Shadow Capitalism

Wild day in the markets today as Ben Bernanke’s cloture vote passed and his reconfirmation vote soon after, thanks to a Zimbabwean Senate today.

But the real story today was Greece’s ever-widening CDS spreads, with the 5yr spread to senior crossing 400bps territory into all-time wides, as default and bailout seem to be the only remaining possibilities at this point. The euro continued its selloff and broke below 1.4000, while Greece’s bond spreads to bunds also widened significantly. With talks of a possible IMF bailout, however, the long bund/short Greek bond trade may unwind as risk spreads across the eurozone.

In other news, money market fund redemptions are now permitted to be suspended by the SEC. Money market funds are (supposed to be) highly liquid and redeemable cash equivalents with low yields, with asset books filled with commercial paper and other very liquid short-term debt instruments. After last year’s Lehman debacle, which caused two funds to break the buck, a complete halt in operational financing, and allegedly the brink of systemic financial collapse, the SEC is now subjecting these funds to potential withdrawal suspensions in the event of another electronic bank run.

What this does is shift demand from short-term corporate debt to short-term sovereign debt, which the Treasury needs, given its huge funding holes. In addition, the capital outflows from front-end corps gets mopped up by taxpayer-funded guarantees.

The sudden loss of liquidity for these securities may be a prime culprit for the negative yields observed in 1-mo T-bills yesterday. That and risk aversion as risk assets begin the reversal of their junk rally since March 2009.

The bounce I expected around 1085 indeed materialized in a late-day rally, and the puts I sold have taken sharp haircuts since my hedges were triggered earlier in the market session. Though we didn’t quite make it to the 1102 level where I’d been planning on taking some hedges off the table, I did so anyway because of the possibility of a gap down. This is a very volatile market. Rallying through 1102 should provide a little more momentum on the buy-side and the next line in the sand on the upside is 1115, which I don’t expect to be broken. A break below 1085 will unwind my entire hedge book.

S&P finding some support around the 1080-1090 zone, which I mentioned the possibility of here. No telling if it’s a short term bounce or the beginning of another wave up, so hedging risk with some sold puts in ultralong ETFs tracking the S&P and tracking financials.

If we bounce, I’ll cover some puts around 1102 and the balance of them at 1115. A break of 1115 will trigger some short position unwinds and a market-neutral portfolio allocation. If we break 1085 on the downside, the hedges are back off. As of now, I’m staying net-short but hedged. The GDP release this Friday may catalyze some market direction.

Also closing a portion of my short book in X, just taking some profits ahead of a potential bounce. I will be posting a cover trade on the “Trades” tab if/when the balance of the position is unwound. So far this has been a great trade.

The Atlanta Fed’s Weekly Highlights points out that only $12.7B of the $175 agency debt and $110B of the agency MBS purchase programs remain to be deployed. With the $300B in Tsy purchases dried up already from last fall, this means 92.5% of QE liquidity has been injected, and less than $125B remain.

This has drastic consequences for risk assets, which have been running up based on carry trades dependent on hot money inflows from QE injections and a declining USD (also a consequence of QE, among other liquidity injections). Factor in the fractional-leverage potential of the Treasuries portion of QE (which were deployed ultimately to Primary Dealers, many of which are banks that can speculate in securities) at a 10:1 baseline leverage ratio, and the amount of liquidity that has already been injected inches up to 97.4% of total liquidity.

Clearly there are significant demand holes in both the Treasury and mortgage markets that will require a second iteration of quantitative easing, but with Bernanke’s reappointment itself not even certain, there’s going to need to be a resurgence in political capital for any substantive QE 2.0 to occur. And yes, of course, that means asset declines. Be watching to see if Bernanke drains excess liquidity through TOMOs, as unwinding the permanent purchase portion of the Fed’s asset book seems highly unlikely at this point, considering an expansion in fact is the more likely (and necessary) scenario. Also be watching the Exchange Stabilization Fund operations to see if there’s any USD reverse repos funded by EUR or JPY sales from the ESF asset books. The Treasury did this back in the summer of 2008 during the commodity bubble to stabilize the dollar via reverse repurchase agreements with interest paid in foreign currencies.

Dollar liquidity runs the world at this point, and will continue to do so until dollar-denominated debt is cleared from the system, most likely primarily through debt inflation with small episodes of deleveraging and writedowns to replenish political capital for more injections. The declining dollar (caused by dollar liquidity injections) is responsible for short-term credit access for foreign banks and domestic banks, as well as driving up risk assets via carry trades. That marginal liquidity is all but gone and the real-economy level cash flow problems are sufficient to cause deleveraging and a rush to USD, if excess marginal liquidity is taken out of the picture. Whether the Fed or Treasury intervene through TOMOs or ESF EUR- or JPY-funded reverse repos may turn out to be irrelevant, because of the secular credit crunch. But a rush to dollars (and especially dollar-denominated debt) is absolutely necessary for the United States at this point, and the sovereign funding crisis is going to be bigger issue going forward in 2010 than financials solvency crisis. It’s a circular process, from (1) natural deleveraging and credit crunch, to (2) reactionary injected liquidity (which causes a declining USD), to (3) capital outflows from Tsys, to (4) reactionary liquidity injection cessation or even liquidity drain, to (5) inflows into Tsys and back to deleveraging and credit tightening.

With 7.5% of QE liquidity remaining, we are somewhere between (3) and (4), if not between (4) and (5). Caution is prudent.

The Atlanta Fed’s paper is republished below.

Earlier this month, Tishman Speyer and Blackrock Realty defaulted on the $4.4B debt financing their overleveraged $5.4B Stuyvesant Town/Peter Cooper Village purchase from 2006, in the second-largest CRE default in history. Now the 56-building property is being foreclosed on, in the largest foreclosure in history, as Tishman Speyer and Blackrock Realty hand over ownership to their creditors. Some estimates place the current value of the property at $1.8B, a dramatic 66% value decline from the purchase price. This will wreak havoc on CRE and CMBS, which in turn will wreak havoc on banks, insurers, and quasi-financials (GE, Sears, etc). CALPers is one of the equityholders, and Hartford Financial (HIG) a debtholder, to the property, and the writedowns they face will damage their already very depleted capital bases.

From the Wall Street Journal’s article:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

The property’s owners signaled they would be unable to reach a deal with lenders and instead decided to allow creditors to proceed with what amounts to an orderly deed-in-lieu of foreclosure, which means a borrower voluntarily gives the property back to lenders to avoid a foreclosure proceeding.

“It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives,” the venture said in a statement to The Wall Street Journal. “We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city.”

The troubles at Stuyvesant Town reflect the dismal condition of the apartment market throughout the country as high unemployment hammers rents and occupancy levels. Hardest-hit are highly leveraged deals done by private companies that, unlike large public real-estate companies, have been closed out of the capital markets.

Stuyvesant Town creditors weren’t immediately available for comment. But pressure on the Tishman group has mounted in recent weeks as some of the property’s creditors have threatened to foreclose. In a letter sent to Tishman last week, a group including Concord Capital, an affiliate of Winthrop Realty Trust, said it intends to pursue “its rights and remedies,” including possibly moving to foreclose on the property within 90 to 180 days.

By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors—including the California Public Employees’ Retirement System, a Florida pension fund and the Church of England—and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out.

The Tishman venture’s decision to hand back the keys represents a defeat for a company that for years represented the gold standard of commercial real-estate deals, reaping high returns for investors.

Tishman Speyer has invested in such trophy assets as Rockefeller Center and the Chrysler Building, and its founder, Jerry Speyer, has been a major player in both real-estate and political circles for years. His son Rob Speyer is being groomed to take over the family real-estate empire.

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn’t threatened. It took advantage of easy credit and investors’ eagerness to buy into real estate during the good times. As a result, it didn’t put much of its own cash into deals.

Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money, with about $56 million from Jerry Speyer and Rob Speyer, co-chief executives of the New York-based company.

Tishman has earned more than $10 million in property-management fees since the Stuyvesant Town acquisition, according to analysts at Deutsche Bank AG.

Tishman Speyer “would not consider a long-term management contract to continue operating the property that does not involve ownership,” the partnership said in the statement. “Without a restructuring that would keep our ownership group as part of the equity, we felt it best that the new owners install a new management team.”

The Stuyvesant Town complex was developed by MetLife for returning World War II veterans and remained a middle-class haven even as rents in other parts of the city soared. Tishman’s plans were to raise the rents for hundreds of the units to market rates.

But the strategy backfired because of a slowing New York economy, a heavy debt load and a court ruling hindering the owners’ ability to convert rent-controlled units to market rentals. In January, the property depleted what was left in reserve funds and defaulted on its first mortgage.

Nationwide, scores of other apartment deals also are tanking as landlords are being forced to cut rents and offer incentives like flat-screen TVs to attract and retain tenants. San Francisco’s Lembi family, the biggest apartment owner in that city, has been forced to give up numerous apartment properties to its lenders because it couldn’t repay debt.

Investors who purchased commercial-mortgage-backed securities, or CMBS, also are facing losses. In December, more multifamily CMBS loans moved into delinquency than for any other property type, with 113 new loans, totaling $1.1 billion, becoming delinquent, according to Moody’s Investors Service.

The Stuyvesant Town collapse comes amid mounting woes in the market for retail stores, hotels, apartments and other commercial property. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy-court protection last year, and more commercial-property projects could fail amid an inability to repay debt because of dwindling rent rolls and still-scarce financing for all but large real-estate investment trusts.

The troubles experienced by landlords nationwide are stoking fears among regulators and bankers that turmoil in commercial real-estate may derail the hoped-for economic recovery.

Research firm Foresight Analytics estimates delinquencies on commercial real-estate loans held by banks will rise to 9.47% in the fourth quarter, up from 5.49% a year earlier.

The S&P 500′s breakdown is still the defining technical event to watch. On the short term, we may find some support around the 1080 level (which happens to be aroudn the 100DMA as well), which was support all through November and December and resistance back in September, but a breakdown through that level should continue the decline. If this sell-off continues, the 200DMA should provide the next level of major support. How the S&P reacts aroudn its 50DMA in the near-term should confirm or reject the reversal thesis.

Google (GOOG) broke down from its 13-month long rising wedge earlier this month and the selling has come in droves. It has broken key averages on massive volume, but may be soon to find some support around the 525 level, which was also support back in November. If GOOG bounces at that level, it may set up a potential head and shoulders pattern, with the neckline around 525.

Crude oil has been in a rising wedge since last summer. The 80-85/bbl level has offered significant resistance and crude may be ready to break down from its wedge pattern and reverse its rally from last year. A break below the 70 level that marked the cycle low last month could trigger big selling.

Since its September & October 2009 breakouts, gold has had a pretty nice run, but now is in consolidation mode. The lower high this month may be defining a forming descending triangle, with support around the 105 level (in the GLD ETF). With liquidity drying up and risk assets beginning possibly new selloffs, the next move in gold may be down, with the selloff triggered by a breakdown through the descending triangle support level. This would be bullish for the dollar. If gold breaks out and continues its rally, then the USD should reverse back down, and equities and other risk assets should continue bleeding higher. The defined technicals of gold make it an interesting asset to watch and use for prognosticating other asset classes, as well.

General Electric (GE) seems to be approaching the apex of an ascending triangle it has been forming since last summer, based around the long-term 17 resistance level. The 100DMA has offered significant support/resistance for GE extending all the way back to 2007, and GE’s stock has been bouncing off of it since August of last year. A breakdown through the triangle’s support trendline should also send the stock breaking down through its 100DMA, which could trigger some big selling. With the earnings beat being a sell-the-news event and the fundamentals behind the stock absolutely abysmal (the albatross known as NBC Universal and GE Capital’s ridiculous TCE leverage ratios, enormous exposure to commercial real estate, and substantial investment in Eastern Europe come to mind), any selloff in broader indices should this high-beta, barely-solvent (if not insolvent) issue very hard. On the other hand, if assets continue rallying, a breakout through 17 should send GE back to the 20s.

Sohu (SOHU) is forming an enormous symmetrical triangle consolidating its rally from 2002 to 2008. This is a very similar formation to the large triangle I noticed forming in the Nasdaq back in summer 2008 that eventually led to a crash once the triangle broke down, leading to one of my best and most profitable technicals-based plays. I see a lot of Chinese issues showing similar patterns and with talks or liquidity extraction in China and the obvious bubbles in various Chinese asset classes, a triangle breakdown should send SOHU tanking. Earnings sent SOHU selling off on huge volume last November. This looks like a pretty great short to me.

The long bond has seen dramatically rising yields since January as the yield curve steepens due to rising inflationary concerns and deteriorating sovereign credit risk (USA CDS was one of the worst-performing sovereign names in Q4 2009, widening 13.5bps or about 66%). However, the 30yr yield seems to hit an important long-term resistance level at 475bps and appears ready to go back down. Since September, the 30yr has been defined by a rising channel; once that breaks, long bond yields could sell back off, with the 30yr targeting the 420bps support level, and if that breaks the 390bps support level, both of which are significant S/R zones. With risk aversion creeping back into the market (and the Treasury’s desperate funding crisis it may try to resolve by the Fed draining liquidity and/or engineering a risk asset selloff), US sovereign fixed-income should find some inflows from risk assets. Thoguh we suspect the back-end of the curve to not see a lot of inflows on a relative basis, hedging that steepener trade on the short/intermediate term may be prudent.

Hard to chart the VIX, as it is an indicator rather than necessarily a supply/demand-oriented security, but here are some trendlines for your viewing pleasure. If the 200DMA breakout can hold, a return of vol should be at hand.

Freemont McMoran Copper & Gold (FCX) is one of my favorite high-beta names to play on both the long and short side. It has broken down from its rising wedge that has defined its ascent since last spring and also broken its 50DMA, both on big volume. FCX puked two days ago on the biggest volume since early March 2009. That is indicative of distribution. The 90 level is the line in the sand for upside; if it can somehow rally back to that level and breach it, it’s got some upside potential. But for now this looks like a short/sell on strength to me. It should bounce around a little at the 73 level it’s currently at (as it has been), as it is an important support level, but breaking down again through that level should trigger more selling. And with China tightening, the copper bubble is under pressure.

As a corollary, copper’s chart is posted below. Significant resistance at the 3.50 level suggests a possible breakdown from its rising wedge coming soon.

The Russell 2000 is at an important S/R zone, at the 62-65 area (on the IWM ETF), which was important resistance in 2005, support in 2006, and support again in 2008 on two different cycle lows. On a shorter term, it is approaching the apex of a rising wedge that it has been forming since last summer. If it breaks down through this wedge, a reversal will probably be at hand, given the significant long-term resistance limiting upside potential. This is important because the Russell selling off means outflows and underperformance from beta-skewed strategies. It is common knowledge that the rally since March 2009 in equities has been very skewed toward high-beta names, which makes sense because excess marginal liquidity chases beta on a relative basis, and an underperformance of the Russell relative to less volatile indices should spell huge trouble for all risk asset classes.

Research in Motion (RIMM) is potentially breaking down from an enormous ascending triangle that it has been busy forming since September 2008. The 86 resistance level of this triangle, which technically consolidated the crash, has found heavy supply whenever the stock makes a trip up to it, especially in its last touch of the resistance level last fall, when RIMM gapped down on huge volume on bad earnings. The triangle breakdown also corresponds with a 50DMA breakdown, but volume thus far has been light. If volume comes in on the supply side and the charts show a more definitive breakdown, I’ll be building a substantial short position in this equity. Earnings from last month have been overwhelmingly in the sell-the-news, gap-and-trap category.

The Nazzy has had a very impressive rally since last spring, but Friday’s selloff could be a technical sell/short trigger, as it broke the important trendline that defined its rally. In addition, it broke its 50DMA and volume was heavy on the supply side for three consecutive days. If the USD keeps strengthening, hot money inflows chasing the higher beta nature of tech stocks will dissipate and the QQQQ should selloff sharply. Upside potential at this point looks limited, but a constructive base over the next few weeks could change that.

The Bernanke re-confirmation issue is gaining increasing coverage as the days slip away until his first term expires. With just six days left in his first term, the shifting and ever-transitory political winds will dictate his future and consequently of the global financial and economic landscape.

Earlier today, Reuters reported that Bernanke would be meeting Senate Majority Whip Dick Durbin (D-IL) at the Capitol this afternoon. According to Durbin and a senior administration official, Obama has been actively campaigning for Bernanke’s reappointment, including making phonecalls to Senators ahead of the confirmation hearings.

As of the current tally, 40 senators will vote yes, 17 no, and 32 undecided. The remaining 11 have not voiced any conviction either way, nor have they said they’re undecided.

Twelve more yes votes are needed for cloture, and with less than a week until Bernanke’s term expires and an increasingly populist Senate, the power of filibuster may come back to the limelight, just days after Martha Coakley lost the Massachusetts Senator race to Republican Scott Brown, preventing a reconciliation of the Senate’s version of the healthcare reform bill with the House’s.

With midterms later this year, the undecided Senators know their votes on the Bernanke reappointment will have huge implications for their own Senate seats, especially considering 84% of respondents to a Fox News poll (yes, I know it’s Fox News, but here me out) want Bernanke gone.

And the pendulum swing is favoring the GOP right now, with Coakley’s loss fresh in everyone’s minds and the bank/government collusions and conspiracies pervading the news for the last few months. As Obama’s popularity continues its free-fall, Republicans will attempt further to associate the bailouts with the Dems and consequently Bernanke. Even John McCain (R-AZ) has voiced opposition to Bernanke’s reappointment. This is the same man whose economic adviser, Phil Gramm, was one of the brains behind the inane repeal of Glass-Steagall (that is, until Gramm announced that America was a “nation of whiners” complaining about a recession that apparently didn’t exist).

Make no mistake about it, the undecideds are playing a wait-and-see game to assess the political winds before issuing any conviction in the form of a vote. With Senate Majority Leader Harry Reid (D-NV) expecting to file the cloture motion sometime this week, the pressure behind being the 60th vote is on.

If cloture fails and unlimited debate manifests, Bernanke’s term will expire without a reconfirmation for a second stint. The failure of cloture itself should send Bernanke’s Fed chairman career straight to the ground. And Obama’s with it.

I personally expect Bernanke to come up with 60 “yes” votes, one way or another. Whether it’s due to the active urging of the President, or another sell-off in equities attributed to the uncertainty, I think cloture will pass and a majority will vote to confirm. However, I think the possibility of Bernanke not being re-confirmed are higher than ever, and failure to keep him in the Fed Chairman seat could be in the nail in the coffin for the Obama administration.

This is a time of populist politics and the political winds are just as volatile as the financial markets. With 50.8% of Americans opposing the healthcare plan and the resurgence of the filibuster privilege with Brown’s ninth-inning victory, Republicans have a surplus of political capital they haven’t seen since the months following 9/11. If they continue to successfully pass off ownership of the bailouts and bank shenanigans to the Democrats, internal divisions between the the Democratic party will further widen, and the Dems eager to dissociate from the Obama administration and the Bernanke bailouts may increase in quantity as well as conviction.

Indeed, almost two-thirds of the Senators who have yet to voice a “yes” or “no” vote to Bernanke’s reconfirmation are Dems. If even half of these Dems vote “no” on cloture (which is a vote to extend debate, allowing them the flexibility of claiming they didn’t vote against Bernanke but were merely undecided still and desired more debate), cloture will almost certainly fail and Bernanke will not be reappointed. The cloture vote will fall to the marginal Democrat(s).

22 of the 43 undecided/non-respondent Senators need to vote yes for cloture to pass. If the anti-Obama and anti-Wall Street perceptions are amplified within the next few days, we may see Senators falling back to a “no” vote on cloture, which merely signifies a desire to debate further, if for nothing else but their own self-serving political reasons. Whether we see a Coakley Fail version 2.0 or we see a (slight) vindication for the Obama administration, the next few days will have drastic implications on the long-term economic, financial, and political landscape in America.

At the very least, these are interesting times.

We at Shadow Capitalism encourage readers to write their Senators urging them to vote no on Senator Reid’s imminent cloture motion and vote no on Bernanke’s reconfirmation if cloture does indeed pass. Below is a list of as-of-yet undecided or non-respondent Senators. They will decide the future of American monetary policy. We acknowledge the corruption in Washington and the conflict of interests between Congressmen and their constituents that sometimes occur. However, these are unique times, as populist anger is actually causing substantive implications in Washington. Obama’s approval rating has plummeted against the backdrop of one of the largest rallies in American equity market history. A shoe-in Democratic candidate in one of the historically bluest states was handed a last-minute loss at the hands of a rather-unknown GOP candidate vying to replace Ted Kennedy’s Senate seat. Senators are scared for their own jobs that will be up in the air come November. They need to appease their constituents now more than ever. Let them know what you think.

Barrasso, John (R-WY) – Senator_JBarrasso@barrasso.senate.gov
Begich, Mark (D-AK) – senator@begich.senate.gov
Bond, Kit (R-MO) – http://bond.senate.gov/public/index.cfm?FuseAction=ContactUs.ContactForm
Brownback, Sam (R-KS) – http://brownback.senate.gov/public/contact/emailsam.cfm
Burris, Roland (D-IL) – Senator_RolandBurris@Burris.Senate.Gov
Cantwell, Maria (D-WA) – http://cantwell.senate.gov/contact/index.html
Cardin, Benjamin (D-MD) – http://www.cardin.senate.gov/contact/email.cfm
Casey, Jr., Robert (D-PA) – http://casey.senate.gov/contact/
Chambliss, Saxby (R-GA) – http://chambliss.senate.gov/public/index.cfm?FuseAction=ContactUs.ContactForm
Coburn, Tom (R-OK) – http://coburn.senate.gov/public/index.cfm?FuseAction=ContactSenatorCoburn.Home
Cochran, Thad (R-MO) – http://cochran.senate.gov/contact.htm
Ensign, John (R-NV) – http://ensign.senate.gov/public/index.cfm?FuseAction=Contact.ContactForm
Enzi, Michael (R-WY) – http://enzi.senate.gov/public/index.cfm?FuseAction=ContactInformation.EmailSenatorEnzi
Franken, Al (D-MN) – info@franken.senate.gov
Gillibrand, Kirsten (D-NY) – kirsten_gillibrand@gillibrand.senate.gov
Grassley, Chuck (R-IA) – http://grassley.senate.gov/contact.cfm
Harkin, Tom (D-IA) – http://isakson.senate.gov/contact.cfm
Kaufman, Edward (D-DE) – http://kaufman.senate.gov/services/contact/
Klobuchar, Amy (D-MN) – http://lautenberg.senate.gov/contact/
Leahy, Patrick (D-VT) – senator_leahy@leahy.senate.gov
LeMieux, George (R-FL) – http://lemieux.senate.gov/public/?p=EmailSenatorLeMieux
Levin, Carl (D-MI) – http://levin.senate.gov/contact/index.cfm
Lincoln, Blanche (D-AR) – http://lincoln.senate.gov/contact/index.cfm
McCaskill, Claire (D-MO) – http://mccaskill.senate.gov/contact/
McConnell, Mitch (R-KY) – http://mcconnell.senate.gov/contact_form.cfm
Mikulski, Barbara (D-MD) – http://mikulski.senate.gov/mailform.html
Murkowski, Lisa (R-AK) – http://murkowski.senate.gov/public/index.cfm?FuseAction=ContactMe.EMailLisa
Murray, Patty (D-WA) – http://murray.senate.gov/email/index.cfm
Risch, James (R-ID) – http://risch.senate.gov/public/index.cfm?p=Email
Roberts, Pat (R-KS) – http://roberts.senate.gov/public/index.cfm?FuseAction=ContactInformation.EmailPat
Shaheen, Jeanne (D-NH) – http://shaheen.senate.gov/contact/
Snowe, Olympia (R-ME) – http://snowe.senate.gov/contact.htm
Specter, Arlen (D-PA) – http://specter.senate.gov/public/index.cfm?FuseAction=Contact.ContactForm
Stabenow, Debbie (D-MI) – http://stabenow.senate.gov/email.htm
Thune, John (R-SD) – http://thune.senate.gov/public/index.cfm?FuseAction=Contact.Email
Udall, Mark (D-CO) – Senator_Mark_Udall@markudall.senate.gov
Udall, Tom (D-NM) – http://tomudall.senate.gov/?p=contact
Webb, Jim (D-VA) – http://webb.senate.gov/contact.cfm
Wyden, Ron (D-OR) – http://wyden.senate.gov/contact/

Most of Goldman’s reports as of late have been pretty mediocre, but this one caught my eye. Very insightful analysis, both fundamental and technical, not to mention a good macro lens the trade ideas are focused through.

Enjoy.

Like Stan, Eminem’s biggest yet perilously ignored fan, Fed Chairman fails to garner the acceptance of one of his biggest idols, Anna Schwartz. Like Stan, Bernanke justifies his inane decisions by referencing staments, principles, and actions of his hero; and like Stan, Bernanke receives a less-than-satisfactory response from the mind that he claims shape his policies.

In November 2002, Bernanke gave a speech admiring the work of Milton Friedman and Anna Schwartz. Specifically, he commented on their belief that the Federal Reserve’s drain of liquidity in the late 1920s catalyzed the Great Depression:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Six years later, Bernanke lowered the Federal Funds rate to zero, citing Schwartz and Friedman’s beliefs as justification.

But Schwartz wasn’t too sure about his train of thought. In an October 2008 WSJ op-ed, she criticized Bernanke’s view of the financial crisis as a liquidity crisis, rather than a solvency crisis, and refutes his comparisons to the Great Depression and the Fed’s involvement in it:

If [in the 1920s] the borrowers hadn’t withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress.

But that’s not what’s going on in the market now … Alll these exotic securities that the market does not know how to value.”

Why are they ‘toxic’? They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.

And in July of last year, she published another op-ed, entitled Man Without a Plan, this time in the New York Times. It is reprinted below (emphasis ours).

As Federal Reserve chairman, Ben Bernanke has committed serious sins of commission and omission — and for those many sins, he does not deserve reappointment.

Let me begin with the former. It is standard practice for a central bank like the Federal Reserve to ease monetary policy to combat a recession, and then to tighten it as recovery gets under way. Mr. Bernanke so far has only had to do the first half, and has conducted a policy of extreme ease. The Fed’s Open Market Committee cut the federal funds rate in October to 1 percent from 1.5 percent, and then in December to a range of zero percent to 0.25 percent.

What drove down the funds rate was the Federal Reserve’s decision to increase its depository bank reserves. Bank reserves have been rising since Sept. 17, as the Fed purchased securities and financed loans. When the Fed committee cut the rate to zero, it was merely ratifying the de facto rate.

Mr. Bernanke seems to know only two amounts: zero and trillions. Before 2008 there were only moderate increases in the Federal Reserve’s aggregate balance sheet numbers, but since then the balance sheet has exploded by trillions of dollars. The increase was spurred by the Fed’s loans to troubled institutions and purchases of securities.

Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up. This results in excesses, and also increases the severity of the recession that inevitably follows when the bubble bursts.

Let’s move on to the sins of omission. After 2007, the Federal Reserve clearly observed that the mortgage loan industry was being transformed into an issuer of securities backed by a pool of mortgages of varying quality. Yet the Fed at no point clearly warned investors that these new instruments were difficult to price. (These securities were backed by everything from top-quality mortgages to subprime ones, and it was difficult to determine what value to assign to different mortgages.)

Partly as a result of the Fed’s silence, investors who loaded up their balance sheets with these securities were ignorant of the great risks of trying to sell assets that are difficult to price. Other new instruments, like derivatives, were not risk-free, although the market became enamored of them.

The Fed is the manager of markets. There is thus every reason to expect that it would see the problems that these new instruments were likely to create for normal transactions, and speak up about them.

The Fed delivered plenty of rhetoric about the importance of transparency, yet failed to articulate its own goals. The market was thus bewildered when the Fed rescued certain firms and not others. Mr. Bernanke should have explained the principles behind these decisions. The market could not understand why the Fed rescued Bear Stearns and then permitted Lehman Brothers to die.

As a consequence, there was volatility in the credit and equity markets and a general sense of turmoil that demonstrated that participants were at a loss to understand the functioning of the Fed.

Last year, when the credit market became dysfunctional and normal channels for borrowing broke down, the Fed misread the situation. It persisted in believing that the market needed more liquidity, even though this was not a solution to the market disturbances. The real problem was that because of the mysterious new instruments that investors had acquired, no one knew which firms were solvent or what assets were worth. At the same time, these new instruments were being repriced in the market. The firms that owned them then needed to restore their depleted capital. When big firms experienced enormous losses, the Fed did not respond in a way that calmed markets. Most of all, Mr. Bernanke ultimately failed to convince the market that the Fed had a plan, and was not performing ad hoc.

I am certain that there are economists whose reputations for outstanding academic work in monetary policy are every bit as distinguished as Mr. Bernanke’s, and who have good judgment and experience within the Federal Reserve System. President Obama should choose one of them.

We urge Mr. Bernanke to not drink and drive, nor strangle his pregnant girlfriend, as Stan does. Instead we suggest he listen to Ms. Schwartz and abandon his policy of reflation of asset bubbles with taxpayer-funded injected liquidity.