The Financial Minority Report

Everyone in the financial sphere is talking about the proposed banking overhaul put forth by Obama this morning. Stories like this are everywhere.

It is still early to tell, and we don’t know yet how much of his proposal will actually get into a bill passed by congress, but I see this at best as an attempt to lance a boil on the plague stricken patient. As proposed, it could end “Too Big To Fail” at some institutions such as JP Morgan Chase and Citigroup but others would remain and in fact have their position enhanced.

Why? Well, Obama wants to end the banks’ ability to speculate with depositors money (while having FDIC and Federal Reserve backstops, read TAXPAYER BACKSTOPS). That is all well and good and I am generally in favor of it. BUT IT DOES NOTHING TO STOP SPECULATION BY BANKS THAT DO NOT HAVE DEPOSITORS. That would be Goldman Sachs and Morgan Stanley. They would continue to have access to the FDIC’s bank loan guarantee program and the Federal Reserve 0% interest rates, both of which are again, guaranteed by you and me, the American Taxpayer.

These guys win at the expense of everyone else. Again.

We can no longer achieve economic growth by taking on debt. According to the data released today, each new dollar of debt results in a loss of 15 cents of GDP.

Source: Federal Reserve, Bureau of Economic Analysis

There continues to be amazing yield compression at the short maturity end of the Treasury Yield curve. At the same time there is a growing disinterest in the long maturity end. Today’s Treasury auction of 30 year maturities fetched a median yield of 4.42% with a whopping 40% of the allotment going off at the high yield of 4.52% resulting in the widest 2year – 30year gap since 1980.

Yes, another method of transferring the losses in the private sector onto the Federal Government’s balance sheet and thus to all of us as taxpayers. This one is called HEMAP or Homeowner’s Emergency Mortgage Assistance Program. The money for this is being appropriated in H.R.3766 while the legal framework is part of H.R.4173, both being considered by the House of Representatives. You can read more about it here.

The relevant quote is:

“A homeowner found eligible to participate in the program then makes a partial mortgage payment to the U.S. Department of Housing and Urban Development instead of the lender. HUD subsequently pays the homeowner’s entire monthly mortgage to the lender provided that the homeowner has a reasonable prospect of resuming mortgage payments within 24 months.”

It appears that Wall Street/Federal Reserve lobbyists have no real desire to end Too Big To Fail. To wit, we have this from the NATION

“The sale pitch for financial-reform legislation pending in the House claims it would put an stop to “too big to fail” bailouts for the leading banks. The reality is the opposite. The federal government would instead be granted unlimited authority to spend whatever it takes to prop up the big boys when they get in trouble. Only in the next crisis, Congress won’t have to be asked for the money. The financial rescues will be funded by the secretive Federal Reserve, not the Treasury, with money the Fed itself creates.

And the emergency lending could be pumped into any financial institution in trouble–not just behemoth commercial banks but investment houses like Goldman Sachs, insurance companies, hedge funds or any other pools of private capital whose failure regulators believe would threaten the system.

This sounds nutty and it is. A permanent security blanket for big boys of finance will further inflame public opinion. Only the public isn’t likely to know. The crucial terms for Fed financing are set by an innocuous-sounding amendment offered by Representative Brad Miller of North Carolina. Any financial holding company designated as a “systemic risk” and subject to stricter regulatory standards “shall have the same access to the discount window lending of an appropriate Federal Reserve Bank as is available to a member bank of each Federal Reserve bank.”

This last-minute amendment, if included on final passage, solves a huge problem for the Obama administration–how to pay for the next bailout if another financial calamity unfolds. In the House banking committee, the administration’s legislation originally sought unlimited authority for the Treasury and the president. But committee members choked on the implications after Representative Brad Sherman of California denounced it as “TARP on steroids.” TARP was the original $700 billion bailout jammed through Congress last year. Citizens are still angry and some members of Congress who voted for TARP are likely to lose their seats.

Solution? Let the Fed do it behind closed doors. The Federal Reserve’s discount lending to commercial banks is normally not disclosed to the public since it might signal the bank is in trouble and undermine investor confidence. That secrecy can hardly be sustained in another crisis, however, since financial markets will swiftly figure out which financial firms are the lucky winners in the Fed’s fail-or-flourish lottery.”

Items such as this I suspect are motivated by the continued insolvency of the financial system. They are motivated by self preservation instincts of the powerful. We are not out of the woods in this crisis and there is no economic recovery. The world economy has absorbed much more than the maximum amount of debt that is serviceable, the only argument is over who is going to pay.