Cali's debt worries as leading indicator

It's often said that California leads the nation in all manner of cultural, political, and economic trends. That's partly why this recent S&P downgrade of California's debt ratings seems so worrisome.

From Reuters, "California debt rating cut as cash crunch looms":

"California's main debt rating was cut on Wednesday by Standard & Poor's, which said the government of the most populous U.S. state could nearly run out of cash in March -- and another rating cut might follow.

The state government's budget gap of nearly $20 billion over the next year and a half leaves it in a precarious situation, requiring tax increases or spending cuts, either of which may slow economic recovery, the agency said in a statement.

"If economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months," S&P said after cutting the rating on $63.9 billion of California's general obligation debt one notch to A- from A.

The new level is four notches above "junk" status, a level at which many investors refuse to buy debt."

Do Cali's debt problems and poor finances hint at trouble for other US states? We'll have more on that issue tomorrow, with a spate of new research and commentary to help us along. See you then.

Ron Paul: why the Fed likes independence

Ron Paul's latest "Texas Straight Talk" update deals with Treasury Secretary Tim Geithner's scheme to cover up details of AIG's "backdoor bailout" of large investment banks, and also covers the much-debated issue of the Fed's "independence".



Here's what Congressman Paul had to say about the recent backroom dealings by the Treasury and the Fed, and "Why the Fed Likes Independence":

"This claim that the Fed should have “independence” is a canard. They very much enjoy their comfortable pattern of bailing out friends and devaluing the currency with no oversight and no accountability. Geithner specifically asked officials at AIG not to disclose to the SEC or to the public particulars about this special deal for his friends. We only know these details now because AIG was eventually forthcoming when Congress demanded some answers.

We should be getting this information, and information on all such dealings, straight from the Fed. The Fed should be accountable to Congress because it is a creature of Congress. The Constitution gives Congress the authority to oversee the integrity of the monetary unit. We have unwisely and unconstitutionally delegated this authority to the Federal Reserve, which has in turn devalued our dollar by 95 percent and counting.

When the Federal Reserve engages in harmful policies, Congress is still ultimately responsible. If the Fed is not made accountable through a GAO audit at least, it will continue to be accountable to no one, and that is unacceptable."
Please see our related links section for more discussion on why the Federal Reserve should (or should not be) held accountable through government audits.

Related articles and posts:

1. Interview: Ron Paul & Steve Forbes discuss the Fed - Forbes.

2. Fed wants to keep US bailouts secret - Finance Trends.

3. Geithner wants zipped lips on AIG swaps - Finance Trends.

4. Ron Paul answers questions on C-SPAN - RonPaul.com.

Fed wants to keep US bailout secrets

Bloomberg has been doing a great job of showcasing the "transparency" of the Federal Reserve over the past year or so, in spite of many attempts by the Fed and bailed out banks to block the news outlet's progress in procuring data on a $2 trillion loan program initiated by the Fed during the 2008 financial panic.

Here's Bloomberg's latest on the Fed's bailout secrets:

"The Federal Reserve will ask a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history.

The U.S. Court of Appeals in Manhattan, after hearing arguments in the case today, will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.

Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg..."

As noted in the earlier Bloomberg piece from Dec. 2008 (also linked above), the Fed lent cash & government securities to banks in exchange for collateral including "stocks and subprime and structured securities such as collateralized debt obligations".

Obviously, many people are a bit concerned about the quality of that collateral. Having access to data on the quality of securities held on the Fed's balance sheet would give investors & the public an idea about the potential losses the government faces on those assets.

Related articles and posts:

1. Fed refuses to disclose recipients of $2 trillion - Bloomberg.

2. Ron Paul: audit the Fed - Finance Trends.

Friday: Geithner, China, & sovereign default

Just taking a look this hour at the newly posted Friday links at Abnormal Returns.

They've got the latest on Tim Geithner's troubles in this AIG swaps fiasco, plus coverage of 2009 hedge fund returns, Jim Chanos' views on China, Iceland as an indicator for sovereign defaults, and more.

All topics we're interested in here at Finance Trends, so head on over to AR and have a look at their linkfest. Have a great weekend, and we'll see you soon.

Geithner wants zipped lips on AIG swaps

Tim Geithner and the New York Fed told AIG to limit their swaps disclosure. The saga continues and Bloomberg has the details:

"The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms."

Timmy, you class act, you. Still, this latest bit of news shouldn't come as too much of a shock to anyone who's been following these bailout shenanigans.

In fact, this latest Bloomberg piece on the email exchanges between AIG and the New York Fed follows up earlier reports by Richard Teitelbaum and Hugh Son on the AIG swaps deal from October '09.

"Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.

“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.” "

Read all about it and pass the news along.

Related articles and posts:

1. Fed told AIG not to disclose swap details - Dealbook.

2. Marc Faber interview: rotten apples in DC - Finance Trends.

3. Jim Rogers: "Geithner's clueless" - Finance Trends.

4. Geithner's gift to Pimco, BlackRock, et al - Finance Trends.

Gold & Cadillacs: a value comparison

Mike Hewitt at Dollar Daze posted an interesting graph not too long ago comparing gold and Cadillacs, or more precisely, the value of gold as measured by its purchasing power of Cadillac cars over time.


I thought back on this great little visual recently while discussing gold's role as a store of value with a friend.

We ruminated briefly on gold's utility as an inflation hedge or preserver of one's purchasing power and I offered the classic example of the more or less constant ability to purchase a fine men's suit with an ounce of gold.

Later, we resumed our discussion by looking over the Dow to gold ratio and the similar S&P 500/gold ratio mentioned in the recent Barron's interview with Kevin Duffy and Bill Laggner.

These are all fine examples of the fact that while gold's purchasing power of real goods or assets may fluctuate during certain periods, its role as a store of value remains constant over time.

Still, I happen to believe that a picture is often worth a thousand words, and this is why I am so enamored by the Gold and Cadillacs example offered by Mike's post.

In fact, if you compare (as Mike has) the Cadillac Eldorado 2-door coupe or convertible with its present day successor, the Cadillac XLR-V, with all its modern gadgetry and "improvements" (those so often touted in the BLS' hedonic indexing of prices), I'm sure you'll be similarly amazed to see how well gold's purchasing power has held up, or increased, in this particular instance (although we should point out that in 1971 gold was still artificially pegged at $35 an ounce, when a more realistic market price would have been $103 an ounce).

Barron's interview: Kevin Duffy & Bill Laggner

Barron's recently ran an interview with hedge fund managers Kevin Duffy & Bill Laggner of Bearing Asset Management called, "Shorting the Economic Recovery". Here's a lead-in to their discussion:

"PERHAPS ONE OF THE greatest failings in the run-up to the financial meltdown was a lack of perspective -- an inability by many market participants to see the big picture. Not so with Kevin Duffy and Bill Laggner, principals of the Dallas-based hedge fund Bearing Asset Management.

With the help of their proprietary credit-bubble index, developed in 2004, the managers sounded early warnings on housing and credit excesses, and capitalized handsomely on their forecasts by shorting Fannie Mae, Freddie Mac, money-center banks and brokers, builders, mortgage insurers and the like.

Students of the Austrian school of economics, which espouses a free-market philosophy that ascribes business-cycle booms and busts to government meddling with interest rates, the pair is solidly in the contrarian camp, believing that the worst for the markets may be yet to come."

Thanks to Bear Mountain Bull, The Big Picture, & Controlled Greed for drawing attention to this article on their blogs.

If you find Duffy & Laggner's analysis insightful, or if you'd like to gauge the accuracy of some of their earlier calls, you may also want to take a look at some of the resources provided in our related articles section below. Enjoy the interviews.

Related articles and posts:

1. This Time It's Value Traps - John Rubino at Safehaven.

2. Interview w/ Kevin Duffy & Bill Laggner - VoiceAmerica.