decades where sound banking principles were foisted upon a cowed banking community. For a time, institutions were permitted neither to be “too big to fail” nor “too big to manage.”

    But the story changed.

    Over the past several years, we have seen the all-too-predictable return of irrational euphoria and the belief that those who ride a speculative wave have actual wisdom, not luck. We have suffered collective amnesia with respect to the cost of undervalued financial risk. We willingly believed in an alchemy that pretends to turn debt into equity. We subscribed to a naive view that unbridled leverage is a sound financial architecture.

    Is there a way to shake off our amnesia? Of course: We need reasoned rules limiting the rapacious excesses of the untamed financial world, regulatory symmetry between risk and reward, safe guardianship of the public fisc, regulators willing to brave prevailing winds and power brokers, and a sense of humility whenever we believe we are truly smarter than those who preceded us.

    John Carney at Business Insider:

    The greatest lesson of 1929 and the Great Depression–that excess credit would distort the economy so badly that it could take years to put it back on track–was made to seem irrelevant and outdated, especially in the go-go economic climate of the new millennium.

    There are frightening parallels between 1929 and 2009. Post-1929 Wall Street’s leaders more or less controlled the shape of regulation that emerged.  Likewise their current-day counter-parts are fighting to control the next generation of regulation. Even something as innocuous as the consumer financial protection agency seems designed to support more bank consolidation and punish local, independent banks.

    The fight over pay is largely a side show. It attracts lots of headlines but pales in significance to matters such as the role of ratings agencies and the correct structure of capital requirements. And even when those subjects are raised we’re told nonsensical lies such as the idea that it is the way ratings agencies were compensated that derailed them, that it was the repeal of Glass-Steagal that ruined banking, that the problem was unregulated markets, or that unregulated hedge funds or derivatives need to be brought to under control.

    Anything but the critical matters: a credible policy of allowing market failure, better capital reserve requirements for banks and an end to overly permissive credit coming from the central bank.

    Can we have banking regulation that isn’t designed by bankers or immediately captured by bankers? The historical lessons are not reassuring.

    Barry Ritholtz:

    Has it only been 80 years? Gee, time really flies when you are accumulating debt at compound interest rates.

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    Matthew Scott at Daily Finance:

    To safeguard investors and the markets after the 1929 crash, tighter banking regulations were enacted. Margin accounts were regulated to prevent investors from borrowing their way to ruin. The FDIC was established to insure bank deposits and restore confidence in the markets. The SEC was created to fight corruption in the stock markets. And the precursor to Fannie Mae was created to stop the need for short-term lending that had also played a role in causing people to be overleveraged during the 1929 crash.

    Diane Swonk, chief economist of Mesirow Financial, doesn’t expect investors will see the federal government acting to protect their interests with the same level of regulatory reform this time around.

    “The policy response [to stop the market slide] was pretty swift and dramatic, but the change in regulation in terms of the structure of our financial services industry has yet to really take its full form,” she said. “Although we’re seeing things come out piecemeal right now, the type of seismic shift you saw coming out of the Great Depression, we have yet to see.”

    So the markets lose 45 percent in seven months and regulators don’t see a need to change anything? In Swonk’s opinion, because fiscal policy was handled better during the current crash and markets rebounded quickly, regulators are probably more inclined to add a few new rules or reinforce rules already in place, rather than do a major restructuring. The Great Depression was different in that it lasted about ten years: “Partly because it went on for so long, it forced us to make much more dramatic changes in the way financial markets were structured,” Swonk said.

    So with few major regulatory changes coming and a rocky recovery on the horizon, where is the investor left? Speculation is still a problem, pushing up the price of everything from stocks to gold to oil. And both Inflation and deflation lurk as dangers.

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    The Notorious G.M.A.C.

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    Calculated Risk:

    From the WSJ: GMAC Asks for Fresh Lifeline. The WSJ is reporting GMAC is in “advanced” talks with Treasury for another bailout: “The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into [GMAC], on top of the $12.5 billion that GMAC has received since December 2008 …

    Naked Capitalism:

    The numbers aren’t as impressive as AIG’s but the general premise is the same. The automaker’s financial service arm it asking for a third taxpayer-provided cash transfusion. Might help if someone stanched the bleeding first.

    But no, bleeding is part of the game plan. The reason for more dough to GMAC is so GM and Chrysler can continue to finance auto purchases, not as a result of greater than expected losses on its existing portfolio. So this is cash for clunkers under another brand name.

    Douglas McIntyre at Daily Finance:

    The money that will probably go to GMAC raises another critical issue: what happens if financial institutions that have already received government funds need more money to continue operating or lending money to consumers and businesses? It is currently assumed that the largest banks like Citigroup ( C) and Bank of America (BAC) are now on the mend and will be able to pay the government back the money that they have taken under TARP.

    Dozens of medium-sized banks and financial firms took money from the government as part of the TARP program, and recent data from the Treasury shows that 34 of these did not pay dividends on the money for the August fiscal quarter. That means there are probably a number of severely troubled financial firms still battling to fix their balance sheet problems.

    GMAC may not be the last financial operation to request more federal government funding, so what will the Treasury do if more companies come knocking on the door asking for additional capital? It could cause a bit of a panic if the government starts turning them down.

    James Kwak:

    So I have two ideas. The first is that if we put more money in GMAC, we should divide it in two and let the mortgage lending part fail. If we insist on keeping the whole thing afloat, that means we are subsidizing both the auto lending part (which is supposedly critical to the economy) and the mortgage lending part (which isn’t).

    The second is that this would be a great time for JPMorgan Chase to get some good PR by stepping in and offering to replace GMAC as the funding source for GM and Chrysler dealers, so the government can abandon GMAC. Or even buying GMAC outright, including assuming all its debt and committing to subsidize the auto business, for $1 or so. Yes, that would make JPMorgan bigger, which I’m not thrilled about. But from Jamie Dimon’s perspective, it would show the potential benefits of having big banks that are willing to act in the national interest now and then, and it would be a little like Goldman declining to haggle over the price of buying back its warrants from Treasury.

    Now the idea of relying on big banks to serve the national interest obviously sounds like bad policy to me. But if Jamie Dimon wants to take this problem off the taxpayer’s hand, I think he would be welcome to it.

    Zac Bissonnette at Bloggingstocks:

    Here’s what is so incredibly so screwd up about this: GMAC provides financing for car buyers. Any personal finance expert will tell you that borrowing money to buy a car is one of the dumbest things that you can possibly do.

    By shoring up GMAC’s capital structure and therefore its ability to continue making car loans, the United States government is providing the means for Americans to get themselves into horrible financial situations.
    That’s unconscionable and it’s immoral.

    Our elected officials are now pitting the health of the auto industry against the financial well-being of families all over the country, and they’re doing it under the guise of helping the economy.

    News flash: in the long run, using taxpayer dollars to finance financial overextension will not lead to prosperity.

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    Filed under Economics, The Crisis