Debt and More Debt; Crisis Deepens

Earthside Comments: There is more bad news on the economy, but below is just about as much as we can stand for now.

Note in the first report what has happened to the interest rate on Treasury bonds upon the announcement of the federal government's $2 trillion deficit for fiscal 2009 (it will be that number by the time we reach October ... you can be sure of that). According to Obama in last evening's speech and also most conventional economic pundits, getting borrowing going again is critical to recovery -- but gigantic deficits have the immediate impact of raising interest rates -- a prime example of what a total mess we're in, uh?

Hunker down ... the rest of this post speaks for itself.

Obama Forecasts $1.75 Trillion Deficit This Year | Reuters

President Barack Obama will forecast the biggest U.S. deficit since World War Two in a budget that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy's freefall.

An eye-popping $1.75 trillion deficit for the 2009 fiscal year is projected in Obama's first budget, according to U.S. officials who briefed reporters on the numbers.

That is equal to 12.3 percent of U.S. gross domestic product -- the largest share since 1945 when the country ran a shortfall of 21.5 percent of GDP. ...

... The soaring deficit figure sent U.S. Treasury bond prices lower and yields up to three week highs on Thursday. ...

... The deficit number reinforced concerns the government will need to sell record amounts of debt to pay for programs aimed at pulling the economy out of a deep recession.

"The budget issue is definitely one for Treasuries because it means greater funding going forward, it means that there is going to be a lot of supply that has to be taken on board by the market," said Orlando Green, fixed income strategist at Calyon in London. ...

... Obama's $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 billion economic stimulus package that the Democratic president signed earlier this month.

His stimulus package and other efforts to revitalize the economy have done little to cheer Wall Street. U.S. stocks prices hit 12-year lows this week.

GM Posts $9.6 Billion 4Q Loss, Burns Through $6.2 Billion Cash | Associated Press

General Motors Corp. posted a $9.6 billion fourth-quarter loss and said it burned through $6.2 billion of cash in the last three months of 2008 as it fought the worst U.S. auto sales climate since 1982 and sought government loans to keep the century-old company running.

The nation's biggest domestic automaker said Thursday it lost $30.9 billion for the full year and expects an opinion from its auditors as to whether the company remains a "going concern" when its annual report is issued in March. That means the auditors will determine whether there is substantial doubt about the automaker's ability to continue operations.

Chief Financial Officer Ray Young said the determination will depend a lot on whether GM gets further government loans and whether it can accomplish its restructuring goals.

The company has received $13.4 billion in federal loans since Dec. 31 and says it needs up to $30 billion to stay out of Chapter 11 bankruptcy protection. Top GM executives were in Washington, D.C., Thursday to meet with the Obama administration's auto task force to talk about restructuring and additional loans.

New Jobless Claims Jump Unexpectedly to 667,000 | Associated Press

New jobless claims rose more than expected last week and the number of laid-off Americans continuing to receive unemployment benefits topped 5.1 million, fresh evidence the recession is increasingly forcing employers to shed jobs.

The Labor Department said Thursday that first-time requests for unemployment benefits jumped to 667,000 from the previous week's figure of 631,000. Analysts had expected a slight drop in claims.

The 667,000 new claims are the most since October 1982, though the labor force has grown by about half since then.

The number of people receiving unemployment insurance for more than one week also increased more than expected to 5.1 million. That's the fifth straight week the figure has set a new record-high on data going back to 1967, and compared with only about 2.8 million people a year ago.

As a proportion of the work force, the number of people continuing to receive benefits has reached its highest point since July 1983.

Orders for Big-Ticket Goods Weaker Than Expected | Associated Press

Manufacturers saw orders for big-ticket goods plunge by a bigger-than-expected 5.2 percent in January as global economic troubles cut into demand from customers both in the United States and abroad.

The latest report on U.S. factory activity, released by the Commerce Department on Thursday, showed that orders had fallen for a record six straight months. The previous record - a four-month-stretch of declines - came in 1992.

The weakness in January was broadly based with orders for autos, metal products, machinery, computers and electrical equipment and household appliances all posting declines.

Not only was January's drop steeper than the 2.5 percent decline analysts were expecting, but activity in December turned out to be much weaker. Updated figures now show a 4.6 percent drop in orders, versus a 3 percent decline previously estimated.

Manufacturers have trimmed production and payrolls as they race to cut costs to survive the economic fallout. The collapse of the U.S. housing market has especially crimped demand for all kinds of building materials and equipment, as well as a range of consumer goods, including furniture, carpet and household appliances.

The Blind Leading the Blind: Wall Street and Bernanke | Dave Lindorff/CounterPunch.org

'There will be blood' - Niall Ferguson Interview | Globe & Mail

It's Time to Break up the Big Banks | Mike Whitney/Information Clearing House

"We will preserve the banking system that is owned and managed by the private sector."
Treasury Secretary Timothy Geithner

Timothy Geithner is putting the finishing touches on a plan that will dump $1 trillion of toxic assets onto the US taxpayer. The plan, which goes by the opaque moniker the "Public-Private Investment Fund" (PPIF), is designed to provide lavish incentives to hedge funds and private equity firms to purchase bad assets from failing banks. It is a sweetheart deal that provides government financing and guarantees for illiquid mortgage-backed junk for which there is currently no active market. What's got Geithner worried, is the fear that the public will see through this latest boondoggle and set off a political firestorm. If that happens, the markets will go into a swan-dive and Geithner's career at Treasury will come to an abrubt end.

Details of the plan remain sketchy, but the PPIF will work in concert with the Fed's new lending facility, the Term Asset-Backed Securities Loan Facility, or TALF, which will start operating in March and will provide up to $1 trillion of financing for buyers of new securities backed by credit card, auto and small-business loans. In contrast, Geithner's financial rescue "partnership" will focus on cleaning up banks balance sheets by purging mortgage-backed securities. (MBS)

In Monday's New York Times, Paul Krugman summed up the Geithner plan like this:

"Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose. Why not just go ahead and nationalize?"

Why not, indeed, except for the fact that Geithner's main objective is to "keep the banks in private hands" regardless of the cost to the taxpayer. The Treasury Secretary believes that if he presents his plan a "lending program" rather than another trillion dollar "freebie" from Uncle Sam he'll have a better chance slipping it by Congress and thereby preserving the present management structure at the banks. Keeping the banking giants in one piece is "Job 1" at Treasury, which explains why bank-loyalist Geithner was chosen in the first place.

Geithner's PPIF is a way of showering speculators with subsidies to purchase non-performing loans at bargain-basement prices. The Fed is using a similar strategy with the TALF which, according to the New York Times, could easily generate "annual returns of 20 percent or more" for those who borrow from the facility.

From the New York Times:

"Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent. Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment. In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion." (NY Times)

This is a blatant ripoff, which is why the plan has been painstakingly concealed behind abstruse acronyms and complex explanations of how the transactions actually work. The only way investors can lose money is if they hold on to the securities after they fall below 16 percent of their original value which, won't happen, since investors can bail out at any time and leave the taxpayer holding the bag. Call it the "Geithner Put", another gift from Uncle Sugar to the Wall Street land-sharks.

Geithner's thinks that if he obfuscates the details of his plan as much as possible, he'll be able to get what he wants with no one the wiser. But he's mistaken. His credibility has already been battered by his chronic evasiveness. Now the pundits are blaming him for falling consumer confidence and the plummeting stock market. Whatever plan Geithner proposes, will be put under a microscope and dissected one molecule at a time. He won't get the opportunity to pull the wool over the public's eyes again. He's got one chance to make good, and if he botches it, Obama will be forced to send him packing. The political furor will be too much to handle.

It is no coincidence that the Fed announced its expansion of the TALF on the same day that Geithner presented his outline for a "public-private partnership". The two plans represent the Obama Team's strategy for "squaring the circle", that is, for keeping the big banks in private hands while purging their balance sheets of worthless assets at the public's expense. Here's how it's presented on the Fed's website:

"Under the TALF, the Federal Reserve Bank of New York will provide non-recourse funding to any eligible borrower owning eligible collateral... As the loan is non-recourse, if the borrower does not repay the loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets... The TALF loan is non-recourse except for breaches of representations, warranties and covenants, as further specified in the MLSA."

Non-recourse funding? You mean, like a mortgage, where if the homeowner finds that he is underwater, he can just walk away and leave the bank to cover the losses?

That's right. The Fed and Treasury are planning to provide roughly 90 percent of the funding for toxic assets (for which Geithner will certainly pay "full price", making the banks "whole" again) which they will sell at firesale prices to their dodgy friends at the hedge funds and private equity firms giving them an opportunity to make boatloads of capital if the investments appreciate and, if they don't, just "return to sender". And it's all "risk free".

Is Geithner really so confident in his powers of persuasion that he thinks he can sneak this by the American people? Or will the task of selling the idea to the public be passed on to the banking lobby's number 1 "go to guy", Barack Hussein Obama?

The markets are not going to like the idea of recapitalizing the banks through the backdoor. Wall Street will see right through the smoke n' mirrors and react accordingly. The toxic assets have to be fairly valued; price discovery is basic to any functioning market. If the banks need recapitalizing, they will have to do it the old fashion way. They'll have to restructure their capital, which means shareholders get the ax, bond holders get a haircut, management gets the door, and the American people become majority shareholders. That's how it works in a free market. When businesses are insolvent; they file for bankruptcy and the debts are written down. Period. No exceptions. Geithner wants to rewrite the rules to help his buddies, but it isn't going to fly.
The Baseline Scenario's Simon Johnson put it perfectly when he said:

"Above all, we need to encourage or, most likely, force the large insolvent banks to break up. Their political power needs to be broken, and the only way to do that is to pull apart their economic empires. It doesn’t have to be done immediately, but it needs to be a clearly stated goal and metric for the entire reprivatization process."